-----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, MdYZwgtkE3oez+Xs5V1LsVAd2rtaubmRLK5Yym8pf4gD0nSU2yVHhzsozBcWxxCJ 0CPP8RHOJmCYe6mIZBBUCw== 0001038838-04-000555.txt : 20040701 0001038838-04-000555.hdr.sgml : 20040701 20040701125033 ACCESSION NUMBER: 0001038838-04-000555 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040701 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARADAY FINANCIAL INC CENTRAL INDEX KEY: 0000910639 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-MANAGEMENT CONSULTING SERVICES [8742] IRS NUMBER: 330565710 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-22236 FILM NUMBER: 04894056 BUSINESS ADDRESS: STREET 1: 175 SOUTH MAIN STREET STREET 2: SUITE 1240 CITY: SALT LAKE CITY STATE: UT ZIP: 84111 BUSINESS PHONE: 8019617356 MAIL ADDRESS: STREET 1: 24901 DANA POINT HARBOR DR STREET 2: STE 200 CITY: DANA POINT STATE: CA ZIP: 92629 10KSB 1 k033104.txt 10-KSB YEAR ENDED MARCH 31, 2004 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ FORM 10-KSB Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended -------------------------- March 31, 2004 000-22236 ----------------------- (Commission file number) FARADAY FINANCIAL, INC. ----------------------------------------------- (Name of registrant as specified in its charter) Delaware 33-0565710 ------------------------------- --------------------------------- (State or other jurisdiction of (IRS employer identification no.) incorporation) 175 South Main, Suite 1240, SLC, UT 84111 (801) 502-6100 ----------------------------------------- ------------------------------- (Address of principal executive offices) (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ] Issuers revenues for its most recent fiscal year: None. The aggregate market value of voting stock held by non-affiliates of the registrant at March 31, 2004: The common voting stock of the registrant is not publicly traded and has no readily ascertainable fair market value. Shares outstanding of the registrant's common stock as of June 22, 2004: 2,318,000. FARADAY FINANCIAL, INC. TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-KSB YEAR ENDED MARCH 31, 2004 PART I Item 1. Description of Business ..........................................3 Item 2. Description of Properties ........................................7 Item 3. Legal Proceedings ................................................7 Item 4. Submission of Matters to a Vote of Security Holders ..............7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ............................................8 Item 6. Management's Discussion and Analysis or Plan of Operation ........9 Item 7. Financial Statements ............................................14 Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure ......................................14 Item 8A. Controls and Procedures .........................................14 PART III Item 9. Directors and Executive Officers of the Registrant ..............15 Item 10. Executive Compensation ..........................................16 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ....................16 Item 12. Certain Relationships and Related Transactions ..................18 Item 13. Exhibits and Reports on Form 8-K ................................18 Item 14. Principal Accountant Fees and Services ..........................18 Forward-Looking Statements When used in this Form 10-KSB, in our filings with the Securities and Exchange Commission ("SEC"), in our press releases or other public or stockholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases "would be," "will allow," "intends to," "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project," or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements specifically include, but are not limited to, the closing of possible acquisition or reorganization transactions and the consummation of a transaction with Video Internet Broadcasting Corporation. We caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, are based on certain assumptions and expectations which may or may not be valid or actually occur, and which involve various risks and uncertainties set forth in Item 6 "Risk Factors" and elsewhere herein. As a result, our actual results for future periods could differ materially from those anticipated or projected. Unless otherwise required by applicable law, we do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement. PART I Item 1. Description of Business. Business Development The Company was organized under the laws of the State of Delaware on June 11, 1992 under the name "Faraday Financial, Inc." The Company has been in the development stage since incorporation and has spent most of its efforts in developing and marketing various products; however, it has not yet had revenues sufficient to sustain operation and has relied upon financing from stockholders and an occasional issuance of its common stock. The Company intends to seek out various business opportunities, including the acquisition of an operating company. In March 2004, Faraday Financial, Inc. ("Faraday") incorporated Homenet Utah, Inc. ("HU") and Home Marketing Group, Inc. ("HMG") as a wholly-owned subsidiaries. HU has had no operations since inception. HMG has been engaged in telemarketing activities since April 6, 2004. When used in this annual report, the term "Company," "we," "our," "us" and similar terms includes the registrant and its wholly-owned subsidiaries. Business of Issuer With the exception of the telemarketing activities of HMG, we are not currently engaged in any substantive business activity and, except as discussed below, we have no plans to engage in any such activity in the foreseeable future. In our present form, we may be deemed to be a vehicle to acquire or merge with a business or company. Regardless, the commencement of any business opportunity will be preceded by the consideration and adoption of a business plan by our Board of Directors. Our plan of operation for the next 12 months will be to: (i) consider industries in which our Company may have an interest; (ii) adopt a business plan with respect to the business of any selected industry; and (iii) commence such operations through funding and/or the acquisition of a "going concern" engaged in the industry selected. We will not restrict our search to any particular business or industry, and the areas in which we will seek out particular business opportunities or acquisitions, reorganizations or mergers may include, but will not be limited to, the fields of high technology, manufacturing, natural resources, service, research and development, communications, transportation, insurance, brokerage, finance and all medically related fields, among others. We recognize that the number of suitable potential business ventures that may be available to us may be extremely limited, and may be restricted to entities who desire to avoid what these entities may deem to be the adverse factors related to an initial public 3 offering ("IPO"). The most prevalent of these factors include substantial time requirements, legal and accounting costs, the inability to obtain an underwriter who is willing to publicly offer and sell shares, the lack of or the inability to obtain the required financial statements for such an undertaking, limitations on the amount of dilution to public investors in comparison to the stockholders of any such entities, along with other conditions or requirements imposed by various federal and state securities laws, rules and regulations. Any of these types of transactions, regardless of the prospects, would require us to issue a substantial number of shares of our common stock, usually amounting to between 80% and 95% of our outstanding securities following the completion of any such transaction; accordingly, investments in any such private enterprise, if available, would be much more favorable than any investment in the Company. Management intends to consider a number of factors prior to making any decision as to whether to participate in any specific business endeavor, none of which may be determinative or provide any assurance of success. These may include, but will not be limited to an analysis of the quality of the entity's management personnel; the anticipated acceptability of any new products or marketing concepts; the merit of technological changes; its present financial condition, projected growth potential and available technical, financial and managerial resources; its working capital, history of operations and future prospects; the nature of its present and expected competition; the quality and experience of its management services and the depth of its management; its potential for further research, development or exploration; risk factors specifically related to its business operations; its potential for growth, expansion and profit; the perceived public recognition or acceptance of its products, services, trademarks and name identification; and numerous other factors which are difficult, if not impossible, to properly or accurately analyze, let alone describe or identify, without referring to specific objective criteria. Regardless, the results of operations of any specific entity may not necessarily be indicative of what may occur in the future, by reason of changing market strategies, plant or product expansion, changes in product emphasis, future management personnel and changes in innumerable other factors. Further, in the case of a new business venture or one that is in a research and development mode, the risks will be substantial, and there will be no objective criteria to examine the effectiveness or the abilities of its management or its business objectives. Also, a firm market for its products or services may yet need to be established, and with no past track record, the profitability of any such entity will be unproven and cannot be predicted with any certainty. Management will attempt to meet personally with management and key personnel of the entity sponsoring any business opportunity afforded to our Company, visit and inspect material facilities, obtain independent analysis or verification of information provided and gathered, check references of management and key personnel and conduct other reasonably prudent measures calculated to ensure a reasonably thorough review of any particular business opportunity; however, due to time constraints of management, these activities may be limited. We are unable to predict when or even if we may actually participate in any specific business endeavor. We anticipate that proposed business ventures will be made available to us through personal contacts of directors, executive officers and principal stockholders, professional advisors, broker dealers in securities, venture capital personnel, members of the financial community and others who may present unsolicited proposals. In certain cases, we may agree to pay a finder's fee or to otherwise compensate the persons who submit a potential business endeavor in which our Company eventually participates. Such persons may include our directors, executive officers and beneficial owners our securities or their affiliates. In this event, such fees may become a factor in negotiations regarding any potential venture and, accordingly, may present a conflict of interest for such individuals. Management does not presently intend to acquire or merge with any business enterprise in which any member of management has a prior ownership interest. The Company's directors and executive officers have not used any particular consultants, advisors or finders on a regular basis. Although we currently have no plans to do so, depending on the nature and extent of services rendered, it may compensate members of management in the future for services that they may perform for the Company. Because we currently have extremely limited resources, and we are unlikely to have any significant resources until we have determined a business or enterprise to engage in or have completed a merger or acquisition, management expects that any such compensation would take the form of an issuance of the Company's common stock to these persons; this would have the effect of further diluting the holdings of our other stockholders. There are presently no preliminary agreements or understandings between us and members of management respecting such compensation. 4 Substantial fees are often paid in connection with the completion of all types of acquisitions, reorganizations or mergers. These fees are usually divided among promoters or founders, after deduction of legal, accounting and other related expenses, and it is not unusual for a portion of these fees to be paid to members of management or to principal stockholders as consideration for their agreement to retire a portion of the shares of common stock owned by them. Management may actively negotiate or otherwise consent to the purchase of all or any portion of their common stock as a condition to, or in connection with, a proposed reorganization, merger or acquisition. It is not anticipated that any such opportunity will be afforded to other stockholders or that such stockholders will be afforded the opportunity to approve or consent to any particular stock buy-out transaction. In the event that such fees are paid, they may become a factor in negotiations regarding any potential acquisition by the Company and, accordingly, may also present a conflict of interest for such individuals. We have no present arrangements or understandings respecting any of these types of fees or opportunities. Telemarketing Activities Since April 6, 2004, HMG has been utilizing the services of eight employees to primarily sell software packages via telemarketing. HMG has been able to generate sufficient revenues to cover its costs and is not dependent on Faraday for financial support. HMG and its telemarketing activities are not viewed by Faraday management as a significant part of the Company's long term business plan. Lending Activities In furtherance of our efforts to become a vehicle to acquire or merge with a business or company, we entered into the following arrangements. Notes Payable and Agreement with NutraCea In December 2000, the Company entered into a merger agreement with NutraCea (formerly NutraStar Incorporated). The merger was contingent on a $500,000 loan from Faraday to NutraCea. As of March 2001, the Company had secured investors and advanced $500,000 to NutraCea. By April 2001 the Company determined that the merger plans were terminated. The $500,000 that had been advanced to NutraCea was due within 90 days and bore interest at 12%. The note carried an optional conversion feature in which the Company could convert the principal and accrued interest into common stock of NutraCea at a rate of $1.00 per share. The notes also carried a mandatory conversion feature as follows: in the event that NutraCea merged into a public company or issued shares pursuant to its initial public offering of common stock, the outstanding principal and accrued interest was to be converted into common stock of Nutracea at the lesser of a) $1.00 per share, b) the average share price over the initial 10 day trading period less 20%, or c) the price per share of common stock offered in a private placement at the time of mandatory conversion. Investors advanced the $500,000 to Faraday (the "NutraCea Funding Parties") with the understanding that following either a merger with NutraCea or NutraCea's merger with another public company, the amounts would be converted to equity in the newly merged corporation. However, no written agreements were signed formalizing the nature or the terms of the advances. Management of the Company believes and reported the accounting for the investors' advance of $500,000 to NutraCea on behalf of the Company as notes payable. The Company recorded $78,711, $67,740 and $56,102 of interest expense related to these notes payable at 12% per annum for the years ended March 31, 2004, 2003 and 2002. On December 13, 2001, the Company reached a settlement agreement with NutraCea. The agreement states that NutraCea borrowed a total of $500,000 from the Company pursuant to a series of promissory notes bearing interest at 12% per annum and due and payable 90 days from the date of issuance. The outstanding principal and accrued but unpaid interest on the date of the settlement was $551,797. Per the terms of the agreement the Company and NutraCea released, settled and disposed of any and all claims, demands and disputes of any kind between them, including, but not limited to, any disputes connected with the proposed terminated merger. NutraCea settled their debt to the Company of $500,000 principal and $51,797 accrued interest in exchange for 735,730 shares of NutraCea Preferred Stock per the terms of the agreement. 5 The agreement also stipulates that failure on the part of NutraCea to file a Registration Statement on Form SB-2 or a substantially equivalent registration that is declared effective by the Securities and Exchange Commission by June 30, 2002 will result in conversion of the 735,730 Preferred Shares to the same number of Common Shares of NutraCea. NutrCea failed to register the Preferred Shares with the Securities and Exchange Commission on or before June 30, 2002. On July 16, 2002, a Complaint was filed against NutraCea by the Company in the United States District Court, for the District of Utah (Case No 02-CV-00959). The Company filed the lawsuit when NutraCea failed to meet the terms set forth in the settlement agreement. NutraCea did file a registration statement with the Securities and Exchange Commission on June 4, 2002, however, such registration statement had not been declared effective as of June 30, 2002 as required by the settlement agreement. In the event that NutraCea failed to affect a registration statement by June 30, 2002, NutraCea's Chief Executive Officer, Ms. Patricia McPeak, was to transfer to the Company an additional 735,730 pre-reverse split shares of her common stock and become personally liable to the Company for the original $500,000 debt amount plus 12% interest per annum. The lawsuit also seeks to award the Company any attorney's fees and other costs related to this matter. On August 29, 2002, NutraCea filed a motion to dismiss the Complaint filed by the Company due to lack of personal jurisdiction for both NutraCea and Ms. McPeak. On November 27, 2002, NutraCea's motion to dismiss was denied as to both NutraCea and Ms. McPeak. An alternative settlement agreement was reached on December 10, 2003, whereby the suit was dismissed and the Company shall be guaranteed payment on any deficiency upon the sale of their common stock. On September 18, 2003 the Company converted its existing 735,730 preferred shares of NutraCea to 735,730 shares of NutraCea common stock. Also, in September of 2003 per the terms of the new settlement agreement NutraCea transferred an additional 735,730 shares of its common stock to the Company. NutraCea also paid deferred dividends to the Company as of September 18, 2003 in the form of 1,301,692 shares of its common stock. The new settlement agreement also states that the Company has until September 18, 2004 to sell the NutraCea common stock, and in the event the Company is unable to realize $551,797 plus any legal fees the Company incurred as of September 18, 2003 through the sale of its 2,774,772 shares of NutraCea common stock (735,730 preferred shares converted to common plus the additional 735,730 common shares and 1,301,692 shares granted in payment of dividends) that NutraCea shall have 90 days from the date that the Company demonstrates that through its best efforts it has not been able to realize $551,797 plus legal fees through the sale of its NutraCea common stock, to transfer to the Company additional NutraCea common shares to make up any deficiency between the actual sales price obtained by the Company after it has sold all of its NutraCea shares and the amount of $551,797 plus legal fees. In addition, should the Company choose not to sell any portion of its NutraCea common stock prior to September 18, 2004, the value of any portion of its NutraCea common stock still remaining shall be credited against the original $551,797. Furthermore, should the value of the common stock exceed the $551,797, the Company is entitled to keep the excess. The Company is obligated to distribute the stock awards from the settlement to the NutraCea Funding Parties. As of March 31, 2004, the Company has distributed a total of 73,735 shares of NutraCea common stock valued at $114,178 directly to NutraCea Funding Parties. The Company accounted for the transaction as a reduction to the principal amount of the notes. Also during the year ended March 31, 2004, the Company sold 347,743 shares of the NutraCea common stock and distributed the proceeds to NutraCea Funding Parties. The total amount distributed to the investors was $259,585 and was accounted for as a reduction to the principal amount of the notes. The Company plans to distribute the remaining shares of the NutraCea stock or the proceeds from the sales of the stock to NutraCea Funding Parties until the remaining principal and accrued interest is paid in full. At March 31, 2004, the remaining principal balance of these notes was $209,531. The Company has recorded accrued interest of $205,523 as of March 31, 2004. 6 Notes Payable, Notes Receivable and Agreement with VIB.TV The Company has discussed entering into an agreement with Video Internet Broadcasting Corporation (VIB) whereby all of the VIB equity security holders would exchange their VIB securities for common stock of the Company so that VIB becomes a wholly owned subsidiary of the Company immediately following the closing of the share exchange. It is proposed that all of the outstanding VIB equity securities will be acquired by the Company in exchange solely for the Company's common voting stock. This transaction is intended to qualify as a corporate reorganization under Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended, and related or other applicable sections there under. Unless otherwise agreed by the Company and VIB, the transaction shall close only in the event VIB is able to acquire all of the outstanding VIB shares of capital stock. At closing, all of the VIB officers and directors shall resign and the nominees of Faraday shall be appointed the officers and directors of VIB. No written agreement has been reached to memorialize this transaction, the terms of the transaction are still in the discussion stage and have not been agreed by the parties and there can be no assurance that this transaction will close on the stated terms or at all. In connection with the proposed corporate reorganization between the Company and VIB, the parties entered into a loan agreement, pursuant to which the Company has lent VIB a principal amount of $625,000 as of June 22, 2004. VIB is in difficult financial circumstances and there can be no assurance that VIB will be able to repay the amounts lent. Government Regulation We are subject to regulations applicable to businesses generally. In addition, because of HMG's telemarketing activities, it is subject to laws and regulations concerning telemarketing sales and practices. In addition, due to public interest in limiting telemarketing sales practices, it is probable that additional laws and regulations will be adopted with respect to telemarketing in the future, including with respect to issues such as do not call lists. The adoption of any such additional laws or regulations may decrease the ability of HMG to conduct its telemarketing business. However, HMG and its telemarketing activities are not viewed by Faraday management as a significant part of the Company's long term business plan. Employees The Company has two officers who work for the Company, one full time and the other on a part time basis. HMG also employs eight telemarketers. The Company has no other employees. Item 2. Description of Properties Our principal offices are located at 175 South Main, Suite 1240, Salt Lake City, Utah 84111, under the terms of a lease with an unaffiliated lessor, which expires on 2007. The offices comprise 500 square feet of space. HMG subleases approximately 2000 square feet of space in Provo, Utah. HMG operates its telemarketing business from the Provo, Utah location. We believe that our current office space will be adequate to meet our current needs and we do not expect needing additional space until and unless we enter into an acquisition arrangement whereby we are commence operations outside of the telemarketing area. Item 3. Legal Proceedings The Company is not a party to, nor are its properties the subject of, any pending legal proceedings and no such proceedings are known to the Company to be threatened or contemplated by or against it. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of the security holders during the 4th quarter of the fiscal year covered by this report. 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Market Information To the knowledge of current management, there is no public trading market for the Company's common stock. As of June 22, 2004, the Company had outstanding 2,318,000 shares of common stock and 576,500 warrants that were exercisable for a total of 576,500 shares of common stock at an exercise price of $1.50 per share. Of the outstanding shares, 40,000 may be sold pursuant to Rule 144 under the Securities Act or the Company has agreed to register under the Securities Act for sale by security holders. Holders At June 22, 2004, there were approximately 112 holders of record of the Company's common stock. Dividends The Company has not declared any cash dividends within the past two years on its common stock. The Company does not anticipate or contemplate paying dividends in the foreseeable future. It is the present intention of management to utilize available funds, if any, for the acquisition and development of business opportunities. Sales of Equity Securities Between March and June, 2004, the Company entered into loan agreements with eight accredited and sophisticated investors whereby the Company borrowed $765,000 in funds from these investors. Maven Properties, Ltd., an entity controlled by Frank J. Gillen, lent $60,000 of these funds and Badger Investments, LLC, an entity controlled by Shauna Badger, lent $200,000 of these funds. The loans accrue interest at 12% per annum and are due six months from the effective date of the loan. Principal and interest not paid when due bear interest at the rate of 18% per annum. The notes are convertible at any time at the option of the holder into shares of the Company's common stock at the rate of one share of common stock for every $1.00 in principal and accrued interest that is converted. In addition, lenders received warrants to acquire 100 shares of common stock at an exercise price of $1.50 per share for every one thousand dollars in principal lent by the lender. The Company did not use an underwriter in connection with these transactions and the transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 as promulgated thereunder. In April 2004, the Company issued warrants exercisable for 100,000 shares of common stock to five HMG employees who are employed as telemarketers. The warrants are exercisable at $1.50 per share. The Company did not use an underwriter in connection with these transactions and the transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 as promulgated thereunder. In April 2004, the Company issued warrants exercisable for a total of 100,000 shares of common stock to the Company's two directors as compensation for services rendered. The warrants are exercisable at $1.50 per share. The Company did not use an underwriter in connection with these transactions and the transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 as promulgated thereunder. In June 2004, the Company issued 48,000 shares of its common stock to Frank J. Gillen and Shauna Badger in consideration for the cancellation of $24,000 in accrued salary obligations owed to these officers. The Company did not use an underwriter in connection with these transactions and the transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 as promulgated thereunder. The Company has not issued any other securities during the past three fiscal years. The Company is not aware of any other arrangements, the operation of which may, at a subsequent date, result in a change in control of the Company. 8 Repurchases of Equity Securities
(d) Maximum Number or Approximate (c) Total Number of Dollar Value) of Shares Purchases as Shares that May Yet (a) Total Number Part of Publicly Be purchased Under of Shares (b) Average Price Announced Plans the Plans or Purchased Paid per Share or Programs Program(1) ---------------- ------------------ ------------------- -------------------- Period ------ January 1 through January 31, 2004 0 0 0 0 February 1 through February 29, 2004 0 0 0 0 March 1 through March 31, 2004 250,000 $.14 0 545,400 Total 250,000 $.14 0 545,400
The Company entered into a verbal agreement whereby it agreed to repurchase 795,400 shares of its common stock (includes those identified in the table) from Reed Jensen, Jeffrey Brown, and Lee Jackson for aggregate consideration of $59,250. An initial 250,000 shares were redeemed for $34,375 and in March 2004 and the remaining 545,400 shares were redeemed in May 2004 for $25,000. Item 6. Management's Discussion and Analysis or Plan of Operation The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. Plan of Operation The Company has no business operations, and very limited assets or capital resources. The Company's business plan is to seek one or more potential business ventures that, in the opinion of management, may warrant involvement by the Company. The Company recognizes that because of its limited financial, managerial and other resources, the type of suitable potential business ventures which may be available to it will be extremely limited. The Company's principal business objective will be to seek long-term growth potential in the business venture in which it participates rather than to seek immediate, short-term earnings. In seeking to attain the Company's business objective, it will not restrict its search to any particular business or industry, but may participate in business ventures of essentially any kind or nature. It is emphasized that the business objectives discussed are extremely general and are not intended to be restrictive upon the discretion of management. The Company will not restrict its search for any specific kind of firms, but may participate in a venture in its preliminary or development stage, may participate in a business that is already in operation or in a business in various stages of its corporate existence. It is impossible to predict at this stage the status of any venture in which the Company may participate, in that the venture may need additional capital, may merely desire to have its shares publicly traded, or may seek other perceived advantages which the Company may offer. In some instances, the business endeavors may involve the acquisition of or merger with a corporation which does not need substantial additional cash but which desires to establish a public trading market for its common stock. 9 In furtherance of the Company's plan of operation, the Company has discussed entering into an agreement with VIB whereby all of the VIB equity security holders would exchange their VIB securities for common stock of the Company so that VIB becomes a wholly owned subsidiary of the Company immediately following the closing of the share exchange. It is proposed that all of the outstanding VIB equity securities will be acquired by the Company in exchange solely for the Company's common voting stock. This transaction is intended to qualify as a corporate reorganization under Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended, and related or other applicable sections there under. Unless otherwise agreed by the Company and VIB the transaction will close only in the event VIB is able to acquire all of the outstanding VIB shares of capital stock. At closing, all of the VIB officers and directors shall resign and the nominees of the Company would be appointed the officers and directors of VIB. No written agreement has been reached to memorialize this transaction, the terms of the transaction are still in the discussion stage and have not been agreed by the parties and there can be no assurance that this transaction will close on the stated terms or at all. In connection with the proposed corporate reorganization between the Company and VIB, the parties entered into a loan agreement, pursuant to which the Company has lent VIB a principal amount of $625,000 as of June 22, 2004. VIB is in difficult financial circumstances and there can be no assurance that VIB will be able to repay the amounts lent. Liquidity and Capital Resources We used net cash for operating activities of $102,598 during the year ended March 31, 2004. As of March 31, 2004, we have $153,854 in current assets, $1,147,324 in current liabilities and a working capital (deficit) of ($993,470). Our current liabilities include $212,443 in accrued liabilities, an obligation in the amount of $209,531 payable on demand and unsecured convertible promissory notes in the amount of $710,000 that are due and payable in full in September 2004. Our working capital requirements for the foreseeable future will vary based upon a number of factors, including the costs associated with any potential acquisition, including the proposed transaction with VIB, and other factors that may not be foreseeable at this time. We believe that we will need at least $100,000 in funding for then next twelve months if we do not enter into a transaction with VIB or another acquisition transaction and we will need to raise additional funds in an undetermined amount thereafter. We have no commitments to provide additional funding and there can be no assurance that we will be able to obtain additional funding on satisfactory terms or at all. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Recent Accounting Pronouncements SFAS No. 143 - In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which established a uniform methodology for accounting for estimated reclamation and abandonment costs. The statement was effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material effect on the financial statements of the Company. SFAS No. 145 - On April 30, 2002, the FASB issued FASB Statement No. 145 (SFAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145 rescinds both FASB Statement No. 4 (SFAS 4), "Reporting Gains and Losses from Extinguishment of Debt," and the amendment to SFAS 4, FASB Statement No. 64 (SFAS 64), "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." Through this rescission, SFAS 145 eliminates the requirement (in both SFAS 4 and SFAS 64) that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. However, an entity is not prohibited from classifying such gains and losses as extraordinary items, so long as it meets the criteria in paragraph 20 of Accounting Principles Board Opinion No. 30, Reporting the Results of 10 Operations Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. Further, SFAS 145 amends paragraph 14(a) of FASB Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The amendment requires that a lease modification (1) results in recognition of the gain or loss in the 9 financial statements, (2) is subject to FASB Statement No. 66, "Accounting for Sales of Real Estate," if the leased asset is real estate (including integral equipment), and (3) is subject (in its entirety) to the sale-leaseback rules of FASB Statement No. 98, "Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct Financing Leases." Generally, FAS 145 is effective for transactions occurring after May 15, 2002. The adoption of SFAS 145 did not have a material effect on the financial statements of the Company. SFAS No. 146 - In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS 146 will change on a prospective basis the timing of when the restructuring charges are recorded from a commitment date approach to when the liability is incurred. The adoption of SFAS 146 did not have a material effect on the financial statements of the Company. SFAS No. 147 - In October 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 147, "Acquisitions of Certain Financial Institutions" which is effective for acquisitions on or after October 1, 2002. This statement provides interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both SFAS 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets". The adoption of SFAS No. 147 did not have a material effect on the financial statements of the Company. SFAS No. 148 - In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123" which is effective for financial statements issued for fiscal years ending after December 15, 2002. This Statement amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The adoption of SFAS No. 148 did not have a material effect on the financial statements of the Company. SFAS No. 149 - In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" which is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. This statement amends and clarifies financial accounting for derivative instruments embedded in other contracts (collectively referred to as derivatives) and hedging activities under SFAS 133. The adoption of SFAS No. 149 did not have a material effect on the financial statements of the Company. SFAS No. 150 - In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" which is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. This Statement establishes standards for how an issuer classifies and measures in its statement of 11 financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. The adoption of SFAS No. 150 did not have a material effect on the financial statements of the Company. FASB Interpretation No. 45 - "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57 and 107". The initial recognition and initial measurement provisions of this Interpretation are to be applied prospectively to guarantees issued or modified after December 31, 2002. The disclosure requirements in the Interpretation were effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FASB Interpretation No. 45 did not have a material effect on the financial statements of the Company. FASB Interpretation No. 46 - In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities." FIN 46 provides guidance on the identification of entities for which control is achieved through means other than through voting rights, variable interest entities, and how to determine when and which business enterprises should consolidate variable interest entities. This interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 did not have a material impact on the Company's financial statements. During the year ended March 31, 2004, the Company adopted the following Emerging Issues Task Force Consensuses which did not have a material impact on the Company's financial statements: EITF Issue No. 00-21 "Revenue Arrangements with Multiple Deliverables", EITF Issue No. 01-8 " Determining Whether an Arrangement Contains a Lease", EITF Issue No. 02-3 "Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities", EITF Issue No. 02-9 "Accounting by a Reseller for Certain Consideration Received from a Vendor", EITF Issue No. 02-17, "Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination", EITF Issue No. 02-18 "Accounting for Subsequent Investments in an Investee after Suspension of Equity Method Loss Recognition", EITF Issue No. 03-1, "The Meaning of Other Than Temporary and its Application to Certain Instruments", EITF Issue No. 03-5, "Applicability of AICPA Statement of Position 9702, `Software Revenue Recognition' to Non-Software Deliverables in an Arrangement Containing More Than Incidental Software", EITF Issue No. 03-7, "Accounting for the Settlement of the Equity Settled Portion of a Convertible Debt Instrument That Permits or Requires the Conversion Spread to be Settled in Stock", EITF Issue No. 03-10, "Application of EITF Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers. Critical Accounting Policies The carrying value of the Company's cash equivalents and accounts payable approximate fair values due to their short-term nature. The carrying value of the Company's investments equals their fair value, which is based upon quoted prices in active markets. The Company follows the provisions of SFAS 115 regarding marketable securities. The Company`s securities investments that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading securities are recorded at fair value on the balance sheet in current assets, with the change in fair value during the period included in earnings. Securities investments that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and recorded at amortized cost in investments and other assets. Securities investments not classified as either held-to-maturity or trading securities are classifies as available-for-sale securities. Available-for-sale securities are recorded at fair value in investments and other assets on the balance sheet, with the change in fair value during the period excluded from earnings and recorded net of tax as a separate component of equity. All marketable securities held by the Company have been classified as available-for-sale securities. Under FASB Statement 123, the Company estimates the fair value of each stock purchase warrant at the grant date by using the Black-Scholes option 12 pricing model with the following weighted average assumptions used for grants, respectively; dividend yield of zero percent; expected volatility of 108%; risk-free interest rate of 4.5 percent and expected life of 6 months, for the year ended March 31, 2004. As of March 31, 2003 and 2002 there were no stock purchase warrants outstanding. Risk Factors The Company is subject to certain other risk factors due to its development stage status, the industry in which it competes and the nature of its operations. These risk factors include the following. We have a history of losses and may never become profitable. We have no operations and have incurred a net loss of $301,193 for the year ended March 31, 2004. We will not be profitable until and unless we acquire an operating business and we anticipate continuing to lose money. We have no written agreement or commitments relating to the acquisition of an operating business and there can be no assurance that we will acquire and operating business on satisfactory terms or at all. There is no assurance that we will be able to generate revenues in the future. We do not have sufficient funds to execute our business plan. The Report of Independent Public Accountants relating to the Company's March 31, 2004 audited financial statements contains a "going concern" explanatory paragraph. We believe that we will need at least $100,000 in funding for then next twelve months if we do not enter into an acquisition transaction and we will need to raise additional funds in an undetermined amount thereafter. We have no commitments to provide additional funding. There can be no assurance that we will be able to secure additional funds by the issuance of equity or debt securities or that such funding, if it can be obtained, will be available on favorable terms. Moreover, the Company's business plans may change or unforeseen events may occur which affect the amount of additional funds required by the Company. If additional funds are not obtained when required, the lack thereof may have a material adverse effect on the Company. We may not be repaid the $625,000 that we lent to VIB. We have made loans to VIB in the principal amount of $625,000. VIB is in financial distress. There can be no assurance that the Company will be repaid any of the funds that were lent. We may be subject to liability as a result of our failure to file the required reports with the Securities and Exchange Commission Our common stock is registered pursuant to section 12(g) of the Securities Exchange Act of 1934 (the "1934 Act") and we are thereby obligated to file annual reports on Form 10-K or 10-KSB, quarterly reports on Form 10-Q or 10-QSB, Current Reports on Form 8-K, other reports and information as described in the 1934 Act and related rules and to otherwise comply with various provisions of the 1934 Act and related rules. Since 1996 we have failed to comply with substantially all of the obligations imposed upon it by the 1934 Act (the "1934 Act Violations"). As a result, we could be subject to substantial civil and criminal penalties due to such non-compliance. There can be no assurance that substantial civil and criminal penalties will not be imposed. Our management is involved with other business activities, which could reduce the time they allocate to our operations. Our operations depend substantially on the skills and experience of our officers and directors. We do not have employment agreements with any of our officers. Any of our officers or directors can leave at any time. Moreover, our officers and directors are each involved in other business activities and may, in the future, become involved in other business opportunities. If a specific business opportunity becomes available, one or more of these individuals may face a conflict in selecting between the Company and other business opportunities. Should the services of our present officers and directors become unavailable for any reason, our business could be adversely affected. There is 13 no assurance that we will be able to retain the existing working team or attract new officers and directors of the caliber and experience needed to achieve our objectives. No assurance of a liquid public market for our common stock The is no market for our securities and there can be no assurance that a market will develop. If a market develops, there can be no assurance as to the depth or liquidity of any market for our securities or the prices at which holders may be able to sell their securities. As a result, an investment in our securities may not be liquid, and investors may not be able to liquidate their investment readily or at all when they need or desire to sell. Applicability of low priced stock risk disclosure requirements may adversely affect the prices at which our common stock trades Our common stock may be considered a low priced security under rules promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"). Under these rules, broker-dealers participating in transactions in low priced securities must first deliver a risk disclosure document which describes the risks associated with such stocks, the broker-dealer's duties, the customer's rights and remedies, and certain market and other information, and make a suitability determination approving the customer for low priced stock transactions based on the customer's financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent of the customer, and provide monthly account statements to the customer. With these restrictions, the likely effect of designation as a low priced stock will be to decrease the willingness of broker-dealers to make a market for the stock, to decrease the liquidity of the stock and to increase the transaction cost of sales and purchases of such stock compared to other securities. Item 7. Financial Statements See attached financial statements. Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure The Company is not aware, and has not been advised by its auditors, of any disagreement on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. Item 8A. Controls and Procedures The Company has evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures as of March 31, 2004, pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting him to material information relating to the Company required to be included in the Company's periodic SEC filings. There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation. 14 PART III Item 9. Directors and Executive Officers of the Registrant Identify Directors and Executive Officers Set forth below is certain information concerning each of the directors and executive officers of the Company as of June 22, 2004: With Company Name Age Position Since ---- --- -------- ------------- Frank J. Gillen 35 Director, President, Chief Executive 1999 Officer and Chief Financial Officer Shauna Badger 48 Director, Secretary and Treasurer 2004 - ------------- Frank J. Gillen. Mr. Gillen has been with the Company since 1999 and his term as a director of the Company expires at the next annual meeting of stockholders. Mr. Gillen was the founder of Maven Strategic Partners, Inc. which was formed in 1999. Maven Strategic Partners, Inc. invested in various small cap stocks and was active in day trading. A small part of the revenues were generated from business consulting and identifying distressed companies that could be bought or merged into another strategic company. Mr. Gillen sold his interest in Maven Strategic Partners, Inc. in 2002. Mr. Gillen then began working for Ford Allen, Inc., a business consulting company until he began working for the Company on a full time basis. Shauna Badger. Ms. Badger has been with the Company since 2004 and her term as a director of the Company expires at the next annual meeting of stockholders. During the prior five years, Ms. Badger has been principally employed as the sole proprietor of an interior design business Rocky Mountain Designs, that purchases investment property in Park City and Deer Valley, Utah. The interior design business specialize in designing and decorating second home vacation properties that it either leases or resells. Ms. Badger spends approximately 60% of her available business time working for the Company. Our directors do not hold directorships in any other public companies. Identify Significant Employees The Company has no other significant employees. Family Relationships None Involvement in Certain Legal Proceedings Our officers and directors have not been involved in any material legal proceedings which occurred within the last five years of any type as described in Regulation S-B. 15 Audit Committee The Company has only two part-time employees that are also the sole directors and officers. The Company has no operations and inadequate funding. Therefore, the Company has no audit, compensation or nominating committee and, as a result, the Company does not have a financial expert serving on its audit committee. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act requires our executive officers, directors and persons who beneficially own more than 10% of our common stock to file initial reports of ownership and reports of changes in ownership with the SEC. Such persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms filed by such persons. Based solely on our review of forms furnished to us and representations from reporting persons, we believe that all filing requirements applicable to our executive officers, directors and more than 10% stockholders were complied with during the year ended March 31, 2004, except as otherwise set forth in the following paragraph. In March 2004, the Company redeemed 250,000 shares of common stock from Reed Jensen, Jeffrey Brown, and Lee Jackson. In March 2004, Maven Properties, Ltd., an entity controlled by Frank J. Gillen, and Badger Investments, LLC, an entity controlled by Shauna Badger, lent the Company $60,000 and $200,000, respectively, which loans are convertible into common stock of the Company and, in connection with the loans, these lenders received warrants immediately exercisable for 6,000 and 20,000 shares of common stock, respectively. To the Company's knowledge, none of the transactions described in this paragraph have been report the required Section 16(a) forms. Code of Ethics Due to the fact that the Company has no operations and inadequate funding, the Company has not adopted a Code of Ethics and does not anticipate doing so in the immediate future. Item 10. Executive Compensation Summary Compensation Table. The following table provides certain information regarding compensation paid by the company to the named executive officer.
SUMMARY COMPENSATION TABLE Annual Compensation Awards Payouts --------------------------------------- ------------------------ ---------- Restricted Stock All Other Name and Other Annual Stock Options/ LTIP Compensation Principal Position Year(1) Salary ($) Bonus($) Compensation($)(2) Awards ($) SAR(#)(2) Payouts($) ($) (3) ------------------ ------- ---------- -------- ------------------ ---------- --------- ---------- ------- Frank J. Gillen 2002 0 0 - - - - - Director, CEO, President 2003 3,000 0 - - - - - and CFO 2004 18,000 0 - - - - - - ---------------
(1) Represents fiscal years ending March 31 of each year. (2) Does not include warrants exercisable for 50,000 shares of the Company's common stock at $1.50 per share that were issued after March 31, 2004. Compensation of Directors Each director received warrants exercisable for 50,000 shares of common stock in April, 2004 as compensation for services rendered on the Board. The Company has made no other arrangement with respect to the future compensation of directors. 16 Compensation of Officers In 2003, the Company paid Mr. Gillen a monthly wage of $1,000 and in 2004 that amount was increased to $4,000 per month. Beginning in 2004, the Company also agreed to pay Ms. Badger a monthly wage of $4,000 per month. The Company has employment agreements in place with both of its officers. After March 31, 2004, the Company also issued to a total of 48,000 shares of common stock as payment for $24,000 in back wages. Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The following table sets forth certain information with respect to the beneficial ownership of the common stock of the Company as of June 22, 2004, for: (i) each person who is known by the Company to beneficially own more than 5 percent of the Company's common stock, (ii) each of the Company's directors, (iii) each of the Company's Named Executive Officers, and (iv) all directors and executive officers as a group. As of June 22, 2004, the Company had 2,318,000 shares of common stock outstanding.
Name and Address Shares Beneficially Percentage of Shares Of Beneficial Owner(1) Owned(2) Beneficially Owned Position ---------------------- ------------------- -------------------- -------- Frank J. Gillen 1,005,000(3) 41.2% Director, President, Chief Executive Officer and Chief Financial Officer Shauna Badger 1,094,000(4) 42.3% Director, Secretary and Treasurer Directors and Executive Officers 2,099,000 83.5% as a Group (2 people) Maven Properties, Ltd. 931,000(5) 39.1%(5) Badger Investments, LLC 870,000(6) 34.3%(6) 549 West 4630 North Provo, Utah 84604 - ----------------
(1) Except where otherwise indicated, the address of the beneficial owner is deemed to be the same address as the Company. (2) Beneficial ownership is determined in accordance with SEC rules and generally includes holding voting and investment power with respect to the securities. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for computing the percentage of the total number of shares beneficially owned by the designated person, but are not deemed outstanding for computing the percentage for any other person. (3) Includes 24,000 shares of common stock and warrants that are immediately exercisable for 50,000 shares of common stock at $1.50 per share that are owned by Mr. Gillen. Also includes 865,000 shares of common stock, warrants that are immediately exercisable for 6,000 shares of common stock at $1.50 per share and a convertible note that is immediately convertible into 60,000 shares of common stock (the note conversion figure does not include accrued interest that is also convertible into shares of common stock) that are owned by Maven Properties, Ltd., an entity that is controlled by Mr. Gillen. The convertible notes are convertible into common stock of the Company at the rate of one share of common stock for every $1.00 of interest and accrued interest that is owing on the obligations. (4) Includes 174,000 shares of common stock and warrants that are immediately exercisable for 50,000 shares of common stock at $1.50 per share that are owned by Ms. Badger. Also includes 650,000 shares of common stock, warrants that are immediately exercisable for 20,000 shares of common stock at $1.50 per share and a convertible note that is immediately convertible into 200,000 shares of common stock (the note conversion figure does not include accrued interest that is also convertible into shares of common stock) that are owned by Badger Investments, LLC, an entity that is controlled by Ms. Badger. The convertible notes are convertible into common stock of the Company at the rate of one share of common stock for every $1.00 of interest and accrued interest that is owing on the obligations. (5) These shares are included in the reported beneficial ownership of Mr. Gillen. See footnote 3. (6) These shares are included in the reported beneficial ownership of Ms. Badger. See footnote 4. Changes in Control With the exception of the possible reorganization with VIB, the Company is not aware of any arrangements which may result in a change in control of the Company. For a discussion of the possible VIB transaction see "Business-Lending Activities." 17 Securities Authorized for Issuance Under Equity Compensation Plans The Company does not have any equity compensation plans. Item 12. Certain Relationships and Related Transactions. In March 2004, Maven Properties, Ltd., an entity controlled by Frank J. Gillen, and Badger Investments, LLC, an entity controlled by Shauna Badger, lent the Company $60,000 and $200,000, respectively, which loans are convertible into common stock of the Company at the rate of one share of common stock for every $1.00 of interest and accrued interest that is owing on the obligations and, in connection with the loans, these lenders received warrants immediately exercisable for 6,000 and 20,000 shares of common stock, respectively. From March through May 2004, the Company redeemed 795,400 shares of common stock from Reed Jensen, Jeffrey Brown, and Lee Jackson for aggregate consideration of $59,250. In addition, in June 2004, Maven Properties, Ltd., Shauna Badger and Badger Investments, LLC purchased an aggregate of 1,665,000 shares of common stock from Reed Jensen, Jeffrey Brown, and Lee Jackson for aggregate consideration of $78,250. Item 13. Exhibits and Reports on Form 8-K. Exhibits Listed on page 20 hereof. Reports on Form 8-K No reports on Form 8-K were filed by the Company during the fourth quarter ended March 31, 2004. Item 14. Principal Accountant Fees and Services. Audit Fees The aggregate fees billed for professional services rendered by our principal accountant for the audit of our annual financial statements, review of financial statements included in our quarterly reports and other fees that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal year ended March 31, 2004 was $17,770. Audit Related Fees The aggregate fees billed for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements, other than those previously reported in this Item 14, for the fiscal year ended March 31, 2004 was $17,395. Tax Fees The aggregate fees billed for professional services rendered by our principal accountant for tax compliance, tax advice and tax planning for the fiscal year ended March 31, 2004 was $375. All Other Fees There were no fees billed for products and services provided by the principal accountant, other than those previously in this Item 14, for the fiscal year ended March 31, 2004. Audit Committee The Company's Board of Directors functions as its audit committee. It is the policy of the Company for all work performed by our principal accountant to be approved in advance by the Board of Directors. All of the services described above in this Item 14 were approved in advance by our Board of Directors. 18 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized. FARADAY FINANCIAL, INC. (Registrant) Date: June 29, 2004 By /s/ Frank J. Gillen Frank J. Gillen Director, President, Chief Executive Officer and Chief Financial Officer In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Frank J. Gillen Director, President, Chief Executive June 29, 2004 - ---------------------- Officer and Chief Financial Officer Frank J. Gillen /s/ Shauna Badger Director, Secretary and Treasurer June 29, 2004 - ---------------------- Shauna Badger 19 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION OF EXHIBIT ----------- ---------------------- 3(i).1 Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 of the Company's Form 10-SB, File No. 0-22236) 3(ii).1 Bylaws of the Company (Incorporated by reference to Exhibit 3.2 of the Company's Form 10-SB, File No. 0-22236) 10.1 Settlement Agreement by and between the Company and NutraCea, dated December 10, 2002. 10.2 Loan Agreement by and between the Company and Video Internet Broadcasting Corporation, dated February 18, 2004 10.3 Security Agreement by and between the Company and Video Internet Broadcasting Corporation, dated March 12, 2004 10.4 Intellectual Property Security Agreement by and between the Company and Video Internet Broadcasting Corporation, dated March 12, 2004 10.5 Amendment Number One to the Agreements by and between the Company and Video Internet Broadcasting Corporation, dated April 21, 2004 10.6 Amendment Number Two to the Agreements by and between the Company and Video Internet Broadcasting Corporation, dated May 1, 2004 10.7 Form of Loan Agreement by and between the Company and Lenders whereby the Company borrowed the principal amount of $765,000. 10.8 Form of Loan Agreement by and between the Company and Lenders whereby the Company borrowed the principal amount of $445,000. 10.9 Employment Agreement with Frank J. Gillen 10.10 Employment Agreement with Shauna Badger 21.1 Subsidiaries of the Registrant 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 20 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS March 31, 2004 and 2003 F-1 C O N T E N T S Independent Auditors' Report............................................F-3 Consolidated Balance Sheets.............................................F-4 Consolidated Statements of Operations and Other Comprehensive Income....F-5 Consolidated Statements of Stockholders' Equity (Deficit)...............F-6 Consolidated Statements of Cash Flows...................................F-8 Notes to the Consolidated Financial Statements ........................F-10 F-2 INDEPENDENT AUDITORS' REPORT To the Board of Directors and the Stockholders of Faraday Financial, Inc. and Subsidiaries (A Development Stage Company) Salt Lake City, Utah We have audited the accompanying consolidated balance sheets of Faraday Financial, Inc. and Subsidiaries (a development stage company) as of March 31, 2004 and 2003 and the related consolidated statements of operations and other comprehensive income, stockholders' equity (deficit) and cash flows for the years ended March 31, 2004, 2003 and 2002 and from inception on June 11, 1992 through March 31, 2004. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements from inception on June 11, 1992 through March 31, 2001 were audited by other auditors whose report dated January 17, 2001 expensed an unqualified opinion and included as explanatory paragraph raising substantial doubt about the Company's ability to continue as a going concern. Our opinion from inception on June 11, 1992 through March 31, 2001 is based solely on the opinion of the prior auditors. We conducted our audits 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Faraday Financial, Inc. and Subsidiaries (a development stage company) as of March 31, 2004 and 2003 and the results of their operations and their cash flows for the years ended March 31, 2004, 2003 and 2002 and from inception on June 11, 1992 through March 31, 2004 in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company is a development stage company with no significant operating results to date, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. HJ & Associates, LLC Salt Lake City, Utah May 18, 2004 F-3
FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Consolidated Balance Sheets ASSETS March 31, ----------------------------------- 2004 2003 --------------- --------------- CURRENT ASSETS Cash in bank $ 141,786 $ - Cash in escrow 5,000 - Accrued interest receivable 7,068 - --------------- --------------- Total Current Assets 153,854 - --------------- --------------- PROPERTY AND EQUIPMENT Furniture & equipment, net 14,240 - Less - accumulated depreciation (165) - --------------- --------------- Total Property and Equipment 14,075 - --------------- --------------- OTHER ASSETS Note receivable (Note 2) 500,000 - Available-for-sale securities (Note 1) - 662,157 --------------- --------------- Total Other Assets 500,000 662,157 --------------- --------------- TOTAL ASSETS $ 667,929 $ 662,157 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable $ 15,350 $ 9,800 Accrued liabilities (Note 2) 212,443 133,732 Convertible debt related parties (Note 2) 919,531 500,295 --------------- --------------- Total Current Liabilities 1,147,324 643,827 --------------- --------------- Total Liabilities 1,147,324 643,827 --------------- --------------- STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $0.001 par value, 20,000,000 shares authorized; 3,000,000 issued and 2,750,000 and 3,000,000 outstanding, respectively 3,000 3,000 Capital in excess of par value 4,902 4,902 Treasury shares at cost (34,375) - Other comprehensive income - 162,157 Deficit accumulated during the development stage (452,922) (151,729) --------------- --------------- Total Stockholders' Equity (Deficit) (479,395) 18,330 --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 667,929 $ 662,157 =============== =============== The accompanying notes are an integral part of these consolidated financial statements. F-4
FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Consolidated Statements of Operations and Other Comprehensive Income From Inception on For the years ended, June 11, March 31, 1992 Through ----------------------------------------------------- March 31, 2004 2003 2002 2004 --------------- --------------- --------------- --------------- REVENUES $ - $ - $ - $ - EXPENSES Depreciation expense 165 - - 165 General and administrative 103,148 529 16,619 131,035 --------------- --------------- --------------- --------------- Total Expenses 103,313 529 16,619 131,200 --------------- --------------- --------------- --------------- LOSS FROM OPERATIONS (103,313) (529) (16,619) (131,200) --------------- --------------- --------------- --------------- OTHER INCOME (EXPENSE) Loss on sale of securities (311,004) - - (311,004) Gain on legal settlement (Note 2) 184,767 - - 184,767 Interest income 7,068 - - 15,567 Interest expense (78,711) (67,740) (56,102) (211,052) --------------- --------------- --------------- --------------- Total Other Income (Expenses) (197,880) (67,740) (56,102) (321,722) --------------- --------------- --------------- --------------- NET LOSS (301,193) (68,269) (72,721) (452,922) --------------- --------------- --------------- --------------- OTHER COMPREHENSIVE INCOME Change in marketable securities (162,157) 110,360 51,797 - --------------- --------------- --------------- --------------- Total Other Comprehensive Income (162,157) 110,360 51,797 - --------------- --------------- --------------- --------------- COMPREHENSIVE INCOME (LOSS) $ (463,350) $ 42,091 $ (20,924) $ (452,922) =============== =============== =============== =============== BASIC LOSS PER SHARE $ (0.10) $ 0.01 $ (0.01) =============== =============== =============== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,750,000 3,000,000 3,000,000 =============== =============== =============== FULLY DILUTED INCOME (LOSS) PER SHARE $ (0.10) $ 0.01 $ (0.01) =============== =============== =============== FULLY DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,750,000 3,500,000 3,000,000 =============== =============== =============== The accompanying notes are an integral part of these consolidated financial statements. F-5
FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Consolidated Statements of Stockholders' Equity (Deficit) Deficit Accumulated Common Stock Additional Treasury Stock Other During the --------------------- Paid-in ----------------------- Comprehensive Development Shares Amount Capital Shares Amount Income Stage --------- -------- -------- ------- ---------- ----------- ------------ Inception, June 11, 1992 - $ - $ - - $ - $ - $ - Common stock issued for cash at $0.001 per share 400,000 400 100 - - - - Common stock issued for cash at $0.01 per share 24,600 25 221 - - - - Capital Contribution - - 500 - - - - Net loss from inception on June 11, 1992 through March 31, 1999 - - - - - - (2,902) --------- -------- -------- ------- ---------- ----------- ------------ Balance, March 31, 1999 424,600 425 821 - - - (2,902) Conversion of note payable to Related party at $0.003 per share 575,400 575 1,081 - - - - Common stock issued for cash at $0.003 per share 2,000,000 2,000 3,000 - - - - Net loss for the year ended March 31, 2000 - - - - - - (4,894) --------- -------- -------- ------- ---------- ----------- ------------ Balance, March 31, 2000 3,000,000 3,000 4,902 - - - (7,796) Net loss for the year ended March 31, 2001 - - - - - - (2,943) --------- -------- -------- ------- ---------- ----------- ------------ Balance, March 31, 2001 3,000,000 $ 3,000 $ 4,902 - $ - $ - $ (10,739) --------- -------- -------- ------- ---------- ----------- ------------ The accompanying notes are an integral part of these consolidated financial statements. F-6
FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Consolidated Statements of Stockholders' Equity (Deficit) (Continued) Deficit Accumulated Common Stock Additional Treasury Stock Other During the --------------------- Paid-in ----------------------- Comprehensive Development Shares Amount Capital Shares Amount Income Stage --------- -------- -------- ------- ---------- ----------- ------------ Balance, March 31, 2001 3,000,000 $ 3,000 $ 4,902 - $ - $ - $ (10,739) Unrealized Gain on Investment - - - - - 51,797 - Net loss for the year ended March 31, 2002 - - - - - - (72,721) --------- -------- -------- ------- ---------- ----------- ------------ Balance, March 31, 2002 3,000,000 3,000 4,902 - - 51,797 (83,460) Unrealized Gain on Investment - - - - - 110,360 - Net loss for the year ended March 31, 2003 - - - - - - (68,269) --------- -------- -------- ------- ---------- ----------- ------------ Balance, March 31, 2003 3,000,000 3,000 4,902 - - 162,157 (151,729) Purchase of treasury shares - - - 250,000 (34,375) - - Unrealized Loss on Investment - - - - - (162,157) - Net loss for the year ended March 31, 2004 - - - - - - (301,193) --------- -------- -------- ------- ---------- ----------- ------------ Balance, March 31, 2004 3,000,000 $ 3,000 $ 4,902 250,000 $ (34,375) $ - $ (452,922) ========= ======== ======== ======= ========== =========== ============ The accompanying notes are an integral part of these consolidated financial statements. F-7
FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Consolidated Statements of Cash Flows From Inception on For the Years Ended June 11, March 31, 1992 Through ---------------------------------------------- March 31, 2004 2003 2002 2004 ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (301,193) $ (68,269) $ (72,721) $ (452,922) Adjustments to reconcile net loss to used by operating activities: Depreciation & amortization expense 165 - - 436 Expenses paid with note payable - - - 1,656 Loss on sale of securities 311,004 - - 311,004 Gain on legal settlement (184,767) - - (184,767) Changes in operating assets and liabilities: Increase in cash in escrow (5,000) - - (5,000) (Increase) decrease in interest receivable (7,068) - 8,499 (7,068) Increase in accounts payable 5,550 - - 15,350 Increase in current liabilities and accrued interest 78,711 67,740 56,236 212,443 ------------ ------------ ------------ ------------ Net Cash Used by Operating Activities (102,598) (529) (7,986) (108,868) ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Organization costs - - - (271) Purchase of fixed assets (14,240) - - (14,240) Purchase of securities - - - (500,000) Sale of securities 259,585 - - 259,585 Issuance of note receivable (500,000) - (50,000) (500,000) ------------ ------------ ------------ ------------ Net Cash Used by Investing Activities (254,655) - (50,000) (754,926) ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Common stock issued for cash - - - 5,746 Purchase of treasury shares (34,375) - - (34,375) Proceeds from contribution of capital - - - 500 Proceeds from convertible notes 710,000 295 58,220 1,210,295 Principal payments on convertible notes (176,586) - - (176,586) ------------ ------------ ------------ ------------ Net Cash Provided by Financing Activities 499,039 295 58,220 1,005,580 ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH 141,786 (234) 234 141,786 CASH AT BEGINNING OF YEAR - 234 - - ------------ ------------ ------------ ------------ CASH AT END OF YEAR $ 141,786 $ - $ 234 $ 141,786 ============ ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements. F-8
FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Consolidated Statements of Cash Flows (Continued) From Inception on For the Years Ended June 11, March 31, 1992 Through ---------------------------------------------- March 31, 2004 2003 2002 2004 ------------ ------------ ------------ ------------ SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued for debt paid on behalf of the Company $ - $ - $ - $ 1,656 Distribution of assets in payment of convertible debt $ 114,178 $ - $ - $ 114,178 CASH PAID FOR: Interest $ - $ - $ - $ - Taxes $ - $ - $ - $ - The accompanying notes are an integral part of these consolidated financial statements. F-9
FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements March 31, 2004 and 2003 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary of significant accounting policies of Faraday Financial, Inc. and Subsidiaries is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles in the United States of America and have been consistently applied in the preparation of the financial statements. a. Organization and Business Activities Faraday Financial, Inc. was incorporated under the laws of the State of Delaware June 11, 1992. The Company has been in the development stage since incorporation and has spent most of its efforts in developing and marketing various products; however, it has not yet had revenues sufficient to sustain operations and has relied upon financing from shareholders and an occasional issuance of its common stock. The Company intends to seek out various business opportunities, including acquisition. During December 2003, the Company incorporated Lynx WiFi, Inc. as a wholly-owned subsidiary. In March 2004, the Company incorporated Homenet Utah, Inc. and Homenet Marketing Group, Inc. as wholly-owned subsidiaries. The subsidiaries have had no operations since inception. b. Basis of Presentation The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year presentation. c. Cash and Cash Equivalents Short-term liquid investments with an initial maturity of generally three months or less, including investments in money market funds are considered cash equivalents. d. Revenue Recognition Policy The Company currently has no source of revenues. Revenue recognition policies will be determined when principal operations begin. e. Fair Value of Financial Instruments The carrying value of the Company's cash equivalents and accounts payable approximate fair values due to their short-term nature. The carrying value of the Company's investments equals their fair value, which is based upon quoted prices in active markets. F-10 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements March 31, 2004 and 2003 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) f. Property and Equipment Property and equipment are stated at cost. Expenditures for small tools, ordinary maintenance and repairs are charged to operations as incurred. Major additions and improvements are capitalized. Depreciation is computed using the straight-line method over estimated useful lives as follows: Equipment 3 to 5 years Furniture and fixtures 5 years Depreciation expense for the years ended March 31, 2004, 2003 and 2002 was 165, $0 and $0, respectively. g. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Homenet Marketing Group, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. h. Marketable Securities The Company follows the provisions of SFAS 115 regarding marketable securities. The Company`s securities investments that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading securities are recorded at fair value on the balance sheet in current assets, with the change in fair value during the period included in earnings. Securities investments that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and recorded at amortized cost in investments and other assets. Securities investments not classified as either held-to-maturity or trading securities are classifies as available-for-sale securities. Available-for-sale securities are recorded at fair value in investments and other assets on the balance sheet, with the change in fair value during the period excluded from earnings and recorded net of tax as a separate component of equity. All marketable securities held by the Company have been classified as available-for-sale securities. F-11 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements March 31, 2004 and 2003 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) i. Earnings Per Share ("EPS") The computation of basic loss per share of common stock is based on the weighted average number of shares outstanding during the period of the consolidated financial statements. Fully diluted income (loss) per share calculations are not presented for years in which a loss is incurred as any stock equivalents are antidilutive in nature. The Company has included 500,000 common stock equivalents at March 31, 2003, ad has excluded 990,531 and 500,000 common stock equivalents at March 31, 2004 and 2002, respectively.
For the Year Ended March 31, 2004 ----------------------------------------------------------------- Loss Shares Per Share (Numerator) (Denominator) Amount ----------------------------------------------------------------- Basic $ (463,350) 2,750,000 (0.17) Fully Diluted $ (463,350) 2,750,000 (0.17) For the Year Ended March 31, 2003 ----------------------------------------------------------------- Loss Shares Per Share (Numerator) (Denominator) Amount ----------------------------------------------------------------- Basic $ 42,091 3,000,000 0.01 Fully Diluted $ 42,091 3,500,000 0.01 For the Year Ended March 31, 2002 ----------------------------------------------------------------- Loss Shares Per Share (Numerator) (Denominator) Amount ----------------------------------------------------------------- Basic $ (20,924) 3,000,000 (0.01) Fully Diluted $ (20,924) 3,000,000 (0.01)
j. Comprehensive Income The components of other comprehensive income (loss) include the change in fair market value of available-for-sale investments owned by the Company. F-12 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements March 31, 2004 and 2003 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) k. Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Net deferred tax liabilities consist of the following components as of March 31, 2004, 2003 and 2002:
2004 2003 2002 ------------ ------------ ------------ Deferred tax assets: NOL Carryover $ 243,600 $ 22,885 $ 22,680 Deferred tax liabilities: Depreciation (730) - - Valuation allowance (242,870) (22,885) (22,680) ------------ ------------ ------------ Net deferred tax asset $ - $ - $ - ============ ============ ============
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income from continuing operations for the years ended March 31, 2004, 2003 and 2002 due to the following:
2004 2003 2002 ------------ ------------ ------------ Book income (loss) $ (180,705) $ (16,415) $ (8,160) Accrued Interest 34,060 26,420 9,870 Meals and entertainment 2,080 - - Realized Gain / Loss (72,060) (43,040) (20,200) Other (3,360) - (40) Valuation allowance 219,985 205 18,530 ------------ ------------ ------------ $ - $ - $ - ============ ============ ============
F-13 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements March 31, 2004 and 2003 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) k. Income Taxes (Continued) At March 31, 2004, the Company had net operating loss carryforwards of approximately $624,000 that may be offset against future taxable income from the year 2004 through 2024. No tax benefit has been reported in the March 31, 2004 financial statements since the potential tax benefit is offset by a valuation allowance of the same amount. Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting purposes are subject to annual limitations. Should a change in ownership occur, net operating loss carryforwards may be limited as to use in future years. l. Recent Accounting Pronouncements SFAS No. 143 - In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which established a uniform methodology for accounting for estimated reclamation and abandonment costs. The statement was effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 did not have a material effect on the financial statements of the Company. SFAS No. 145 - On April 30, 2002, the FASB issued FASB Statement No. 145 (SFAS 145), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS 145 rescinds both FASB Statement No. 4 (SFAS 4), "Reporting Gains and Losses from Extinguishment of Debt," and the amendment to SFAS 4, FASB Statement No. 64 (SFAS 64), "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." Through this rescission, SFAS 145 eliminates the requirement (in both SFAS 4 and SFAS 64) that gains and losses from the extinguishment of debt be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. However, an entity is not prohibited from classifying such gains and losses as extraordinary items, so long as it meets the criteria in paragraph 20 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. Further, SFAS 145 amends paragraph 14(a) of FASB Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between the accounting for sale-leaseback transactions and certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The amendment requires that a lease modification (1) results in recognition of the gain or loss in the 9 financial statements, (2) is subject to FASB Statement No. 66, "Accounting for Sales of Real Estate," if the leased asset is real estate (including integral equipment), and (3) is subject (in its entirety) to the sale-leaseback rules of FASB Statement No. 98, "Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term, and Initial Direct Costs of Direct Financing Leases." Generally, FAS 145 is effective for transactions occurring after May 15, 2002. The adoption of SFAS 145 did not have a material effect on the financial statements of the Company. F-14 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements March 31, 2004 and 2003 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) l. Recent Accounting Pronouncements (Continued) SFAS No. 146 - In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal Activities" (SFAS 146). SFAS 146 addresses significant issues regarding the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002 and early application is encouraged. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146. The effect on adoption of SFAS 146 will change on a prospective basis the timing of when the restructuring charges are recorded from a commitment date approach to when the liability is incurred. The adoption of SFAS 146 did not have a material effect on the financial statements of the Company. SFAS No. 147 - In October 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 147, "Acquisitions of Certain Financial Institutions" which is effective for acquisitions on or after October 1, 2002. This statement provides interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both SFAS 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with SFAS No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible Assets". The adoption of SFAS No. 147 did not have a material effect on the financial statements of the Company. SFAS No. 148 - In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123" which is effective for financial statements issued for fiscal years ending after December 15, 2002. This Statement amends SFAS 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The adoption of SFAS No. 148 did not have a material effect on the financial statements of the Company. F-15 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements March 31, 2004 and 2003 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) l. Recent Accounting Pronouncements (Continued) SFAS No. 149 - In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" which is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. This statement amends and clarifies financial accounting for derivative instruments embedded in other contracts (collectively referred to as derivatives) and hedging activities under SFAS 133. The adoption of SFAS No. 149 did not have a material effect on the financial statements of the Company. SFAS No. 150 - In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" which is effective for financial instruments entered into or modified after May 31, 2003, and is otherwise effective at the beginning of the first interim period beginning after June 15, 2003. This Statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligation of the issuer. The adoption of SFAS No. 150 did not have a material effect on the financial statements of the Company. FASB Interpretation No. 45 - "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB Statements No. 5, 57 and 107". The initial recognition and initial measurement provisions of this Interpretation are to be applied prospectively to guarantees issued or modified after December 31, 2002. The disclosure requirements in the Interpretation were effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FASB Interpretation No. 45 did not have a material effect on the financial statements of the Company. FASB Interpretation No. 46 - In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities." FIN 46 provides guidance on the identification of entities for which control is achieved through means other than through voting rights, variable interest entities, and how to determine when and which business enterprises should consolidate variable interest entities. This interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The adoption of FIN 46 did not have a material impact on the Company's financial statements. F-16 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements March 31, 2004 and 2003 NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) l. Recent Accounting Pronouncements (Continued) During the year ended March 31, 2004, the Company adopted the following Emerging Issues Task Force Consensuses which did not have a material impact on the Company's financial statements: EITF Issue No. 00-21 "Revenue Arrangements with Multiple Deliverables", EITF Issue No. 01-8 " Determining Whether an Arrangement Contains a Lease", EITF Issue No. 02-3 "Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities", EITF Issue No. 02-9 "Accounting by a Reseller for Certain Consideration Received from a Vendor", EITF Issue No. 02-17, "Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination", EITF Issue No. 02-18 "Accounting for Subsequent Investments in an Investee after Suspension of Equity Method Loss Recognition", EITF Issue No. 03-1, "The Meaning of Other Than Temporary and its Application to Certain Instruments", EITF Issue No. 03-5, "Applicability of AICPA Statement of Position 9702, `Software Revenue Recognition' to Non-Software Deliverables in an Arrangement Containing More Than Incidental Software", EITF Issue No. 03-7, "Accounting for the Settlement of the Equity Settled Portion of a Convertible Debt Instrument That Permits or Requires the Conversion Spread to be Settled in Stock", EITF Issue No. 03-10, "Application of EITF Issue No. 02-16 by Resellers to Sales Incentives Offered to Consumers by Manufacturers. NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES Notes Payable and Agreement with NutraCea In December 2000, the Company entered into a merger agreement with NutraCea (formerly NutraStar Incorporated). The merger was contingent on a $500,000 loan from Faraday to NutraCea. As of March 2001, the Company had secured investors and advanced $500,000 to NutraCea. By April 2001 the Company determined that the merger plans were terminated. The $500,000 that had been advanced to NutraCea was due within 90 days and bore interest at 12%. The note carried an optional conversion feature in which the Company could convert the principal and accrued interest into common stock of NutraCea at a rate of $1.00 per share. The notes also carried a mandatory conversion feature as follows: in the event that NutraCea merged into a public company or issued shares pursuant to its initial public offering of common stock, the outstanding principal and accrued interest was to be converted into common stock of Nutracea at the lesser of a) $1.00 per share, b) the average share price over the initial 10 day trading period less 20%, or c) the price per share of common stock offered in a private placement at the time of mandatory conversion. F-17 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements March 31, 2004 and 2003 NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (Continued) Notes Payable and Agreement with NutraCea (Continued) Investors advanced the $500,000 with the understanding that following either a merger with NutraCea or NutraCea's merger with another public company, the amounts would be converted to equity in the newly merged corporation. However, no written agreements were signed formalizing the nature or the terms of the advances. Management of the Company believes that accounting for the investors' advance of $500,000 to NutraCea on behalf of Faraday as notes payable is the most accurate way to report the transaction. The Company recorded $71,791, $67,740 and $56,102 of interest expense related to these notes payable at 12% per annum for the years ended March 31, 2004, 2003 and 2002. On December 13, 2001, the Company reached a settlement agreement with NutraCea. The agreement states that NutraCea borrowed a total of $500,000 from the Company pursuant to a series of promissory notes bearing interest at 12% per annum and due and payable 90 days from the date of issuance. The outstanding principal and accrued but unpaid interest on the date of the settlement was $551,797. Per the terms of the agreement the Company and NutraCea released, settled and disposed of any and all claims, demands and disputes of any kind between them, including, but not limited to, any disputes connected with the proposed terminated merger. NutraCea settled their debt to Faraday of $500,000 principal and $51,797 accrued interest in exchange for 735,730 shares of NutraCea Preferred Stock per the terms of the agreement. The agreement also stipulates that failure on the part of NutraCea to file a Registration Statement on For SB-2 or a substantially equivalent registration that is declared effective by the Securities and Exchange Commission by June 30, 2002 will result in conversion of the 735,730 Preferred Shares to the same number of Common Shares of NutraCea. NutrCea failed to register the Preferred Shares with the Securities and Exchange Commission on or before June 30, 2002, and therefore, NutraCea was obligated to convert the 735,730 Preferred Shares to 735,730 Common Shares. On July 16, 2002, a Complaint was filed against NutraCea by the Company in the United States District Court, for the District of Utah (Case No 02-CV-00959). The Company filed the lawsuit when NutraCea failed to meet the terms set forth in the settlement agreement. NutraCea did file a registration statement with the Securities and Exchange Commission on June 4, 2002, however, such registration statement had not been declared effective as of June 30, 2002 as required by the settlement agreement. As discussed previously, in the event that NutraCea failed to affect a registration statement by June 30, 2002, NutraCea's Chief Executive Officer, Ms. Patricia McPeak, was to transfer to the Company an additional 735,730 pre-reverse split shares of her common stock and become personally liable to the Company for the original $500,000 debt amount plus 12% interest per annum. The lawsuit also seeks to award the Company any attorney's fees and other costs related to this matter. F-18 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements March 31, 2004 and 2003 NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (Continued) Notes Payable and Agreement with NutraCea (Continued) On August 29, 2002, NutraCea filed a motion to dismiss the Complaint filed by the Company due to lack of personal jurisdiction for both NutraCea and Ms. McPeak. On November 27, 2002, NutraCea's motion to dismiss was denied as to both NutraCea and Ms. McPeak. An alternative settlement agreement was reached on December 10, 2003, whereby the suit was dismissed and the Company shall be guaranteed payment on any deficiency upon the sale of their common stock. On September 18, 2003 the Company converted its existing 735,730 preferred shares of NutraCea to 735,730 shares of NutraCea common stock. Also, in September of 2003 per the terms of the new settlement agreement NutraCea transferred an additional 735,730 shares of its common stock to the Company. NutraCea also paid deferred dividends to the Company as of September 18, 2003 in the form of 1,301,692 shares of its common stock. The new settlement agreement also states that the Company has until September 18, 2004 to sell the NutraCea common stock, and in the event the Company is unable to realize $551,797 plus any legal fees the Company incurred as of September 18, 2003 through the sale of its 2,774,772 shares of NutraCea common stock (735,730 preferred shares converted to common plus the additional 735,730 common shares and 1,301,692 shares granted in payment of dividends) that NutraCea shall have 90 days from the date that the Company demonstrates that through its best efforts it has not been able to realize $551,797 plus legal fees through the sale of its NutraCea common stock, to transfer to the Company additional NutraCea common shares to make up any deficiency between the actual sales price obtained by the Company after it has sold all of its NutraCea shares and the amount of $551,797 plus legal fees. In addition, should the Company choose not to sell any portion of its NutraCea common stock prior to September 18, 2004, the value of any portion of its NutraCea common stock still remaining shall be credited against the original $551,797. Furthermore, should the value of the common stock exceed the $551,797, the Company is entitled to keep the excess. It is the full intention of the Company to distribute the stock awards from the settlement on a pro rata basis to each investor. As of March 31, 2004 the Company has distributed a total of 73,735 shares of NutraCea common stock valued at $114,178 directly to the investors. The Company accounted for the transaction as a reduction to the principal amount of the notes. F-19 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements March 31, 2004 and 2003 NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (Continued) Notes Payable and Agreement with NutraCea (Continued) Also during the year ended March 31, 2004 the Company sold 347,743 shares of the NutraCea common stock and distributed the proceeds to the investors. The total amount distributed to the investors was $259,585 and was accounted for as a reduction to the principal amount of the notes. The Company plans to distribute the remaining shares of the NutraCea stock or the proceeds from the sales of the stock to investors until the remaining principal and accrued interest is paid in full. At March 31, 2004 the remaining principal balance of these notes was $209,531. The Company has recorded accrued interest of $205,523 as of March 31, 2004. Notes Payable, Notes Receivable and Agreement with VIB.TV The Company plans to enter into an agreement with Video Internet Broadcasting Corporation (VIB) whereby all of the VIB equity security holders would exchange their VIB securities for common stock of Faraday so that VIB becomes a wholly owned subsidiary of Faraday immediately following the closing of the share exchange. It is proposed that all of the outstanding VIB equity securities will be acquired by Faraday in exchange solely for Faraday common voting stock. This transaction is intended to qualify as a corporate reorganization under Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended, and related or other applicable sections there under. At closing, Faraday will issue an aggregate of 4,407,992 shares of Faraday's common stock for immediate delivery to the VIB equity security holders on the basis of one (1) Faraday share of common stock for each outstanding share of VIB capital stock. Unless otherwise agreed by Faraday and VIB the transaction shall close only in the event VIB is able to acquire all of the outstanding VIB shares of capital stock. At closing, all of the VIB officers and directors shall resign and the nominees of Faraday shall be appointed the officers and directors of VIB. In connection with the proposed corporate reorganization between Faraday and VIB, the parties entered into a loan agreement, pursuant to which Faraday has lent VIB a principal amount of $500,000 as of March 31, 2004. Faraday loaned an additional $250,000 to VIB subsequent to year-end for a total principal amount of $750,000. F-20 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements March 31, 2004 and 2003 NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (Continued) Notes Payable, Notes Receivable and Agreement with VIB.TV (Continued) To obtain the financing needed for the loan agreement between Faraday and VIB, Faraday entered into loan agreements with several investors. During March 2004, the Company issued convertible debentures to finance its loan to VIB. The debentures accrue interest at 12% per annum and are due six months from the original date of the notes. Principal and interest not paid when due shall bear interest at the rate of 18% per annum. The notes are convertible at any time at the option of the holder into shares of the Company's common stock at the rate of one share of common stock for every $1.00 in principal and accrued interest that is converted. In addition, the notes have attached common stock purchase warrants to acquire 100 shares of common stock at an exercise price of $1.50 per share for every one thousand dollars in principal lent by the lender. In determining whether an instrument includes a beneficial conversion option, the Emerging Issues Task Force reached a consensus that the effective conversion price based on the proceeds received for or allocated to the convertible instrument should be used to compute the intrinsic value, if any, of the embedded conversion option. As a result of this consensus, an issuer should first allocate the proceeds received in a financing transaction that includes a convertible instrument to the convertible instrument and any other detachable instruments included in the exchange (such as detachable warrants) on a relative fair value basis. Then, the Issue 98-5 model should be applied to the amount allocated to the convertible instrument, and an effective conversion price should be calculated and used to measure the intrinsic value, if any, of the embedded conversion option. Faraday issued $710,000 of convertible debt with a par amount of $710,000 and 71,000 warrants. The convertible debt is convertible at a conversion price of $1 per share (holder would receive 1 share of stock for each dollar of debt or 710,000 shares of the Company's common stock). Using the black-scholes model, the 71,000 warrants have no value. The Company has recorded accrued interest of $6,920 associated with the convertible debentures. The Company has determined that the embedded conversion option within the debt instrument is not beneficial (has no intrinsic value) to the holder. F-21 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements March 31, 2004 and 2003 NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (Continued) Notes Payable, Notes Receivable and Agreement with VIB.TV (Continued) Notes payable, convertible debentures and notes payable - related parties consist of the following as of March 31, 2004: Unsecured notes payable to shareholders of the Company due on demand, payable through the issuance of or proceeds from the sale of shares of NutraCea common stock Interest is computed at a rate of 12% per annum. $ 209,531 Unsecured convertible notes payable to shareholders of the Company due September 2004, convertible at the holders option to common stock of the Company at a ratio of one share per each dollar of outstanding principal and interest. Interest is computed at a rate of 12% per annum. 710,000 --------- Total Notes payable, notes payable - related parties and Convertible Debentures Payable $ 919,531 ========= Interest expense on the above debt amounted to $78,711, $67,740, and $56,102 for the years ended March 31, 2004, 2003 and 2002, respectively. NOTE 3 - OUTSTANDING STOCK PURCHASE WARRANTS Under FASB Statement 123, the Company estimates the fair value of each stock purchase warrant at the grant date by using the Black-Scholes option pricing model with the following weighted average assumptions used for grants, respectively; dividend yield of zero percent; expected volatility of 108%; risk-free interest rate of 4.5 percent and expected life of 6 months, for the year ended March 31, 2004. As of March 31, 2003 and 2002 there were no stock purchase warrants outstanding. Had compensation cost for the Company's stock options granted to directors and employees been based on the fair value as determined by the Black-Scholes option pricing model at the grant date under the accounting provisions of SFAS No. 123, the Company would have recorded an additional expense of $-0- for the year ended March 31, 2004. As the value of the warrants is $-0- the Company's net loss would not have been changed. F-22 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements March 31, 2004 and 2003 NOTE 3 - OUTSTANDING STOCK PURCHASE WARRANTS (Continued) A summary of the status of the Company's stock warrants as of March 31, 2004 and changes during the year ended March 31, 2004 is presented below:
Weighted Weighted Options Average Average and Exercise Grant Value Warrants Price Fair Value -------- -------- ----------- Outstanding, March 31, 2003 - $ - $ - Granted 71,000 1.50 - Expired/Canceled - - - Exercised - - - --------- ---------- ----------- Outstanding, March 31, 2004 71,000 $ 1.50 $ - ========= ========== =========== Exercisable, March 31, 2004 71,000 $ 1.50 $ - ========= ========== ===========
NOTE 4 - GOING CONCERN The Company's financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. In order to continue as a going concern, develop a reliable source of revenues, and achieve a profitable level of operations the Company will need, among other things, additional capital resources. Management's plans to continue as a going concern include raising additional capital through sales of common stock. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. F-23 EX-10.1 2 ex101k033104.txt SETTLEMENT AGREEMENT Exhibit 10.1 SETTLEMENT AGREEMENT This Settlement Agreement ("Agreement") is entered into this 10th day of December, 2003, by and between Nutrastar, Inc., a Nevada corporation ("Nutrastar") and Patricia McPeak ("McPeak") (collectively referred to as the "Nutrastar Defendants"), on one hand, and Faraday Financial, Inc., a Delaware corporation ("Faraday"), on the other hand. RECITALS A. On July 16, 2002, Faraday filed an action against, among others, the Nutrastar Defendants in the Third Judicial District Court, for Salt Lake County, State of Utah, Case No. 020906477 (the "Lawsuit"), which sought money damages for alleged breaches of contract, unjust enrichment and conversion; B. On January 3, 2003, the Nutrastar Defendants filed their Answer and Counterclaim (the "Counterclaim"), asserting numerous affirmative defenses and seeking the recision of various of the parties' agreements; C. Faraday and the Nutrastar Defendants wish to resolve finally the respective claims and defenses in the Lawsuit and Counterclaim. NOW, THEREFORE, IN CONSIDERATION of the foregoing covenants, promises, and releases set forth herein, the parties hereto agree as follows: 1. Faraday's Release and Discharge. Subject to the provisions of Section 4, and in consideration of the payments set forth in Section 3, Faraday, on behalf of itself and its respective past, present and future insurers, assignees, subrogees, affiliates, subsidiaries, parent persons or entities, partners, limited partners, joint venturers, members, managers, shareholders, directors, officers, employees, employers, trustors, trustees, beneficiaries, loan participants, agents, fiduciaries, and attorneys does hereby fully and irrevocably release, acquit and forever discharge the Nutrastar Defendants, together with all of the Nutrastar Defendants' past, present, and future insurers, assignees, subrogees, shareholders, directors, officers, employees, employers, trustors, trustees, beneficiaries, agents, fiduciaries, and attorneys and each of them who might be liable or claim to be liable, none of whom admit liability, but all of whom expressly deny liability, of any form any and all past, present, or future claims, demands, debts, contracts, actions, or causes of action, suits, or causes of suit, of any kind or nature whatsoever, whether known or unknown, suspected or unsuspected, and in whatever legal theory or form, which Faraday now has, claims to have, or has at any time heretofore had, or claims to have had, arising from, by reason of, or in any way connected with any transaction, agreement, contract, act, or omission, whatsoever, pertaining to the Lawsuit or Counterclaim. However, if the terms and conditions of Section 4 are not satisfied, the release and discharge provided for in this Section shall be null and void. 2. Nutrastar's Release and Discharge. Subject to the provisions of Section 4, and in consideration of the payments set forth in Section 3, the Nutrastar Defendants, on behalf of themselves and their respective past, present and future insurers, assignees, subrogees, affiliates, subsidiaries, parent persons or entities, partners, limited partners, joint venturers, members, managers, shareholders, directors, officers, employees, employers, trustors, trustees, beneficiaries, loan participants, agents, fiduciaries, and attorneys do hereby fully and irrevocably release, acquit and forever discharge Faraday, together with all of Faraday's past, present, and future insurers, assignees, subrogees, shareholders, directors, officers, employees, employers, trustors, trustees, beneficiaries, agents, fiduciaries, and attorneys and each of them who might be liable or claim to be liable, none of whom admit liability, but all of whom expressly deny liability, of any form any and all past, present, or future claims, demands, debts, contracts, actions, or causes of action, suits, or causes of suit, of any kind or nature whatsoever, whether known or unknown, suspected or unsuspected, and in whatever legal theory or form, which the Nutrastar Defendants now have, claim to have, or have at anytime heretofore had, or claim to have had, arising from, by reason of, or in any way connected with any transaction, agreement, contract, act, or omission, whatsoever, pertaining Page 1 to the Lawsuit or Counterclaim. However, if the terms and conditions of Section 4 are not satisfied, the release and discharge provided for in this Section shall be null and void. 3. Payments. In consideration of the mutual releases set forth above, Faraday and the Nutrastar Defendants agree as follows: a. On September 18, 2003, Faraday converted its existing 735,730 preferred shares of Nutrastar stock to 735,730 shares of Nutrastar common stock; and b. On September 18, 2003, Nutrastar paid to Faraday its deferred dividends as of September 18, 2003, in the total amount of $90,127.00 in the form of restricted common stock based on a per share price of $.075 per share for a total of 1,201,692 Nutrastar common shares. 4. Guarantee. Nutrastar covenants, agrees, and guaranties that in the event Faraday, after the expiration of twelve (12) months from the execution of this Agreement, is unable to realize $551,797.00 plus any legal fee's Faraday incurred as of the date of this agreement (approximately $9,800.00 dollars) through the sale of its Nutrastar common stock obtained by Faraday through Section 3 of this Agreement, along with the Nutrastar common stock already in the possession of Faraday (approximately an additional 1 million shares to be verified with Faraday), that Nutrastar shall have 90 days from the date that Faraday demonstrates that through its best efforts it has not bee able to realize $551,797.00 plus any legal fee's Faraday incurred as of the date of this agreement (approximately $9,800.00 dollars)through the sale of its Nutrastar common stock to transfer to Faraday additional Nutrastar common shares to make up any deficiency between the actual sales price obtained by Faraday after Faraday has sold all of its Nutrastar shares and the amount of $551,797.00 plus any legal fee's Faraday incurred as of the date of this agreement (approximately $9,800.00 dollars). Should Faraday choose not to sell any portion of its common stock during the twelve month period, the value of any such common stock still remaining shall be credited against outstanding balance remaining of the original $551,797.00. Furthermore, should the value of the common stock exceed the $551,797.00, Faraday shall be entitled to keep the excess. Faraday further agrees that it will use its best efforts to obtain the highest selling price for its Nutrastar shares. In the event that Nutrastar fails in the time allowed to provide Faraday with sufficient shares of Nutrastar common stock to satisfy the $551,797.00, Faraday reserves the right to lift the stay of this lawsuit described in Section 5 and to seek to collect the deficiency between the amounts actually obtained by Faraday through the sale of all of its Nutrastar stock and the amount of $551,797.00. Page 2 5. Stay of Proceedings and Dismissal with Prejudice. Concurrently with the execution of this Agreement, counsel for Faraday and counsel for the Nutrastar Defendants shall file with the Court a joint stipulated motion to stay all proceedings. Furthermore, Faraday and the Nutrastar Defendants agree that if within the time period provided in Section 4, the value of Faraday's common stock meets or exceeds $551,797.00 or notwithstanding the valve of Faraday's Nutrastar stock, Faraday has not attempted to lift the stay of the lawsuit within 18 months after the execution of this Agreement that counsel for Faraday and the Nutrastar Defendants shall deliver to the other an executed stipulation for dismissal with prejudice of the Complaint and Counterclaim. Faraday hereby authorizes counsel for the Nutrastar Defendants to file said stipulation for dismissal with the Court. 6. Miscellaneous. 7. Amendment and Waiver. No amendment or waiver of any provisions of this Agreement shall in any event be effective unless the same shall be in writing and signed by the parties hereto, and then such waiver or consent shall be effective only in the specific instance or for the specific purpose for which it is given. 8. Parties in Interest. This Agreement shall inure to the benefit of and be binding upon the parties named herein and their respective successors and assigns. 9. Entire Transaction. This Agreement contains the entire understanding among the parties with respect to the transactions contemplated hereby and shall supersede all other agreements and understandings between the parties. Other than this Agreement, there are no other agreements, statements, representations, and/or warranties, oral or otherwise, upon which any of the other parties hereto are relying. 10. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Utah. The parties agree that any dispute arising from this Agreement shall be litigated in courts located in Salt Lake County, Utah. 11. Headings. This section and other headings contained in this Agreement are for purposes of reference only and shall not effect in any way the meaning or interpretation of this Agreement. 12. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same Agreement. Facsimile signatures shall be deemed to be originals. 13. Attorney's Fees. In the event of breach of this Agreement, the party found at fault hereby agrees to pay the costs and reasonable attorney's fees incurred in the enforcement thereof. 14. Incorporated Documents. All exhibits, attachments, and other documents to be delivered by parties hereto concurrently herewith are hereby incorporated in this Agreement by this reference. NUTRASTAR, INC., a Nevada corporation By: /s/ Patricia McPeak --------------------------------------- Its: /s/ Patricia McPeak ------------------------------------------ PATRICIA McPEAK FARADAY FINANCIAL, INC., a Delaware corporation By: /s/ Frank J. Gillen --------------------------------------- Its: President Page 3 EX-10.2 3 ex102k033104.txt LOAN AGREEMENT Exhibit 10.2 LOAN AGREEMENT This Loan Agreement ("Agreement") is entered into by and between Faraday Financial, Inc. ("Lender"), a Delaware corporation, and Video Internet Broadcasting Corporation ("Company"), a Washington corporation, to be effective as of the 18th day of February, 2004. WITNESSETH: WHEREAS, Company is in need of immediate capital to fund its planned operations. WHEREAS, Lender is willing to make periodic loans to Company in the total aggregate principal amount of up to FIVE HUNDRED THOUSAND DOLLARS ($500,000 USD) upon the terms and conditions set forth herein and Company is willing to borrow up to the stated amount upon such terms. NOW, THEREFORE, IT IS AGREED AS FOLLOWS: Periodic Loans. 1.1 Definitions. Certain capitalized terms are used in this Agreement as specifically defined in this Section 1.1 as follows: "Affiliate" means any Person directly or indirectly controlling, controlled by or under direct or indirect common control with Company (or other specified Person) and shall include (a) any Person who is an officer, director or beneficial holder of at least 10% of the outstanding capital stock of Company (or other specified Person), (b) any Person of which Company (or other specified Person) or any officer or director of Company (or other specified Person) shall, directly or indirectly, either beneficially own at least 10% of the outstanding equity securities or constitute at least a 10% participant, and (c) in the case of a specified Person who is an individual, Members of the Immediate Family of such Person. "Agreement" is defined in the Preamble. "Balance Sheet Date" is defined in Section 8.6. "Bylaws" means all written rules, regulations, procedures and bylaws and all other similar documents, relating to the management, governance or internal regulation of a Person other than an individual, each as from time to time amended or modified. "Charter" means the articles or certificate of incorporation, statute, constitution, joint venture or partnership agreement or articles or other charter of any Person other than an individual, each as from time to time amended or modified. "Code" means the federal Internal Revenue Code of 1986 or any successor statute, and the rules and regulations thereunder, as from time to time amended and in effect. "Commission" means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act, the Exchange Act or both. "Company" is defined in the Preamble. "Company Intellectual Property" is defined in Section 8.17(b). "Contractual Obligation" means, with respect to any Person, any contracts, agreements, deeds, mortgages, leases, licenses, other instruments, commitments, undertakings, arrangements or understandings, written or oral, or other documents, including any document or instrument evidencing indebtedness, to which any such Person is a party or otherwise subject to or bound by or to which any asset of any such Person is subject. "Employee Benefit Plan" means each and all "employee benefit plans" as defined in section 3(3) of ERISA, maintained or contributed to by Company, any of its Affiliates or any of their respective predecessors, or in which Company, any of its Affiliates or any of their respective predecessors participates or participated and which provides benefits to employees of Company or their spouses or covered dependents or with respect to which Company has or may have a material liability, including, (i) any such plans that are "employee welfare plans" as defined in section 3(1) of ERISA and (ii) any such plans that are "employee pension benefit plans" as defined in section 3(2) of ERISA. "ERISA" means the Employee Retirement Income Security Act of 1974 or any successor statute and the rules and regulations thereunder, and in the case of any referenced section of any such statute, rule or regulation, any successor section thereof, collectively and as from time to time amended and in effect. "ERISA Group", with respect to any entity, means any Person which is a member of the same "controlled group" or under "common control", within the meaning of section 414(b) or (c) of the Code or section 4001(b)(1) of ERISA, with such entity. "Exchange Act" means the Securities Exchange Act of 1934, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as from time to time amended and in effect. "Financial Statements" is defined in Section 8.6. "GAAP" means United States generally accepted accounting principles, as in effect from time to time, consistently applied. "Initial Installment" is defined in Section 2.1. "Intellectual Property" is defined in Section 8.17(a). "Intellectual Property Licenses" is defined in Section 8.17(d). "Legal Requirement" means any federal, state or local law, statute, standard, ordinance, code, order, rule, regulation, resolution, promulgation or any final order, judgment or decree of any court, arbitrator, tribunal or governmental authority, or any license, franchise, permit or similar right granted under any of the foregoing. "Lender" is defined in the Preamble. "Loans" is defined in Section 2.1. "Material Adverse Effect" means a material adverse effect upon the business, assets, financial condition, income or prospects of Company, including, without limitation, the termination or modification in a manner adverse to Company of any license or other agreement to which Company is a party. "Maximum Amount" is defined in Section 2.1. "Members of the Immediate Family," as applied to any individual, means each parent, spouse, child, brother, sister or the spouse of a child, brother or sister of the individual, and each trust created for the benefit of one or more of such persons and each custodian of a property of one or more such persons. "Notes" is defined in Section 2.3. "Other Intellectual Property" is defined in Section 8.17(c) "Pension Plan" means each pension plan (as defined in section 3(2) of ERISA) established or maintained, or to which contributions are or were made by Company or any of its Subsidiaries or former Subsidiaries, or any Person which is a member of the same ERISA Group with any of the foregoing. "Person" means an individual, partnership, limited liability company, corporation, company, association, trust, joint venture, unincorporated organization and any governmental department or agency or political subdivision. "Related Agreements" means the Notes, Security Agreement and any other security agreements, assignments, subordination agreements, pledge or 2 hypothecation agreements, mortgages, deeds of trust, leases, contracts, guaranties, and other instruments and documents now or hereafter existing that are executed or delivered in conjunction with this Agreement. "Securities" is defined in Section 7.2. "Securities Act" means the Securities Act of 1933, as amended, or any successor federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be from time to time amended and in effect. "Security Agreement" is defined in Section 6. "Subsidiary" means any Person of which Company now or hereafter shall at the time (a) own directly or indirectly through a Subsidiary at least 50% of the outstanding capital stock or membership interest (or other shares of beneficial interest) entitled to vote generally or (b) constitute a general partner. "Welfare Plan" means each welfare plan (as defined in section 3(l) of ERISA) established or maintained, or to which any contributions are or were made, by Company or any of its Subsidiaries or any Person which is a member of the same ERISA Group with any of the foregoing. Section 2. Periodic Loans. 2.1 During the term hereof, unless Lender shall terminate this Agreement upon an event of default under any Related Agreement, Lender hereby agrees to make periodic loans (collectively and individually, the "Loans") to Company in an aggregate principal amount at any one time outstanding not to exceed FIVE HUNDRED THOUSAND DOLLARS (U.S.) ($500,000 USD) ("Maximum Amount"). Lender shall lend Company the initial amount of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000) on the date hereof (the "Initial Installment"). After March 1, 2004 and subject to the other terms and conditions set forth herein, additional amounts up to the Maximum Amount will be available to Company for draw through the term of this Agreement. In order for Company to draw down funds subsequent to the Initial Installment, Company must notify Lender at least ten days prior to the date on which Company is seeking borrow additional funds and the aggregate amount of funds to be borrowed on such date. 2.2 A condition precedent to each draw made at any time hereunder shall be that all representations and warranties made by Company in any Related Agreement or in connection herewith shall be true, correct, valid and complete at such time and the making of such loan shall be deemed to be a representation and warranty of Company to the effect that no event has occurred which may constitute an event of default under any Related Agreements or any other agreement to which Company is a party or by which Company or any of its properties are bound. 2.3 All amounts lent hereunder shall be evidenced by Notes in substantially the same form as attached hereto as Exhibit A (the "Notes"). Company shall deliver to Lender Notes in the principal amount of funds lent on each date that Lender provides funds to Company hereunder. Section 3. Finance Charges. All outstanding principal shall bear interest at the rate of twelve percent (12%) per annum. Principal and interest not paid when due shall bear interest at the rate of eighteen percent (18%) per annum. Interest will be computed on the basis on a 360-day year for actual days elapsed. Section 4. Payments. Principal and interest shall be due and payable in a single balloon payment on December, 31, 2004, unless the maturity date is accelerated as described in the Note. Payments shall be credited to Company's account on the date that such payment is received by Lender. Such payments shall be applied first to late charges and collection costs, if any, then to accrued interest to the date of payment, and then to the principal outstanding. Section 5. Security. Lender's obligation to lend funds in addition to those lent as part of the Initial Installment is subject to Company, as security for the prompt satisfaction of all of Company's obligations hereunder, including payment of the indebtedness evidenced by the Notes and the Initial Installment, granting 3 to Lender a first priority security interest in all of Company's assets (including the assets of any Subsidiaries) whether now owned or hereafter acquired by Company, or in which Company now has or at any time in the future may acquire any right, title or interest, together with all replacements therefor and all proceeds thereof (including insurance proceeds thereof). Lender, at its sole and absolute discretion, waive this provision in whole or in part with respect to any or all of the funds lent hereunder. Any such waiver, however, must be in writing and signed by Lender. Section 6. Deliveries. Contemporaneously with the execution of this Agreement, the parties shall deliver to each other properly executed copies of the following agreements: (a) A Note of even date herewith by and between Lender and Company to memorialize the payment of the Initial Installment. (b) The Loan proceeds relating to the Initial Installment. At such time as funds, in addition to the Initial Installment, are lent hereunder, Company shall deliver to Lender (and any Subsidiaries) a duly executed Security Agreement in the form attached hereto as Exhibit B ("Security Agreement") and any other documents relating to a such security interest. Section 7. Representations of Lender. 7.1 Lender's representations in this Agreement are complete and accurate to the best of Lender's knowledge, and Company may rely upon them. 7.2 Lender is able to bear the economic risk of an investment in the Note and the underlying common stock (individually and collectively, the "Securities") can afford the loss of the entire investment in the Securities, and will, after making an investment in the Securities, have sufficient means of providing for Lender's current needs and possible future contingencies. 7.3 The Securities will not be sold by Lender without registration under applicable securities acts or a proper exemption from such registration. 7.4 The Securities subscribed for herein is being acquired for Lender's own account and risk, for investment purposes, and not on behalf of any other person or with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act of 1933. Lender is aware that there are substantial restrictions on the transferability of the Securities. 7.5 Lender has had access to any and all information concerning Company that Lender required or considered necessary to make a proper evaluation of this investment. Lender further understands that no opinion is being given as to any securities or tax matters involving the offering. 7.6 Lender also understands and agrees that stop transfer instructions relating to the Securities will be placed in Company's transfer ledger, and that the Securities will bear a legend in substantially the following form: THIS SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THESE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A OF SUCH ACT. 4 7.7 Lender knows that the Securities are offered and sold pursuant to exemptions from registration under the Securities Act of 1933, and state securities law based, in part, on these warranties and representations, which are the very essence of this Agreement, and constitute a material part of the bargained-for consideration without which this Agreement would not have been executed. 7.8 Lender has the capacity to protect Lender's own interest in connection with this transaction or has a pre-existing personal or business relationship with Company or one or more of its officers, directors or controlling persons consisting of personal or business contacts of a nature and duration such as would enable a reasonably prudent purchaser to be aware of the character, business acumen and general business and financial circumstances of such person with whom such relationship exists. 7.9 This Agreement when fully executed and delivered by Company will constitute a valid and legally binding obligation of Lender, enforceable in accordance with its terms. Lender was not formed or organized for the specific purpose of acquiring the Securities. In the event Lender is an entity, the purchase of the Securities by Lender is a permissible investment in accordance with Lender's Articles of Incorporation or other similar charter document, and has been duly approved by all requisite action by the entity's owners, directors, officers or other authorized managers. The person signing this document and all documents necessary to consummate the purchase of the Securities has all requisite authority to sign such documents on behalf of Lender. 7.10 Lender represents that Lender is a sophisticated and an "accredited investor" as defined under Rule 501 of Regulation D. Section 8. Representations of Company. Company hereby represents and warrants to Lender as follows: 8.1 Company is a duly organized and validly existing corporation in good standing under the laws of Washington. Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which it does business, except where the failure to be so qualified would not have a Material Adverse Effect. 8.2 Company has all necessary corporate power and authority to enter into and perform this Agreement and the Related Agreements to which it is a party, to issue and sell the Notes, to own all the properties owned by it and to carry on the businesses now conducted or presently proposed to be conducted by it. Company has taken all corporate action necessary to authorize this Agreement, the Related Agreements to which it is a party and the issuance of the Notes to be issued and sold hereunder. 8.3 Except as listed in Schedule 8.3, Company has no Subsidiaries. Each of the Subsidiaries is a duly organized and validly existing under the laws of its jurisdiction of organization, which jurisdiction is listed in Schedule 8.3. Each Subsidiary has all necessary power and authority to own all the properties owned by it and to carry on the businesses now conducted or presently proposed to be conducted by it. Each Subsidiary is duly qualified to do business as a foreign entity and is in good standing in each jurisdiction in which it does business, except where the failure to be so qualified would not have a Material Adverse Effect. Company owns all of the issued and outstanding capital stock and/or other securities of each of its Subsidiaries and there are no outstanding preemptive, conversion or other rights, options, warrants or agreements granted or issued by or binding upon any Subsidiary for the purchase or acquisition of any shares of its capital stock. 8.4 The authorized capital stock of Company as of the date of the Agreement is set forth in Schedule 8.4. Schedule 8.4 contains a true and correct list of all outstanding capital stock, warrants and options as of the date of the Agreement, including the owner thereof, and, with respect to the warrants and options, the exercise price and the dates of issuance and termination. All of the outstanding shares of capital stock of Company are validly issued, fully paid, nonassessable and subject to no lien or restriction on transfer, except restrictions on transfer imposed by the Related Agreements and applicable securities laws or as otherwise set forth in Schedule 8.4. The shares of common 5 stock issuable upon conversion of the Notes have been duly and validly reserved and, upon issuance in accordance with the conversion provisions of the Notes will be validly issued, fully paid, nonassessable and subject to no lien or restriction on transfer, except restrictions on transfer imposed by the Related Agreements and applicable securities laws or as otherwise set forth in Schedule 8.4. All of the outstanding shares of capital stock and other securities of Company have been offered and sold in compliance with applicable federal and state securities laws. Other than as set forth in Schedule 8.4, Company has no outstanding (i) rights (either preemptive or otherwise) or options to subscribe for or purchase, or any warrants or other agreements providing for or requiring the issuance of, any capital stock or any securities convertible into or exchangeable for its capital stock, (ii) obligation to repurchase or otherwise acquire or retire any of its capital stock, any securities convertible into or exchangeable for its capital stock or any rights, options or warrants with respect thereto, (iii) rights that require it to register the offering of any of its securities under the Securities Act or (iv) any restrictions on voting any of its securities. 8.5 All shareholder approval and corporate action on the part of Company necessary for the due authorization, execution and delivery of this Agreement and the Related Agreements to which Company is a party and the consummation of the transactions contemplated herein and therein, and for the due authorization and issuance of (i) the Notes and (ii) the common stock issuable upon conversion of the Notes has been taken. This Agreement and the Related Agreements to which Company is a party are legal, valid and binding agreements of Company, enforceable in accordance with their terms. The execution, delivery and performance by Company of this Agreement and the Related Agreements to which Company is a party and the issuance and sale of the Notes will not result in any violation of or be in conflict with, or result in a breach of or constitute a default under, any term or provision of any Legal Requirement to which Company or any of its Subsidiaries is subject, or Company's or any Subsidiary's Charter or Bylaws, or any Contractual Obligation to which Company or any of its Subsidiaries is a party or by which it is bound. 8.6 Lender has been furnished with complete and correct copies of the following financial statements of Company (the "Financial Statements"): the unaudited consolidated balance sheet of Company as of September 30, 2004 (the "Balance Sheet Date") and the respective related consolidated statement of profit and loss and retained earnings for the nine-month period then ended and (b) the unaudited consolidated balance sheet of Company as of December 31, 2002 together with the related consolidated statement of profit and loss for the twelve-month period then ended. The Financial Statements have been prepared in accordance with GAAP consistently applied, except that they do not include a statement of cash flows or notes as required by GAAP, and fairly and accurately present the financial condition of Company and its Subsidiaries at the date thereof and the results of its operations for the period covered thereby. All the books, records and accounts of Company and its Subsidiaries are accurate and complete, are in accordance with good business practice and all laws, regulations and rules applicable to Company and its Subsidiaries and the conduct of their business and accurately present and reflect all of the transactions described therein. 8.7 Neither Company nor any of its Subsidiaries (i) has any outstanding indebtedness for borrowed money except as reflected in the Financial Statements or Schedule 8.7 and (ii) except as reflected, is a guarantor or otherwise contingently liable on such indebtedness of any other Person. Except as set forth in Schedule 8.7, neither Company nor any of its Subsidiaries has any material liabilities or obligations, contingent or otherwise, which are not reflected or provided for in the Financial Statements. 8.8 Since the Balance Sheet Date, there have occurred no event or events that, individually or in the aggregate, have caused or will cause a Material Adverse Effect. Except as set forth in Schedule 8.8, since the Balance Sheet Date, neither Company nor any of its Subsidiaries has (a) declared any dividend or other distribution on any shares of its capital stock, (b) made any payment (other than compensation to its directors, officers and employees at rates in effect prior to the Balance Sheet Date or for bonuses accrued in accordance with normal practice prior to the Balance Sheet Date) to any of its Affiliates, (c) increased the compensation, including bonuses, payable or to be payable to any of its directors, officers, employees or Affiliates, or (d) entered into any Contractual Obligation, or entered into or performed any other transaction, other than as specifically contemplated by this Agreement. 6 8.9 Schedule 8.9 contains, together with a reference to the paragraph pursuant to which each item is being disclosed, a correct and complete list of all Contractual Obligations of a material nature of Company and its Subsidiaries of the types described below: (a) All collective bargaining agreements, all employment, bonus or consulting agreements, all pension, profit sharing, deferred compensation, stock option, stock purchase, retirement, welfare or incentive plans or agreements, and all plans, agreements or practices that constitute "fringe benefits" to any of the employees of Company or its Subsidiaries. (b) All Contractual Obligations under which Company or any Subsidiary is restricted from carrying on any business, venture or other activities anywhere in the world. (c) All Contractual Obligations to sell or lease (as lessor) any of the properties or assets of Company or any Subsidiary, except in the ordinary course of business, or to purchase or lease (as lessee) any real property. (d) All Contractual Obligations pursuant to which Company or any Subsidiary guarantees any liability of any Person, or pursuant to which any Person guarantees any liability of Company or any Subsidiary. (e) All Contractual Obligations pursuant to which Company or any Subsidiary provides goods or services involving payments to Company or any Subsidiary of more than $10,000 annually, which Contractual Obligation is not terminable by Company or any Subsidiary without penalty upon notice of thirty (30) days or less. (f) All Contractual Obligations with any Affiliate of Company or any Subsidiary (other than the Related Agreements). (g) All Contractual Obligations providing for the disposition of the business, assets or shares of Company or any Subsidiary or the merger or consolidation or sale or purchase of all or substantially all of the assets or business of any Person, and any letters of intent relating to the foregoing. (h) All Contractual Obligations of Company or any Subsidiary relating to the borrowing of money or to the mortgaging or pledging of, or otherwise placing a lien on, any asset of Company or any Subsidiary (except liens imposed by operation of law in favor of landlords, suppliers, mechanics or others who provide services to Company or any Subsidiary). All of the Contractual Obligations of Company and its Subsidiaries are enforceable against Company and its Subsidiaries, as the case may be, and, to Company's knowledge, the other parties thereto in accordance with their terms, except that the enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization or similar laws, from time to time in effect, which affect enforcement of creditors' rights generally. Neither Company nor any of its Subsidiaries is in default under nor, to Company's knowledge, are there any liabilities arising from any breach or default by any Person prior to the date of this Agreement of, any provision of any such Contractual Obligation. Upon request by counsel for Lender, Company will, prior to each loan request, furnish to counsel for Lender true and correct copies of all Contractual Obligations listed in Schedule 8.9. 8.10 Company has insurance policies in full force and effect, written by reputable insurers licensed to write insurance in the states in which Company and its Subsidiaries conduct business, which insurance contracts provide for coverages which are usual and customary in its business as to amount and scope. Schedule 8.10 contains a correct and complete list and description of all insurance policies owned by Company or any of its Subsidiaries, correct and complete copies of which have previously been made available to Lender. Neither Company nor any of its Subsidiaries is in default under any of its insurance policies, nor has Company or any of its Subsidiaries received any notice of cancellation or intent to cancel or increase premiums with respect to present 7 insurance policies. Schedule 8.10 also contains a list of all pending claims with any insurance company and any instances of a denial of coverage of Company or any of its Subsidiaries by any insurance company. 8.11 Other than as set forth in Schedule 8.11, no Affiliate of Company or any Subsidiary is a customer or supplier of, or is party to any Contractual Obligation with, Company or any Subsidiary. 8.12 The operations of Company and its Subsidiaries as now conducted are not in violation of, nor is Company or any Subsidiary in default under, any Legal Requirements presently in effect or Company's or any Subsidiary's Charter or Bylaws. Company and its Subsidiaries have all franchises, licenses, permits or other authority presently necessary for the conduct of their businesses as now conducted. 8.13 Schedule 8.13 sets forth a complete list of all Employee Benefit Plans and all Welfare Plans applicable to the employees of Company and its Subsidiaries. Each Employee Benefit Plan and Welfare Plan has been administered in substantial compliance with its terms and all applicable laws, including the Code and ERISA. Except as set forth in Schedule 8.13, neither Company nor any Subsidiary has any obligation under any Welfare Plan to provide for the continuation of benefits (other than disability payments and medical benefits incurred for illness arising in the course of employment) for more than one year after retirement or other termination of employment. No "reportable events" within the meaning of section 4043 of ERISA have occurred with respect to any Employee Benefit Plan. No Pension Plan is a "multiemployer plan" as defined in ERISA. The present value of benefits liabilities as described in Title IV of ERISA of Employee Benefit Plans does not exceed the current value of such Employee Benefit Plans assets allocable to such benefits liabilities by more than $50,000. 8.14 None of the employees of Company or any Subsidiary is presently represented by a labor union, and no petition has been filed or proceedings instituted by any employee or group of employees with any labor relations board seeking recognition of a bargaining representative. Except as set forth in Schedule 8.14, no controversies or disputes are pending between Company or any Subsidiary and/or any employee(s) of the same. To Company's knowledge, no employee of Company or any Subsidiary is in violation of any term of any Contractual Obligation with a former employer relating to the right of any such employee to be employed by Company or such Subsidiary because of the nature of Company's or such Subsidiary's business or the use of any trade secrets or proprietary information. Except as set forth in Schedule 8.14, each employee of Company and its Subsidiaries is an "employee at will" and may be terminated by Company or such Subsidiary without payment of any amounts other than accrued wages. 8.15 Company and each of its Subsidiaries has filed all federal, state and local tax and information returns which are required to be filed by it and such returns are true and correct. Company and each of its Subsidiaries have paid all taxes, interest and penalties, if any, reflected in such tax returns or otherwise due and payable by it. Company has no knowledge of any material additional assessments or any basis therefor. The charges, accruals and reserves on the balance sheet of Company as of the Balance Sheet Date in respect of taxes or other governmental charges are adequate in amount for the payment of all liabilities for such taxes or other governmental charges. Company and its Subsidiaries have withheld or collected from each payment made to its employees the amount of all taxes required to be withheld or collected therefrom and has paid over such amounts to the appropriate taxing authorities. Any deficiencies proposed as a result of any governmental audits of such tax returns have been paid or settled or are being contested in good faith, and there are no present disputes as to taxes payable by Company or any of its Subsidiaries. 8.16 Except as set forth on Schedule 8.16, No litigation or proceeding before, or investigation by, any foreign, federal, state or municipal board or other governmental or administrative agency or any arbitrator is pending or, to Company's knowledge, threatened (nor to Company's knowledge, does any basis exist therefor) against Company or any of its Subsidiaries or, to Company's knowledge, any officer of Company or any Subsidiary, which individually or in the aggregate could result in any material liability or which may otherwise result in a Material Adverse Effect, or which seeks rescission of, seeks to enjoin the consummation of, or which questions the validity of, this Agreement or any other Related Agreement or any of the transactions contemplated hereby or thereby. 8 8.17 (a) "Intellectual Property" shall mean any or all of the following and all rights in, arising out of, or associated therewith anywhere in the world held by such Person and not otherwise in the public domain: (1) all United States, international and foreign patents and applications therefor (including provisional applications) and all reissues, divisions, renewals, extensions, provisionals, continuations and continuations-in-part thereof; (2) all inventions (whether patentable or not), patterns, drawings, blueprints, specifications, products in development, processes, applications, circuits, invention disclosures, improvements, trade secrets, proprietary information, know how, mask works (and all information contained in a mask but not yet fixed in a chip), technology, technical data and customer lists, and all documentation relating to any of the foregoing; (3) all copyrights, copyright registrations and applications therefor; (4) all industrial designs and any registrations and applications therefor throughout the world; (5) all trade names, logos, common law trademarks and service marks, trademark and service mark registrations and applications therefor and all goodwill associated therewith throughout the world; (6) all databases and data collections and all rights therein throughout the world; (7) all software including all source code, object code, firmware, development tools, files, records and data, all media on which any of the foregoing is recorded; (8) all permits, privileges or royalties; (9) all domain names and website addresses; (10) any similar, corresponding or equivalent rights to any of the foregoing and (11) all documentation related to any of the foregoing. (b) Schedule 8.17 sets forth each item of Intellectual Property that is owned by Company and that is used in or material to the conduct of Company's business as it is currently conducted (the "Company Intellectual Property"), including, without limitation, all software programs and databases, including any registration and/or application numbers therefor. Except as set forth on Schedule 8.17, Company owns and will own on the Closing Date each item of Company Intellectual Property set forth on Schedule 8.17. Company's patents, trademarks and copyrights that have been duly registered with, filed in or issued by, as the case may be, the U.S. Patent and Trademark Office and U.S. Copyright Office or other filing offices, domestic or foreign are listed on Schedule 8.17, and the same remain in full force and effect. (c) Schedule 8.17 lists each item of Intellectual Property other than Company Intellectual Property that is necessary for the conduct of, or otherwise material to, Company's business as currently conducted ("Other Intellectual Property"), including without limitation, all software programs. Company has the right, by license or other agreement, to use each item of Other Intellectual Property. (d) Schedule 8.17 sets forth all written or oral licenses, permissions and arrangements pursuant to which (a) Company permits any Person to use any item of Company Intellectual Property (b) Company uses any Intellectual Property owned by any Person ((a) and (b) collectively, the "Intellectual Property Licenses"). Except as set forth on Schedule 8.17, all Intellectual Property Licenses are in full force and effect in accordance with their terms, and are free and clear of any Liens. (e) Company has delivered to Lender correct and complete copies of (1) all registrations and applications for any Company Intellectual Property; (2) all Intellectual Property Licenses listed on Schedule 8.17; and (3) copies of any assignments pursuant to which Company owns any Company Intellectual Property. (f) Except as set forth on Schedule 8.17: (1) Company is not in material default under any Intellectual Property License, and to Company's knowledge, no such material default is currently threatened; (2) the operation of Company's business as currently conducted does not infringe the proprietary rights of any Person or constitute unfair competition or trade practices under the laws of any jurisdiction and Company has not received any notice, oral or written, that alleges the contrary; (3) to Company's knowledge, no Company Intellectual Property and no Other Intellectual Property used by Company under any Intellectual Property License is being infringed by any third party or group thereof; and (4) there is no claim or demand of any Person pertaining to, or any proceeding which is pending or, to Company's knowledge, threatened, that challenges Company's rights with respect to any item of Company Intellectual Property or any Other Intellectual Property used by Company, or the validity or enforceability of any item of Company Intellectual Property, nor are there any claims that any default exists under any Intellectual Property License. 9 (g) Except as set forth on Schedule 8.17, no item of Company Intellectual Property or Other Intellectual Property, or any Intellectual Property License, is subject to any outstanding order, ruling, decree, judgment or stipulation by or with any court, tribunal arbitrator, or other Governmental Authority that could affect the Seller's ability to use, license, or transfer such Company Intellectual Property or its validity or enforceability. (h) Company has taken all steps that are reasonably required to protect Company's rights in confidential information and trade secrets of Company or Company's business or provided by any third party to Company. Without limiting the foregoing, Company has, and enforces, a policy requiring each employee and contractor to execute (A) proprietary information and confidentiality agreements in connection with Company Intellectual Property and (B) invention assignment agreements, substantially in Company's standard forms, and all current employees and contractors of Company have executed such agreements. 8.18 No consent, approval, qualification, order or authorization of, or filing with any governmental authority is required in connection with Company's valid execution, delivery or performance of the Related Agreements to which it is a party, or the offer, issue or sale of the Notes by Company, the conversion of the Notes, or the issuance of common stock upon conversion of the Notes, or the consummation of any other transaction pursuant to this Agreement on the part of Company, except filings under applicable federal securities or blue sky laws. 8.19 Company is not obligated to pay any broker's fee, finder's fee, investment banker's fee or other similar transaction fee in connection with the transactions contemplated hereby. 8.20 The minute books of Company and each Subsidiary, which shall have been provided to counsel for Lender prior to the date hereof or at any time hereafter while amounts are still owing on the Notes. The minute books contain, and shall continue to contain at all times while amounts are owing on the Notes, a complete record of actions taken at all meetings of directors, managers, shareholders and members since January 2000 and reflect all such actions accurately in all material respects. 8.21 Company is not a "United States real property holding corporation" as defined in section 897(c)(2) of the Code and Treasury Regulation section 1.897-2(b). 8.22 Neither this Agreement, nor any agreement, certificate, statement or document furnished in writing by or on behalf of Company to Lender in connection herewith or therewith contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein or therein, in light of the circumstances under which they were made, not misleading. Section 9. Covenants. 9.1 Company and each Subsidiary will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the rights (charter and statutory) and franchises of Company. 9.2 Company and each Subsidiary will comply with all applicable statutes, regulations, orders and restrictions of the United States, any state, municipality or other governmental division thereof, and agencies and instrumentalities of the foregoing, in respect of the conduct of its business and the ownership of its property, except where such non-compliance will not have a material adverse effect on Company or its business. 9.3 Company and each Subsidiary shall file, when due, all federal, state and local tax and information returns that it is required to file. Company and each Subsidiary will pay when due all taxes, interest and penalties, if any, reflected in such tax returns or otherwise due and payable by it. 9.4 Neither Company nor any Subsidiary shall not declare any dividend or distribution payable in securities of other persons, evidences of indebtedness issued by Company or other persons, assets, including, but not limited to cash and/or non-cash dividends, or options or rights prior to the date the Loan is repaid in full. 10 9.5 Neither Company nor any Subsidiary shall not enter into any transaction or series of transactions that results in a sale, transfer of or other disposal of more than 15% of Company's assets or which otherwise results in a sale, transfer or other disposal of assets outside the ordinary course of business. 9.6 Neither Company nor any Subsidiary shall not redeem any shares of common stock, membership interest or other securities. 9.7 Without the consent of Lender, Company will not use the proceeds from the Initial Installment for any purposes other than those set forth on Schedule 9.7a and it will not use the proceeds from any Loan proceeds subsequent to the Initial Installment for any purposes other than those set forth on Schedule 9.7b. 9.8 The parties will use reasonable commercial efforts to enter into a share exchange agreement between Company and Lender whereby Company will become a wholly owned subsidiary of Lender and the historical security holders of Company will own between 40% and 50% of the outstanding securities of Lender. The Shares Exchange Agreement shall contain, among other things, representations, warranties and indemnifications as are customary for a transaction of this type and as are mutually agreeable to Company and Lender. The arrangement is also anticipated to provide the Company with use of a $1.5 million line of credit for use in the Company's project with the City of Provo. 9.9 Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement, including, without limitation, using all reasonable efforts to obtain all necessary waivers, consents and approvals and to effect all necessary registrations and filings. Section 10. Miscellaneous. 10.1 This Agreement, including any attached exhibits or schedules, constitutes the entire agreement between the parties pertaining to the subject matter contained in this Agreement. All prior and contemporaneous agreements, representations and understandings of the parties, oral or written, are superseded by and merged in this Agreement. No supplement, modification or amendment of this Agreement shall be binding unless in writing and executed by Company and Lender. 10.2 The provisions of this Agreement shall be binding upon Company, its legal representatives, successors or assigns, and shall be for the benefit of Lender and its respective successors and assigns. 10.3 The headings of this Agreement are for purposes of reference only and shall not limit or define the meaning of any provision of this Agreement. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which shall constitute one and the same instrument. 10.4 If any action is brought by either party in respect to its rights under this Agreement, or to obtain an interpretation thereof, the prevailing party shall be entitled to reasonable attorneys' fees and court costs as determined by the court. 10.5 No waiver of any of the provisions of this Agreement shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver be a continuing waiver. Except as expressly provided in this Agreement, no waiver shall be binding unless executed in writing by the party making the waiver. Either party may waive any provision of this Agreement intended for its benefit; provided, however, such waiver shall in no way excuse the other party from the performance of any of its other obligations under this Agreement. 10.6 The representations, warranties, acknowledgments and agreements made by Lender shall survive the closing of the transaction described herein and 11 run in favor of, and for the benefit of, Company. The representations, warranties, acknowledgments and agreements made by Company shall survive the closing of the transaction described herein and run in favor of, and for the benefit of, Lender. 10.7 The obligations of the parties hereto shall not be delegated or assigned to any other party without the prior written consent of the other party. 10.8 This Agreement shall be governed by the laws of the State of Utah. Any legal action to enforce or obtain an interpretation of this Agreement shall be filed only in the Third Judicial District Court of Salt Lake County or the United States District Court in Salt Lake City, Utah, and the parties consent to the exercise of personal over them by said courts. 10.9 Any notices required or permitted hereunder shall be furnished in writing to each party at such party's address appearing on the signature page below or as such party may otherwise direct in writing actually received by the other party. 10.10 Company shall do, execute, acknowledge and deliver all such further acts, deeds, assignments, transfers and assurances as Lender may reasonably require to effectuate the purposes of this Agreement. 10.11 In the event that any court of competent jurisdiction shall determine that any provision, or any portion thereof, contained in this Agreement shall be unreasonable or unenforceable in any respect, then such provision shall be deemed limited to the extent that such court deems it reasonable and enforceable, and as so limited shall remain in full force and effect. In the event that such court shall deem any such provision, or portion thereof, wholly unenforceable, the remaining provisions of this Agreement shall nevertheless remain in full force and effect. IN WITNESS WHEREOF, the undersigned have executed this Agreement to be effective as of the date first written above. FARADAY FINANCIAL, INC. VIDEO INTERNET BROADCASTING CORPORATION By /s/ W. Kelly Ryan By /s/ Frank J. Gillen Its: Chief Executive Officer Its: President Address: Address: Faraday Financial, Inc. Video Internet Broadcasting Corporation Attn: Frank Gillen Attn: Kelly Ryan 2055 East 6425 South 135 Basin Street SW Salt Lake City, Utah 84121 Ephrata, WA 98823 Phone: (801)746-3311 Phone: (509) 754-2600 Fax: (801) 746-3311 Fax: (509) 754-1399 EIN 33-0565710 EIN 91-2133121 12 SCHEDULE OF EXHIBITS EXHIBIT NO. DESCRIPTION OF EXHIBIT ----------- ---------------------- A Form of Convertible Promissory Note B Form of Security Agreement VIDEO INTERNET BROADCASTING CORPORATION a Washington corporation 12% CONVERTIBLE PROMISSORY NOTE No. ________ $____________ USD NEITHER THIS PROMISSORY NOTE NOR THE UNDERLYING SECURITIES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, OR UNDER ANY OTHER APPLICABLE STATE SECURITIES LAWS. NEITHER THIS PROMISSORY NOTE NOR ANY SECURITIES ISSUED PURSUANT TO ITS CONVERSION MAY BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS. 1. Promise to Pay. Video Internet Broadcasting Corporation, a Washington corporation, ("Company"), for value received, hereby promises to pay to Faraday Financial, Inc. ("Holder"), the principal sum of ____________________ Dollars ($____________), with interest at the rate of twelve percent (12%) per annum until this Note has been paid in full or converted pursuant to the provisions hereof. Interest will be computed on the basis of a 360-day year for actual days elapsed. 2. Payments. Except as otherwise set forth in Section 4, principal and interest shall be due and payable in a single balloon payment (the "Maturity Date") on the earlier of (i) December 31, 2004 or (ii) in the event that Company is no longer working toward entering into and closing on a share exchange agreement by and between Company and Holder whereby Company will become a wholly owned subsidiary of Holder and the historical security holders of Company will own between 40% and 50% of the outstanding common stock of Holder. Principal and any interest not paid when due shall bear interest at the rate of eighteen percent (18%) per annum. Company may not prepay any amounts owing hereunder without the written consent of Holder. Payments shall be credited to Company's account on the date that such payment is received by Holder. All payments on this Note shall be applied, at the option of Holder, first to late charges and collection costs, if any, then to accrued interest and then to principal. 3. Default. The occurrence of one or more of the following events shall constitute an event of default: (a) The nonpayment of the principal or interest of this Note when the same shall have become due and payable which nonpayment is not cured within five (5) days of written notice thereof. (b) Filing by Company of a petition in bankruptcy or seeking reorganization, arrangement, adjustment, or composition of or in respect of Company's debts, whether under the United States Bankruptcy Code or any other applicable federal or state law; entry of an order for relief under the United States Bankruptcy Code, whether pursuant to a voluntary or involuntary petition; the filing of an involuntary petition seeking adjudication of Company as a debtor under the United States Bankruptcy Code or similar federal law, if said petition is not dismissed within sixty (60) days; entry of a decree or order appointing a receiver, liquidator, assignee, or trustee of Company, or any substantial part if its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of sixty (60) days; or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by Company in furtherance of any such action. (c) Default by Company under the Loan Agreement, by and between the Holder and Company, pursuant to which this Note was issued (the "Loan Agreement") any security agreement or any obligation, instrument, note or agreement for borrowed money in excess of $25,000 beyond any applicable notice or grace period provided in the underlying documents. A-1 (d) Breach by Company of any of its representations, warranties, covenants or obligations under this Note, the Loan Agreement, any security agreement or other agreement between the parties. (e) Failure of Company to use reasonable commercial efforts to enter into a share exchange agreement between Company and Holder whereby Company will become a wholly owned subsidiary of Holder and the historical security holders of Company will own between 40% and 50% of the outstanding securities of Lender. The Shares Exchange Agreement shall contain, among other things, representations, warranties and indemnifications as are customary for a transaction of this type and as are mutually agreeable to Company and Lender. Company will give Holder written notice of the occurrence of any of the events set forth above in this Section 3 promptly but in no event more than one business day after the occurrence of any of such events. 4. Acceleration. At the option of Holder, without limiting any other remedies available to Holder and without demand or notice, all principal and any unpaid interest shall become immediately due and payable upon a default as set forth in Section 3 above. Without limiting any other remedies available to Holder and without demand or notice, all principal and any unpaid interest shall become immediately due and payable upon a default as set forth in Section 3 above. In the event the principal and any unpaid interest are accelerated pursuant to this Section 4, Holder, at its option and without limiting any other remedies available to Holder, may elect to exercise the conversion rights set forth herein and to receive payment of amounts due and owing hereunder in the form of securities, in lieu of the payment of cash. 5. Conversion Privilege. At any time while this Note is outstanding, Holder of this Note shall have the right, at Holder's option, from time to time to convert all or part of the principal and accrued, but unpaid, interest of this Note into shares of Company's common stock, par value $.50 per share (the "Common Stock") at the rate of one share of Common Stock for every $.50 in principal and accrued interest that is converted. To exercise the conversion privilege, Holder shall surrender this Note to Company at its principal office along with a written conversion notice. This Note or a portion thereof shall be deemed to have been converted immediately prior to the close of business on the date of receipt of the Note, even if Company's stock transfer books are on that date closed, and Holder shall be treated for all purposes as the record holder of the shares of common stock deliverable upon such conversion as of the close of business on such date. Holder may convert all or part of the principal and accrued interest, if any, from time to time. Upon election to convert all of the principal amount and accrued interest of this Note, the Note will be cancelled. If all of the principal and accrued interest is converted then, as a condition to such conversion, Holder must surrender this Note to Company at Company's principal offices. In the event of a partial conversion then, as a condition to such conversion, Holder must surrender the Note to Company for endorsement to reflect the amount owing at the time of such conversion. Upon conversion Company shall, as promptly as practicable after the surrender, deliver to Holder a certificate or certificates representing the securities into which this Note may be converted. Fractional shares shall not be issued, but the conversion price of such fractional share will be paid in cash to Holder. The "conversion price" at which Common Stock shall be issuable upon conversion of this Note as provided in above in this Section 5 shall be subject to adjustment as follows. (a) In the event Company shall at any time or from time to time after the date hereof fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling Holder thereof to receive directly or indirectly, additional shares of Common Stock ("Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such split, subdivision, dividend or distribution if no record date is fixed), the conversion price shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase of outstanding shares. (b) In the event that Company shall issue Additional Stock (as defined below) prior to or at any closing entitling any party to subscribe for or purchase shares of its capital stock without consideration or at a price per share that is lower than the conversion price, then the conversion price in A-2 effect immediately prior to each such issuance or deemed issuance shall be adjusted to a price determined by the following formula: (A + B) / (C + D), where "A" equals the number of shares of capital stock outstanding immediately prior to such issuance or sale multiplied by the then applicable conversion price, where "B" equals the consideration, if any, received by Company upon such issuance or sale, where "C" equals the total number of shares of capital stock outstanding prior to issuance of the additional shares and where "D" equals any additional stock or conversion shares, or any other shares reserved for issuance which are associated with such financing, immediately after such issuance or sale. "Additional Stock" means any shares of capital stock or shares of capital stock issuable pursuant to any indebtedness or shares of stock convertible into or exchangeable for capital stock ("Convertible Securities") or rights, options or warrants to subscribe for, purchase or otherwise acquire capital stock or Convertible Securities issued or deemed to have been issued by Company after the date of issuance of this Note, except securities issued or issuable upon conversion of this Note. (c) No adjustment of the conversion price shall be made in an amount less than one-half of One Cent ($0.005) per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and shall be taken into account in any subsequent adjustment to the conversion price. No adjustment of the conversion price pursuant to this Section 5(c) shall have the effect of increasing the conversion price in effect immediately prior to such adjustment. (d) In the case of the issuance of securities of Company for (i) cash, the amount of consideration received by Company for such securities shall be deemed to be the amount of cash paid therefor before deducting any discounts, commissions or other expenses allowed, paid or incurred by Company for any underwriting or otherwise in connection with the issuance and sale thereof, or (ii) consideration in whole or in part other than cash, the consideration other than cash shall be deemed to have a dollar value equal to the fair market value of such non-cash consideration, irrespective of any accounting treatment thereof, as determined by a vote of the majority of the board of directors. (e) If at any time or from time to time there shall be a reorganization, recapitalization or reclassification of the capital stock of Company or a consolidation or merger of Company with another corporation, or a sale of all or substantially all of the assets of Company to another corporation or a liquidation of Company, provision shall be made so that Holder of this Note shall thereafter be entitled to receive, upon conversion of this Note, the number of shares of stock or other securities or property of Company or otherwise, receivable upon such transaction (or any similar transaction) by a holder of the number of shares of Common Stock or other conversion securities into which this Note could have been converted immediately prior to such transaction (or similar transaction). In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 5 with respect to the rights of Holder of this Note after the reorganization, recapitalization, reclassification, consolidation, merger, sale, liquidation or similar transaction to the end that the provisions of this Section 5 (including adjustments of the conversion price then in effect and the number of securities purchasable upon conversion of this Note) shall be applicable after that event as nearly equivalent as may be practicable. (f) Before taking any action which would cause an adjustment reducing the conversion price below the then par value, if any, of the shares of Common Stock issuable upon the conversion of this Note, Company will take any corporate action which may, in the opinion of its counsel, be necessary in order that Company may validly and legally issue registered, fully paid and non-assessable shares of the Common Stock at such adjusted conversion price. (g) Upon the occurrence of each adjustment or readjustment of the conversion price pursuant to this Section 5, Company, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, certified by Company's President or Chief Financial Officer. Company shall, upon the written request at any time of Holder, furnish or cause to be furnished to such Holder a like certificate setting forth (i) such adjustment and readjustment, (ii) the conversion price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of this Note. (h) Company covenants that it will at all times until any closing, reserve and keep available out of its authorized capital stock, solely A-3 for the purpose of delivery upon conversion of this Note as herein provided, such number of shares of Common Stock or other securities as shall then be deliverable upon the conversion of the maximum amount of principal and accrued but unpaid interest convertible pursuant to this Note. Company covenants that all the shares of Common Stock or other securities which shall be so deliverable upon conversion of this Note shall be duly and validly issued, registered, fully paid and non-assessable. (i) The delivery of certificates for shares of Common Stock or other capital stock upon the conversion of this Note shall be made without charge to Holder for any documentary, stamp or similar issue or transfer tax in respect of the issuance of such certificates, and such certificates shall be delivered in the name of, or in such names as may be directed by Holder. (j) In the event of any taking by Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, Company shall mail to Holder, at least ten (10) business days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such right, and the amount and character of such right. (k) Company will not, by amendment of its charter or through any reorganization, recapitalization or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 5 and in the taking of all such action as may be necessary or appropriate to protect the conversion rights of Holder of this Note against impairment. (l) Company will not declare a distribution payable in securities of other persons, evidences of indebtedness issued by Company or other persons, assets or options or rights while amounts are owing on this Note without the written approval of Holder. (m) Notwithstanding any other provision contained in this Section 5 or elsewhere in this Agreement, there shall be no adjustment in the "conversion price" (a) upon the exercise of any warrant or of any other security issued by Company in connection with the offer and sale of Company's securities pursuant to the Loan Agreement, (b) upon the exercise of or conversion of any convertible securities, options or warrants issued and outstanding on the effective date of the Loan Agreement, and/or (c) the issuance or exercise of stock options issued under Company's current stock option plans. 6. Restrictions on Transfer. This Note has not been registered under the Securities Act of 1933. This Note, or any right hereunder, may not be enforced against Company by any holder, except the original Holder herein, and Company shall not be obligated to recognize any purported transferee or assignee, (i) unless there is an effective registration covering the Note or underlying right under the Securities Act of 1933 and applicable state securities laws, (ii) unless Company receives an opinion of an attorney, licensed to practice within the United States, that the transfer of the Note, or any underlying right, complies with the requirements of the Securities Act of 1933 and any relevant state securities law, or (iii) unless the transfer is made pursuant to Rule 144 under the Securities Act of 1933. Any permitted transferee or assignee shall be subject to the restrictions and to the terms of this Note and the related Loan Agreement and any security agreement, and Company may require said transferee or assignee to execute and deliver such further instruments evidencing or acknowledging the same. Company shall bear all reasonable costs and expenses associated with any transfer or exchange. 7. Rights of the Holder. Except as provided herein, the Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in Company, either at law or equity, unless and until securities granting shareholder rights are issued pursuant to the conversion provisions hereof. 8. No Merger. So long as this Note or the Agreement remain outstanding, Company shall not consolidate with or merge into any other person or convey, transfer or lease its properties and assets substantially as an entirety to any person, and Company shall not permit any person to consolidate with or merge into Company or convey, transfer or lease its properties and assets substantially as an entirety to Company. A-4 9. Replacement Securities. If the Note is mutilated and is surrendered to Company or if Holder presents evidence to the reasonable satisfaction of Company that the Note has been lost, destroyed or wrongfully taken, Company shall issue a replacement Note of like tenor. Company shall bear all reasonable costs and expenses associated with replacing the Note. 10. Notices. Any notices required or permitted hereunder shall be in writing and shall be given by personal delivery; by deposit in the United States mail, certified mail, return receipt requested, postage prepaid; or by established express delivery service, freight prepaid. Notices shall be delivered, addressed, or transmitted to the parties at the following addresses, which may be changed by a notice given to the other party in accordance with this Section. The date notice is deemed to have been given, received and become effective shall be the date on which the notice is delivered, if notice is given by personal delivery, two (2) days following the date of deposit in the mail, if the notice is sent through the United States mail, or the date of actual receipt, if the notice is sent by express delivery service. Company's address is: Faraday Financial, Inc. Attn: Frank Gillen, President 175 South Main, Suite 1240 Salt Lake City, Utah 84121 Phone: (801) 746-3311 Fax: (801) 746-3312 The Holder's address is: Video Internet Broadcasting Corporation Attn: Kelly Ryan, CEO 135 Basin Street SW Epharta, WA 98823 Phone: (509) 754-2600 Fax: (509) 754-1399 11. Miscellaneous. (a) The headings of this Note are for purposes of reference only and shall not limit or define the meaning of any provision of this Note. (b) If suit or action is instituted in connection with any controversy arising out of this Note, or in the enforcement of any rights hereunder, the prevailing party shall be entitled to recover in addition to costs such sums as the court may adjudge as reasonable attorney's fees, including attorney's fees incurred in any appeal. (c) This Note shall be governed by the laws of the State of Utah. Any legal action to enforce or obtain an interpretation of this Agreement shall be filed in the Third Judicial District Court of Salt Lake County or the United States District Court in Salt Lake City, Utah, and the parties consent to the exercise of personal over them by said courts. (d) In computing any period of time pursuant to this Note, the day of the act, event or default from which the designated period of time begins to run shall be included, unless it is a Saturday, Sunday, or a legal holiday, in which event the period shall begin to run on the next day which is not a Saturday, Sunday, or legal holiday, in which event the period shall run until the end of the next day thereafter which is not a Saturday, Sunday, or legal holiday. (e) Nothing herein shall be construed to be to the benefit of any third party, nor is it intended that any provision shall be for the benefit of any third party. A-5 (f) The obligations of Company or the Holder may not be delegated or assigned to any other party without the prior written consent of the other. (g) In the event that any court of competent jurisdiction shall determine that any provision, or any portion thereof, contained in this Note shall be unreasonable or unenforceable in any respect, then such provision shall be deemed limited to the extent that such court deems it reasonable and enforceable, and as so limited shall remain in full force and effect. In the event that such court shall deem any such provision, or portion thereof, wholly unenforceable, the remaining provisions of this Note shall nevertheless remain in full force and effect. IN WITNESS WHEREOF, this Note is executed by Video Internet Broadcasting Corporation, to be effective as of the 17th day of February, 2004. VIDEO INTERNET BROADCASTING CORPORATION, a Washington corporation By /s/ W. Kelly Ryan --------------------------------------- Its Chief Executive Officer STATE OF WA ) ss: COUNTY OF GRANT ) On this 18th day of February, 2004, before me appeared W. Kelly Ryan, to me personally known, who being duly sworn did say that he/she is the President of VEDEO INTERNET BROADCASTING CORPORATION, the within named corporation, and that the instrument was signed in behalf of said corporation and acknowledged the instrument to be the free act and deed of the corporation. /s/ ------------------------------ NOTARY PUBLIC My Commission Expires: Residing at: Ephrata, WA 5-9-05 A-6 EXHIBIT B SECURITY AGREEMENT This Agreement, to be effective as of February 17, 2004, by and among VIDEO INTERNET BROADCASTING CORPORATION, a Washington limited liability company (the "Company") and FARADAY FINANCIAL, INC. (the "Secured Party"). WITNESSETH: WHEREAS, Company and Secured Party are parties to a Loan Agreement, dated February 17, 2004, wherein Secured Party may loan Company up to FIVE HUNDRED THOUSAND DOLLARS ($500,000) in principal and which loans are memorialized by 12% convertible promissory notes (the "Notes"). The loan agreement provides for, upon the satisfaction of certain contingencies, the grant by Company to Secured Party of a security interest in Company assets; and WHEREAS, Secured Party has required that Company execute and deliver to Secured Party this Agreement. NOW, THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: 1. Security Interest. 1.1 Collateral. As security for the payment and performance of Company's obligations to Secured Party under the Note (the "Secured Obligations"), Company hereby creates a security interest in favor of Secured Party in all of Company's right, title and interest in and to (but none of its obligations or liabilities with respect to) all items and types of present and future property described in clauses below, whether now owned or hereafter acquired, all of which shall be included in the term "Collateral": All accounts, chattel paper, deposit accounts, documents (negotiable and nonnegotiable), general intangibles, goods (including inventory and equipment), instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas and other minerals, now existing or hereafter arising, and all cash and non-cash proceeds and products thereof, including all insurance proceeds 1.2 Perfection of Collateral. Secured Party is authorized, from time to time, to file and record in the proper filing and recording places, all such instruments, including, without limitation, Uniform Commercial Code financing statements, and to take all such other action, as Secured Party deems reasonably necessary for perfecting or otherwise confirming to it the security interest granted by Company to Secured Party in the Collateral pursuant to this Agreement. 1.3 No Liens or Dispositions. All Collateral shall be free and clear of any liens and restrictions on the transfer thereof, including, without limitation, contractual provisions which prohibit the assignment of rights under contracts, except for (a) nonconsensual liens imposed by law, and (b) liens and restrictions on transfer approved in writing by Secured Party. Except with Secured Party's prior written consent, Company will not sell, lease or otherwise dispose of any of the Collateral, except in each case in the ordinary course of business consistent with past practice. 2. Right to Realize upon Collateral. Except to the extent prohibited by applicable law that cannot be waived, this Section 2 shall govern Secured Party's rights to realize upon the Collateral upon the occurrence of an Event of Default (as defined in the note(s) memorializing funds lent under the Note). The provisions of this Section 2 are in addition to any rights and remedies available at law or in equity. 2.1 Assembly of Collateral; Receiver. Upon Secured Party's written request, assemble the Collateral and otherwise make it available to Secured Party. Secured Party may have a receiver appointed for all or any portion of Company's assets or business which constitutes the Collateral in order to manage, protect, preserve, sell and otherwise dispose of all or any portion of the Collateral. B-1 2.2 Waiver. To the extent it may lawfully do so, Company waives and relinquishes the benefit and advantage of, and covenants not to assert against Secured Party, any valuation, stay, appraisement, extension, redemption or similar laws now or hereafter existing which, but for this Section 2.2, might be applicable to the sale of any Collateral made under the judgment, order or decree of any court, or privately under the power of sale conferred by this Agreement, or otherwise. 2.3 Foreclosure Sale. All or any part of the Collateral may be sold for cash or other value in any number of lots at public or private sale, without demand, advertisement or notice; provided, however, that unless the Collateral to be sold threatens to decline speedily in value or is of a type customarily sold on a recognized market, Secured Party shall give Company 10 days' prior written notice of the time and place of any public sale, or the time after which a private sale may be made, which notice each of Company and Secured Party agrees to be reasonable. At any sale or sales of Collateral, Secured Party or any of its assigns may bid for and purchase all or any part of the property and rights so sold and may use all or any portion of the Secured Obligations owed to Secured Party as payment for the property or rights so purchased, and upon compliance with the terms of such sale may hold and dispose of such property and rights without further accountability to Company, except for the proceeds of such sale or sales pursuant to Section 2.4. 2.4 Application of Proceeds. The proceeds of all sales and collections in respect of any Collateral or other assets of Company, all funds collected from Company and any cash contained in the Collateral, the application of which is not otherwise specifically provided for herein, shall be applied as follows or in such other order as Secured Party may determine: A. First, to the payment of the costs and expenses of such sales and collections, the reasonable expenses of Secured Party and the reasonable fees and expenses of its counsel. B. Second, any surplus then remaining to the payment of the Secured Obligations. C. Third, any surplus then remaining shall be paid to Company. 3. Custody of Collateral. Except as provided by applicable law that cannot be waived, Secured Party will have no duty as to the custody and protection of the Collateral, the collection of any part thereof or of any income thereon or the preservation or exercise of any rights pertaining thereto, including, without limitation, rights against prior parties, except for the use of reasonable care in the custody and physical preservation of any Collateral in its possession. Secured Party will not be liable or responsible for any loss or damage to any Collateral, or for any diminution in the value thereof, by reason of the act or omission of any agent selected by Secured Party acting in good faith. 4. Incorporation of Loan Agreement. The Loan Agreement and related Notes and the terms and provisions thereof are hereby incorporated herein in their entirety by this reference. 5. General. The obligations of the parties hereto shall not be delegated or assigned to any other party without the prior written consent of the other party. Notices shall be furnished in writing to each party at such party's address appearing on the signature page of the Note or as such party may otherwise direct in writing actually received by the other party. The invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of any other provision hereof, and any invalid or unenforceable provision shall be modified so as to be enforceable to the maximum extent of its validity or enforceability. The headings in this Agreement are for convenience of reference only and shall not limit, alter or otherwise affect the meaning hereof. This Agreement constitutes the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior and current understandings and agreements, whether written or oral, with respect to such subject matter. This Agreement may be executed in any number of counterparts, which together shall constitute one instrument. This Agreement shall be governed by and construed in accordance with the laws (other than the conflict of laws rules) of the State of Utah, except as may be required by the Uniform Commercial Code of other jurisdictions with respect to matters involving the perfection of Secured Party's lien on the Collateral located in such other jurisdictions. Each of the undersigned has caused this Security Agreement to be executed and delivered by its duly authorized officer as an agreement to be effective as of the date first written above. B-2 COMPANY: VIDEO INTERNET BROADCASTING CORPORATION By /s/ W. Kelly Ryan ------------------------------------- Its: SECURED PARTY: FARADAY FINANCIAL, INC. By /s/ Frank Gillen ------------------------------------- Its: President B-3 SCHEDULE 9.7a USE OF PROCEEDS FROM INITIAL INSTALLMENT The proceeds from the Initial Installment (as defined in the Loan Agreement to which this Schedule is attached) shall be used only pay the following creditors up to the following amounts: Name of Creditor Maximum Amount of Payment ---------------- ------------------------- Denton Harris $105,000 GC PUD 35,000 Brian Potter 35,000 Bob Murtagh 5,000 Mike Sherri 11,750 Stonebridge 25,000 Bob Keeslinz 15,000 SCHEDULE 9.7b USE OF PROCEEDS AFTER INITIAL INSTALLMENT The proceeds after the Initial Installment (as defined in the Loan Agreement to which this Schedule is attached) shall be used only pay the following creditors up to the following amounts: Name of Creditor Maximum Amount of Payment ---------------- ------------------------- Payroll Taxes (December) $10,000 Brian Potter (back wages) 36,000 Brian Potter (travel) 10,000 Bob Murtagh 30,000 Mike Devine 17,000 GC PUD 165,000 Wilson Sonsine 25,000 MCSI 50,000 Sharon Grants 25,000 Moreover, $250,000 in convertible debt held by Mike Devine, Brion Potter, Robin Carr, David Hull, Keith Lennsen and Butch Yoder shall be converted into common stock at fifty cents ($.50) per share as per the terms of the convertible notes as soon as the Company accepts loan proceeds in excess of the Initial Installment. EX-10.3 4 ex103k033104.txt SECURITY AGREEMENT Exhibit 10.3 SECURITY AGREEMENT THIS SECURITY AGREEMENT, dated as of March 12, 2004, between FARADAY FINANCIAL, INC., a Delaware corporation (the "Lender"), and VIDEO INTERNET BROADCASTING CORPORATION, a Washington corporation (hereinafter, the "Company"). WHEREAS, the Company has entered into a Loan Agreement, dated as of March 23, 2004 (as amended and in effect from time to time, the "Loan Agreement"), with the Lender, pursuant to which the Lender, subject to the terms and conditions contained therein, has made loans to the Company; and WHEREAS, as a condition to the Lender's making any loans to the Company under the Loan Agreement, the Company is required to execute and deliver to the Lender a security agreement in substantially the form hereof; and WHEREAS, the Company wishes to grant a security interest in favor of the Lender as herein provided. NOW, THEREFORE, in consideration of the promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Definitions. All capitalized terms used herein without definitions shall have the respective meanings provided therefor in the Loan Agreement. The term "State", as used herein, means the State of Washington. All terms defined in the Uniform Commercial Code of the State and used herein shall have the same definitions herein as specified therein. However, if a term is defined in Article 9 of the Uniform Commercial Code of the State differently than in another Article of the Uniform Commercial Code of the State, the term has the meaning specified in Article 9. The term "Obligations"; as used herein, means all of the indebtedness, obligations and liabilities of the Company to the Lender, individually or collectively, whether direct or indirect, joint or several, absolute or contingent, due or to become due, now existing or hereafter arising under or in respect of the Loan Agreement, any promissory notes or other instruments or agreements executed and delivered pursuant thereto or in connection therewith or this Agreement, and the term "Event of Default"; as used herein, means the failure of the Company to pay or perform any of the Obligations as and when due to be paid or performed under the terms of the Loan Agreement. 2. Grant of Security Interest. The Company hereby grants to the Lender, to secure the payment and performance in full of all of the Obligations, a security interest in and pledges and assigns to the Lender the following properties, assets and rights of the Company, wherever located, whether now owned or hereafter acquired or arising, and all cash and non-cash proceeds and products thereof (all of the same being hereinafter called the "Collateral"): all personal and fixture property of every kind and nature including without limitation all goods (including inventory, equipment and any accessions thereto), instruments (including promissory notes), documents (negotiable and nonnegotiable), accounts (including health-care-insurance receivables), chattel paper (whether tangible or electronic), deposit accounts, letters-of-credit, letter-of-credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims, securities and all other investment property, supporting obligations, any other contract rights or rights to the payment of money, insurance claims and proceeds, oil, gas and other minerals, and all general intangibles (including all payment intangibles). The Lender acknowledges that the attachment of its security interest in any commercial tort claim as original collateral is subject to the Company's compliance with Section 4.7. 3. Authorization to File Financing Statements. The Company hereby irrevocably authorizes the Lender at any time and from time to time to file in any filing office in any Uniform Commercial Code jurisdiction any initial financing statements and amendments thereto that (a) indicate the Collateral (i) as all assets of the Company or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the Uniform Commercial Code of the State or such jurisdiction, or (ii) as being of an equal or lesser scope or with greater detail, and (b) provide any other information required by part 5 of Article 9 of the Uniform Commercial Code of the State or such other jurisdiction for the sufficiency or filing office acceptance of any financing statement or amendment, including (i) whether the Company is an organization, the type of organization and any organization identification number issued to the Company and, (ii) in the case of a financing statement filed as a fixture filing or indicating Collateral as as-extracted collateral or timber to be cut, a sufficient description of real property to which the Collateral relates. The Company agrees to furnish any such information to the Lender promptly upon the Lender's request. The Company also ratifies its authorization for the Lender to have filed in any Uniform Commercial Code jurisdiction any like initial financing statements or amendments thereto if filed prior to the date hereof. 4. Other Actions. Further to insure the attachment, perfection and first priority of, and the ability of the Lender to enforce, the Lender's security interest in the Collateral, the Company agrees, in each case at the Company's expense, to take the following actions with respect to the following Collateral and without limitation on the Company's other obligations contained in this Agreement: 4.1. Promissory Notes and Tangible Chattel Paper. If the Company shall at any time hold or acquire any promissory notes or tangible chattel paper, the Company shall forthwith endorse, assign and deliver the same to the Lender, accompanied by such instruments of transfer or assignment duly executed in blank as the Lender may from time to time specify. 4.2. Deposit Accounts. For each deposit account that the Company at any time opens or maintains, the Company shall, at the Lender's request and option, pursuant to an agreement in form and substance satisfactory to the Lender, either (a) cause the depository bank to agree to comply, without further consent of the Company, at any time with instructions from the Lender to such depository bank directing the disposition of funds from time to time credited to such deposit account, or (b) arrange for the Lender to become the customer of the depository bank with respect to the deposit account, with the Company being permitted, only with the consent of the Lender, to exercise rights to withdraw funds from such deposit account. The provisions of this paragraph shall not apply to (i) any deposit account for which the Company, the depository bank and the Lender have entered into a cash collateral agreement specially negotiated among the Company, the depository bank and the Lender for the specific purpose set forth therein, (ii) a deposit account for which the Lender is the depository bank and is in automatic control, and (iii) any deposit accounts specially and exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of the Company's salaried employees 4.3. Investment Property. If the Company shall at any time hold or acquire any certificated securities, the Company shall forthwith endorse, assign and deliver the same to the Lender, accompanied by such instruments of transfer or assignment duly executed in blank as the Lender may from time to time specify. If any securities now or hereafter acquired by the Company are uncertificated and are issued to the Company or its nominee directly by the issuer thereof, the Company shall immediately notify the Lender thereof and, at the Lender's request and option, pursuant to an agreement in form and substance satisfactory to the Lender, either (a) cause the issuer to agree to comply, without further consent of the Company or such nominee, at any time with instructions from the Lender as to such securities, or (b) arrange for the Lender to become the registered owner of the securities. If any securities, whether certificated or uncertificated, or other investment property now or hereafter acquired by the Company are held by the Company or its nominee through a securities intermediary or commodity intermediary, the Company shall immediately notify the Lender thereof and, at the Lender's request and option, pursuant to an agreement in form and substance satisfactory to the Lender, either (i) cause such securities intermediary or (as the case may be) commodity intermediary to agree to comply, in each case without further consent of the Company or such nominee, at any time with entitlement orders or other instructions from the Lender to such securities intermediary as to such securities or other investment property, or (as the case may be) to apply any value distributed on account of any commodity contract as directed by the Lender to such commodity intermediary, or (ii) in the case of financial assets or other investment property held through a securities intermediary, arrange for the Lender to become the entitlement holder with respect to such investment property, with the Company being permitted, only with the consent of the Lender, to exercise rights to withdraw or otherwise deal with such investment property. 2 The provisions of this paragraph shall not apply to any financial assets credited to a securities account for which the Lender is the securities intermediary. 4.4. Collateral in the Possession of a Bailee. If any Collateral is at any time in the possession of a bailee, the Company shall promptly notify the Lender thereof and, at the Lender's request and option, shall promptly obtain an acknowledgement from the bailee, in form and substance satisfactory to the Lender, that the bailee holds such Collateral for the benefit of the Lender and such bailee's agreement to comply, without further consent of the Company, at any time with instructions of the Lender as to such Collateral. 4.5. Electronic Chattel Paper and Transferable Records. If the Company at any time holds or acquires an interest in any electronic chattel paper or any "transferable record," as that term is defined in Section 201 of the federal Electronic Signatures in Global and National Commerce Act, or in ss.16 of the Uniform Electronic Transactions Act as in effect in any relevant jurisdiction, the Company shall promptly notify the Lender thereof and, at the request and option of the Lender, shall take such action as the Lender may reasonably request to vest in the Lender control, under ss.9-105 of the Uniform Commercial Code, of such electronic chattel paper or control under Section 201 of the federal Electronic Signatures in Global and National Commerce Act or, as the case may be, ss.16 of the Uniform Electronic Transactions Act, as so in effect in such jurisdiction, of such transferable record. 4.6. Letter-of-credit Rights. If the Company is at any time a beneficiary under a letter of credit now or hereafter, the Company shall promptly notify the Lender thereof and, at the request and option of the Lender, the Company shall, pursuant to an agreement in form and substance satisfactory to the Lender, either (i) arrange for the issuer and any confirmer or other nominated person of such letter of credit to consent to an assignment to the Lender of the proceeds of the letter of credit or (ii) arrange for the Lender to become the transferee beneficiary of the letter of credit, with the Lender agreeing, in each case, that the proceeds of the letter to credit are to be applied to the outstanding Obligation. 4.7 Commercial Tort Claims. If the Company shall at any time hold or acquire a commercial tort claim, the Company shall immediately notify the Lender in a writing signed by the Company of the particulars thereof and grant to the Lender in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to the Lender. 4.8. Other Actions as to any and all Collateral. The Company further agrees, upon request of the Lender and at the Lender's option, to take any and all other actions as the Lender may determine to be necessary or useful for the attachment, perfection and first priority of, and the ability of the Lender to enforce, the Lender's security interest in any and all of the Collateral, including, without limitation, (a) executing, delivering and, where appropriate, filing financing statements and amendments relating thereto under the Uniform Commercial Code, to the extent, if any, that the Company's signature thereon is required therefor, (b) causing the Lender's name to be noted as secured party on any certificate of title for a titled good if such notation is a condition to attachment, perfection or priority of, or ability of the Lender to enforce, the Lender's security interest in such Collateral, (c) complying with any provision of any statute, regulation or treaty of the United States as to any Collateral if compliance with such provision is a condition to attachment, perfection or priority of, or ability of the Lender to enforce, the Lender's security interest in such Collateral, (d) obtaining governmental and other third party waivers, consents and approvals in form and substance satisfactory to the Lender, including, without limitation, any consent of any licensor, lessor or other person obligated on Collateral, (e) obtaining waivers from mortgagees and landlords in form and substance satisfactory to the Lender and (f) taking all actions under any earlier versions of the Uniform Commercial Code or under any other law, as reasonably determined by the Lender to be applicable in any relevant Uniform Commercial Code or other jurisdiction, including any foreign jurisdiction. 5. Relation to Other Security Documents. The provisions of this Agreement supplement the provisions of any real estate mortgage or deed of trust 3 granted by the Company to the Lender and which secures the payment or performance of any of the Obligations. Nothing contained in any such real estate mortgage or deed of trust shall derogate from any of the rights or remedies of the Lender hereunder. 5.1. Patent and Trademark Assignments. Concurrently herewith the Company is executing and delivering to the Lender the Patent Assignment and the Trademark Assignment pursuant to which the Company is assigning to the Lender certain Collateral consisting of patents and patent rights and trademarks, service marks and trademark and service mark rights, together with the goodwill appurtenant thereto. The provisions of the Patent Assignment and the Trademark Assignment are supplemental to the provisions of this Agreement, and nothing contained in the Patent Assignment or the Trademark Assignment shall derogate from any of the rights or remedies of the Lender hereunder. Neither the delivery of, nor anything contained in, the Patent Assignment or the Trademark Assignment shall be deemed to prevent or postpone the time of attachment or perfection of any security interest in such Collateral created hereby. 5.2. Copyright Memorandum. Concurrently herewith the Company is executing and delivering to the Lender for recording in the United States Copyright Office (the "Copyright Office') a Memorandum of Grant of Security Interest in Copyrights. The Company represents and warrants to the Lender that such Memorandum identifies all now existing material copyrights and other rights in and to all material copyrightable works of the Company, identified, where applicable, by title, author and/or Copyright Office registration number and date. The Company represents and warrants to the Lender that it has registered all material copyrights with the Copyright Office, as identified in such Memorandum. The Company covenants, promptly following the Company's acquisition thereof, to provide to the Lender like identifications of all material copyrights and other rights in and to all material copyrightable works hereafter acquired by the Company, to register such copyrights with Copyright Office and to execute and deliver to the Lender a supplemental Memorandum of Grant of Security Interest in Copyrights, in form and substance satisfactory to Lender, modified to reflect such subsequent acquisitions and registrations. 6. Representations and Warranties Concerning Company's Legal Status. The Company has previously delivered to the Lender a certificate signed by the Company and entitled "Perfection Certificate" (the "Perfection Certificate"). The Company represents and warrants to the Lender as follows: (a) the Company's exact legal name is that indicated on the Perfection Certificate and on the signature page hereof, (b) the Company is an organization of the type, and is organized in the jurisdiction, set forth in the Perfection Certificate, (c) the Perfection Certificate accurately sets forth the Company's organizational identification number or accurately states that the Company has none, (d) the Perfection Certificate accurately sets forth the Company's place of business or, if more than one, its chief executive office, as well as the Company's mailing address, if different, (e) all other information set forth on the Perfection Certificate pertaining to the Company is accurate and complete and (f) there has been no change in any of such information since the date on which the Perfection Certificate was signed by the Company. 7. Covenants Concerning Company's Legal Status. The Company covenants with the Lender as follows: (a) without providing at least 30 days prior written notice to the Lender, the Company will not change its name, its place of business or, if more than one, chief executive office, or its mailing address or organizational identification number if it has one, (b) if the Company does not have an organizational identification number and later obtains one, the Company will forthwith notify the Lender of such organizational identification number, and (c) the Company will not change its type of organization, jurisdiction of organization or other legal structure. 8. Representations and Warranties Concerning Collateral, Etc. The Company further represents and warrants to the Lender as follows: (a) the Company is the owner of the Collateral, free from any right or claim of any person or any adverse lien, security interest or other encumbrance, except for the security interest created by this Agreement, (b) none of the Collateral constitutes, or is the proceeds of, "farm products" as defined in ss.9-102(a)(34) of the Uniform Commercial Code of the State, (c) none of the account debtors or other persons obligated on any of the Collateral is a governmental authority covered by the Federal Assignment of Claims Act or like federal, state or local statute or rule in respect of such Collateral, (d) the 4 Company holds no commercial tort claim except as indicated on the Perfection Certificate, and (e) the Company has at all times operated its business in compliance with all applicable provisions of the federal Fair Labor Standards Act, as amended, and with all applicable provisions of federal, state and local statutes and ordinances dealing with the control, shipment, storage or disposal of hazardous materials or substances, (f) all other information set forth on the Perfection Certificate pertaining to the Collateral is accurate and complete, and (g) there has been no change in any of such information since the date on which the Perfection Certificate was signed by the Company. 9. Covenants Concerning Collateral, Etc. The Company further covenants with the Lender as follows: (a) the Collateral, to the extent not delivered to the Lender pursuant to ss.4, will be kept at those locations listed on the Perfection Certificate and the Company will not remove the Collateral from such locations, without providing at least 30 days prior written notice to the Lender, (b) except for the security interest herein granted, the Company shall be the owner of the Collateral free from any right or claim of any other person or any lien, security interest or other encumbrance, and the Company shall defend the same against all claims and demands of all persons at any time claiming the same or any interests therein adverse to the Lender, (c) the Company shall not pledge, mortgage or create, or suffer to exist any right of any person in or claim by any person to the Collateral, or any security interest, lien or other encumbrance in the Collateral in favor of any person, other than the Lender, (d) the Company will keep the Collateral in good order and repair and will not use the same in violation of law or any policy of insurance thereon, (e) the Company will permit the Lender, or its designee, to inspect the Collateral at any reasonable time, wherever located, (f) the Company will pay promptly when due all taxes, assessments, governmental charges and levies upon the Collateral or incurred in connection with the use or operation of such Collateral or incurred in connection with this Agreement, (g) the Company will continue to operate its business in compliance with all applicable provisions of the federal Fair Labor Standards Act, as amended, and with all applicable provisions of federal, state and local statutes and ordinances dealing with the control, shipment, storage or disposal of hazardous materials or substances, and (h) the Company will not sell or otherwise dispose, or offer to sell or otherwise dispose, of the Collateral or any interest therein except for sales of inventory in the ordinary course of business. 10. Insurance. 10.1. Maintenance of Insurance. The Company will maintain with financially sound and reputable insurers insurance with respect to its properties and business against such casualties and contingencies as shall be in accordance with general practices of businesses engaged in similar activities in similar geographic areas. Such insurance shall be in such minimum amounts that the Company will not be deemed a co-insurer under applicable insurance laws, regulations and policies and otherwise shall be in such amounts, contain such terms, be in such forms and be for such periods as may be reasonably satisfactory to the Lender. In addition, all such insurance shall be payable to the Lender as loss payee. Without limiting the foregoing, the Company will (i) keep all of its physical property insured with casualty or physical hazard insurance on an "all risks" basis, with broad form flood and earthquake coverages and electronic data processing coverage, with a full replacement cost endorsement and an "agreed amount" clause in an amount equal to 100% of the full replacement cost of such property, (ii) maintain all such workers' compensation or similar insurance as may be required by law and (iii) maintain, in amounts and with deductibles equal to those generally maintained by businesses engaged in similar activities in similar geographic areas, general public liability insurance against claims of bodily injury, death or property damage occurring, on, in or about the properties of the Company; business interruption insurance; and product liability insurance. 10.2. Insurance Proceeds. The proceeds of any casualty insurance in respect of any casualty loss of any of the Collateral shall, subject to the rights, if any, of other parties with an interest having priority in the property covered thereby, (i) so long as no Default or Event of Default has occurred and is continuing and to the extent that the amount of such proceeds is less than $1,500, be disbursed to the Company for direct application by the Company solely to the repair or replacement of the Company's property so damaged or destroyed and (ii) in all other circumstances, be held by the Lender as cash collateral for the Obligations. The Lender may, at its sole option, disburse from time to time all or any part of such proceeds so held as cash collateral, upon such terms and conditions as the Lender may reasonably 5 prescribe, for direct application by the Company solely to the repair or replacement of the Company's property so damaged or destroyed, or the Lender may apply all or any part of such proceeds to the Obligations. 10.3. Continuation of Insurance. All policies of insurance shall provide for at least 90 days prior written cancellation notice to the Lender. In the event of failure by the Company to provide and maintain insurance as herein provided, the Lender may, at its option, provide such insurance and charge the amount thereof to the Company. The Company shall furnish the Lender with certificates of insurance and policies evidencing compliance with the foregoing insurance provision. 11. Collateral Protection Expenses; Preservation of Collateral. 11.1. Expenses Incurred by Lender. In the Lender's discretion, if the Company fails to do so, the Lender may discharge taxes and other encumbrances at any time levied or placed on any of the Collateral, make repairs thereto and pay any necessary filing fees or insurance premiums. The Company agrees to reimburse the Lender on demand for all expenditures so made. The Lender shall have no obligation to the Company to make any such expenditures, nor shall the making thereof be construed as a waiver or cure any Default or Event of Default. 11.2. Lender's Obligations and Duties. Anything herein to the contrary notwithstanding, the Company shall remain obligated and liable under each contract or agreement comprised in the Collateral to be observed or performed by the Company thereunder. The Lender shall not have any obligation or liability under any such contract or agreement by reason of or arising out of this Agreement or the receipt by the Lender of any payment relating to any of the Collateral, nor shall the Lender be obligated in any manner to perform any of the obligations of the Company under or pursuant to any such contract or agreement, to make inquiry as to the nature or sufficiency of any payment received by the Lender in respect of the Collateral or as to the sufficiency of any performance by any party under any such contract or agreement, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to the Lender or to which the Lender may be entitled at any time or times. The Lender's sole duty with respect to the custody, safe keeping and physical preservation of the Collateral in its possession, under ss.9-207 of the Uniform Commercial Code of the State or otherwise, shall be to deal with such Collateral in the same manner as the Lender deals with similar property for its own account. 12. Securities and Deposits. The Lender may at any time, at its option, transfer to itself or any nominee any securities constituting Collateral, receive any income thereon and hold such income as additional Collateral or apply it to the Obligations. Whether or not any Obligations are due, the Lender may demand, sue for, collect, or make any settlement or compromise which it deems desirable with respect to the Collateral. Regardless of the adequacy of Collateral or any other security for the Obligations, any deposits or other sums at any time credited by or due from the Lender to the Company may at any time be applied to or set off against any of the Obligations. 13. Notification to Account Debtors and Other Persons Obligated on Collateral. The Company shall, at the request and option of the Lender, notify account debtors and other persons obligated on any of the Collateral of the security interest of the Lender in any account, chattel paper, general intangible, instrument or other Collateral and that payment thereof is to be made directly to the Lender or to any financial institution designated by the Lender as the Lender's agent therefor, and the Lender may itself, without notice to or demand upon the Company, so notify account debtors and other persons obligated on Collateral. After the making of such a request or the giving of any such notification, the Company shall hold any proceeds of collection of accounts, chattel paper, general intangibles, instruments and other Collateral received by the Company as trustee for the Lender without commingling the same with other funds of the Company and shall turn the same over to the Lender in the identical form received, together with any necessary endorsements or assignments. The Lender shall apply the proceeds of collection of accounts, chattel paper, general intangibles, instruments and other Collateral received by the Lender to the Obligations, such proceeds to be immediately credited after final payment in cash or other immediately available funds of the items giving rise to them. 6 14. Power of Attorney 14.1. Appointment and Powers of Lender. The Company hereby irrevocably constitutes and appoints the Lender and any officer or agent thereof, with full power of substitution, as its true and lawful attorneys-in-fact with full irrevocable power and authority in the place and stead of the Company or in the Lender's own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments that may be necessary or useful to accomplish the purposes of this Agreement and, without limiting the generality of the foregoing, hereby gives said attorneys the power and right, on behalf of the Company, without notice to or assent by the Company, to do the following: (a) to sell, transfer, pledge, make any agreement with respect to or otherwise dispose of or deal with any of the Collateral in such manner as is consistent with the Uniform Commercial Code of the State and as fully and completely as though the Lender were the absolute owner thereof for all purposes, and to do, at the Company's expense, at any time, or from time to time, all acts and things which the Lender deems necessary or useful to protect, preserve or realize upon the Collateral and the Lender's security interest therein, in order to effect the intent of this Agreement, all no less fully and effectively as the Company might do, including, without limitation, (i) the filing and prosecuting of registration and transfer applications with the appropriate federal, state or local agencies or authorities with respect to trademarks, copyrights and patentable inventions and processes, (ii) upon written notice to the Company, the exercise of voting rights with respect to voting securities, which rights may be exercised, if the Lender so elects, with a view to causing the liquidation of assets of the issuer of any such securities and (iii) the execution, delivery and recording, in connection with any sale or other disposition of any Collateral, of the endorsements, assignments or other instruments of conveyance or transfer with respect to such Collateral; and (b) to the extent that the Company's authorization given in Section 3 is not sufficient, to file such financing statements with respect hereto, with or without the Company's signature, or a photocopy of this Agreement in substitution for a financing statement, as the Lender may deem appropriate and to execute in the Company's name such financing statements and amendments thereto and continuation statements which may require the Company's signature. 14.2. Ratification by Company. To the extent permitted by law, the Company hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and is irrevocable. 14.3. No Duty on Lender. The powers conferred on the Lender hereunder are solely to protect its interests in the Collateral and shall not impose any duty upon it to exercise any such powers. The Lender shall be accountable only for the amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Company for any act or failure to act, except for the Lender's own gross negligence or willful misconduct. 15. Rights and Remedies. If an Event of Default shall have occurred and be continuing, the Lender, without any other notice to or demand upon the Company, shall have in any jurisdiction in which enforcement hereof is sought, in addition to all other rights and remedies, the rights and remedies of a secured party under the Uniform Commercial Code of the State and any additional rights and remedies as may be provided to a secured party in any jurisdiction in which Collateral is located, including, without limitation, the right to take possession of the Collateral, and for that purpose the Lender may, so far as the Company can give authority therefor, enter upon any premises on which the Collateral may be situated and remove the same therefrom. The Lender may in its discretion require the Company to assemble all or any part of the Collateral at such location or locations within the jurisdiction(s) of the Company's principal office(s) or at such other locations as the Lender may reasonably designate. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, the Lender shall give to the Company at least five Business Days prior written notice of the time and place of any public sale of Collateral or of the time after which any private sale or any other intended disposition is to be made. The Company hereby 7 acknowledges that five Business Days prior written notice of such sale or sales shall be reasonable notice. In addition, the Company waives any and all rights that it may have to a judicial hearing in advance of the enforcement of any of the Lender's rights and remedies hereunder, including, without limitation, its right following an Event of Default to take immediate possession of the Collateral and to exercise its rights and remedies with respect thereto. 16. Standards for Exercising Rights and Remedies. To the extent that applicable law imposes duties on the Lender to exercise remedies in a commercially reasonable manner, the Company acknowledges and agrees that it is not commercially unreasonable for the Lender (a) to fail to incur expenses reasonably deemed significant by the Lender to prepare Collateral for disposition or otherwise to fail to complete raw material or work in process into finished goods or other finished products for disposition, (b) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (c) to fail to exercise collection remedies against account debtors or other persons obligated on Collateral or to fail to remove liens or encumbrances on or any adverse claims against Collateral, (d) to exercise collection remedies against account debtors and other persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (e) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (f) to contact other persons, whether or not in the same business as the Company, for expressions of interest in acquiring all or any portion of the Collateral, (g) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the collateral is of a specialized nature, (h) to dispose of Collateral by utilizing Internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets, (i) to dispose of assets in wholesale rather than retail markets, (j) to disclaim disposition warranties, (k) to purchase insurance or credit enhancements to insure the Lender against risks of loss, collection or disposition of Collateral or to provide to the Lender a guaranteed return from the collection or disposition of Collateral, or (1) to the extent deemed appropriate by the Lender, to obtain the services of other brokers, investment bankers, consultants and other professionals to assist the Lender in the collection or disposition of any of the Collateral. The Company acknowledges that the purpose of this Section 16 is to provide non-exhaustive indications of what actions or omissions by the Lender would fulfill the Lender's duties under the Uniform Commercial Code of the State or any other relevant jurisdiction in the Lender's exercise of remedies against the Collateral and that other actions or omissions by the Lender shall not be deemed to fail to fulfill such duties solely on account of not being indicated in this Section 16. Without limitation upon the foregoing, nothing contained in this Section 16 shall be construed to grant any rights to the Company or to impose any duties on the Lender that would not have been granted or imposed by this Agreement or by applicable law in the absence of this Section 16. 17. No Waiver by Lender, etc. The Lender shall not be deemed to have waived any of its rights and remedies in respect of the Obligations or the Collateral unless such waiver shall be in writing and signed by the Lender. No delay or omission on the part of the Lender in exercising any right or remedy shall operate as a waiver of such right or remedy or any other right or remedy. 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. All rights and remedies of the Lender with respect to the Obligations or the Collateral, whether evidenced hereby or by any other instrument or papers, shall be cumulative and may be exercised singularly, alternatively, successively or concurrently at such time or at such times as the Lender deems expedient. 18. Suretyship Waivers by Company. The Company waives demand, notice, protest, notice of acceptance of this Agreement, notice of loans made, credit extended, Collateral received or delivered or other action taken in reliance hereon and all other demands and notices of any description. With respect to both the Obligations and the Collateral, the Company assents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of or failure to perfect any security interest in any Collateral, to the addition or release of any party or person primarily or secondarily liable, to the acceptance of partial payment thereon and the settlement, compromising or adjusting of any thereof, all in such manner and at such time or times as the Lender may deem advisable. The Lender shall have no duty as to the collection or protection of the Collateral or any income therefrom, the preservation of rights against prior parties, or the preservation of any rights pertaining thereto beyond the safe custody thereof as set forth in Section 11.2. The Company further waives any and all other suretyship defenses. 8 19. Marshalling. The Lender shall not be required to marshal any present or future collateral security (including but not limited to the Collateral) for, or other assurances of payment of, the Obligations or any of them or to resort to such collateral security or other assurances of payment in any particular order, and all of its rights and remedies hereunder and in respect of such collateral security and other assurances of payment shall be cumulative and in addition to all other rights and remedies, however existing or arising. To the extent that it lawfully may, the Company hereby agrees that it will not invoke any law relating to the marshalling of collateral which might cause delay in or impede the enforcement of the Lender's rights and remedies under this Agreement or under any other instrument creating or evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, the Company hereby irrevocably waives the benefits of all such laws. 20. Proceeds of Dispositions; Expenses. The Company shall pay to the Lender on demand any and all expenses, including reasonable attorneys' fees and disbursements, incurred or paid by the Lender in protecting, preserving or enforcing the Lender's rights and remedies under or in respect of any of the Obligations or any of the Collateral. After deducting all of said expenses, the residue of any proceeds of collection or sale or other disposition of Collateral shall, to the extent actually received in cash, be applied to the payment of the Obligations in such order or preference as the Lender may determine, proper allowance and provision being made for any Obligations not then due. Upon the final payment and satisfaction in full of all of the Obligations and after making any payments required by Sections 9-608(a)(1)(C) or 9-615(a)(3) of the Uniform Commercial Code of the State, any excess shall be returned to the Company. In the absence of final payment and satisfaction in full of all of the Obligations, the Company shall remain liable for any deficiency. 21. Overdue Amounts. Until paid, all amounts due and payable by the Company hereunder shall be a debt secured by the Collateral and shall bear, whether before or after judgment, interest at the rate of interest 18% per annum. 22. Governing Law; Consent to Jurisdiction. THIS AGREEMENT IS INTENDED TO TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF UTAH. The Company agrees that any action or claim arising out of any dispute in connection with this Agreement, any rights or obligations hereunder or the performance or enforcement of such rights or obligations may be brought in the courts of the State or any federal court sitting therein and consents to the non-exclusive jurisdiction of such court and to service of process in any such suit being made upon the Company by mail at the address specified in Section 10 of the Loan Agreement. The Company hereby waives any objection that it may now or hereafter have to the venue of any such suit or any such court or that such suit is brought in an inconvenient court. 23. Waiver of Jury Trial. THE COMPANY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OR ENFORCEMENT OF ANY SUCH RIGHTS OR OBLIGATIONS. Except as prohibited by law, the Company waives any right which it may have to claim or recover in any litigation referred to in the preceding sentence any special, exemplary, punitive or consequential damages or any damages other than, or in addition to, actual damages. The Company (i) certifies that neither the Lender nor any representative, agent or attorney of the Lender has represented, expressly or otherwise, that the Lender would not, in the event of litigation, seek to enforce the foregoing waivers or other waivers contained in this Agreement and (ii) acknowledges that, in entering into the Loan Agreement, the Lender is relying upon, among other things, the waivers and certifications contained in this Section 23. 9 24. Miscellaneous. The headings of each section of this Agreement are for convenience only and shall not define or limit the provisions thereof. This Agreement and all rights and obligations hereunder shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of the Lender and its successors and assigns. If any term of this Agreement shall be held to be invalid, illegal or unenforceable, the validity of all other terms hereof shall in no way be affected thereby, and this Agreement shall be construed and be enforceable as if such invalid, illegal or unenforceable term had not been included herein. The Company acknowledges receipt of a copy of this Agreement. [signature page follows] 10 IN WITNESS WHEREOF, intending to be legally bound, the Company has caused this Agreement to be duly executed as of the date first above written. VIDEO INTERNET BROADCASTING CORPORATION By: /s/ M.W. Devine --------------------------------- Title: President ACCEPTED: FARADAY FINANCIAL, INC. By: /s/ Frank Gillen ------------------------ Title: President CERTIFICATE OF ACKNOWLEDGMENT STATE OF WASHINGTON ) ss. COUNTY OF ) Before me, the undersigned, a Notary Public in and for the county aforesaid, on this __ day of March, 2004, personally appeared M.W. Devine to me known personally, and who, being by me duly sworn, deposes and says that he is the president of VIEDO INTERNET BROADCASTING CORPORATION, and that said instrument was signed and sealed on behalf of said corporation by authority of its Board of Directors, and said President acknowledged said instrument to be the free act and deed of said corporation. /s/ ------------------------------ Notary Public My commission expires: 11 PERFECTION CERTIFICATE (UCC Financing Statements) The undersigned, the __________________ and the _______________________ of VIDEO INTERNET BROADCASTING CORPORATION, a Washington corporation (the "Company"), hereby certifies, with reference to a certain Security Agreement, dated as of March ___, 2004 (terms defined in such Security Agreement having the same meanings herein as specified therein), between the Company and FARADAY FINANCIAL, INC., a Delaware corporation (the "Lender"), to the Lender as follows: 1. Name. The exact legal name of the Company as that name appears on its Articles of Incorporation is as follows: 2. Other Identifying Factors. (a) The following is the mailing address of the Company: (b) If different from its mailing address, the Company's place of business or, if more than one, its chief executive office is located at the following address: Address County State ------- ------ ----- (c) The following is the type of organization of the Company: (d) The following is the jurisdiction of the Company's organization: (e) The following is the Company's state issued organizational identification number [state "None" if the state does not issue such a number]: 3. Other Names, Etc. (a) The following is a list of all other names (including trade names or similar appellations) used by the Company, or any other business or organization to which the Company became the successor by merger, consolidation, acquisition, change in form, nature or jurisdiction of organization or otherwise, now or at any time during the past five years: (b) Attached hereto as Schedule 3 is the information required in Section 2 for any other business or organization to which the Company became the successor by merger, consolidation, acquisition, change in form, nature or jurisdiction of organization or otherwise, now or at any time during the past five years: 4. Other Current Locations. (a) The following are all other locations in the United States of America in which the Company maintains any books or records relating to any of the Collateral consisting of accounts, instruments, chattel paper, general intangibles or mobile goods: 12 Address County State ------- ------ ----- (b) The following are all other places of business of the Company in the United States of America: Address County State ------- ------ ----- (c) The following are all other locations in the United States of America where any of the Collateral consisting of inventory or equipment is located: Address County State ------- ------ ----- (d) The following are the names and addresses of all persons or entities other than the Company, such as lessees, consignees, warehousemen or purchasers of chattel paper, which have possession or are intended to have possession of any of the Collateral consisting of instruments, chattel paper, inventory or equipment: Name and Mailing Address County State ------------------------ ------ ----- 5. Prior Locations. (a) Set forth below is the information required by Section 4(a) or (b) with respect to each location or place of business previously maintained by the Company at any time during the past five years in a state in which the Company has previously maintained a location or place of business at any time during the past four months: Address County State ------- ------ ----- (b) Set forth below is the information required by Section 4(c) or (d) with respect to each other location at which, or other person or entity with which, any of the Collateral consisting of inventory or equipment has been previously held at any time during the past twelve months: Address County State ------- ------ ----- 6. Fixtures. Attached hereto as Schedule 6 is the information required by UCC ss.9-502(b) or former UCC ss.9-402(5) of each state in which any of the Collateral consisting of fixtures are or are to be located and the name and address of each real estate recording office where a mortgage on the real estate on which such fixtures are or are to be located would be recorded. 7. Unusual Transactions. Except for those purchases, acquisitions and other transactions described on Schedule 3 or on Schedule 7 attached hereto, all of the Collateral has been originated by the Company in the ordinary course of the Company's business or consists of goods which have been acquired by the Company in the ordinary course from a person in the business of selling goods of that kind. 13 8. File Search Reports. Attached hereto as Schedule 8(A) is a true copy of a file search report from the Uniform Commercial Code filing officer (or, if such officer does not issue such reports, from an experienced Uniform Commercial Code search organization acceptable to the Lender) (i) in each jurisdiction identified in Section 2(d) or in Sections 4 or 5 with respect to each name set forth in Section 1 or 3, (ii) from each filing officer in each real estate recording office identified on Schedule 6 with respect to real estate on which Collateral consisting of fixtures are or are to be located and (iii) in each jurisdiction in which any of the transactions described in Schedule 3 or 7 took place with respect to the legal name of the person from which the Company purchased or otherwise acquired any of the Collateral. Attached hereto as Schedule 8(B) is a true copy of each financing statement or other filing identified in such file search reports. 9. UCC Filings. A duly authorized financing statement, in a form acceptable to the Lender and containing the indication of the Collateral set forth on Schedule 9(A) has been duly filed in the central Uniform Commercial Code filing office in the jurisdiction identified in Section 2(d) and in each real estate recording office referred to on Schedule 6 hereto. Attached hereto as Schedule 9(B) is a true copy of each such filing duly acknowledged or otherwise identified by the filing office. All filing fees and taxes payable in connection with the filings described in this Section 9 have been paid. IN WITNESS WHEREOF, the undersigned have hereunto signed this Certificate on March 23, 2004. /s/ M.W. Devine ------------------------------------ Title: /s/ W. Kelly Ryan ------------------------------------ Title: 14 EX-10.4 5 ex104k033104.txt INTELLECTUAL PROPERTY SECURITY AGREEMENT Exhibit 10.4 INTELLECTUAL PROPERTY SECURITY AGREEMENT THIS INTELLECTUAL PROPERTY SECURITY AGREEMENT ("Security Agreement") is made to be effective as of March 30, 2004 by VIDEO INTERNET BROADCASTING CORPORATION (the "Grantor") in favor of FARADAY FINANCIAL, INC. (the "Lender"). RECITALS: WHEREAS, pursuant to that certain Loan Agreement, dated February 17, 2004, (as amended, extended, modified, restructured or renewed from time to time, the "Loan Agreement"), by and among Grantor and Lender, Lender has agreed to make a loans in the aggregate principal amount of $500,000 to Grantor evidenced by promissory notes dated February 17, 2004 and March 23, 2004 (together with any amendments, extensions, modifications and/or renewals thereof and/or any promissory notes given in payment thereof, the "Note") (capitalized terms used and not otherwise defined herein shall have the meaning assigned to them in the Loan Agreement); WHEREAS, Grantor owns or has rights in certain Intellectual Property listed on Schedule A hereto; WHEREAS, Grantor desires to mortgage, pledge and grant to Lender, for the benefit of Lender, a security interest in all of its right, title and interest in, to and under the Collateral (as hereinafter defined), including without limitation, the property listed on the attached Schedule A, together with any renewal or extension thereof, and all Proceeds (as hereinafter defined) thereof, to secure the payment of the Obligations (as hereinafter defined); and WHEREAS, it is a condition precedent to the obligation of the Lender to make the Loan to Grantor under the Loan Agreement, that Grantor execute this Agreement. NOW, THEREFORE, in consideration of the premises and to induce Lender to make the Loan to Grantor under the Loan Agreement, Grantor hereby agrees with Lender, as follows: 1. Defined Terms. Unless otherwise defined herein, terms which are defined in the Loan Agreement and used herein are so used as so defined, and the following terms shall have the following meanings: General Definitions: "Collateral" has the meaning assigned to it in Section 2 of this Security Agreement. "Obligations" means (a) loans to be made concurrently or in connection with this Agreement or the Loan Agreement as evidenced by one or more promissory notes payable to the order of Lender that shall be due and payable as set forth in such promissory notes, and any renewals or extensions thereof, (b) the full and prompt payment and performance of any and all other indebtedness and other obligations of Grantor to Lender, direct or contingent (including but not limited to obligations incurred as endorser, guarantor or surety), however 1 evidenced or denominated, and however and whenever incurred, including but not limited to indebtedness incurred pursuant to any present or future commitment of Lender to Grantor, and (c) all future advances made by Lender for taxes, levies, insurance and preservation of the Collateral and all attorney's fees, court costs and expenses of whatever kind incident to the collection of any of said indebtedness or other obligations and the enforcement and protection of the security interest created under this Security Agreement. "Proceeds" means "proceeds," as such term is defined in Section 9-306(1) of the UCC and, to the extent not included in such definition, shall include, without limitation, (a) all income, royalties, damages and payments now and hereafter due and/or payable under or with respect to the Intellectual Property, including (without limitation) damages and payments for past or future infringements thereof, (b) the right to sue and recover for past, present, and future infringements of the Intellectual Property, including all judgments and settlements in favor of Grantor in respect thereof, (c) any and all proceeds of any insurance, indemnity, warranty, guaranty or letter of credit payable to Grantor, from time to time with respect to any of the Collateral, (d) all payments (in any form whatsoever) paid or payable to Grantor from time to time in connection with any taking of all or any part of the Collateral by any governmental authority or any Person acting under color of governmental authority), and (e) all other amounts from time to time paid or payable or received or receivable under or in connection with any of the Collateral. "Security Agreement" means this Intellectual Property Security Agreement, as amended, supplemented or otherwise modified from time to time. "UCC" means the Uniform Commercial Code as from time to time in effect in the State of Washington. Definitions Relating to Intellectual Property: "Intellectual Property" means the Owned and Recordable Intellectual Property, the Licensed Intellectual Property, and the Other Intellectual Property, and any other proprietary property or technology, and agreements relating thereto, including, without limitation, any and all improvements and future developments material to the operation of Grantor's businesses. "Owned and Recordable Intellectual Property" means (1) the Copyrights, (2) the Patents, (3) the Trademarks, and (4) any and all rights, title and interest of Grantor in and to any computer code now exists or arises hereafter, as defined below: (1) "Copyrights" means all types of protective rights granted (or applications therefor) for any work that constitutes copyrightable subject matter, including without limitation, literary works, musical works, dramatic works, pictorial, graphic and sculptural works, motion pictures and other audiovisual works, sound recordings, architectural works, recognized under federal law and all comparable rights recognized in foreign jurisdictions or conventions or by treaty and including, without limitation, those works listed on Schedule A hereto. Schedule A indicates in each case whether the applicable Copyright is registered or the subject of a pending registration in the U.S. Copyright Office and any foreign jurisdictions. Schedule A also indicates whether the Copyright is the subject of any claim of co-ownership (including any claim of ownership applicable to separate or preexisting works included in any derivative or collective work), and, if so, whether the exercise of Grantor's rights therein are subject to (A) royalty obligations due such co-owner, its successors or assigns, (B) restrictions on exercise, assignment or sublicensing, or (C) revocation or termination. Unless otherwise expressly noted, the listing of any work shall be construed to include any separate or preexisting work 2 included in a derivative or collective work, and shall also be construed to include preliminary drafts or versions and revisions thereof that are not separately registered by Grantor. (2) "Patents" means all types of exclusionary or protective rights granted (or applications therefor) for inventions (including, without limitation, letters patent, plant patents, utility models, breeders' right certificates, inventor's certificates and the like), and all reissues and extensions thereof and all renewals, divisions, continuations and continuations-in-part thereof, recognized under federal law and all comparable rights recognized in foreign jurisdictions or conventions or by treaty, including, without limitation, all such rights listed in Schedule A. Schedule A indicates in each case whether the applicable Patent is issued or the subject of a pending application in the U.S. Patent & Trademark Office and any foreign jurisdictions. Schedule A also indicates whether the Patent is the subject of any claim of co-ownership, and, if so, whether the exercise of Grantor's rights therein are subject to (A) royalty obligations due such co-owner, its successors or assigns, (B) restrictions on exercise, assignment or sublicensing, or (C) revocation or termination. (3) "Trademarks" means (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, logos, internet domain names and other sources of business identifiers used in any country in the world, whether registered or unregistered, and the goodwill associated therewith, now existing or hereafter acquired, and (b) all registrations, recordings and renewals thereof, and all applications in connection therewith, issued by, filed in or otherwise recognized by a national, state, or foreign governmental authority or any foreign jurisdiction or convention or by treaty, including, without limitation, those rights listed in Schedule A hereto. Schedule A indicates in each case whether the applicable Trademark is registered or recorded, or the subject of a pending registration or recording, in the U.S. Patent & Trademark Office, a state trademark office, other U.S., state or local registrations or recording offices, and any foreign jurisdictions. Schedule A also indicates whether the Copyright is the subject of any claim of co-ownership, and, if so, whether the exercise of Grantor's rights therein are subject to (A) royalty obligations due such co-owner, its successors or assigns, (B) restrictions on exercise, assignment or sublicensing, or (C) revocation or termination. Unless otherwise expressly noted, the listing of any Trademark shall be construed related marks, brands, logos, etc. that are not separately registered or recorded by Grantor. (4) "Software" Shall mean the Software (including all computer code) in development in all versions and all forms of expression thereof, including but not limited to proprietary rights and intellectual property contained therein or connected therewith and including the source code, formula, protocol, and/or written descriptions of the same, whether digitally, electronically or otherwise recorded or transcribed. "Intellectual Property Contract Rights" means (1) Patent Licenses, (2) Copyright Licenses, (3) Trademark Licenses, and (4) Other Technology Licenses, as defined below. (1) "Copyright License" means any agreement material to the operation of Grantor's business or the value of the Copyrights, whether written or oral, providing for the grant by or to Grantor of any right or interest in any Copyright, or whereby Grantor receives or provides a release or immunity from claims for infringement of any such Copyright, including, without limitation, those agreements listed or described on Schedule B hereto. Schedule B indicates, where applicable and insofar as may be material to Grantor, whether the Copyright License is the subject of (A) any grant of exclusive rights or assignment of rights to or from Grantor, (B) royalty obligations due to or from Grantor, (C) restrictions on exercise or sublicensing, or (D) the express right of Grantor to assign the Copyright License, including as required under the 3 Security Agreement, (E) revocation or termination, and (F) confidentiality or non-disclosure covenants that may apply to Lender or any assignee of the Copyright License. Other Technology Licenses that are listed or described on Schedule B hereto do not need to be listed or described as Copyright Licenses, unless they are the subject of a grant of exclusive rights or assignment of rights to or from Grantor. (2) "Patent License" means any agreement material to the operation of Grantor's business or the value of the Patents, whether written or oral, providing for the grant by or to Grantor of any right or interest in any Patent, or whereby Grantor receives or provides a release or immunity from claims for infringement of any such Patent, including, without limitation, those agreements listed or described on Schedule B hereto. The Schedule indicates, where applicable and insofar as may be material to Grantor, whether the Patent License is the subject of (A) any grant of exclusive rights, (B) royalty obligations due to or from Grantor, (C) restrictions on exercise or sublicensing, or (D) the express right of Grantor to assign the Patent License, including as required under the Security Agreement, (E) revocation or termination, and (F) confidentiality or non-disclosure covenants that may apply to Lender or any assignee of the Patent License. Other Technology Licenses that are listed or described on Schedule B hereto do not need to be listed or described as Patent Licenses, unless they are the subject of a grant of exclusive rights or assignment of rights to or from Grantor. (3) "Trademark License" means any agreement material to the operation of Grantor's business or the value of the Trademarks, written or oral, providing for the grant by or to Grantor of any right or interest in any Trademark, or whereby Grantor receives or provides a release or immunity from claims for infringement of any such Trademark, including, without limitation, those agreements listed or described in Schedule B hereto. Schedule B indicates, where applicable and insofar as may be material to Grantor, whether the Trademark License is the subject of (A) any grant of exclusive rights, (B) royalty obligations due to or from Grantor, (C) restrictions on exercise or sublicensing, or (D) the express right of Grantor to assign the Trademark License, including as required under the Security Agreement, (E) revocation or termination, and (F) confidentiality or non-disclosure covenants that may apply to Lender or any assignee of the Patent License. (4) "Other Technology License" means any agreement material to the operation of Grantor's business, written or oral, providing for the grant by or to Grantor of any right to use or exploit technology or computer software, even if defined or divided according to Intellectual Property, including, without limitation, those agreements listed on Schedule B hereto. Schedule B indicates, where applicable and insofar as may be material to Grantor, whether the Other Technology License is the subject of (A) any grant of exclusive rights, (B) royalty obligations due to or from Grantor, (C) restrictions on exercise, assignment or sublicensing, or (D) the express right of Grantor to assign the Other Technology License, including as required under the Security Agreement, (E) revocation or termination, and (F) confidentiality or non-disclosure covenants that may apply to Lender or any assignee of the Other Technology License. "Other Intellectual Property" means (1) Know-How, (2) Inventions, (3) Trade Secrets, and (4) Domain Names, as defined below. (1) "Know-how" means any knowledge or information that is material to Grantor's business and that enables Grantor to operate its business with the accuracy, efficiency or precision necessary for commercial success, or otherwise affords Grantor a commercial advantage for the possession or knowledge thereof, whether or not currently constituting Trade Secret(s) or Invention(s). 4 (2) "Invention" means any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof that is material to the operation of Grantor's businesses and developed by Grantor, its employees or agents, which could potentially be eligible for protection as Patent(s), but whether or not currently the subject of Patent(s). (3) "Trade Secret" means all information or other items recognized as "trade secrets" under state or federal law and all comparable rights recognized in foreign jurisdictions or conventions or by treaty. (4) "Domain Name" means a unique alphanumeric designation to facilitate reference to the set of numbers that actually locate a particular computer connected to the global information network, being any name representing a record that exists within the Domain Name System (DNS). The domain name may be associated with a services contract provided by the domain name's registrar. 2. Grant of Security Interest. As collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations, Grantor hereby assigns and grants to Lender for the benefit of Lender a security interest in all of Grantor's right, title and interest in and to the Intellectual Property now owned or held, in whole or in part, or at any time hereafter acquired by Grantor or in which Grantor now has or at any time in the future may acquire any right, title or interest (collectively, the "Collateral"), including all Proceeds and products thereof. 3. Representations and Warranties Concerning the Intellectual Property. Grantor represents and warrants that: (a) Schedule A lists all Owned and Recordable Intellectual Property in which Grantor has or claims a partial or entire ownership interest and that is material to the operation of the present or planned business of Grantor. Schedule A is complete, correct and current as of the date of execution of this Agreement and contains all information required to be listed or described therein. Except as otherwise indicated in Schedule A, Grantor is the sole legal and beneficial owner of all the Owned and Recordable Intellectual Property listed in Schedule A. Grantor has taken reasonable and prudent action to protect, preserve and enforce its rights under the Owned and Recordable Intellectual Property. (b) Schedule B lists or describe all Intellectual Property Contract Rights in which Grantor has or claims any right or interest and that is material to the operation of the present or planned business of Grantor or the value of the Owned and Recordable Intellectual Property. Schedule B is complete, correct and current as of the date of execution of this Agreement and contain all information required to be listed or described therein. Except as otherwise indicated in Schedule B, the Intellectual Property Contract Rights require no license, consent or approval of third parties in order to be effective and exercisable in accordance with their respective terms, including in connection with any subsequent assignment thereof following foreclosure and sale or reorganization in bankruptcy, and each agreement listed therein is valid, subsisting, and in effect, and neither Grantor nor, to Grantor's knowledge (but without prejudice to Grantor's rights thereunder), any other party is or, with the passage of time or the render of notice, could be in material default thereunder. Grantor has taken reasonable and prudent action to identify the circumstances in which Intellectual Property Contract Rights should be established in order to protect and promote Grantor's business. (c) Except for ownership claims, restrictions and other terms listed or disclosed in Schedule A or Schedule B, as applicable, Grantor's right, title and interest in and to the Intellectual Property are free and clear of any 5 and all liens, security interests, options, licenses, pledges, assignments, encumbrances and/or agreements of any kind. To the best of Grantor's knowledge, Grantor's right, title and interest in and to the Intellectual Property are sufficient to enable Grantor to operate its business as present and as planned without serious risk of infringement or liability that has not been fully accrued or reserved. (d) All prior transfers and assignments by or to Grantor, directly or indirectly, of Owned and Recordable Intellectual Property have been duly and validly recorded or registered as necessary to reflect the accurate state of ownership thereof and vest indefeasibly in Grantor the ownership it holds or claims therein. For this purpose, the grant to or by Grantor of any exclusive right or license in Intellectual Property shall be considered a transfer or assignment appropriate for recording or registration unless Grantor's counsel specifically advises Grantor such action is unnecessary. Grantor has not, within the three (3) months prior to the date of execution of this Agreement, executed and/or delivered any transfer or assignment of any of the Intellectual Property, recorded or unrecorded. (e) No actions or proceedings have been instituted or are pending or, to Grantor's knowledge, threatened against Grantor or Grantor's licensees, sublicensees, agents, dealers, distributors or customers that challenge Grantor's claimed ownership status or rights in any Intellectual Property or Grantor's right to use or otherwise exploit the Intellectual Property in its present or planned business or claim that Grantor is in default of any Intellectual Property Contract Rights. No holding, decision or judgment has been rendered by any federal, state, local or foreign governmental authority which would limit, cancel or question the validity of any of the Intellectual Property in any respect that would conflict or interfere with the operation of Grantor's present or planned business or diminish the value of the Intellectual Property as claimed by Grantor. (f) To the best of Grantor's knowledge (but without prejudice to Grantor's rights with respect thereto), no third party is infringing or violating Grantor's rights in Intellectual Property or exceeding the scope of authorization or license under any Intellectual Property Contract Rights (to the extent granted to such third party by Grantor). (g) Except for the reservations of rights listed or described in Schedule A and Schedule B, all past and present employees, agents and contractors whom Grantor hired or engaged, directly or indirectly, and who engaged in research, development, consulting, programming, or similar technical services ("service providers"), are subject to legally binding obligations that require such service providers to disclose and deliver to Grantor their entire work product, including any Intellectual Property associated therewith, and accord to Grantor exclusive and unrestricted ownership therein. 4. Covenants. Grantor covenants and agrees with Lender that, from and after the date of this Security Agreement until the Obligations are paid in full: (a) At least on the first day of every month, commencing on April 1, 2004, Grantor will, at its sole expense, execute and deliver updated versions of Schedule A and Schedule B. Such Schedules as updated shall be complete, correct and current as of the date of delivery thereof and shall contain all information required to be listed or described therein in order to be in compliance with the provisions of Section 3 hereof (which, for such purpose, shall apply as of the date of each such further delivery). (b) Grantor will not transfer or assign, or grant any exclusive license to, any of its Intellectual Property of material value. Grantor will not license, sublicense, waive, surrender or abandon any of its Intellectual Property Contract Rights except in the ordinary course of business. 6 Notwithstanding such transfer, assignment, license, sublicense, waiver, surrender or abandonment, the Collateral shall remain subject to the security interest granted hereunder, except as released by Lender in writing in reference thereto. (c) Grantor will, at its sole expense, promptly notify Lender in the event that any third party threatens or asserts any action or proceedings against Grantor or Grantor's licensees, sublicensees, agents, dealers, distributors or customers that challenge Grantor's claimed ownership status or rights in any Intellectual Property or Grantor's right to use or otherwise exploit the Intellectual Property in its present or planned business or claim that Grantor is in default of any Intellectual Property Contract Rights. (d) Grantor agrees to pay or cause to be paid all royalties, fees and other amounts due from Grantor under all Intellectual Property Contract Rights, except to the extent that the continuation of such Intellectual Property Contract Rights is not material to the present and planned business of Grantor and lapse or delay in payment is otherwise not prejudicial to Grantor. (e) Grantor will, at its sole expense, follow good practices in an ordinary and prudent manner to protect, preserve and enforce its rights in Intellectual Property. Upon Lender's request, Grantor will furnish Lender with such information as Lender may require with regard to Grantor's practices in such regard. (f) Grantor will maintain accurate and complete records of its Intellectual Property. With regard to computer programs and related technology included in such Intellectual Property, Grantor will retain in at least one off-site repository identified to Lender current copies of all source code, system documentation, statements of principles of operation, and schematics, as well as pertinent commentary or explanation, that may be necessary to render such materials understandable and usable by a trained computer programmer. Included with such materials shall be any programs (including compilers), "workbenches," tools, and higher level (or "proprietary") languages used for the development, maintenance and implementation of such computer programs. (g) Whenever Grantor, either by itself or through any agent, employee, licensee or designee, shall file a patent application or for the registration of any Trademark or Copyright with the United States Patent and Trademark Office, the United States Copyright Office, or any similar office or agency in any other country or any political subdivision thereof, including when obtaining any interest therein from a prior owner by transfer, Grantor shall (A) simultaneously file or record evidence of Lender's security interest in the Collateral sufficient to meet the requirements for Lender's security interest therein to be recognized, protected and perfected and (B) report such filing to Lender within five (5) business days after the last day of the fiscal quarter in which such filing occurs. (h) Grantor will, at its sole expense, pay promptly when due all taxes, assessments and governmental charges, if any, upon or against the Grantor or its property or operations, including (without limitation) fees due to protect, preserve or enforce its Intellectual Property, in each case before the same become delinquent and before penalties accrue thereon or Grantor's rights therein lapse or are prejudiced, unless and to the extent that the same are being contested in good faith by appropriate proceedings. (i) When and as requested by Lender, Grantor will, at its sole expense, execute, deliver, and record, in such manner as Lender may require, such further instruments and documents and take such further action as Lender may reasonably request for the purpose of obtaining or preserving the full benefits of this Security Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation 7 statements under the UCC in effect in any jurisdiction with respect to the liens created hereby, and the recording of instruments confirming Lender's security interest therein with applicable federal or foreign authorities and agencies. Grantor hereby authorizes Lender to file any such financing or continuation statement or other instrument without the signature of Grantor or, if applicable, by affixing the signature of Grantor on Grantor's behalf, to the extent permitted by applicable law. A carbon, photographic or other reproduction of this Security Agreement shall be sufficient as a financing statement for filing in any jurisdiction. (j) Grantor will not create, incur or permit to exist, will take all commercially reasonable actions to defend the Collateral against, and will take such other commercially reasonable action as is necessary to remove, any lien or claim on or to the Collateral, other than the liens created hereby, and other than as permitted pursuant to the Loan Agreement, and will take all commercially reasonable actions to defend the right, title and interest of Lender in and to any of the Collateral against the claims and demands of all persons whomsoever. Grantor will advise Lender promptly, in reasonable detail, at Lender's address as set forth in the Loan Agreement, (i) of any lien (other than liens created hereby or permitted under the Loan Agreement) on, or claim asserted against, Collateral and (ii) of the occurrence of any other event which could reasonably be expected to have a material adverse effect on the aggregate value of the Collateral or on the liens created hereunder. 5. Lender's Appointment as Attorney-in-Fact. (a) Grantor hereby irrevocably constitutes and appoints Lender and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of Grantor and in the name of Grantor or in its own name, from time to time after the occurrence, and during the continuation of, an Event of Default in Lender's discretion, for the purpose of carrying out the terms of this Security Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Security Agreement, and, without limiting the generality of the foregoing, Grantor hereby grants Lender the power and right, on behalf of Grantor without notice to or assent by Grantor, to do the following: (i) at any time when any Event of Default shall have occurred and is continuing in the name of Grantor or its own name, or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under, or with respect to, any Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by Lender for the purpose of collecting any and all such moneys due with respect to such Collateral whenever payable; (ii) to pay or discharge taxes and liens levied or placed on or threatened against the Collateral, to effect any repairs or any insurance called for by the terms of this Security Agreement and to pay all or part of the premiums therefor and the costs thereof; and (iii) (A) to direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to Lender or as Lender shall direct, (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral, (C) to sign and endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection 8 with any of the Collateral, (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral, (E) to defend any suit, action or proceeding brought against Grantor with respect to any Collateral, (F) to settle, compromise or adjust any suit, action or proceeding described in the preceding clause and, in connection therewith, to give such discharges or releases as Lender may deem appropriate, (G) to transfer, assign, license or sublicense any Intellectual Property, throughout the world for such term or terms, on such conditions, and in such manner, as Lender shall in its sole discretion determine, (H) to prepare and transmit the necessary InterNic Registrant Name Change Agreement, and to correspond with InterNic or any other registrar to authorize transfer of the Domain Name, and (I) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though Lender were the absolute owner thereof for all purposes, and to do, at Lender's option and Grantor's expense, at any time, or from time to time, all acts and things which Lender deems necessary to protect, preserve or realize upon the Collateral and the liens of Lender thereon and to effect the intent of this Security Agreement, all as fully and effectively as Grantor might do. Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable. (b) Grantor also authorizes Lender, at any time and from time to time, to execute, in connection with the sale provided for in Section 8 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral. (c) The powers conferred on Lender hereunder are solely to protect the interests of Lender in the Collateral and shall not impose any duty upon Lender to exercise any such powers. Lender shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its partners, officers, directors, employees or agents shall be responsible to Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct or failure to comply with mandatory provisions of applicable law. 6. Performance by Lender of Grantor's Obligations. If Grantor fails to perform or comply with any of its agreements contained herein and Lender, as provided for by the terms of this Security Agreement, shall itself perform or comply, or otherwise cause performance or compliance, with such agreement, then the expenses of Lender incurred in connection with such performance or compliance, together with interest thereon at the highest default rate provided in the Note, shall be payable by Grantor to Lender on demand and shall constitute Obligations secured hereby. 7. Proceeds. It is agreed that if an Event of Default shall occur and be continuing, then (a) all Proceeds received by Grantor consisting of cash, checks and other cash equivalents shall be held by Grantor in trust for Lender, segregated from other funds of Grantor, and shall, forthwith upon receipt by Grantor, be turned over to Lender in the exact form received by Grantor (duly endorsed by Grantor to Lender, if required), and (b) any and all such Proceeds received by Lender (whether from Grantor or otherwise) shall promptly be applied by Lender against, the Obligations (whether matured or unmatured), such application to be in such order as set forth in the Loan Agreement. 8. Remedies Upon Default. Upon an Event of Default under and as defined in the Loan Agreement, Lender may pursue any or all of the following remedies, without any notice to Grantor except as required below: 9 (a) Lender may give written notice of default to Grantor, following which Grantor shall not dispose of, conceal, transfer, sell or encumber any of the Collateral (including, but not limited to, cash proceeds) without Lender's prior written consent, even if such disposition is otherwise permitted hereunder in the ordinary course of business. Any such disposition, concealment, transfer or sale after the giving of such notice shall constitute a wrongful conversion of the Collateral. Lender may obtain a temporary restraining order or other equitable relief to enforce Grantor's obligation to refrain from so impairing the Collateral. (b) Lender may take possession of any or all of the Collateral. Grantor hereby consents to Lender's entry into any of Grantor's premises to repossess Collateral, and specifically consents to Lender's forcible entry thereto as long as Lender causes no significant damage to the premises in the process of entry (frilling of locks, cutting of chains and the like do not in themselves cause "significant" damage for the purposes hereof) and provided that Lender accomplishes such entry without a breach of the peace. (c) Lender may dispose of the Collateral at private or public sale. Any required notice of sale shall be deemed commercially reasonable if given at least five (5) days prior to sale. Lender may adjourn any public or private sale to a different time or place without notice or publication of such adjournment, and may adjourn any sale either before or after offers are received. The Collateral may be sold in such lots as Lender may elect, in its sole discretion. Lender may take such action as it may deem necessary to repair, protect, or maintain the Collateral pending its disposition. (d) Lender may exercise its lien upon and right of setoff against any monies, items, credits, deposits or instruments that Lender may have in its possession and that belong to Grantor or to any other person or entity liable for the payment of any or all of the Obligations. (e) Lender may exercise any right that it may have under any other document evidencing or securing the Obligations or otherwise available to Lender at law or equity. 9. Limitation on Duties Regarding Preservation of Collateral. Lender's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the UCC or otherwise, shall be to deal with it in the same manner as Lender would deal with similar property for its own account. Neither Lender nor any of its partners, directors, officers, employees or agents shall be liable for failure to demand, collect or realize upon all or any part of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of Grantor or otherwise. 10. Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Collateral are irrevocable and powers coupled with an interest. 11. Severability. Any provision of this Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 10 12. Section Headings. The section headings used in this Security Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 13. No Waiver: Cumulative Remedies. Lender shall not by any act (except by a written instrument pursuant to Section 14 hereof), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by Lender of any right or remedy hereunder on any occasion shall not be construed as a bar to any right or remedy, which Lender would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 14. Waivers and Amendments; Successors and Assigns. None of the terms or provisions of this Security Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by Grantor and Lender, provided that any provision of this Security Agreement may be waived by Lender in a written letter or agreement executed by Lender or by facsimile transmission from Lender. This Security Agreement shall be binding upon the successors and assigns of Grantor and shall inure to the benefit of Lender and its successors and assigns. 15. Notices. Any and all notices, elections or demands permitted or required to be made under this Security Agreement shall be in writing, signed by the party giving such notice, election or demand and shall be delivered personally, telecopied, or sent by certified mail or overnight via nationally recognized courier service (such as Federal Express), to the other party at the address set forth below, or at such other address as may be supplied in writing and of which receipt has been acknowledged in writing. The date of personal delivery or telecopy or two (2) business days after the date of mailing (or the next business day after delivery to such courier service), as the case may be, shall be the date of such notice, election or demand. For the purposes of this Security Agreement: The Address of Lender is: Faraday Financial, Inc. Attn: Frank J. Gillen, President 175 South Main, Suite 1240 Salt Lake City, Utah 84111 Phone: (801) 746-3311 Fax: (801) 746-3312 The Address of Grantor is: Video Internet Broadcasting Corporation Attn: Kelly Ryan, C.E.O. 135 Basin Street SW Epharta, WA 98823 Phone: (509) 754-2600 Fax: (509) 754-1399 16. Governing Law. This Security Agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of Utah applicable to contracts to be wholly performed in such State, or to the extent required, by federal law. 11 17. Counterparts. This Agreement may be executed in any number of counterparts and by different parties to this Agreement in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same Agreement. 18. Consent to Jurisdiction; Exclusive Venue. Grantor hereby irrevocably consents to the Jurisdiction of the United States District Court sitting in the State of Utah and of all Utah state courts sitting in Salt Lake County, Utah, for the purpose of any litigation to which Lender may be a party and which concerns this Security Agreement or the Obligations. It is further agreed that venue for any such action shall lie exclusively with courts sitting in the State of Utah, Salt Lake County unless Lender agrees to the contrary in writing. 19. Waiver of Trial by Jury. LENDER AND GRANTOR HEREBY KNOWINGLY AND VOLUNTARILY WITH THE BENEFIT OF COUNSEL WAIVE TRIAL BY JURY IN ANY ACTIONS, PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN CONTRACT OR TORT OR OTHERWISE, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO THIS AGREEMENT OR THE LOAN DOCUMENTS. IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed and delivered as of the date first above written. GRANTOR: VIDEO INTERNET BROADCASTING CORPORATION By /s/ Michael Devine ---------------------------------- Its: President LENDER: FARADAY FINANCIAL, INC. By /s/ Frank Gillen ---------------------------------- Its: President STATE OF ARIZONA ) ss: COUNTY OF PIMA ) On this 31st day of March, 2004, before me appeared Michael Devine, to me personally known, who being duly sworn did say that he/she is the President of VIDEO INTERNET BROADCASTING CORPORATION, the within named corporation, and that the instrument was signed in behalf of said corporation and acknowledged the instrument to be the free act and deed of the corporation. /s/ ---------------------------------- NOTARY PUBLIC My Commission Expires: Residing at: Tucson, AZ August 6, 2006 12 SCHEDULE A SCHEDULE B EX-10.5 6 ex105k033104.txt AMENDMENT NUMBER ONE TO THE AGREEMENTS Exhibit 10.5 AMENDMENT NUMBER ONE TO THE AGREEMENTS THIS AMENDMENT NUMBER ONE TO THE AGREEMENTS (the "Amendment") is made and entered into as of this ____ day of April, 2004, by and between FARADAY FINANCIAL, INC., a Delaware corporation (the "Lender"), and VIDEO INTERNET BROADCASTING CORPORATION, a Washington corporation (the "Company"). R E C I T A L S A. The parties entered into an agreement captioned "Loan Agreement," effective February 17, 2004 (the "Loan Agreement"), pursuant to which the Lender has lent the Company the principal amount of FIVE HUNDRED THOUSAND DOLLARS ($500,000). B. The parties entered into an agreement captioned "Security Agreement," dated March 12, 2004 (the "Security Agreement"). C. The parties entered into an agreement captioned "Intellectual Property Security Agreement," effective March 30, 2004 (the "IP Security Agreement"). D. The Loan Agreement, Security Agreement and the IP Security Agreement are sometimes hereinafter individually and collectively referred to as the "Agreements." E. The parties desire to amend the Agreements to reflect the loan of up to an additional TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000) in principal by Lender to the Company under the terms of the Agreements. F. All capitalized terms not otherwise defined herein, shall have the meaning set forth in the Agreements. IN CONSIDERATION of the premises and of the mutual covenants and agreements hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby covenant and agree as follows: 1. Without altering or amending any other part of the Loan Agreement, the second recital of the Loan Agreement is hereby amended to read in its entirety as follows: WHEREAS, Lender is willing to make periodic loans to Company in the total aggregate principal amount of up to SEVEN HUNDRED FIFTY THOUSAND DOLLARS ($750,000 USD) upon the terms and conditions set forth herein and Company is willing to borrow up to the stated amount upon such terms. 2. Without altering or amending any other part of Section 2 of the Loan Agreement or any other part of the Loan Agreement, Section 2.1 of the Loan Agreement is hereby amended to read in its entirety as follows: 2.1 During the term hereof, unless Lender shall terminate this Agreement upon an event of default under any Related Agreement, Lender hereby agrees to make periodic loans (collectively and individually, the "Loans") to Company in an aggregate principal amount at any one time outstanding not to exceed SEVEN HUNDRED FIFTY THOUSAND DOLLARS (U.S.) ($750,000 USD) ("Maximum Amount"). Lender shall lend Company the initial amount of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000) on the date hereof (the "Initial Installment"). After March 1, 2004 and subject to the other terms and conditions set forth herein, additional amounts up to the Maximum Amount will be available to Company for draw through the term of this Agreement. In order for Company to draw down funds subsequent to the Initial Installment, Company must notify Lender at least ten days prior to the date on which Company is seeking borrow additional funds and the aggregate amount of funds to be borrowed on such date. 3. Without altering or amending any other part of Section 6 of the Loan Agreement or any other part of the Loan Agreement, the last paragraph contained in Section 6 of the Loan Agreement is hereby amended to read in its entirety as follows: At such time as funds, in addition to the Initial Installment, are lent hereunder, Company shall deliver to Lender (and any Subsidiaries) a duly executed Security Agreement in the form attached hereto as Exhibit B ("Security Agreement") or in such other form(s) as may be agreed by the parties and any other documents relating to such security interest. 4. Without altering or amending any other part of the IP Security Agreement, the first recital of the IP Security Agreement is hereby amended to read in its entirety as follows: WHEREAS, pursuant to that certain Loan Agreement, dated February 17, 2004, (as amended, extended, modified, restructured or renewed from time to time, the "Loan Agreement"), by and among Grantor and Lender, Lender has agreed to make a loans in the aggregate principal amount of up to $750,000 to Grantor evidenced by promissory notes dated February 17, 2004 and March 23, 2004 and such other promissory notes as may be executed by Grantor in favor of Lender (together with any amendments, extensions, modifications and/or renewals thereof and/or any promissory notes given in payment thereof, the "Note") (capitalized terms used and not otherwise defined herein shall have the meaning assigned to them in the Loan Agreement); 5. The Agreements shall remain in full force and effect and shall remain unaltered, except to the extent specifically amended in this Amendment. 6. This Amendment may be signed in several counterparts, through the use of multiple signature pages appended to each original, and all such counterparts shall constitute one and the same instrument. Any counterpart to which is attached the signatures of all parties shall constitute an original of this Amendment. IN WITNESS WHEREOF, the parties hereto have executed this Amendment to be effective as of the date first written above. COMPANY: VIDEO INTERNET BROADCASTING CORPORATION By --------------------------------------- Its: LENDER: FARADAY FINANCIAL, INC. By /s/ Frank Gillen --------------------------------------- Its: President 2 STATE OF _____________ ) ss: COUNTY OF ___________ ) On this ____ day of ______________, 2004, before me appeared ____________, to me personally known, who being duly sworn did say that he/she is the President of VIDEO INTERNET BROADCASTING CORPORATION, the within named corporation, and that the instrument was signed in behalf of said corporation and acknowledged the instrument to be the free act and deed of the corporation. ___________________________________ NOTARY PUBLIC My Commission Expires: Residing at: _____________________ _________________________ 3 EX-10.6 7 ex106k033104.txt AMENDMENT NUMBER TWO TO THE AGREEMENTS Exhibit 10.6 AMENDMENT NUMBER TWO TO THE AGREEMENTS THIS AMENDMENT NUMBER TWO TO THE AGREEMENTS (the "Amendment") is made and entered into as of this ____ day of May, 2004, by and between FARADAY FINANCIAL, INC., a Delaware corporation (the "Lender"), and VIDEO INTERNET BROADCASTING CORPORATION, a Washington corporation (the "Company"). R E C I T A L S A. The parties entered into an agreement captioned "Loan Agreement," effective February 17, 2004 (the "Loan Agreement"), pursuant to which the Lender has lent the Company the principal amount of FIVE HUNDRED THOUSAND DOLLARS ($500,000). B. The parties entered into an agreement captioned "Security Agreement," dated March 12, 2004 (the "Security Agreement"). C. The parties entered into an agreement captioned "Intellectual Property Security Agreement," effective March 30, 2004 (the "IP Security Agreement"). D. The Loan Agreement, Security Agreement, IP Security Agreement and the Initial Amendment (defined below) are sometimes hereinafter individually and collectively referred to as the "Agreements." E. The parties entered into an agreement captioned "Amendment Number One to the Agreements," effective April ___, 2004 (the "Initial Amendment"), pursuant to which the Lender lent the Company the additional principal amount of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000). F. The parties desire to further amend the Agreements to reflect the loan of up to an additional ONE MILLION FIVE HUNDRED THOUSAND DOLLARS ($1,500,000) in principal by Lender to the Company under the terms of the Agreements. G. All capitalized terms not otherwise defined herein, shall have the meaning set forth in the Agreements. IN CONSIDERATION of the premises and of the mutual covenants and agreements hereinafter set forth and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby covenant and agree as follows: 1. Without altering or amending any other part of the Loan Agreement, the second recital of the Loan Agreement is hereby amended to read in its entirety as follows: WHEREAS, Lender is willing to make periodic loans to Company in the total aggregate principal amount of up to TWO MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS U.S. ($2,250,000 USD) upon the terms and conditions set forth herein and Company is willing to borrow up to the stated amount upon such terms. 2. Without altering or amending any other part of Section 2 of the Loan Agreement or any other part of the Loan Agreement, Section 2.1 of the Loan Agreement is hereby amended to read in its entirety as follows: 2.1 During the term hereof, unless Lender shall terminate this Agreement upon an event of default under any Related Agreement, Lender hereby agrees to make periodic loans (collectively and individually, the "Loans") to Company in an aggregate principal amount at any one time outstanding not to exceed TWO MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS (U.S.) ($2,250,000 USD) ("Maximum Amount"). Lender loaned the Company the initial principal amount of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000) on or about the date of the Loan Agreement (the "Initial Installment"). Subsequent to the Initial Installment, the Lender loaned the Company the additional principal amount of FIVE HUNDRED THOUSAND DOLLARS ($500,000). After the date hereof and subject to the other terms and conditions set forth herein, up to an additional SIX HUNDRED THOUSAND DOLLARS ($600,000) may be borrowed by the Company from Lender, provided, however, that such amounts may only be used in connection with the Company's agreement with Provo City relating to the roll-out of certain internet services and other matters described therein (the "Provo Agreement"). When additional funds are available to the Lender to loan to the Company and subject to the other terms and conditions set forth herein, additional amounts up to the Maximum Amount will be available to the Company for draw through the term of this Agreement provided, however, that such amounts may only be used in connection with the Provo Agreement. In order for Company to draw down funds subsequent to the Initial Installment, Company must notify Lender at least ten days prior to the date on which Company is seeking borrow additional funds and the aggregate amount of funds to be borrowed on such date. All draws are also subject to the Company providing Lender with reasonable assurances that the funds will be used for the purposes described in this Section 2.1 and the purposes described in Section 9.7. 3. Without altering or amending any other part of Section 9 of the Loan Agreement or any other part of the Loan Agreement, Section 9.7 of the Loan Agreement is hereby amended to read in its entirety as follows: Without the consent of Lender, Company will not use the proceeds from the Initial Installment for any purposes other than those set forth on Schedule 9.7a and it will not use the proceeds from any Loan proceeds subsequent to the Initial Installment for any purposes other than those set forth on Schedule 9.7b and such other purposes as are agreed in advance in writing. 4. Without altering or amending any other part of the IP Security Agreement, the first recital of the IP Security Agreement is hereby amended to read in its entirety as follows: WHEREAS, pursuant to that certain Loan Agreement, dated February 17, 2004, (as amended, extended, modified, restructured or renewed from time to time, the "Loan Agreement"), by and among Grantor and Lender, Lender has agreed to make a loans in the aggregate principal amount of up to $2,250,000 to Grantor which loans shall be evidenced by promissory notes (together with any amendments, extensions, modifications and/or renewals thereof and/or any promissory notes given in payment thereof, the "Note") (capitalized terms used and not otherwise defined herein shall have the meaning assigned to them in the Loan Agreement); 5. The Agreements shall remain in full force and effect and shall remain unaltered, except to the extent specifically amended in this Amendment. 6. This Amendment may be signed in several counterparts, through the use of multiple signature pages appended to each original, and all such counterparts shall constitute one and the same instrument. Any counterpart to which is attached the signatures of all parties shall constitute an original of this Amendment. IN WITNESS WHEREOF, the parties hereto have executed this Amendment to be effective as of the date first written above. COMPANY: VIDEO INTERNET BROADCASTING CORPORATION By _________________________________ Its: LENDER: FARADAY FINANCIAL, INC. By /s/ Frank Gillen Its: 2 STATE OF _____________ ) ss: COUNTY OF ___________ ) On this ____ day of ______________, 2004, before me appeared ____________, to me personally known, who being duly sworn did say that he/she is the President of VIDEO INTERNET BROADCASTING CORPORATION, the within named corporation, and that the instrument was signed in behalf of said corporation and acknowledged the instrument to be the free act and deed of the corporation. ___________________________________ NOTARY PUBLIC My Commission Expires: Residing at: _____________________ _________________________ 3 EX-10.7 8 ex107k033104.txt LOAN AGREEMENT Exhibit 10.7 LOAN AGREEMENT This Loan Agreement ("Agreement") is entered into by and Between Faraday Financial, Inc., a Delaware corporation (the "Company") and _______ ( "Lender") to be effective as of the ___ day of February, 2004. WITNESSETH: WHEREAS, the Company is in need of immediate capital to fund its planned operations. WHEREAS, Lender is willing to make a loan to the Company in the total aggregate principal amount of ______________ ($ ________ USD) upon the terms and conditions set forth herein and the Company is willing to borrow the stated amount upon such terms. NOW, THEREFORE, IT IS AGREED AS FOLLOWS: Section 1. The Loan. 1.1. Lender hereby agrees to loan the Company (the "Loan") the aggregate principal amount of ___________ ($______ USD) which funds are being provided to the Company contemporaneously with the execution of this Agreement by the parties hereto. The amounts lent hereunder shall be evidenced by a convertible promissory note in substantially the same form as attached hereto as Exhibit "A" (the "Note"). Borrower shall deliver to Lender a Note in the principal amount of funds lent at the same time that the Company receives the Loan proceeds. 1.2. The Company shall use the net proceeds of the Note for working capital and other purposes. Section 2. Finance Charges. All outstanding principal shall bear interest at the rate of Twelve percent (12%) per annum. Principal and interest not paid when due shall bear interest at the rate of eighteen percent (18%) per annum. Interest will be computed on the basis on a 360-day year for actual days elapsed. Lender shall receive common stock purchase warrants to acquire 100 shares of common stock at an exercise price of One Dollar Fifty Cents ($1.50) per share (the "Warrant") for every ONE THOUSDAND DOLLARS in principal lent by Lender to the Company hereunder. The Warrant shall be in substantially the same form as attached hereto as Exhibit "B." Section 3. Payments. Principal and interest shall be due and payable in a single balloon payment on the six month anniversary of the Note. The Company may, from time to time, in the Company's discretion, make one or more periodic payments to Lender. Such payments shall be credited to the Company's account on the date that such payment is received by Lender. Such payments shall be applied first to late charges and collection costs, if any, then to accrued interest to the date of payment, and then to the principal outstanding. Section 4. Deliveries. Contemporaneously with the execution of this Agreement, the parties shall deliver to each other properly executed copies of the following agreements: (a) The Note of even date herewith by and between Lender and the Company. (b) The Warrant of even date herewith by and between Lender and the Company. (c) The Loan proceeds. Section 5. Representations of Lender. 5.1 Lender's representations in this Agreement are complete and accurate to the best of Lender's knowledge, and the Company may rely upon them. 5.2 Lender is able to bear the economic risk of an investment in the Note, Warrant and the underlying securities (individually and collectively, the "Securities") can afford the loss of the entire investment in the Securities, and will, after making an investment in the Securities, have sufficient means of providing for Lender's current needs and possible future contingencies. 5.3 The Securities will not be sold by Lender without registration under applicable securities acts or a proper exemption from such registration. 5.4 The Securities subscribed for herein is being acquired for Lender's own account and risk, for investment purposes, and not on behalf of any other person or with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act of 1933. Lender is aware that there are substantial restrictions on the transferability of the Securities. 5.5 Lender has had access to any and all information concerning the Company that Lender and its financial, tax and legal advisors required or considered necessary to make a proper evaluation of this investment. Specifically, Lender has had the opportunity to review Company's annual report on Form 10-KSB for the fiscal year ended March 31, 1996. The Company has been delinquent on filing subsequent required filings with the Securities and Exchange Commission, does not have sufficient assets to repay the Loan and has had minimal operations over the past two years. The Company has advised Lender that (i) there have been material developments that are not described in such filings, (ii) the Company's financial statements and other information contained in such filings do not reflect material changes that have occurred since the date of the financial statements in said filing and (iii) the Company believes that updated financial and business information would be material to Lender's investment decision. Notwithstanding the foregoing, Lender has declined to review, accept or consider additional information in making an investment decision. In making the decision to acquire the Securities, the Company and its advisers have relied solely upon their own independent investigations, and fully understand that there are no guarantees, assurances or promises in connection with any investment hereunder and understand that the particular tax consequences arising from this investment in the Company will depend upon its individual circumstances. Lender further understands that no opinion is being given as to any securities or tax matters involving the offering. 5.6 Lender also understands and agrees that stop transfer instructions relating to the Securities will be placed in the Company's transfer ledger, and that the Securities will bear a legend in substantially the following form: THIS SECURITIES REPREENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THESE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A OF SUCH ACT. 5.7 Lender knows that the Securities are offered and sold pursuant to exemptions from registration under the Securities Act of 1933, and state securities law based, in part, on these warranties and representations, which are the very essence of this Agreement, and constitute a material part of the bargained-for consideration without which this Agreement would not have been executed. 5.8 Lender has the capacity to protect Lender's own interest in connection with this transaction or has a pre-existing personal or business relationship with the Company or one or more of its officers, directors or controlling persons consisting of personal or business contacts of a nature and 2 duration such as would enable a reasonably prudent purchaser to be aware of the character, business acumen and general business and financial circumstances of such person with whom such relationship exists. 5.9 This Agreement when fully executed and delivered by the Company will constitute a valid and legally binding obligation of Lender, enforceable in accordance with its terms. Lender was not formed or organized for the specific purpose of acquiring the Securities. In the event Lender is an entity, the purchase of the Securities by Lender is a permissible investment in accordance with Lender's Articles of Incorporation or other similar charter document, and has been duly approved by all requisite action by the entity's owners, directors, officers or other authorized managers. The person signing this document and all documents necessary to consummate the purchase of the Securities has all requisite authority to sign such documents on behalf of Lender. 5.10 Lender represents that Lender is a sophisticated and an "accredited investor" as defined under Rule 501 of Regulation D. Section 6. Representations of the Company. 6.1 The Company is a duly organized and validly existing corporation in good standing under the laws of Delaware. 6.2 The Company has all necessary corporate power and authority to enter into and perform this Agreement. The Company has taken all corporate action necessary to authorize this Agreement. 6.3 The execution and delivery of this Agreement, the performance by the Company of its obligations under this Agreement, and the consummation of the transactions provided for in this Agreement have been duly and validly authorized by all necessary corporate action on the part of the Company. This Agreement will, as of the effective date, be duly executed and delivered by the Company and will constitute the valid and binding agreement of the Company enforceable against the Company in accordance with its respective terms, subject to applicable bankruptcy, insolvency and other similar laws affecting the enforceability of creditors' rights generally, general equitable principles and the discretion of courts in granting equitable remedies. 6.4 The execution and delivery by the Company of this Agreement, the performance by the Company of its obligations hereunder, and the consummation of the transactions contemplated hereby, do not and will not (a) violate or conflict with or result in a breach of any provision of the Certificate of Incorporation or Bylaws of the Company; (b) require any consent, approval or notice under, or registration under or payment on account of, or conflict with, or result in a violation or breach of, or constitute (with or without the giving of notice or the lapse of time or both) a default (or give rise to any right of termination, modification (including, in the case of leases, any change in the amount or nature of the rent), cancellation or acceleration or result in the creation or imposition of any lien upon the property of the Company) under, any of the terms, conditions or provisions of any (i) note, bond, mortgage, indenture, license, lease, agreement or other instrument or obligation to which the Company is a party or by which any portion of its properties or assets may be bound, or (ii) permit, license, approval, franchise or other governmental or regulatory authorization held or used by or binding on the Company; (c) violate or contravene any law, statute, rule or regulation, or any order, writ, judgment, injunction, decree or award of any governmental authority binding on the Company; or (d) require any action, consent, approval or authorization of, or review by, or declaration, registration or filing with, or notice to, any governmental authority, except such filings as may be required in connection with applicable securities laws. 6.5 The Company is not obligated to pay any broker's fee, finder's fee, investment banker's fee or other similar transaction fee in connection with the transactions contemplated hereby. Section 7. Covenants. 7.1 The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the rights (charter and statutory) and franchises of the Company. 3 7.2 The Company will comply with all applicable statutes, regulations, orders and restrictions of the United States, any state, municipality or other governmental division thereof, and agencies and instrumentalities of the foregoing, in respect of the conduct of its business and the ownership of its property, except where such non-compliance will not have a material adverse effect on the Company or its business. 7.3 The Company will file, when due, all federal, state and local tax and information returns that it is required to file. The Company will pay when due all taxes, interest and penalties, if any, reflected in such tax returns or otherwise due and payable by it. 7.4 The Company shall not declare any distribution payable in securities of other persons, evidences of indebtedness issued by the Company or other persons, assets (excluding cash dividends) or options or rights prior to the date the Loan is repaid in full. Section 8. Miscellaneous. 8.1 This Agreement, including any attached exhibits or schedules, constitutes the entire agreement between the parties pertaining to the subject matter contained in this Agreement. All prior and contemporaneous agreements, representations and understandings of the parties, oral or written, are superseded by and merged in this Agreement. No supplement, modification or amendment of this Agreement shall be binding unless in writing and executed by the Company and Lender. 8.2 The provisions of this Agreement shall be binding upon the Company, its legal representatives, successors or assigns, and shall be for the benefit of Lender and its respective successors and assigns. 8.3 The headings of this Agreement are for purposes of reference only and shall not limit or define the meaning of any provision of this Agreement. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which shall constitute one and the same instrument. 8.4 If any action is brought by either party in respect to its rights under this Agreement, or to obtain an interpretation thereof, the prevailing party shall be entitled to reasonable attorneys' fees and court costs as determined by the court. 8.5 No waiver of any of the provisions of this Agreement shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver be a continuing waiver. Except as expressly provided in this Agreement, no waiver shall be binding unless executed in writing by the party making the waiver. Either party may waive any provision of this Agreement intended for its benefit; provided, however, such waiver shall in no way excuse the other party from the performance of any of its other obligations under this Agreement. 8.6 The representations, warranties, acknowledgments and agreements made by Lender shall survive the closing of the transaction described herein and run in favor of, and for the benefit of, the Company. The representations, warranties, acknowledgments and agreements made by the Company shall survive the closing of the transaction described herein and run in favor of, and for the benefit of, Lender. 8.7 The obligations of the parties hereto shall not be delegated or assigned to any other party without the prior written consent of the other party. 8.8 This Agreement shall be governed by the laws of the State of Utah. 8.9 Any notices required or permitted hereunder shall be furnished in writing to each party at such party's address appearing on the signature page below or as such party may otherwise direct in writing actually received by the other party. 4 8.10 The Company shall do, execute, acknowledge and deliver all such further acts, deeds, assignments, transfers and assurances as Lender may reasonably require to effectuate the purposes of this Agreement. 8.11 This Loan is one of a series of loans that are being made to the Company by various lenders, which loans shall be in an aggregate principal amount of not more than ONE MILLION DOLLARS ($1,000,000). IN WITNESS WHEREOF, the undersigned have executed this Agreement to be effective as of the date first written above. FARADAY FINANCIAL, INC. LENDER EIN 33-0565710 EIN (if any) __________________ By ____________________________________ By _____________________________ Its: President Its Address: Address: Faraday Financial, Inc. ___________________________ Attn: President Attn: ____________________ 175 South Main Street, #1240 ___________________________ Salt Lake City, Utah 84111 ___________________________ Phone: (801) 746-3311 Phone: ________________________ Fax: (801) 746-3312 Fax: __________________________ 5 SCHEDULE OF EXHIBITS EXHIBIT NO. DESCRIPTION OF EXHIBIT ----------- ---------------------- A Form of Convertible Promissory Note B Form of Series A Common Stock Purchase Warrants EXHIBIT A THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT, UNLESS THE COMPANY HAS RECEIVED THE WRITTEN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH SALE, ASSIGNMENT OR TRANSFER DOES NOT INVOLVE A TRANSACTION REQUIRING REGISTRATION OF THE ACT. CONVERTIBLE PROMISSORY NOTE No. ___ [DATE] $_________ Salt Lake City, Utah FOR VALUE RECEIVED, Faraday Financial, Inc., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of _______ (the "Lender") with a principal business address at ____________, or such other place as the holder hereof shall designate, the principal amount of ________ Dollars ($ _______ USD)or such lesser amount as may be outstanding from time to time, in lawful money of the United States in immediately available funds with accrued interest on the unpaid principal hereof from the date hereof at the rate of twelve percent (12%) per annum. Principal plus interest accrued thereon shall be due and payable in a single installment upon the earlier of (i) the six month anniversary of this Note or (ii) the occurrence of an Event of Default as defined in Section 3 hereof. In the event that any amount owing hereunder is not paid when due, then interest shall accrue from and after the date of such demand at the lower of (i) eighteen percent (18%) per annum or (ii) the highest interest rate acceptable under applicable usury laws, compounded monthly (the "Default Rate"). Interest shall be calculated on the basis of actual days elapsed and a 360-day year. 1. Loan Agreements. This Loan is one of a series of loans that are being made to the Company by various lenders which loans shall be in an aggregate principal amount of not more than ________ Dollars ($________ USD). 2. Conversion. (a) Optional Conversion. At any time while this Note is outstanding, the Holder shall have the right, at Holder's sole option, from time to time to convert all or part of the principal and accrued, but unpaid, interest of this Note into shares of the Company's common stock, par value $.001 per share, (the "Common Stock") at the rate of one share of Common Stock for every $1.00 in principal and accrued interest that is converted. The Holder shall notify the Borrower in writing if Holder elects to convert all or part of this Note. This Note or a portion thereof shall be deemed to have been converted immediately prior to the close of business on the date written notice of conversion is sent by Holder to Borrower, even if Borrower's stock transfer books are on that date closed, and the Holder shall be treated for all purposes as the record holder of the shares of Common Stock deliverable upon such conversion as of the close of business on such date. Upon election to convert all of the principal amount and accrued interest of this Note, the Note will be cancelled. If all of the principal and accrued interest is converted, then the Holder must surrender this Note to the Borrower at the Borrower's principal offices for cancellation. In the event of a partial conversion then the Holder must surrender the Note to the Company for endorsement to reflect the amount owing at the time of such conversion. Upon conversion Borrower shall, as promptly as practicable after the surrender and deliver to the Borrower of the original signature Note for cancellation or endorsement, deliver to Holder a certificate or certificates representing the Common Stock into which this Note may be converted. (b) Fractional Shares. No fractional shares or scrip shall be issued upon conversion of this Note. The number of full shares of Common Stock issuable upon conversion of this Note shall be computed on the basis of the aggregate value of outstanding principal of and accrued interest on this Note (or portion thereof) so converted. The value of any fractional shares shall be paid in cash. A-1 (c) Reservation of Shares. Borrower shall reserve and shall at all times keep available, solely for the purpose of issuance upon conversion of this Note as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of this Note pursuant to the terms hereof. The Borrower covenants that all Common Stock which shall be so issuable shall, upon the conversion of this Note as provided herein, be duly and validly issued and fully paid and nonassessable. 3. Events of Default. The entire outstanding principal amount of, and all accrued unpaid interest on, this Note shall become forthwith due and payable, without presentment, demand, protest, or notice of any kind, upon the happening of any of the following events (each, an "Event of Default"): (a) The failure by the Borrower to make a payment of any principal or interest due on this Note within five days after the date such payment was due and payable. (b) The entry of any decree or order by a court having jurisdiction adjudging the Borrower a debtor or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Borrower under the United States Bankruptcy Code or any other applicable federal or state law, the appointment of a receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Borrower, or of any substantial part of the property of the Borrower, and the continuance of any such decree or order unstayed, undischarged, or undismissed and in effect for more than ninety (90) consecutive days. (c) Institution by the Borrower of proceedings, under the Bankruptcy Code or any other applicable federal or state law, seeking an order for relief, or the consent of the Borrower to the institution of bankruptcy or insolvency proceedings against the Borrower, or the consent by the Borrower to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator or other similar official of or for the Borrower or any substantial part of the property of the Borrower, or the making by the Borrower of any assignment for the benefit of creditors, or the admission by the Borrower of the Borrower's inability to pay its debts generally as they become due, or the taking of any action by the Borrower in furtherance of any such action. Upon the occurrence of any Event of Default, the Lender may take all actions available to it, at law or in equity, to collect and otherwise enforce this Note. 4. Costs and Expenses of Enforcement and Collection. Upon receipt of written evidence reasonably satisfactory to Borrower, the Borrower agrees to pay on demand all reasonable costs and expenses, including reasonable attorneys' fees, incurred or paid by the Lender in enforcing or collecting any of the obligations of the Borrower hereunder. 5. Miscellaneous. (a) The Borrower (i) waives presentment, demand, notice of demand, protest, notice of protest, and notice of nonpayment and any other notice required to be given under the law to the Borrower, in connection with the delivery, acceptance, performance, default or enforcement of this Note, except for notice and presentment upon conversion or at maturity of this Note and notice or proposed transfer of this Note in accordance with the terms hereof; and (ii) agrees that any failure to act or failure to exercise any right or remedy on the part of the registered owner shall not in any way affect or impair the obligations of the Borrower or be construed as a waiver by the owner of, or otherwise affect, any of its rights under this Note. (b) No act, omission or delay by the Lender or course of dealing between the Lender and the Borrower shall constitute a waiver of the rights and remedies of the Lender hereunder. No single or partial waiver by the Lender of any default or right or remedy which it may have shall operate as a waiver of any other default, right or remedy or of the same default, right or remedy on a future occasion. (c) No provision hereof shall be modified, altered or limited except by a written instrument expressly referring to this Note and to such provision, and executed by the Borrower and the Lender. (d) This Note shall be governed by and construed in accordance with the laws of the State of Utah, without giving effect to the choice or conflict of laws principles of that or any other jurisdiction. A-2 (e) Any notice or demand which is required or provided to be given under this Agreement shall be deemed to have been sufficiently given and received for all purposes when delivered by hand or by telecopy, e-mail or other method of electronic transmission (provided such transmission generates evidence of delivery), or five days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or two days after being sent by overnight delivery providing receipt of delivery, to the following addresses: if to the Borrower: Faraday Financial, Inc. Attn: President 175 South Main Street, #1240 Salt Lake City, Utah 84111 Fax: (801) 746-3311 E-mail: fg@fordallen.com if to the Lender: _______________________ _______________________ _______________________ Fax: _________________ E-mail: _______________ (f) In the event that any court of competent jurisdiction shall determine that any provision, or any portion thereof, contained in this Note shall be unreasonable or unenforceable in any respect, then such provision shall be deemed limited to the extent that such court deems it reasonable and enforceable, and as so limited shall remain in full force and effect. In the event that such court shall deem any such provision, or portion thereof, wholly unenforceable, the remaining provisions of this Note shall nevertheless remain in full force and effect. (g) This Note and all obligations evidenced hereby shall be binding upon the successors and assigns of the Borrower and shall, together with the rights and remedies of the Lender hereunder, inure to the benefit of the Lender, its successors, permitted endorsees and assigns. IN WITNESS WHEREOF, this Note has been duly executed and delivered by the Borrower as of the date first written above. BORROWER: FARADAY FINANCIAL, INC. By: ----------------------------- Its: AGREED AND APPROVED: ______________________ By: Its: A-3 EXHIBIT B THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT, UNLESS THE COMPANY HAS RECEIVED THE WRITTEN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH SALE, ASSIGNMENT OR TRANSFER DOES NOT INVOLVE A TRANSACTION REQUIRING REGISTRATION OF THE ACT. SERIES A COMMON STOCK PURCHASE WARRANTS FARADAY FINANICAL, INC. Incorporated Under the Laws of the State of Delaware No. A - ___ ____ Series A Common Stock Purchase Warrants CERTIFICATE FOR SERIES A COMMON STOCK PURCHASE WARRANTS FARADAY FINANCIAL, INC., a Delaware corporation (the "Company"), for value received, hereby certifies that ________ , or registered assigns (the "Holder"), is the registered owner of the above indicated number of Warrants. One (1) Warrant entitles the Holder to purchase one (1) share of the Company's common stock, $.001 par value (the "Common Stock"). The Common Stock issuable upon an exercise of this Warrant is sometimes herein referred to as the "Warrant Stock." 1. Purchase Price. The purchase price (the "Exercise Price") per share for the Warrant Stock shall be $___ per share tendered to the Company in good United States funds. 2. Rights to Exercise. The Holder shall have the right (but not the obligation) to exercise the Warrant to receive the Warrant Stock (subject to adjustment as hereinafter provided) at any time on or before February 23, 2006. 3. Manner of Exercise. In order to exercise this Warrant, the Holder shall surrender this Warrant certificate at the office of the Company, as set forth below, or at such other address within the State of Utah as the Company shall designate in writing, together with a duly executed exercise form in the form attached hereto and simultaneous payment in full (in cash or by certified or official bank or bank cashier's check payable to the order of the Company or by offset of obligations then owed by the Company to the Holder) of the purchase price for the Warrant Stock. Upon surrender of this Warrant certificate in conformity with the foregoing provisions, the Company shall promptly deliver to or upon the written order of the Holder a stock certificate or certificates representing the Warrant Stock. 4. Adjustments upon Certain Events. 4.1 Stock Splits, Stock Combinations and Certain Stock Dividends. If the Company shall at any time subdivide or combine its outstanding Common Stock, or declare a dividend in Common Stock or other securities of the Company convertible into or exchangeable for Common Stock, a Warrant shall, after such subdivision or combination or after the record date for such dividend, be exercisable for that number of shares of Common Stock and other securities of the Company that the Holder would have owned immediately after such event with respect to the Common Stock and other securities for which a Warrant may have been exercised immediately before such event had the Warrant been exercised immediately before such event. Any adjustment under this Section 4.1 shall become effective at the close of business on the date the subdivision, combination or dividend becomes effective. 4.2 Adjustment for Reorganization, Consolidation, Merger. In case of any reorganization of the Company (or any other corporation the stock or other securities of which are at the time receivable upon exercise of a Warrant) or in case the Company (or any such other corporation) shall merge into or with B-4 or consolidate with another corporation or convey all or substantially all of its assets to another corporation or enter into a business combination of any form as a result of which the Common Stock or other securities receivable upon exercise of a Warrant are converted into other stock or securities of the same or another corporation, then and in each such case, the Holder of a Warrant, upon exercise of the purchase right at any time after the consummation of such reorganization, consolidation, merger, conveyance or combination, shall be entitled to receive, in lieu of the shares of Common Stock or other securities to which such Holder would have been entitled had he exercised the purchase right immediately prior thereto, such stock and securities which such Holder would have owned immediately after such event with respect to the shares Common Stock and other securities for which a Warrant may have been exercised immediately before such event had the Warrant been exercised immediately prior to such event. 4.3 Notice. In each case of an adjustment in the Common Stock or other securities receivable upon the exercise of a Warrant, the Company shall promptly notify the Holder of such adjustment. Such notice shall set forth the facts upon which such adjustment is based. 5. Loss, Theft, Destruction, or Mutilation. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft, or destruction) of indemnity satisfactory to it (in the exercise of its reasonable discretion), and (in the case of mutilation) upon surrender and cancellation thereof, the Company will execute and deliver, in lieu thereof, a new Warrant in the same form and tenor. 6. Reservation of Shares Issuable on Exercise of Warrant. The Company will at all times reserve and keep available out of its authorized shares, solely for issuance upon the exercise of the Warrant, such shares of its Common Stock and other securities as from time to time shall be issuable upon the exercise of the Warrant. 7. Miscellaneous. 7.1 Governing Law. This Warrant shall be construed in accordance with, and governed by the substantive laws of, the State of Utah. 7.2 Assignment. The benefit of this Warrant and of the Warrant Stock represented hereby may be assigned and transferred by the Holder and its assigns in accordance with any applicable securities laws and regulations; however, the obligations of the Company and its successors may not be delegated without the prior written consent of the Holder hereof. Subject to the foregoing, this Warrant shall be binding upon and inure to the benefit of the parties and their respective legal representatives, successors, agents, heirs and assigns. 7.3 Enforcement. In the event of a dispute between the parties arising under this Warrant, the party prevailing in such dispute shall be entitled to collect such party's costs and expenses from the other party, including without limitation court costs and reasonable attorneys' fees. 7.4 Notices. Any notice or demand which is required or provided to be given under this Agreement shall be deemed to have been sufficiently given and received for all purposes when delivered by hand or by telecopy, e-mail or other method of electronic transmission (provided such transmission generates evidence of delivery), or five days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or two days after being sent by overnight delivery providing receipt of delivery, to the following addresses: if to the Borrower: Faraday Financial, Inc. Attn: President 175 South Main, #1240 Salt Lake City, Utah 84111 Fax: (801) 746-3311 E-mail: fg@fordallen.com B-5 if to the Lender: _______________________ _______________________ _______________________ Fax: _________________ E-mail: _______________ 7.5 Restrictive Legend. Each Warrant Certificate and each certificate representing Common Stock issued upon exercise of a Warrant, unless such Common Stock is then registered under the Securities Act of 1933, as amended (the "Act"), shall bear a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND MAY BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES OR BLUE SKY LAWS OR IF AN EXEMPTION FROM SUCH REGISTRATION OR QUALIFICATION IS APPLICABLE. 7.6 Payment of Taxes. The Holder shall pay all documentary, stamp or similar taxes and other government charges that may be imposed with respect to the issuance, transfer or delivery of any Warrant Stock on exercise of the Warrants. In the event the Warrant Stock are to be delivered in a name other than the name of the Holder of the Warrant Certificate, no such delivery shall be made unless the person requesting the same has paid the amount of any such taxes or charges incident thereto. 7.7 Reduction in Exercise Price at Company's Option. The Company's Board of Directors may, at its sole discretion, reduce the Exercise Price of the Warrants in effect at any time either for the life of the Warrants or any shorter period of time determined by the Company's Board of Directors. The Company shall promptly notify the Registered Holders of any such reduction in the Exercise Price. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed as of the ____ day of ________________, 2004. FARADAY FINANCIAL, INC., a Delaware corporation By: __________________________________ Its: President B-6 FARADAY FINANCIAL, INC. The following abbreviations, when used in the inscription on the face of this instrument, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JR TEN - as joint tenants with right of survivorship and not as tenants in common UNIF TRANS MIN ACT - ____________ (Custodian for Minor) as custodian for __________ (name of minor) under the Uniform Transfers to Minors Act Additional abbreviations may also be used though not in the above list. FORM OF ASSIGNMENT (To be Executed by the Registered Holder if He or She Desires to Assign Warrants Evidenced by the Within Warrant Certificate) FOR VALUE RECEIVED ___________________________ hereby sells, assigns and transfers unto _____________________________ _________________________ (_______) Warrants, evidenced by the within Warrant Certificate, and does hereby irrevocably constitute and appoint _______________________________________ Attorney to transfer the said Warrants evidenced by the within Warrant Certificates on the books of the Company, with full power of substitution. Dated:____________________ _____________________________ Signature Notice: The above signature must correspond with the name as written upon the face of the Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever. Signature Guaranteed: __________________________________________ SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE. B-7 FORM OF ELECTION TO PURCHASE (To be Executed by the Holder if Holder Desires to Exercise Warrants Evidenced by the Warrant Certificate) To FARADAY FINANCIAL, INC. The undersigned hereby irrevocably elects to exercise ___________________________ (______) Warrants, evidenced by the within Warrant Certificate for, and to purchase thereunder, ____________________________ (______) full shares of Common Stock issuable upon exercise of said Warrants and delivery of $_________ and any applicable taxes. The undersigned requests that certificates for such shares be issued in the name of: PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER _____________________________________ ________________________________________________________________________________ (Please print name and address) ________________________________________________________________________________ If said number of Warrants shall not be all the Warrants evidenced by the within Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so exercised be issued in the name of and delivered to: ________________________________________________________________________________ (Please print name and address) ________________________________________________________________________________ Dated: _____________________ Signature:__________________________ NOTICE: The above signature must correspond with the name as written upon the face of the within Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever, or if signed by any other person the Form of Assignment hereon must be duly executed and if the certificate representing the shares or any Warrant Certificate representing Warrants not exercised is to be registered in a name other than that in which the within Warrant Certificate is registered, the signature of the holder hereof must be guaranteed. Signature Guaranteed: ___________________________________________ SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE. B-8 EX-10.8 9 ex108k033104.txt LOAN AGREEMENT Exhibit 10.8 LOAN AGREEMENT This Loan Agreement ("Agreement") is entered into by and between Faraday Financial, Inc., a Delaware corporation (the "Company") and _______ ("Lender") to be effective as of the ___ day of__________, 2004. WITNESSETH: WHEREAS, the Company is in need of immediate capital to fund its planned operations. WHEREAS, Lender is willing to make a loan to the Company in the total aggregate principal amount of ______________ ($ ________ USD) upon the terms and conditions set forth herein and the Company is willing to borrow the stated amount upon such terms. NOW, THEREFORE, IT IS AGREED AS FOLLOWS: Section 1. The Loan. 1.1 From time to time, between the date of this Agreement and , 200__, Lender agrees to make one or more loans (individually and collectively, the "Loan") on Company's request contained in a written notice given by Company to Lender at least ____ calendar days prior to the proposed date of such loan and containing the proposed date and amount of such loan, which Loan shall not exceed, in the aggregate principal amount outstanding at any one time, ________ ($________USD). The amounts lent hereunder shall be evidenced by promissory notes in substantially the same form as attached hereto as Exhibit "A" (individually and collectively, the "Note" or "Notes"), which Notes shall be executed by the Company and delivered to Lender each time funds are borrowed hereunder and which Notes shall be in the principal amount of the funds borrowed. The credit described above shall be a revolving credit, and, within the limits set forth above, the Company may repay and reborrow as it at its election may determine. The Company agrees to repay all amounts owing on the Loan on or before , 2006. 1.2 The Company shall use the net proceeds of the Note for working capital and other purposes. Section 2. Finance Charges. All outstanding principal shall bear interest at the rate of Twelve percent (12%) per annum. Principal and interest not paid when due shall bear interest at the rate of eighteen percent (18%) per annum. Interest will be computed on the basis on a 360-day year for actual days elapsed. Lender shall receive common stock purchase warrants to acquire one share of common stock at an exercise price of One Dollar Fifty Cents ($1.50) per share (the "Warrant") for every five dollars in maximum aggregate principal committed to be lent by Lender to the Company hereunder. The Warrant shall be in substantially the same form as attached hereto as Exhibit "B." Section 3. Payments. Principal and interest shall be due and payable in a single balloon payment on the two year anniversary of this Agreement. The Company may, from time to time, in the Company's discretion, make one or more periodic payments to Lender. Such payments shall be credited to the Company's account on the date that such payment is received by Lender. Such payments shall be applied first to late charges and collection costs, if any, then to accrued interest to the date of payment, and then to the principal outstanding. Section 4. Deliveries. Contemporaneously with the execution of this Agreement, the parties shall deliver to each other properly executed copies of the following agreements: (a) The Note of even date herewith by and between Lender and the Company. (b) The Warrant of even date herewith by and between Lender and the Company. (c) A Registration Rights Agreement executed by the Company, the Lender and other lenders who are making loans to the Company on substantially the same terms. Section 5. Representations of Lender. 5.1 Lender's representations in this Agreement are complete and accurate to the best of Lender's knowledge, and the Company may rely upon them. 5.2 Lender is able to bear the economic risk of an investment in the Note, Warrant and the underlying securities (individually and collectively, the "Securities") can afford the loss of the entire investment in the Securities, and will, after making an investment in the Securities, have sufficient means of providing for Lender's current needs and possible future contingencies. 5.3 The Securities will not be sold by Lender without registration under applicable securities acts or a proper exemption from such registration. 5.4 The Securities subscribed for herein is being acquired for Lender's own account and risk, for investment purposes, and not on behalf of any other person or with a view to, or for resale in connection with, any distribution thereof within the meaning of the Securities Act of 1933. Lender is aware that there are substantial restrictions on the transferability of the Securities. 5.5 Lender has had access to any and all information concerning the Company that Lender and its financial, tax and legal advisors required or considered necessary to make a proper evaluation of this investment. Specifically, Lender has had the opportunity to review Company's annual report on Form 10-KSB for the fiscal year ended March 31, 1996. The Company has been delinquent on filing subsequent required filings with the Securities and Exchange Commission, does not have sufficient assets to repay the Loan and has had minimal operations over the past two years. The Company has advised Lender that (i) there have been material developments that are not described in such filings, (ii) the Company's financial statements and other information contained in such filings do not reflect material changes that have occurred since the date of the financial statements in said filing and (iii) the Company believes that updated financial and business information would be material to Lender's investment decision. Notwithstanding the foregoing, Lender has declined to review, accept or consider additional information in making an investment decision. In making the decision to acquire the Securities, the Lender and its advisers have relied solely upon their own independent investigations, and fully understand that there are no guarantees, assurances or promises in connection with any investment hereunder and understand that the particular tax consequences arising from this investment in the Company will depend upon its individual circumstances. Lender further understands that no opinion is being given as to any securities or tax matters involving the offering. 5.6 Lender also understands and agrees that stop transfer instructions relating to the Securities will be placed in the Company's transfer ledger, and that the Securities will bear a legend in substantially the following form: THIS SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO THESE SECURITIES UNDER SUCH ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A OF SUCH ACT. 5.7 Lender knows that the Securities are offered and sold pursuant to exemptions from registration under the Securities Act of 1933, and state securities law based, in part, on these warranties and representations, which are the very essence of this Agreement, and constitute a material part of the bargained-for consideration without which this Agreement would not have been executed. 2 5.8 Lender has the capacity to protect Lender's own interest in connection with this transaction or has a pre-existing personal or business relationship with the Company or one or more of its officers, directors or controlling persons consisting of personal or business contacts of a nature and duration such as would enable a reasonably prudent purchaser to be aware of the character, business acumen and general business and financial circumstances of such person with whom such relationship exists. 5.9 This Agreement when fully executed and delivered by the Company will constitute a valid and legally binding obligation of Lender, enforceable in accordance with its terms. Lender was not formed or organized for the specific purpose of acquiring the Securities. In the event Lender is an entity, the purchase of the Securities by Lender is a permissible investment in accordance with Lender's Articles of Incorporation or other similar charter document, and has been duly approved by all requisite action by the entity's owners, directors, officers or other authorized managers. The person signing this document and all documents necessary to consummate the purchase of the Securities has all requisite authority to sign such documents on behalf of Lender. 5.10 Lender represents that Lender is a sophisticated and an "accredited investor" as defined under Rule 501 of Regulation D. Section 6. Representations of the Company. 6.1 The Company is a duly organized and validly existing corporation in good standing under the laws of Delaware. 6.2 The Company has all necessary corporate power and authority to enter into and perform this Agreement. The Company has taken all corporate action necessary to authorize this Agreement. 6.3 The execution and delivery of this Agreement, the performance by the Company of its obligations under this Agreement, and the consummation of the transactions provided for in this Agreement have been duly and validly authorized by all necessary corporate action on the part of the Company. This Agreement will, as of the effective date, be duly executed and delivered by the Company and will constitute the valid and binding agreement of the Company enforceable against the Company in accordance with its respective terms, subject to applicable bankruptcy, insolvency and other similar laws affecting the enforceability of creditors' rights generally, general equitable principles and the discretion of courts in granting equitable remedies. 6.4 The execution and delivery by the Company of this Agreement, the performance by the Company of its obligations hereunder, and the consummation of the transactions contemplated hereby, do not and will not (a) violate or conflict with or result in a breach of any provision of the Certificate of Incorporation or Bylaws of the Company; (b) require any consent, approval or notice under, or registration under or payment on account of, or conflict with, or result in a violation or breach of, or constitute (with or without the giving of notice or the lapse of time or both) a default (or give rise to any right of termination, modification (including, in the case of leases, any change in the amount or nature of the rent), cancellation or acceleration or result in the creation or imposition of any lien upon the property of the Company) under, any of the terms, conditions or provisions of any (i) note, bond, mortgage, indenture, license, lease, agreement or other instrument or obligation to which the Company is a party or by which any portion of its properties or assets may be bound, or (ii) permit, license, approval, franchise or other governmental or regulatory authorization held or used by or binding on the Company; (c) violate or contravene any law, statute, rule or regulation, or any order, writ, judgment, injunction, decree or award of any governmental authority binding on the Company; or (d) require any action, consent, approval or authorization of, or review by, or declaration, registration or filing with, or notice to, any governmental authority, except such filings as may be required in connection with applicable securities laws. 6.5 The Company is not obligated to pay any broker's fee, finder's fee, investment banker's fee or other similar transaction fee in connection with the transactions contemplated hereby. 3 Section 7. Covenants. 7.1 The Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the rights (charter and statutory) and franchises of the Company. 7.2 The Company will comply with all applicable statutes, regulations, orders and restrictions of the United States, any state, municipality or other governmental division thereof, and agencies and instrumentalities of the foregoing, in respect of the conduct of its business and the ownership of its property, except where such non-compliance will not have a material adverse effect on the Company or its business. 7.3 The Company will file, when due, all federal, state and local tax and information returns that it is required to file. The Company will pay when due all taxes, interest and penalties, if any, reflected in such tax returns or otherwise due and payable by it. Section 8. Miscellaneous. 8.1 This Agreement, including any attached exhibits or schedules, constitutes the entire agreement between the parties pertaining to the subject matter contained in this Agreement. All prior and contemporaneous agreements, representations and understandings of the parties, oral or written, are superseded by and merged in this Agreement. No supplement, modification or amendment of this Agreement shall be binding unless in writing and executed by the Company and Lender. 8.2 The provisions of this Agreement shall be binding upon the Company, its legal representatives, successors or assigns, and shall be for the benefit of Lender and its respective successors and assigns. 8.3 The headings of this Agreement are for purposes of reference only and shall not limit or define the meaning of any provision of this Agreement. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which shall constitute one and the same instrument. 8.4 If any action is brought by either party in respect to its rights under this Agreement, or to obtain an interpretation thereof, the prevailing party shall be entitled to reasonable attorneys' fees and court costs as determined by the court. 8.5 No waiver of any of the provisions of this Agreement shall constitute a waiver of any other provision, whether or not similar, nor shall any waiver be a continuing waiver. Except as expressly provided in this Agreement, no waiver shall be binding unless executed in writing by the party making the waiver. Either party may waive any provision of this Agreement intended for its benefit; provided, however, such waiver shall in no way excuse the other party from the performance of any of its other obligations under this Agreement. 8.6 The representations, warranties, acknowledgments and agreements made by Lender shall survive the closing of the transaction described herein and run in favor of, and for the benefit of, the Company. The representations, warranties, acknowledgments and agreements made by the Company shall survive the closing of the transaction described herein and run in favor of, and for the benefit of, Lender. 8.7 The obligations of the parties hereto shall not be delegated or assigned to any other party without the prior written consent of the other party. 8.8 This Agreement shall be governed by the laws of the State of Utah. 8.9 Any notices required or permitted hereunder shall be furnished in writing to each party at such party's address appearing on the signature page below or as such party may otherwise direct in writing actually received by the other party. 4 8.10 The Company shall do, execute, acknowledge and deliver all such further acts, deeds, assignments, transfers and assurances as Lender may reasonably require to effectuate the purposes of this Agreement. 8.11 This Loan is one of a series of loans that are being made to the Company by various lenders, which loans shall be in an aggregate principal amount of not more than ONE MILLION FIVE HUNDRED THOUSAND DOLLARS ($1,500,000). IN WITNESS WHEREOF, the undersigned have executed this Agreement to be effective as of the date first written above. FARADAY FINANCIAL, INC. LENDER EIN 33-0565710 EIN (if any) ____________________ By _________________________________ By _______________________________ Its: President Its Address: Address: Faraday Financial, Inc. __________________________________ Attn: President Attn: ___________________________ 175 South Main Street, #1240 __________________________________ Salt Lake City, Utah 84111 __________________________________ Phone: (801) 746-3311 Phone: __________________________ Fax: (801) 746-3312 Fax: ____________________________ 5 SCHEDULE OF EXHIBITS EXHIBIT NO. DESCRIPTION OF EXHIBIT ----------- ---------------------- A Form of Convertible Promissory Note B Form of Common Stock Purchase Warrants C Registration Rights Agreement EXHIBIT A THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT, UNLESS THE COMPANY HAS RECEIVED THE WRITTEN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH SALE, ASSIGNMENT OR TRANSFER DOES NOT INVOLVE A TRANSACTION REQUIRING REGISTRATION OF THE ACT. CONVERTIBLE PROMISSORY NOTE No. ___ [DATE] $_________ Salt Lake City, Utah FOR VALUE RECEIVED, Faraday Financial, Inc., a Delaware corporation (the "Borrower"), hereby promises to pay to the order of _______ (the "Lender") with a principal business address at ____________, or such other place as the holder hereof shall designate, the principal amount of ________ Dollars ($ _______ USD) or such lesser amount as may be outstanding from time to time, in lawful money of the United States in immediately available funds with accrued interest on the unpaid principal hereof from the date hereof at the rate of twelve percent (12%) per annum. Principal plus interest accrued thereon shall be due and payable in a single installment upon the earlier of (i) [DATE] or (ii) the occurrence of an Event of Default as defined in Section 2 hereof. In the event that any amount owing hereunder is not paid when due, then interest shall accrue from and after the date of such demand at the lower of (i) eighteen percent (18%) per annum or (ii) the highest interest rate acceptable under applicable usury laws, compounded monthly (the "Default Rate"). Interest shall be calculated on the basis of actual days elapsed and a 360-day year. 1. Loan Agreements. This Loan is one of a series of loans that are being made to the Company by various lenders which loans shall be in an aggregate principal amount of not more than One Million Five Hundred Thousand Dollars ($1,500,000 USD). 2. Events of Default. The entire outstanding principal amount of, and all accrued unpaid interest on, this Note shall become forthwith due and payable, without presentment, demand, protest, or notice of any kind, upon the happening of any of the following events (each, an "Event of Default"): (a) The failure by the Borrower to make a payment of any principal or interest due on this Note within five days after the date such payment was due and payable. (b) The entry of any decree or order by a court having jurisdiction adjudging the Borrower a debtor or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Borrower under the United States Bankruptcy Code or any other applicable federal or state law, the appointment of a receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Borrower, or of any substantial part of the property of the Borrower, and the continuance of any such decree or order unstayed, undischarged, or undismissed and in effect for more than ninety (90) consecutive days. (c) Institution by the Borrower of proceedings, under the Bankruptcy Code or any other applicable federal or state law, seeking an order for relief, or the consent of the Borrower to the institution of bankruptcy or insolvency proceedings against the Borrower, or the consent by the Borrower to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator or other similar official of or for the Borrower or any substantial part of the property of the Borrower, or the making by the Borrower of any assignment for the benefit of creditors, or the admission by the Borrower of the Borrower's inability to pay its debts generally as they become due, or the taking of any action by the Borrower in furtherance of any such action. Upon the occurrence of any Event of Default, the Lender may take all actions available to it, at law or in equity, to collect and otherwise enforce this Note. 3. Costs and Expenses of Enforcement and Collection. Upon receipt of written evidence reasonably satisfactory to Borrower, the Borrower agrees to pay on demand all reasonable costs and expenses, including reasonable attorneys' fees, incurred or paid by the Lender in enforcing or collecting any of the obligations of the Borrower hereunder. 4. Miscellaneous. (a) The Borrower (i) waives presentment, demand, notice of demand, protest, notice of protest, and notice of nonpayment and any other notice required to be given under the law to the Borrower, in connection with the delivery, acceptance, performance, default or enforcement of this Note, except for notice and presentment upon conversion or at maturity of this Note and notice or proposed transfer of this Note in accordance with the terms hereof; and (ii) agrees that any failure to act or failure to exercise any right or remedy on the part of the registered owner shall not in any way affect or impair the obligations of the Borrower or be construed as a waiver by the owner of, or otherwise affect, any of its rights under this Note. (b) No act, omission or delay by the Lender or course of dealing between the Lender and the Borrower shall constitute a waiver of the rights and remedies of the Lender hereunder. No single or partial waiver by the Lender of any default or right or remedy which it may have shall operate as a waiver of any other default, right or remedy or of the same default, right or remedy on a future occasion. (c) No provision hereof shall be modified, altered or limited except by a written instrument expressly referring to this Note and to such provision, and executed by the Borrower and the Lender. (d) This Note shall be governed by and construed in accordance with the laws of the State of Utah, without giving effect to the choice or conflict of laws principles of that or any other jurisdiction. (e) Any notice or demand which is required or provided to be given under this Agreement shall be deemed to have been sufficiently given and received for all purposes when delivered by hand or by telecopy, e-mail or other method of electronic transmission (provided such transmission generates evidence of delivery), or five days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or two days after being sent by overnight delivery providing receipt of delivery, to the following addresses: if to the Borrower: Faraday Financial, Inc. Attn: President 175 South Main Street, #1240 Salt Lake City, Utah 84111 Fax: (801) 746-3311 E-mail: fg@fordallen.com if to the Lender: _______________________ _______________________ _______________________ Fax: _________________ E-mail: _______________ (f) In the event that any court of competent jurisdiction shall determine that any provision, or any portion thereof, contained in this Note shall be unreasonable or unenforceable in any respect, then such provision shall be deemed limited to the extent that such court deems it reasonable and enforceable, and as so limited shall remain in full force and effect. In the event that such court shall deem any such provision, or portion thereof, wholly unenforceable, the remaining provisions of this Note shall nevertheless remain in full force and effect. A-2 (g) This Note and all obligations evidenced hereby shall be binding upon the successors and assigns of the Borrower and shall, together with the rights and remedies of the Lender hereunder, inure to the benefit of the Lender, its successors, permitted endorsees and assigns. IN WITNESS WHEREOF, this Note has been duly executed and delivered by the Borrower as of the date first written above. BORROWER: FARADAY FINANCIAL, INC. By:____________________________ Its: AGREED AND APPROVED: ______________________ By:__________________________ Its: A-3 EXHIBIT B THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD, ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT, UNLESS THE COMPANY HAS RECEIVED THE WRITTEN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH SALE, ASSIGNMENT OR TRANSFER DOES NOT INVOLVE A TRANSACTION REQUIRING REGISTRATION OF THE ACT. SERIES B COMMON STOCK PURCHASE WARRANTS FARADAY FINANICAL, INC. Incorporated Under the Laws of the State of Delaware No. B - ___ ____ Series B Common Stock Purchase Warrants CERTIFICATE FOR SERIES B COMMON STOCK PURCHASE WARRANTS FARADAY FINANCIAL, INC., a Delaware corporation (the "Company"), for value received, hereby certifies that ________ , or registered assigns (the "Holder"), is the registered owner of the above indicated number of Warrants. One (1) Warrant entitles the Holder to purchase one (1) share of the Company's common stock, $.001 par value (the "Common Stock"). The Common Stock issuable upon an exercise of this Warrant is sometimes herein referred to as the "Warrant Stock." 1. Purchase Price. The purchase price (the "Exercise Price") per share for the Warrant Stock shall be $1.50 per share tendered to the Company in good United States funds. 2. Rights to Exercise. The Holder shall have the right (but not the obligation) to exercise the Warrant to receive the Warrant Stock (subject to adjustment as hereinafter provided) at any time on or before ________, 2006. 3. Manner of Exercise. In order to exercise this Warrant, the Holder shall surrender this Warrant certificate at the office of the Company, as set forth below, or at such other address within the State of Utah as the Company shall designate in writing, together with a duly executed exercise form in the form attached hereto and simultaneous payment in full (in cash or by certified or official bank or bank cashier's check payable to the order of the Company or by offset of obligations then owed by the Company to the Holder) of the purchase price for the Warrant Stock. Upon surrender of this Warrant certificate in conformity with the foregoing provisions, the Company shall promptly deliver to or upon the written order of the Holder a stock certificate or certificates representing the Warrant Stock. 4. Adjustments upon Certain Events. 4.1 Stock Splits, Stock Combinations and Certain Stock Dividends. If the Company shall at any time subdivide or combine its outstanding Common Stock, or declare a dividend in Common Stock or other securities of the Company convertible into or exchangeable for Common Stock, a Warrant shall, after such subdivision or combination or after the record date for such dividend, be exercisable for that number of shares of Common Stock and other securities of the Company that the Holder would have owned immediately after such event with respect to the Common Stock and other securities for which a Warrant may have been exercised immediately before such event had the Warrant been exercised immediately before such event. Any adjustment under this Section 4.1 shall become effective at the close of business on the date the subdivision, combination or dividend becomes effective. 4.2 Adjustment for Reorganization, Consolidation, Merger. In case of any reorganization of the Company (or any other corporation the stock or other securities of which are at the time receivable upon exercise of a Warrant) or in case the Company (or any such other corporation) shall merge into or with or consolidate with another corporation or convey all or substantially all of its assets to another corporation or enter into a business combination of any form as a result of which the Common Stock or other securities receivable upon exercise of a Warrant are converted into other stock or securities of the same or another corporation, then and in each such case, the Holder of a Warrant, upon exercise of the purchase right at any time after the consummation of such reorganization, consolidation, merger, conveyance or combination, shall be entitled to receive, in lieu of the shares of Common Stock or other securities to which such Holder would have been entitled had he exercised the purchase right immediately prior thereto, such stock and securities which such Holder would have owned immediately after such event with respect to the shares Common Stock and other securities for which a Warrant may have been exercised immediately before such event had the Warrant been exercised immediately prior to such event. 4.3 Notice. In each case of an adjustment in the Common Stock or other securities receivable upon the exercise of a Warrant, the Company shall promptly notify the Holder of such adjustment. Such notice shall set forth the facts upon which such adjustment is based. 5. Loss, Theft, Destruction, or Mutilation. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of this Warrant and (in the case of loss, theft, or destruction) of indemnity satisfactory to it (in the exercise of its reasonable discretion), and (in the case of mutilation) upon surrender and cancellation thereof, the Company will execute and deliver, in lieu thereof, a new Warrant in the same form and tenor. 6. Reservation of Shares Issuable on Exercise of Warrant. The Company will at all times reserve and keep available out of its authorized shares, solely for issuance upon the exercise of the Warrant, such shares of its Common Stock and other securities as from time to time shall be issuable upon the exercise of the Warrant. 7. Miscellaneous. 7.1 Governing Law. This Warrant shall be construed in accordance with, and governed by the substantive laws of, the State of Utah. 7.2 Assignment. The benefit of this Warrant and of the Warrant Stock represented hereby may be assigned and transferred by the Holder and its assigns in accordance with any applicable securities laws and regulations; however, the obligations of the Company and its successors may not be delegated without the prior written consent of the Holder hereof. Subject to the foregoing, this Warrant shall be binding upon and inure to the benefit of the parties and their respective legal representatives, successors, agents, heirs and assigns. 7.3 Enforcement. In the event of a dispute between the parties arising under this Warrant, the party prevailing in such dispute shall be entitled to collect such party's costs and expenses from the other party, including without limitation court costs and reasonable attorneys' fees. 7.4 Notices. Any notice or demand which is required or provided to be given under this Agreement shall be deemed to have been sufficiently given and received for all purposes when delivered by hand or by telecopy, e-mail or other method of electronic transmission (provided such transmission generates evidence of delivery), or five days after being sent by certified or registered mail, postage and charges prepaid, return receipt requested, or two days after being sent by overnight delivery providing receipt of delivery, to the following addresses: B-2 if to the Borrower: Faraday Financial, Inc. Attn: President 175 South Main, #1240 Salt Lake City, Utah 84111 Fax: (801) 746-3311 E-mail: fg@fordallen.com if to the Lender: _______________________ _______________________ _______________________ Fax: _________________ E-mail: _______________ 7.5 Restrictive Legend. Each Warrant Certificate and each certificate representing Common Stock issued upon exercise of a Warrant, unless such Common Stock is then registered under the Securities Act of 1933, as amended (the "Act"), shall bear a legend in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND MAY BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES OR BLUE SKY LAWS OR IF AN EXEMPTION FROM SUCH REGISTRATION OR QUALIFICATION IS APPLICABLE. 7.6 Payment of Taxes. The Holder shall pay all documentary, stamp or similar taxes and other government charges that may be imposed with respect to the issuance, transfer or delivery of any Warrant Stock on exercise of the Warrants. In the event the Warrant Stock are to be delivered in a name other than the name of the Holder of the Warrant Certificate, no such delivery shall be made unless the person requesting the same has paid the amount of any such taxes or charges incident thereto. 7.7 Reduction in Exercise Price at Company's Option. The Company's Board of Directors may, at its sole discretion, reduce the Exercise Price of the Warrants in effect at any time either for the life of the Warrants or any shorter period of time determined by the Company's Board of Directors. The Company shall promptly notify the Registered Holders of any such reduction in the Exercise Price. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed as of the ____ day of ________________, 2004. FARADAY FINANCIAL, INC., a Delaware corporation By: _______________________________ Its: President B-3 FARADAY FINANCIAL, INC. The following abbreviations, when used in the inscription on the face of this instrument, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common TEN ENT - as tenants by the entireties JR TEN - as joint tenants with right of survivorship and not as tenants in common UNIF TRANS MIN ACT - ____________ (Custodian for Minor) as custodian for __________ (name of minor) under the Uniform Transfers to Minors Act Additional abbreviations may also be used though not in the above list. FORM OF ASSIGNMENT (To be Executed by the Registered Holder if He or She Desires to Assign Warrants Evidenced by the Within Warrant Certificate) FOR VALUE RECEIVED ___________________________ hereby sells, assigns and transfers unto _____________________________ _________________________ (_______) Warrants, evidenced by the within Warrant Certificate, and does hereby irrevocably constitute and appoint _______________________________________ Attorney to transfer the said Warrants evidenced by the within Warrant Certificates on the books of the Company, with full power of substitution. Dated:____________________ ___________________________ Signature Notice: The above signature must correspond with the name as written upon the face of the Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever. Signature Guaranteed: __________________________________________ SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE. B-4 FORM OF ELECTION TO PURCHASE (To be Executed by the Holder if Holder Desires to Exercise Warrants Evidenced by the Warrant Certificate) To FARADAY FINANCIAL, INC. The undersigned hereby irrevocably elects to exercise ___________________________ (______) Warrants, evidenced by the within Warrant Certificate for, and to purchase thereunder, ____________________________ (______) full shares of Common Stock issuable upon exercise of said Warrants and delivery of $_________ and any applicable taxes. The undersigned requests that certificates for such shares be issued in the name of: PLEASE INSERT SOCIAL SECURITY OR TAX IDENTIFICATION NUMBER _____________________________________ ________________________________________________________________________________ (Please print name and address) ________________________________________________________________________________ If said number of Warrants shall not be all the Warrants evidenced by the within Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so exercised be issued in the name of and delivered to: ________________________________________________________________________________ (Please print name and address) ________________________________________________________________________________ Dated: _____________________ Signature:__________________________ NOTICE: The above signature must correspond with the name as written upon the face of the within Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever, or if signed by any other person the Form of Assignment hereon must be duly executed and if the certificate representing the shares or any Warrant Certificate representing Warrants not exercised is to be registered in a name other than that in which the within Warrant Certificate is registered, the signature of the holder hereof must be guaranteed. Signature Guaranteed: ___________________________________________ SIGNATURE MUST BE GUARANTEED BY A COMMERCIAL BANK OR MEMBER FIRM OF ONE OF THE FOLLOWING STOCK EXCHANGES: NEW YORK STOCK EXCHANGE, PACIFIC COAST STOCK EXCHANGE, AMERICAN STOCK EXCHANGE, OR MIDWEST STOCK EXCHANGE. B-5 EXHIBIT C REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made and entered into to be effective as of the ___ day of ___________, 2004, by and among Faraday Financial, Inc., a Delaware corporation (the "Company"), and the persons identified on Exhibit A attached hereto (the "Investors"). Recitals WHEREAS, each of the Investors is a party to a Loan Agreement with the Company, which loan agreements provide for loans up to a maximum principal amount of ONE MILLION FIVE HUNDRED THOUSAND DOLLARS ($1,500,000 ) (the "Loan Agreements") and this Registration Rights Agreement is attached as Exhibit C to each such Loan Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: 1. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; REGISTRATION RIGHTS. 1.1 Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth below: (a) "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. (b) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. (c) "Holder" shall mean any Investor who holds Registrable Securities and any holder of Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with Section 1.2 and Section 1.11 hereof. (d) "Initiating Holders" shall mean any Holder or Holders who in the aggregate hold more than fifty percent (50%) of the outstanding Registrable Securities. (e) "Material Adverse Effect" shall mean a material adverse effect upon the business, assets, financial condition, income or prospects of the Company. (f) "Other Stockholders" shall mean persons other than Holders who, by virtue of agreements with the Company, are entitled to include their securities in certain registrations hereunder. (g) "Registrable Securities" shall mean (i) up to 300,000 shares of common stock issuable pursuant to the exercise of warrants issued pursuant to the terms of the Loan Agreements and (ii) any common stock issued as a dividend or other distribution with respect to or in exchange for or in replacement of the shares referenced in clause (i) above, provided, however, that Registrable Securities shall not include any shares of common stock which have previously been registered or which have been sold to the public either pursuant to a registration statement or Rule 144, or which have been sold in a private transaction in which the transferor's rights under this Agreement are not assigned. (h) The terms "register," "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. (i) "Registration Expenses" shall mean all expenses incurred in effecting any registration pursuant to this Agreement, including, without limitation, all registration, qualification, and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and expenses of any regular or special audits incident to or required by any such registration, but shall not include Selling Expenses, fees and disbursements of counsel for the Holders and the compensation of regular employees of the Company, which shall be paid in any event by the Company. (j) "Restricted Securities" shall mean any Registrable Securities required to bear the legend set forth in Section 1.2(b) hereof. (k) "Rule 144" shall mean Rule 144 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission. (l) "Rule 145" shall mean Rule 145 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission. (m) "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time. (n) "Selling Expense" shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the sale of Registrable Securities and fees and disbursements of counsel for any Holder (other than the fees and disbursements of counsel included in Registration Expenses). 1.2 Restrictions on Transfer. (a) Each Holder agrees not to make any disposition of all or any portion of the Registrable Securities unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 1.2, provided and to the extent such Section is then applicable, and: (i) There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (ii) (A) Such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (B) if reasonably requested by the Company, such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. (b) Each certificate representing Registrable Securities shall (unless otherwise permitted by the provisions of this Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws): THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES OR BLUE SKY LAWS OF ANY STATE AND MAY BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES OR BLUE SKY LAWS OR IF AN EXEMPTION FROM SUCH REGISTRATION OR QUALIFICATION IS APPLICABLE. C-2 (c) The Company shall be obligated to reissue promptly unlegended certificates at the request of any Holder thereof if the Holder shall have obtained an opinion of counsel at such Holder's expense (which counsel may be counsel to the Company) reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend. (d) Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities shall be removed upon receipt by the Company of an order of the appropriate blue sky authority authorizing such removal. 1.3 Requested Registration. (a) Request for Registration. If the Company shall receive from Initiating Holders at any time or times not earlier than [September 30, 2004], a written request that the Company effect any registration with respect to all or a part of the Registrable Securities, the Company will: (i) promptly, and in any event no later than ten (10) days of the receipt of such written request; give written notice of the proposed registration to all other Holders; and (ii) as soon as practicable, use commercially reasonable efforts to effect such registration (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws, and appropriate compliance with the Securities Act) to permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within twenty (20) days after such written notice from the Company is mailed or delivered. The Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 1.3: (A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification, or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (B) After the Company has initiated two (2) such registrations pursuant to this Section 1.3(a) (counting for these purposes only registrations which have been declared or ordered effective and pursuant to which securities have been sold and registrations which have been withdrawn by the Holders as to which the Holders have not elected to bear the Registration Expenses pursuant to Section 1.5 hereof and would, absent such election, have been required to bear such expenses); (C) During the period starting with the date sixty (60) days prior to the Company's good faith estimate of the date of filing of, and ending on a date one hundred eighty (180) days after the effective date of, a Company-initiated registration; provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective; or (D) If the Initiating Holders propose to dispose of shares of Registrable Securities which may be immediately registered on Form S-3 pursuant to a request made under Section 1.6 hereof. (b) Subject to the foregoing clauses (A) through (D), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable, and in any event no later than forty-five (45) days, after receipt of the request or requests of the Initiating Holders; provided, however, that if (i) in the good faith judgment of the Board of Directors of the Company, such registration would be seriously detrimental to the Company and the Board of Directors of the Company concludes, as a result, C-3 that it is essential to defer the filing of such registration statement at such time, and (ii) the Company shall furnish to the Initiating Holders a certificate signed by the Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company for such registration statement to be filed in the near future and that it is, therefore, essential to defer the filing of such registration statement, then the Company shall have the right to defer such filing (except as provided in clause (C) above) for a period of not more than one hundred twenty (120) days after receipt of the request of the Initiating Holders, and, provided further, that the Company shall not defer its obligation in this manner more than once in any twelve-month period. The registration statement filed pursuant to the request of the Initiating Holders may, subject to the provisions of Sections 1.3(d) and 1.13 hereof, include other securities of the Company, with respect to which registration rights have been granted, and may include securities of the Company being sold for the account of the Company. (c) Participation. A Holder may elect to include in any registration and underwriting, if applicable, all or a part of the Registrable Securities he holds. (d) Procedures. If (i) the Company shall request inclusion in any registration pursuant to this Section 1.3 of securities being sold for its own account, or if other persons shall request inclusion in any registration pursuant to this Section 1.3 and (ii) the Initiating Holders request that pursuant to this Section 1.3, Registrable Securities be registered pursuant to an underwriting, the Initiating Holders shall, on behalf of all Holders, offer to include such securities in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Article 1 (including Section 1.13). The Company shall (together with all Holders and other persons proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders, which underwriters are reasonably acceptable to the Company. Notwithstanding any other provision of this Section 1.3, if the representative of the underwriters advises the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, then the number of such shares to be included in the underwritten public offering shall be reduced, and shares shall be excluded from such underwritten public offering in a number deemed necessary by such underwriters, first by excluding shares held by the Company, directors, officers, employees and founders of the Company, and then, to the extent necessary, by excluding Registrable Securities in accordance with the allocation provisions contained in Section 1.13. (e) If a person who has requested inclusion in such registration as provided above does not agree to the terms of any such underwriting, such person shall be excluded therefrom by written notice from the Company, the underwriter or the Initiating Holders. Any Registrable Securities or other securities so excluded or withdrawn from such underwriting shall also be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares to be included in such registration was previously reduced as a result of marketing factors pursuant to this Section 1.3(d), then the Company shall offer to all Holders who have retained rights to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among such Holders requesting additional inclusion in accordance with Section 1.13. 1.4 Company Registration. (a) If the Company shall determine to register any of its securities either for its own account or the account of a security holder or holders exercising their respective demand registration rights (other than pursuant to Section 1.3 or 1.6 hereof), other than a registration relating solely to employee benefit plans on Form S-1, Form S-8 or any successor Forms or a registration relating to a corporate reorganization or other transaction on Form S-4 or any successor to Form S-4, or a registration on any registration form that does not permit secondary sales, the Company will: (i) promptly give to each Holder written notice thereof; and (ii) use commercially reasonable efforts to include in such registration (and any related qualification under blue sky laws or other compliance), except as set forth in Section 1.4(b) below, and in C-4 any underwriting involved therewith, all the Registrable Securities specified in a written request or requests, made by any Holder and received by the Company within ten (10) days after the written notice from the Company described in clause (i) above is mailed or delivered by the Company. Such written request may specify all or a part of a Holder's Registrable Securities. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 1.4(a)(i). In such event, the right of any Holder to registration pursuant to this Section 1.4 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders of securities of the Company with registration rights to participate therein distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. Notwithstanding any other provision of this Section 1.4, if the representative of the underwriters advises the Company in writing that marketing factors require a limitation on the number of shares to be underwritten, the representative may (subject to the limitations set forth below) exclude all Registrable Securities from, or limit the number of Registrable Securities to be included in, the registration and underwriting. The Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated first to the Company for securities being sold for its own account and thereafter as set forth in Section 1.13. If any person does not agree to the terms of any such underwriting, he shall be excluded therefrom by written notice from the Company or the underwriter. Any Registrable Securities or other securities so excluded from such underwriting shall be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares of Registrable Securities to be included in such registration was previously reduced as a result of marketing factors, the Company shall then offer to all persons who have retained the right to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the persons requesting additional inclusion in accordance with Section 1.13 hereof. 1.5 Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Sections 1.3, 1.4 and 1.6 hereof and reasonable fees of one counsel for the selling stockholders in the case of registrations pursuant to Section 1.3 and 1.6 shall be borne by the Company; provided, however, that if the Holders bear the Registration Expenses for any registration proceeding begun pursuant to Section 1.3 and subsequently withdrawn by the Holders registering shares therein, such registration proceeding shall not be counted as a requested registration pursuant to Section 1.3 hereof. Furthermore, in the event that a withdrawal by the Holders is based upon material adverse information relating to the Company that is different from the information known or available (upon request from the Company or otherwise) to the Holders requesting registration at the time of their request for registration under Section 1.3, such registration shall not be treated as a counted registration for purposes of Section 1.3 hereof, even though the Holders do not bear the Registration Expenses for such registration. All Selling Expenses relating to securities so registered shall be borne by the holders of such securities pro rata on the basis of the number of shares of securities so registered on their behalf, as shall any other expenses in connection with the registration required to be borne by the Holders of such securities. 1.6 Registration on Form S-3. (a) If the Company qualifies for the use of Form S-3, in addition to the rights contained in the foregoing provisions of this Article 1, the Holders of Registrable Securities shall have the right to request registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended methods of disposition of such shares by such Holder or Holders), provided, however, that any such request must be made by Holders who in the aggregate hold more than ten percent (10%) of the outstanding Registrable Securities, provided, further, that the Company shall not be obligated to effect any such registration (i) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) on Form S-3 at an aggregate price to the public of less than $1,000,000, (ii) in the circumstances described in clauses (A) and (C) of Section 1.3(a), (iii) if the Company shall furnish the C-5 certification described in Section 1.3(b) (but subject to the limitations set forth therein) or (iv) if, in a given twelve month period, the Company has effected one such registration in such period. (b) If a request complying with the requirements of Section 1.6(a) hereof is delivered to the Company, the provisions of Sections 1.3(a)(i) and (ii) and Section 1.3(b) hereof shall apply to such registration. If the registration is for an underwritten offering, the rights of any Holder to registration pursuant to this Section 1.6 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless mutually agreed by a majority in interest of the Initiating Holders and such Holder with respect to such participation and inclusion) to the extent provided herein and the provisions of Section 1.3(d) hereof shall apply to such registration. A Holder may elect to include in such underwriting all or a part of the Registrable Securities he holds. 1.7 Registration Procedures. In the case of each registration effected by the Company pursuant to Section 1, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will use commercially reasonable efforts to: (a) Keep such registration effective for a period of one hundred twenty (120) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; provided, however, that (i) such 120-day period shall be extended for a period of time equal to the period the Holder refrains from selling any securities included in such registration at the request of an underwriter of Common Stock (or other securities) of the Company; and (ii) in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such 120-day period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold, however in no event longer than one year from the effective date of the registration statement and provided that Rule 145, or any successor rule under the Securities Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Securities Act governing the obligation to file a post-effective amendment permit, in lieu of filing a post-effective amendment, that (I) includes any prospectus required by Section 10(a)(3) of the Securities Act, or (II) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (I) and (II) above to be contained in periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the registration statement; (b) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (c) Furnish such number of prospectuses and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request; (d) Notify each seller of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in the light of the circumstances then existing, and at the request of any such seller, prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an 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 not misleading or incomplete in the light of the circumstances then existing; (e) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed; C-6 (f) Use commercially reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; (g) Use commercially reasonable efforts to furnish, at the request of any underwriter on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Section 1, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters.; (h) Provide a transfer agent and registrar for all Registrable Securities registered pursuant to such registration statement and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration; and (i) In connection with any underwritten offering pursuant to a registration statement filed pursuant to Section 1.3 hereof, the Company will enter into an underwriting agreement in form reasonably necessary to effect the offer and sale of Common Stock, provided such underwriting agreement contains reasonable and customary provisions. 1.8 Indemnification. (a) The Company will indemnify each Holder, each of its officers, directors and partners, legal counsel, and accountants and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification, or compliance has been effected pursuant to this Article 1, and each underwriter, if any, and each person who controls within the meaning of Section 15 of the Securities Act any underwriter, against all expenses, claims, losses, damages, and liabilities (or actions, proceedings, or settlements in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular, or other document (including any related registration statement, notification, or the like) incident to any such registration, qualification, or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification, or compliance, and will reimburse each such Holder, each of its officers, directors, partners, legal counsel, and accountants and each person controlling such Holder, each such underwriter, and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending or settling any such claim, loss, damage, liability, or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability, or expense rises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Holder or underwriter and stated to be specifically for use therein. It is agreed that the indemnity agreement contained in this Section 1.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld). (b) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification, or compliance is being effected, indemnify the Company, each of its directors, officers, partners, legal counsel, and accountants and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, each other such Holder and Other Stockholder, and each of their officers, directors, and partners, and each person controlling such Holder or Other Stockholder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular, or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and such Holders, other Stockholders, C-7 directors, officers, partners, legal counsel, and accountants, persons, underwriters, or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular, or other document in reliance upon and in conformity with written information furnished to the Company by such Holder (with respect to such Holder) and stated to be specifically for use therein provided, however, that the obligations of such Holder hereunder shall not apply to amounts paid in settlement of any such claims, losses, damages, or liabilities (or actions in respect thereof) if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld); and provided that in no event shall any indemnity under this Section 1.8 exceed the gross proceeds from the offering received by such Holder. (c) Each party entitled to indemnification under this Section 1.8 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 1.8, to the extent such failure is not prejudicial. Notwithstanding the foregoing, any Indemnified Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless (i) the Indemnified Party shall have been advised by counsel that representation of the Indemnified Party by counsel provided by the Indemnifying Party would be inappropriate due to actual or potential conflicting interests between the Indemnifying Party and the Indemnified Party, including situations in which there are one or more legal defenses available to the Indemnified Party that are different from or additional to those available to the Indemnifying Party, (ii) the Indemnifying Party shall have authorized in writing the employment of counsel for the Indemnified Party at the expense of the Indemnifying Party, or (iii) the Indemnifying Party shall have failed to assume the defense or retain counsel reasonably satisfactory to the Indemnified Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. (d) If the indemnification provided for in this Section 1.8 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage, or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. In no event shall any contribution by a Holder under this Section 1.8(d) exceed the net proceeds from the offering received by such Holder. (e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in any underwriting agreement entered into in connection with the underwritten public offering of Registrable Securities are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control. (f) This Section 1.8 shall survive the completion of any offering of Registrable Securities in a registration statement under this Section 1, and otherwise. C-8 1.9 Information by Holder. Each Holder of Registrable Securities shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification, or compliance referred to in this Section 1. 1.10 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission that may permit the sale of the Restricted Securities to the public without registration, the Company agrees to use its best efforts to: (a) Make and keep public information regarding the Company available as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after the date hereof; (b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) So long as a Holder owns any Restricted Securities, furnish to the Holder forthwith upon written request a written statement by the Company as to its compliance with the reporting requirements of Rule 144, and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration. 1.11 Transfer or Assignment of Registration Rights. The rights to cause the Company to register securities granted to a Holder by the Company under this Article 1 may be transferred or assigned by a Holder only to its partners and Affiliates, provided that the Company is given written notice at the time of or within a reasonable time after said transfer or assignment, stating the name and address of the transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned, and, provided further, that the transferee or assignee of such rights assumes in writing the obligations of such Holder under this Section 1. 1.12 "Market Stand-Off" Agreement. If requested by an underwriter of common stock (or other securities) of the Company, a Holder shall not sell or otherwise transfer or dispose of any common stock (or other securities) of the Company held by such Holder (other than those included in the registration) during the one hundred eighty (180) day period following the effective date of a registration statement of the Company filed under the Securities Act; provided, however, that this Section 1.12 shall not apply unless all officers and directors of the Company and other Investors holding five percent (5%) of the Registrable Securities enter into similar agreements. The obligations described in this Section 1.12 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop-transfer instructions with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of such one hundred eighty (180) day period. 1.13 Allocation of Registration Opportunities. In any circumstance in which all of the Registrable Securities and other shares of common stock of the Company (including shares of common stock issued or issuable upon exercise/conversion of any outstanding convertible securities of the Company) with registration rights (the "Other Shares") requested to be included in a registration on behalf of the Holders or other selling stockholders cannot be so included as a result of limitations of the aggregate number of shares of Registrable Securities and Other Shares that may be so included, the number of shares of Registrable Securities and Other Shares that may be so included shall be allocated among the Holders and other selling stockholders requesting inclusion of shares pro rata on the basis of the number of shares of Registrable Securities and Other Shares that would be held by such Holders and other selling stockholders, assuming conversion; provided, however, that such allocation shall not operate to reduce the aggregate number of Registrable Securities and Other Shares to be included in such registration, if any Holder or other selling stockholder does not request inclusion of the maximum number of shares of Registrable Securities and Other Shares allocated to him pursuant to the above-described procedure, in which case the remaining portion of his allocation shall be reallocated among those requesting Holders and other selling stockholders whose allocations did not satisfy their requests pro rata on the basis of the number of shares of Registrable Securities and Other Shares which would be held by such Holders and other selling stockholders, assuming C-9 conversion, and this procedure shall be repeated until all of the shares of Registrable Securities and Other Shares which may be included in the registration on behalf of the Holders and other selling stockholders have been so allocated. The Company shall not limit the number of Registrable Securities to be included in a registration pursuant to this Agreement in order to include shares held by stockholders with no registration rights or to include shares of stock issued to employees, officers, directors, or consultants pursuant to the Company's stock option or similar compensation plan, or in the case of registrations under Sections 1.3 or 1.6 hereof, in order to include in such registration securities registered for the Company's own account. 1.14 Delay of Registration. No Holder shall have any right to take any action to restrain, enjoin, or otherwise delay any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Article 1. 1.15 Termination of Registration Rights. The right of any Holder to request registration or inclusion in any registration pursuant to Section 1.3, 1.4 or 1.6 shall terminate if all shares of Registrable Securities held or entitled to be held upon conversion by such Holder may immediately be sold under Rule 144 during any 90-day period. 2. MISCELLANEOUS. 2.1 Governing Law. This Agreement shall be governed in all respects by the laws of the State of Delaware, without regard to its conflicts of laws principles. 2.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto. 2.3 Entire Agreement; Amendment; Waiver. This Agreement (including the Exhibits hereto) and the Loan Agreements constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated, except by a written instrument signed by the Company and the Initiating Holders and any such amendment, waiver, discharge or termination shall be binding on all the Holders. 2.4 Notices, etc. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by United States first-class mail, postage prepaid, sent by facsimile or delivered personally by hand or nationally recognized courier addressed (a) if to a Holder, as indicated on the list of Holders attached hereto as Exhibit A, or at such other address or facsimile number as such holder or permitted assignee shall have furnished to the Company in writing, or (b) if to the Company, at such address or facsimile number as the Company shall have furnished to each Holder in writing. All such notices and other written communications shall be effective on the date of mailing, confirmed facsimile transfer or delivery. 2.5 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any Holder, upon any breach or default of the Company under this Agreement shall impair any such right, power or remedy of such Holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default therefore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any Holder of any breach or default under this Agreement or any waiver on the part of any Holder of any provisions or conditions of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any Holder, shall be cumulative and not alternative. 2.6 Rights; Separability. Unless otherwise expressly provided herein, a Holder's rights hereunder are several rights, not rights jointly held with any of the other Holders. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. C-10 2.7 Information Confidential. Each Holder acknowledges that the information received pursuant hereto may be confidential and for its use only, and it will not use such confidential information in violation of the Exchange Act or reproduce, disclose or disseminate such information to any other person (other than its employees or agents having a need to know the contents of such information, and its attorneys), except in connection with the exercise of rights under this Agreement, unless the Company has made such information available to the public generally or such Holder is required to disclose such information by a governmental body. 2.8 Titles and Subtitles. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing or interpreting this Agreement. 2.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. One or more counterparts of this Agreement may be delivered via facsimile and such facsimile counterpart shall have the same effect as an original counterpart hereof. IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights Agreement effective as of the day and year first above written. FARADAY FINANCIAL, INC. By:__________________________________ Name: Title: C-11 Counterpart Signature Page to Registration Rights Agreement The undersigned hereby agrees to become a party as an Investor to the Registration Rights Agreement effective ________, 2004 (the "Agreement") among Faraday Financial, Inc. (the "Company") and the Investors named therein, and hereby authorizes the Company (i) to attach this Counterpart Signature Page to such Agreement and (ii) to add the name of the undersigned to the list of Investors set forth in Annex I to such Agreement. _______________________________ Date: ___________________ C-12 EXHIBIT A INVESTORS: [NAME AND ADDRESS] EX-10.9 10 ex109k033104.txt EMPLOYMENT AGREEMENT Exhibit 10.9 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of this15th day of January, 2004, by and between Faraday Financial, Inc., a Delaware corporation, hereinafter referred to as the "Company" and Frank J. Gillen, hereinafter referred to as "Employee." WHEREAS, the Company and Employee desire that the term of this Agreement begin on February 1, 2004("Effective Date"). WHEREAS, the Company desires to employ Employee as its President and Employee is willing to accept such employment by the Company, on the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the parties hereto agree to the terms and conditions set forth below. 1. EMPLOYMENT: The Company and Employee hereby confirm the Company's employment of Employee for the period and upon the terms and conditions hereinafter set forth. 2. TERM: Employee's employment is at-will, meaning that either Employee or Company may terminate the employment relationship at any time for any reason or no reason (the "Term"). 3. TITLE AND DESCRIPTION OF DUTIES: Employee shall serve as the President of the Company and will report directly to the Company's Board of Directors. During his employment, Employee shall perform the duties and bear the responsibilities commensurate with his position, as directed by the Company's, Board of Directors and shall serve the Company faithfully and to the best of his ability. Employee shall not engage in any other business activity or activities that require personal services by Employee that, in the judgment of the Board of Directors, conflicts with the proper performance of Employee's duties hereunder. Employee further agrees not to work for any competitive enterprise during his employment, including after hours. 4. OWNERSHIP OF WORK PRODUCT: The Company shall own all copyrights, patents, trade secrets, or other intellectual property rights associated with any ideas, concepts, techniques, inventions, processes, or works of authorship developed or created by Employee during the course of performing work for the Company (collectively, the "Work Product"), but excludes all ideas, concepts, techniques, inventions, processes, or works of authorship developed or created by Employee during the term hereof that do not relate to the business of the Company (the business of the Company includes providing wireless broadband service to various locations in the United States and identifying companies that could be acquired by the company in a roll up of their industry). Work Product shall belong exclusively to the Company and shall, to the extent possible, be considered work made for hire for the Company within the meaning of Title 17 of the United States Code. Employee automatically assigns, at the time of creation of applicable Work Product, without any requirement of further consideration, any right, title, or interest it or they may have in such Work Product, including any copyrights or other intellectual property rights pertaining thereto. Upon request of the Company, Employee shall take such further actions, including execution and delivery of instruments of conveyance, as may be appropriate to give full and proper effect to such assignment. Employee further agrees to provide to Company the assistance and documentation required in the procurement of intellectual property. 5. BASE SALARY: During the Term of this Agreement, the Company shall pay Employee a minimum salary on an annualized basis of forty eight thousand dollars ($48,000), payable in monthly installments of four thousand dollars ($4,000) and in accordance with the Company's payroll schedule and subject to all applicable withholdings and deductions. 6. INCENTIVE COMPENSATION: In addition to the base salary described in Section 5, the Company may pay to Employee a discretionary bonus or other incentive compensation, as determined by the board of directors [and/or the president]. 7. BENEFITS: In addition to the base salary described in Section 5 and any other Company benefits and deferred compensation plans as are now generally available or later made generally available to employees of the Company, the Company shall provide Employee, during the Term, with the following Employee benefits: 7.1 Medical Insurance. Employee shall be eligible to participate in the medial insurance plan as is generally available to employees of the Company. The medical insurance premiums will be fully paid by the Company. 7.2 Vacation. Employee shall be entitled to two (2) weeks of paid vacation during each twelve-month period. Vacation days shall be taken at times mutually satisfactory to the Company and Employee. Unused vacation time shall not accrue from year to year. 7.3 Expense Reimbursement. Employee is authorized to incur reasonable business expenses in promoting the business of the Company, including expenses for travel, entertainment and similar items. The Company shall reimburse Employee for all such reasonable expenses upon the presentation by Employee of an itemized accounting and reasonable supporting documentation of such expenses. 7.4 Disability Insurance. Employee shall be eligible to participate in any disability insurance plan as is generally available to employees of the Company. The disability insurance premiums will be fully paid by the Company. 7.5 Director & Officer Insurance. Employee will be covered by Director & Officer Insurance that the Board of Directors deems adequate. 8. TERMINATION: Employee's employment is at-will, meaning that either Employee or Company may terminate the employment relationship at any time for any reason or no reason. In furtherance and not in limitations of the foregoing, if Employee brings materials that the Company's board of directors determines are pornographic or if Employee places or causes such materials to be placed on any Company computer then the Employee may be immediately terminated. 9. DEATH: If Employee dies during the Term of this Agreement, the Company shall promptly pay to the estate of Employee all compensation and bonuses due him upon the date of his death. The term of employment shall be deemed terminated on the date of death. 10. COVENANT NOT TO COMPETE: 10.1 Factual Background. The Company expects to invest considerable time, effort, and capital in enhancing the value and desirability of the skills of its officers and technical personnel. Both this investment and Employee's individual compensation reflect the Company's expectation of receiving a considerable return from the exclusive use of Employee's services and know-how in the future, free from any danger that the Company's competitors may attempt to induce Employee to leave the Company and wrongfully gain the benefit of the Company's investment. The partial restraint set forth in 2 paragraph 10.2 hereof does not, and cannot, provide complete protection for the Company's investment, development efforts, product strategy, and proprietary information, but the Company believes that in combination with the other provisions of this Agreement, it is the most fair and reasonable measure permitted under applicable law to protect the Company's interests, giving due regard to both Employee's interests and the interests of the Company. 10.2 Covenant Not to Compete. Employee agrees that for a period of two years (2) following the termination of Employee's employment, Employee may not compete with the Company in the United States or in such other markets that the Company targeted to enter during the Term of this Agreement by engaging in any business that is directly or indirectly engaged in the development and/or commercialization of products or processes involving broadband, wireless or such other businesses that the Company is engaged in during Employee's employment with the Company. In addition, during said 2 year period Employee agrees not to induce, entice, hire or attempt to hire or employ any employee of the Company. 10.3 Post Termination Employment. Employee acknowledges that (i) in the event this Agreement terminates for any reason, Employee will be able to earn a livelihood without violating the above restrictions; and (ii) that Employee's ability to earn a livelihood without violating such restrictions is a material condition to employment with the Company. 10.4 Injunctive Relief. Employee further acknowledges (i) that compliance with paragraph 10.2 above is necessary to protect the business and goodwill of Employer; and (ii) that a breach of those sections will irreparably and continually damage Employer for which money damages may not be adequate. Consequently, Employee agrees that, in event of a breach or a threat to breach any of these covenants, Employer shall be entitled to both (i) a preliminary or permanent injunction in order to prevent the continuation of such harm and (ii) money damages insofar as they can be determined. Nothing in this Agreement, however, shall be construed to prohibit Employer from also pursuing any other remedy, the parties having agreed that all remedies shall be cumulative. Without limiting the foregoing, as such money damages for the period of time during which Employee violates these covenants, Employer shall be entitled to recover the amount of fees, compensation or other remuneration earned by Employee from any such breach. 10.5 Scope of Restraint Post-Termination Competition. The parties have attempted to limit Employee's right to compete only to the extent necessary to protect the Company from unfair competition. The parties recognize, however, that reasonable people may differ in making such a determination. Consequently, the parties hereby agree that if the scope or enforceability of the restrictive covenant is in anyway disputed at any time, a court or trier fact may modify and enforce the covenant to the extent it believes to be reasonable under the circumstances existing at the time. 11. COVENANT REGARDING CONFIDENTIAL INFORMATION: 11.1 Confidential Information Defined. For purposes of this Agreement, "Confidential Information" is any information, including, but not limited to, technical or non-technical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans, or lists of actual or potential customers or suppliers that: (1) derive economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from their disclosure or use and (2) are the subject of efforts that are reasonable under the circumstances to maintain their secrecy. 11.2 Restrictions on Use and Disclosure of Confidential Information. During the Term of this Agreement and for so long afterwards as the pertinent information or data remain Confidential Information, Employee covenants and agrees that, except as required by Employee's duties to the Company, he will not at any time, directly or indirectly, disclose to or use for the benefit of others, or appropriate for his own personal use, or cause to be used by others, any Confidential Information without first obtaining the written consent of the Company. 11.3 Return of Materials. Employee agrees that all records and other writing of Confidential Information prepared by Employee, or which come into his possession or control, or to which he has access, shall remain the exclusive property of the Company. Upon the request of the Company and, in any event, upon the termination of Employee's employment, Employee must return to 3 the Company and leave at its disposal all memoranda, notes, records, drawings, manuals, computer programs, documentation, diskettes, and other documents or media pertaining to the business of the Company or Employee's specific duties for the Company, including all copies of such materials. Employee must also return to the Company and leave at its disposal all materials involving any Confidential Information of the Company. This paragraph 11.3 is intended to apply to all materials made or compiled by Employee, as well as to all materials furnished to Employee by anyone else in connection with Employee's employment. 12. MISCELLANEOUS: 12.1 Notices. Any notice or request required or permitted to be given hereunder shall be sufficient if in writing and delivered personally or sent by certified mail, return receipt requested, to the addressees given below or to any other address designated by either party by notice similarly given. Such notice shall be deemed to have been given upon the personal delivery or such mailing thereof, as the case may be. Notices to Company: Faraday Financial, Inc. Attn: Frank J. Gillen, President 175 South Main Street, #1240 Salt Lake City, Utah 84111 Notices to Employee: Frank J. Gillen 2055 East 6425 South Salt Lake City, Utah 84121 12.2 Effect of Waiver. The failure of either party to insist on strict compliance with any of the terms, covenants, or conditions of this Agreement by the other party shall not be deemed a waiver of that term, covenant, or condition, nor shall any waiver or relinquishment of any right or power at any one time or times be deemed a waiver or relinquishment of that right or power for all or any other times. 12.3 Severability. The covenants in this Agreement shall be construed as covenants independent of one another and as obligations distinct from any other contract between Employee and the Company. Any claim that Employee may have against the Company shall not constitute a defense to enforcement by the Company of this Agreement. Moreover, it is the desire and intent of the parties that the provisions of this Agreement shall be enforced to the fullest extent possible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any provision or portion of this Agreement shall be adjudicated to be invalid or unenforceable, this Agreement shall be deemed amended to delete from it the portion adjudicated to be invalid or unenforceable and the remaining provisions shall nevertheless continue in full force and effect without being impaired or invalidated in any way. 12.4 Entire Agreement; Modifications. This Agreement is the sole and entire agreement and understanding of the parties with respect to the arrangements herein and supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of Employee by the Company. No prior agreement, whether written or oral, shall be construed to change, amend, alter, repeal, or invalidate this Agreement. Any modification of this Agreement will be effective only if it is in writing and signed by Employee and the Company. 12.5 Voluntary Agreement. Employee represents and agrees that he has reviewed all aspects of this Agreement, that Employee has carefully read and fully understands all the provisions of this Agreement, that Employee is voluntarily entering into this Agreement, and that Employee he has had the opportunity to review any or all aspects of this Agreement with the legal advisor or advisors of Employee's choice before affixing his signature hereto. 12.6 The Company's Rules and Benefits. The parties acknowledge and agree that from time to time the Company may publish rules and regulations pertaining to employees, and may from time to time provide benefits to employees, including Employee, all of which except as hereinafter provided, shall become part of the terms and conditions of Employee's employment for so 4 long as such rules or regulations are deemed applicable to Employee by the Company in its discretion. Provided, however, that in no case shall such rules, regulations or benefits, to the extent they conflict in any way with any of the terms or conditions of this Agreement, be considered to be a modification or waiver of any of the terms of this Agreement. In all cases of conflict, this Agreement shall prevail. 12.7 Construction. This Agreement shall not be construed against the party preparing it, and shall be construed without regard to the identity of the person who drafted it or the party who caused it to be drafted and shall be construed as if all parties had jointly prepared this Agreement and it shall be deemed their joint work product, and each and every provision of this Agreement shall be construed as though all the parties hereto participated equally in the drafting hereof; and any uncertainty or ambiguity shall not be interpreted against any one party. As a result of the foregoing, any rule of construction that a document is to be construed against the drafting party shall not be applicable. 12.8 Governing Law. This Agreement shall at all times be governed by, construed, interpreted and enforced in accordance with the laws of the State of Utah 12.9 Survival of Obligations. All covenants, agreements, representations, and warranties made herein shall survive the execution and delivery of this Agreement and related documents. The covenants in Section 4 and Sections 10 through 12 of this Agreement shall survive termination of this Agreement, regardless of who causes the termination and under what circumstances. 12.10 Specific Performance and Consent to Injunctive Relief. Irreparable harm should be presumed if Employee breaches any covenant in this Agreement. The faithful observance of all covenants in this Agreement is an essential condition to Employee's employment, and the Company is depending upon absolute compliance. Damages would probably be very difficult to ascertain if Employee breached any covenant in this Agreement. This Agreement is intended to protect the proprietary rights of the Company in many important ways. Even the threat of any misuse of the technology of the Company would be extremely harmful, since that technology is essential to the business of the Company. In light of these facts, Employee agrees that any court of competent jurisdiction should immediately enjoin any breach of this Agreement upon the request of the Company, and Employee specifically release the Company from the requirement of posting any bond in connection with temporary or interlocutory injunctive relief, to the extent permitted by law. 12.11 Related Parties. This Agreement shall inure to the benefit of, and be binding upon, the Company and its subsidiaries and its affiliates, together with their successors and assigns, and Employee, together with Employee's executor, administrator, personal representative, heirs, and legatees. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. Faraday Financial, Inc. By: /s/ Frank J. Gillen ---------------------------------- Its: President EMPLOYEE: /s/ Frank J. Gillen ---------------------------------- Frank J. Gillen 5 EX-10.10 11 ex1010k033104.txt EMPLOYMENT AGREEMENT Exhibit 10.10 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made as of this 30th day of January, 2004, by and between Faraday Financial, Inc., a Delaware corporation, hereinafter referred to as the "Company" and Shauna Badger, hereinafter referred to as "Employee." WHEREAS, the Company and Employee desire that the term of this Agreement begin on February 1, 2004("Effective Date"). WHEREAS, the Company desires to employ Employee as its Secretary and Treasurer and Employee is willing to accept such employment by the Company, on the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the parties hereto agree to the terms and conditions set forth below. 1. EMPLOYMENT: The Company and Employee hereby confirm the Company's employment of Employee for the period and upon the terms and conditions hereinafter set forth. 2. TERM: Employee's employment is at-will, meaning that either Employee or Company may terminate the employment relationship at any time for any reason or no reason (the "Term"). 3. TITLE AND DESCRIPTION OF DUTIES: Employee shall serve as the Secretary and Treasurer of the Company and will report directly to the Company's Chief Executive Officer. During his employment, Employee shall perform the duties and bear the responsibilities commensurate with his position, as directed by the Company's, Chief Executive Officer and shall serve the Company faithfully and to the best of his ability. Employee shall not engage in any other business activity or activities that require personal services by Employee that, in the judgment of the Chief Executive Officer, conflicts with the proper performance of Employee's duties hereunder. Employee further agrees not to work for any competitive enterprise during his employment, including after hours. 4. OWNERSHIP OF WORK PRODUCT: The Company shall own all copyrights, patents, trade secrets, or other intellectual property rights associated with any ideas, concepts, techniques, inventions, processes, or works of authorship developed or created by Employee during the course of performing work for the Company (collectively, the "Work Product"), but excludes all ideas, concepts, techniques, inventions, processes, or works of authorship developed or created by Employee during the term hereof that do not relate to the business of the Company (the business of the Company includes providing wireless broadband service to various locations in the United States and identifying companies that could be acquired by the company in a roll up of their industry). Work Product shall belong exclusively to the Company and shall, to the extent possible, be considered work made for hire for the Company within the meaning of Title 17 of the United States Code. Employee automatically assigns, at the time of creation of applicable Work Product, without any requirement of further consideration, any right, title, or interest it or they may have in such Work Product, including any copyrights or other intellectual property rights pertaining thereto. Upon request of the Company, Employee shall take such further actions, including execution and delivery of instruments of conveyance, as may be appropriate to give full and proper effect to such assignment. Employee further agrees to provide to Company the assistance and documentation required in the procurement of intellectual property. 5. BASE SALARY: During the Term of this Agreement, the Company shall pay Employee a minimum salary on an annualized basis of twenty four thousand dollars ($24,000), payable in monthly installments of two thousand dollars ($2,000) and in accordance with the Company's payroll schedule and subject to all applicable withholdings and deductions. 6. INCENTIVE COMPENSATION: In addition to the base salary described in Section 5, the Company may pay to Employee a discretionary bonus or other incentive compensation, as determined by the board of directors and/or the president. 7. BENEFITS: In addition to the base salary described in Section 5 and any other Company benefits and deferred compensation plans as are now generally available or later made generally available to employees of the Company, the Company shall provide Employee, during the Term, with the following Employee benefits: 7.1 Medical Insurance. Employee shall be eligible to participate in the medial insurance plan as is generally available to employees of the Company. The medical insurance premiums will be fully paid by the Company. 7.2 Vacation. Employee shall be entitled to two (2) weeks of paid vacation during each twelve-month period. Vacation days shall be taken at times mutually satisfactory to the Company and Employee. Unused vacation time shall not accrue from year to year. 7.3 Expense Reimbursement. Employee is authorized to incur reasonable business expenses in promoting the business of the Company, including expenses for travel, entertainment and similar items. The Company shall reimburse Employee for all such reasonable expenses upon the presentation by Employee of an itemized accounting and reasonable supporting documentation of such expenses. 7.4 Disability Insurance. Employee shall be eligible to participate in any disability insurance plan as is generally available to employees of the Company. The disability insurance premiums will be fully paid by the Company. 7.5 Director & Officer Insurance. Employee will be covered by Director & Officer Insurance that the Board of Directors deems adequate. 8. TERMINATION: Employee's employment is at-will, meaning that either Employee or Company may terminate the employment relationship at any time for any reason or no reason. In furtherance and not in limitations of the foregoing, if Employee brings materials that the Company's board of directors determines are pornographic or if Employee places or causes such materials to be placed on any Company computer then the Employee may be immediately terminated. 9. DEATH: If Employee dies during the Term of this Agreement, the Company shall promptly pay to the estate of Employee all compensation and bonuses due him upon the date of his death. The term of employment shall be deemed terminated on the date of death. 10. COVENANT NOT TO COMPETE: 10.1 Factual Background. The Company expects to invest considerable time, effort, and capital in enhancing the value and desirability of the skills of its officers and technical personnel. Both this investment and Employee's individual compensation reflect the Company's expectation of receiving a considerable return from the exclusive use of Employee's services and know-how in the future, free from any danger that the Company's competitors may attempt to induce Employee to leave the Company and wrongfully gain the benefit of the Company's investment. The partial restraint set forth in paragraph 10.2 hereof does not, and cannot, provide complete protection for the Company's investment, development efforts, product strategy, and proprietary information, but the Company believes that in combination with the other 2 provisions of this Agreement, it is the most fair and reasonable measure permitted under applicable law to protect the Company's interests, giving due regard to both Employee's interests and the interests of the Company. 10.2 Covenant Not to Compete. Employee agrees that for a period of two years (2) following the termination of Employee's employment, Employee may not compete with the Company in the United States or in such other markets that the Company targeted to enter during the Term of this Agreement by engaging in any business that is directly or indirectly engaged in the development and/or commercialization of products or processes involving broadband, wireless or such other businesses that the Company is engaged in during Employee's employment with the Company. In addition, during said 2 year period Employee agrees not to induce, entice, hire or attempt to hire or employ any employee of the Company. 10.3 Post Termination Employment. Employee acknowledges that (i) in the event this Agreement terminates for any reason, Employee will be able to earn a livelihood without violating the above restrictions; and (ii) that Employee's ability to earn a livelihood without violating such restrictions is a material condition to employment with the Company. 10.4 Injunctive Relief. Employee further acknowledges (i) that compliance with paragraph 10.2 above is necessary to protect the business and goodwill of Employer; and (ii) that a breach of those sections will irreparably and continually damage Employer for which money damages may not be adequate. Consequently, Employee agrees that, in event of a breach or a threat to breach any of these covenants, Employer shall be entitled to both (i) a preliminary or permanent injunction in order to prevent the continuation of such harm and (ii) money damages insofar as they can be determined. Nothing in this Agreement, however, shall be construed to prohibit Employer from also pursuing any other remedy, the parties having agreed that all remedies shall be cumulative. Without limiting the foregoing, as such money damages for the period of time during which Employee violates these covenants, Employer shall be entitled to recover the amount of fees, compensation or other remuneration earned by Employee from any such breach. 10.5 Scope of Restraint Post-Termination Competition. The parties have attempted to limit Employee's right to compete only to the extent necessary to protect the Company from unfair competition. The parties recognize, however, that reasonable people may differ in making such a determination. Consequently, the parties hereby agree that if the scope or enforceability of the restrictive covenant is in anyway disputed at any time, a court or trier fact may modify and enforce the covenant to the extent it believes to be reasonable under the circumstances existing at the time. 11. COVENANT REGARDING CONFIDENTIAL INFORMATION: 11.1 Confidential Information Defined. For purposes of this Agreement, "Confidential Information" is any information, including, but not limited to, technical or non-technical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, product plans, or lists of actual or potential customers or suppliers that: (1) derive economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from their disclosure or use and (2) are the subject of efforts that are reasonable under the circumstances to maintain their secrecy. 11.2 Restrictions on Use and Disclosure of Confidential Information. During the Term of this Agreement and for so long afterwards as the pertinent information or data remain Confidential Information, Employee covenants and agrees that, except as required by Employee's duties to the Company, he will not at any time, directly or indirectly, disclose to or use for the benefit of others, or appropriate for his own personal use, or cause to be used by others, any Confidential Information without first obtaining the written consent of the Company. 11.3 Return of Materials. Employee agrees that all records and other writing of Confidential Information prepared by Employee, or which come into his possession or control, or to which he has access, shall remain the exclusive property of the Company. Upon the request of the Company and, in any event, upon the termination of Employee's employment, Employee must return to the Company and leave at its disposal all memoranda, notes, records, drawings, manuals, computer programs, documentation, diskettes, and other documents or media pertaining to the business of the Company or Employee's specific duties for the Company, including all copies of such materials. Employee must also return to the Company and leave at its disposal all materials involving any Confidential Information of the Company. This paragraph 11.3 is intended to apply to all materials made or compiled by Employee, as well as to all materials furnished to Employee by anyone else in connection with Employee's employment. 3 12. MISCELLANEOUS: 12.1 Notices. Any notice or request required or permitted to be given hereunder shall be sufficient if in writing and delivered personally or sent by certified mail, return receipt requested, to the addressees given below or to any other address designated by either party by notice similarly given. Such notice shall be deemed to have been given upon the personal delivery or such mailing thereof, as the case may be. Notices to Company: FaradayFinancial, Inc. Attn: Frank J. Gillen 175 South Main Street, #1240 Salt Lake City, Utah 84111 Notices to Employee: Shauna Badger 549 West 4630 North Provo, Utah 84604 12.2 Effect of Waiver. The failure of either party to insist on strict compliance with any of the terms, covenants, or conditions of this Agreement by the other party shall not be deemed a waiver of that term, covenant, or condition, nor shall any waiver or relinquishment of any right or power at any one time or times be deemed a waiver or relinquishment of that right or power for all or any other times. 12.3 Severability. The covenants in this Agreement shall be construed as covenants independent of one another and as obligations distinct from any other contract between Employee and the Company. Any claim that Employee may have against the Company shall not constitute a defense to enforcement by the Company of this Agreement. Moreover, it is the desire and intent of the parties that the provisions of this Agreement shall be enforced to the fullest extent possible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any provision or portion of this Agreement shall be adjudicated to be invalid or unenforceable, this Agreement shall be deemed amended to delete from it the portion adjudicated to be invalid or unenforceable and the remaining provisions shall nevertheless continue in full force and effect without being impaired or invalidated in any way. 12.4 Entire Agreement; Modifications. This Agreement is the sole and entire agreement and understanding of the parties with respect to the arrangements herein and supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to the employment of Employee by the Company. No prior agreement, whether written or oral, shall be construed to change, amend, alter, repeal, or invalidate this Agreement. Any modification of this Agreement will be effective only if it is in writing and signed by Employee and the Company. 12.5 Voluntary Agreement. Employee represents and agrees that he has reviewed all aspects of this Agreement, that Employee has carefully read and fully understands all the provisions of this Agreement, that Employee is voluntarily entering into this Agreement, and that Employee he has had the opportunity to review any or all aspects of this Agreement with the legal advisor or advisors of Employee's choice before affixing his signature hereto. 12.6 The Company's Rules and Benefits. The parties acknowledge and agree that from time to time the Company may publish rules and regulations pertaining to employees, and may from time to time provide benefits to employees, including Employee, all of which except as hereinafter provided, shall become part of the terms and conditions of Employee's employment for so long as such rules or regulations are deemed applicable to Employee by the Company in its discretion. Provided, however, that in no case shall such rules, regulations or benefits, to the extent they conflict in any way with any of the terms or conditions of this Agreement, be considered to be a modification or waiver of any of the terms of this Agreement. In all cases of conflict, this Agreement shall prevail. 12.7 Construction. This Agreement shall not be construed against the party preparing it, and shall be construed without regard to the identity of the person who drafted it or the party who caused it to be drafted and shall be construed as if all parties had jointly prepared this Agreement and it shall be deemed their joint work product, and each and every provision of this Agreement shall be construed as though all the parties hereto participated equally in the drafting hereof; and any uncertainty or ambiguity shall not be interpreted against any one party. As a result of the foregoing, any rule of construction that a document is to be construed against the drafting party shall not be applicable. 4 12.8 Governing Law. This Agreement shall at all times be governed by, construed, interpreted and enforced in accordance with the laws of the State of Utah 12.9 Survival of Obligations. All covenants, agreements, representations, and warranties made herein shall survive the execution and delivery of this Agreement and related documents. The covenants in Section 4 and Sections 10 through 12 of this Agreement shall survive termination of this Agreement, regardless of who causes the termination and under what circumstances. 12.10 Specific Performance and Consent to Injunctive Relief. Irreparable harm should be presumed if Employee breaches any covenant in this Agreement. The faithful observance of all covenants in this Agreement is an essential condition to Employee's employment, and the Company is depending upon absolute compliance. Damages would probably be very difficult to ascertain if Employee breached any covenant in this Agreement. This Agreement is intended to protect the proprietary rights of the Company in many important ways. Even the threat of any misuse of the technology of the Company would be extremely harmful, since that technology is essential to the business of the Company. In light of these facts, Employee agrees that any court of competent jurisdiction should immediately enjoin any breach of this Agreement upon the request of the Company, and Employee specifically release the Company from the requirement of posting any bond in connection with temporary or interlocutory injunctive relief, to the extent permitted by law. 12.11 Related Parties. This Agreement shall inure to the benefit of, and be binding upon, the Company and its subsidiaries and its affiliates, together with their successors and assigns, and Employee, together with Employee's executor, administrator, personal representative, heirs, and legatees. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. Faraday Financial, Inc. By: /s/ Frank J. Gillen -------------------------------- Its: Chief Executive Officer EMPLOYEE: /s/ Shauna Badger ------------------------------------ 5 EX-21.1 12 ex21k033104.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 Schedule of Subsidiaries Name of Subsidiary State of Incorporation ------------------ ---------------------- Homenet Utah, Inc. Utah Home Marketing Group, Inc. Utah EX-31.1 13 ex311k033104.txt CEO CERTIFICATION REQUIRED UNDER SECTION 302 Exhibit 31.1 I, Frank J. Gillen, as Chief Executive Officer of the Company, certify that: 2. I have reviewed this report on Form 10-KSB of Faraday Financial, Inc. 3. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 4. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 5. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the small business issuer and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 6. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: June 29, 2004 /s/ Frank J. Gillen - -------------------------- Frank J. Gillen Chief Executive Officer EX-31.2 14 ex312k033104.txt CFO CERTIFICATION REQUIRED UNDER SECTION 302 Exhibit 31.2 I, Frank J. Gillen, as Chief Financial Officer of the Company, certify that: 1. I have reviewed this report on Form 10-KSB of Faraday Financial, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the small business issuer and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of small business issuer's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: June 29, 2004 /s/ Frank J. Gillen - ------------------------- Frank J. Gillen Chief Financial Officer EX-32.1 15 ex321k033104.txt CERTIFICATIONS REQUIRED UNDER SECTION 906 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Faraday Financial, Inc. (the "Company") on Form 10-KSB for the period ending March 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Frank J. Gillen, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Frank J. Gillen - ---------------------- Frank J. Gillen CEO and CFO June 29, 2004 -----END PRIVACY-ENHANCED MESSAGE-----