THIS DEBENTURE, AND THE SECURITIES INTO WHICH IT IS CONVERTIBLE (COLLECTIVELY,
THE "SECURITIES"), HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES
AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE. THE
SECURITIES ARE BEING OFFERED PURSUANT TO A SAFE HARBOR FROM REGISTRATION UNDER
REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"). THE SECURITIES ARE "RESTRICTED" AND MAY NOT BE OFFERED OR SOLD UNLESS
THE SECURITIES ARE REGISTERED UNDER THE ACT, PURSUANT TO REGULATION D OR
PURSUANT TO AVAILABLE EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF THE ACT
AND THE COMPANY WILL BE PROVIDED WITH OPINION OF COUNSEL OR OTHER SUCH
INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH EXEMPTIONS ARE
AVAILABLE. FURTHER HEDGING TRANSACTIONS INVOLVING THE SECURITIES MAY NOT BE MADE
EXCEPT IN COMPLIANCE WITH THE ACT.
COMPENSATION DEBENTURE
VIDEOLOCITY INTERNATIONAL INC.
5% Convertible Debenture
May 3, 2004
No. ___ $390,000
This Secured Debenture is issued by VIDEOLOCITY INTERNATIONAL INC., a
Nevada corporation (the "Company"), to CORNELL CAPITAL PARTNERS, LP (together
with its permitted successors and assigns, the "Holder") pursuant to exemptions
from registration under the Securities Act of 1933, as amended.
ARTICLE I.
Section 1.01 Principal and Interest. For value received, the Company
hereby promises to pay on May ___, 2007, to the order of the Holder in lawful
money of the United States of America and in immediately available funds the
principal sum of Three Hundred Ninety Thousand Dollars (US $390,000), together
with interest on the unpaid principal of this Debenture at the rate of five
percent (5%) per year (computed on the basis of a 365-day year and the actual
days elapsed) from the date of this Debenture until paid. At the Company's
option, the entire principal amount and all accrued interest shall be either (a)
paid to the Holder on the third (3rd) year anniversary from the date hereof or
(b) converted in accordance with Section 1.02 herein provided, however, that in
no event shall the Holder be entitled to convert this Debenture for a number of
shares of Common Stock in excess of that number of shares of Common Stock which,
upon giving effect to such conversion, would cause the aggregate number of
shares of Common Stock beneficially owned by the Holder and its affiliates to
exceed 4.99% of the outstanding shares of the Common Stock following such
conversion.
1
Section 1.02 Optional Conversion. The Holder is entitled, at its
option, to convert, and sell on the same day, at any time and from time to time,
until payment in full of this Debenture, plus accrued interest, into shares (the
"Conversion Shares") of the Company's common stock, par value $0.001 per share
("Common Stock"), at the price per share (the "Conversion Price") equal to the
lesser of (a) an amount equal to two hundred fifty percent (250%) of the closing
bid price of the Common Stock as listed on a Principal Market (as defined
herein), as quoted by Bloomberg L.P. (the "Closing Bid Price") as of the date
hereof, or (b) an amount equal to one hundred percent (100%) of the lowest
Closing Bid Price of the Company's Common Stock, for the three (3) trading days
immediately preceding the Conversion Date (as defined herein). As used herein,
"Principal Market" shall mean The National Association of Securities Dealers
Inc.'s Over-The-Counter Bulletin Board, Nasdaq SmallCap Market, or American
Stock Exchange. If the Common Stock is not traded on a Principal Market, the
Closing Bid Price shall mean, the reported Closing Bid Price for the Common
Stock, as furnished by the National Association of Securities Dealers, Inc., for
the applicable periods. No fraction of shares or scrip representing fractions of
shares will be issued on conversion, but the number of shares issuable shall be
rounded to the nearest whole share. To convert this Debenture, the Holder hereof
shall deliver written notice thereof, substantially in the form of Exhibit "A"
to this Debenture, with appropriate insertions (the "Conversion Notice"), to the
Company at its address as set forth herein. The date upon which the conversion
shall be effective (the "Conversion Date") shall be deemed to be the date set
forth in the Conversion Notice.
Section 1.03 Right of Redemption. The Company at its option shall have
the right to redeem for cash, with three (3) business days advance written
notice (the "Redemption Notice"), a portion of or all of the outstanding
principal sum under this Debenture. The redemption price shall be equal to one
hundred twenty percent (120%) multiplied by the portion of the principal sum
being redeemed, plus any accrued and unpaid interest.
Section 1.04 Reservation of Common Stock. The Company shall reserve and
keep available out of its authorized but unissued shares of Common Stock, solely
for the purpose of effecting the conversion of this Debenture, such number of
shares of Common Stock as shall from time to time be sufficient to effect such
conversion, based upon the Conversion Price. If at any time the Company does not
have a sufficient number of Conversion Shares authorized and available, then the
Company shall call and hold a special meeting of its stockholders within sixty
(60) days of that time for the sole purpose of increasing the number of
authorized shares of Common Stock. Management shall recommend to the
shareholders of the Company to vote in favor of increasing the number of
authorized shares of Common Stock. Management shall also vote all of its shares
of Common Stock in favor of increasing the number of authorized shares of Common
Stock.
Section 1.05 Registration Rights. The Company is obligated to register
the resale of the Conversion Shares under the Securities Act of 1933, as
amended, pursuant to the terms of a Registration Rights Agreement, between the
Company and the Holder of even date herewith (the "Registration Rights
Agreement").
2
Section 1.06 Interest Payments. The interest so payable will be paid at
the time of maturity or conversion to the person in whose name this Debenture is
registered. At the time such interest is payable, the Holder, in its sole
discretion, may elect to receive the interest in cash (via wire transfer or
certified funds) or in the form of Common Stock. In the event of default, as
described in Article III Section 3.01 hereunder, the Holder may elect that the
interest be paid in cash (via wire transfer or certified funds) or in the form
of Common Stock. If paid in the form of Common Stock, the amount of stock to be
issued will be calculated as follows: the value of the stock shall be the
Closing Bid Price on: (i) the date the interest payment is due; or (ii) if the
interest payment is not made when due, the date the interest payment is made. A
number of shares of Common Stock with a value equal to the amount of interest
due shall be issued. No fractional shares will be issued; therefore, in the
event that the value of the Common Stock per share does not equal the total
interest due, the Company will pay the balance in cash.
Section 1.07 Paying Agent and Registrar. Initially, the Company will
act as paying agent and registrar. The Company may change any paying agent,
registrar, or Company-registrar by giving the Holder not less than ten (10)
business days' written notice of its election to do so, specifying the name,
address, telephone number and facsimile number of the paying agent or registrar.
The Company may act in any such capacity.
ARTICLE II.
Section 2.01 Amendments and Waiver of Default. The Debenture may not be
amended without the written consent of the Holder. Notwithstanding the above,
without the consent of the Holder, the Debenture may be amended to cure any
ambiguity, defect or inconsistency, to provide for assumption of the Company
obligations to the Holder or to make any change that does not adversely affect
the rights of the Holder.
ARTICLE III.
Section 3.01 Events of Default. An Event of Default is defined as
follows: (a) failure by the Company to pay amounts due hereunder within fifteen
(15) days of the date of maturity of this Debenture; (b) failure by the Company
to comply with the terms of the Irrevocable Transfer Agent Instructions attached
to the Standby Equity Distribution Agreement of even date herewith entered into
between the Company and the Holder (the "Standby Equity Distribution
Agreement"); (c) failure by the Company's transfer agent to issue Common Stock
to the Holder within five (5) days of the Company's receipt of the attached
Notice of Conversion from Holder; (d) failure by the Company for ten (10) days
after notice to it to comply with any of its other agreements in the Debenture;
(e) events of bankruptcy or insolvency; (f) a breach by the Company of its
obligations under the Standby Equity Distribution Agreement or the Registration
Rights Agreement which is not cured by the Company within ten (10) days after
receipt of written notice thereof. Upon the occurrence of an Event of Default,
the Holder may, in its sole discretion, accelerate full repayment of all
debentures outstanding and accrued interest thereon or may, notwithstanding any
limitations contained in this Debenture and/or the Standby Equity Distribution
Agreement, convert all debentures outstanding and accrued interest thereon into
shares of Common Stock pursuant to Section 1.02 herein.
3
Section 3.02 Failure to Issue Unrestricted Common Stock. As indicated
in Article III Section 3.01, a breach by the Company of its obligations under
the Investor Registration Rights Agreement shall be deemed an Event of Default,
which if not cured within ten (10) days, shall entitle the Holder to accelerate
full repayment of all debentures outstanding and accrued interest thereon or,
notwithstanding any limitations contained in this Debenture and/or the Standby
Equity Distribution Agreement, to convert all debentures outstanding and accrued
interest thereon into shares of Common Stock pursuant to Section 1.02 herein.
The Company acknowledges that failure to honor a Notice of Conversion shall
cause irreparable harm to the Holder.
ARTICLE IV.
Section 4.01 Rights and Terms of Conversion. Commencing on the date six
(6) months after the date hereof, this Debenture, may be converted at any time
following the date of closing, into shares of Common Stock at a price equal to
the Conversion Price as described in Section 1.02 above.
Section 4.02 Re-issuance of Debenture. When the Holder elects to
convert a part of the Debenture, then the Company shall reissue a new Debenture
in the same form as this Debenture to reflect the new principal amount.
Section 4.03 Termination of Conversion Rights. The Holder's right to
convert the Debenture into the Common Stock in accordance with paragraph 4.01
shall terminate on the date that is the third (3rd) year anniversary from the
date hereof and this Debenture shall be automatically converted on that date in
accordance with the formula set forth in Section 4.01 hereof, and the
appropriate shares of Common Stock and amount of interest shall be issued to the
Holder.
ARTICLE V.
Section 5.01 Anti-dilution. In the event that the Company shall at any
time subdivide the outstanding shares of Common Stock, or shall issue a stock
dividend on the outstanding Common Stock, the Conversion Price in effect
immediately prior to such subdivision or the issuance of such dividend shall be
proportionately decreased, and in the event that the Company shall at any time
combine the outstanding shares of Common Stock, the Conversion Price in effect
immediately prior to such combination shall be proportionately increased,
effective at the close of business on the date of such subdivision, dividend or
combination as the case may be.
Section 5.02 Consent of Holder to Sell Capital Stock. Except for the
Standby Equity Distribution Agreement dated the date hereof between the Company
and Cornell Capital Partners, LP. so long as any of the principal of or interest
on this Debenture remains unpaid and unconverted, the Company shall not, without
the prior consent of the Holder, issue or sell (i) any Common Stock or Preferred
Stock without consideration or for a consideration per share less than its fair
market value determined immediately prior to its issuance, (ii) issue or sell
any Preferred Stock, warrant, option, right, contract, call, or other security
or instrument granting the holder thereof the right to acquire Common Stock
without consideration or for a consideration per share less than such Common
Stock's fair market value determined immediately prior to its issuance, (iii)
enter into any security instrument granting the holder a security interest in
any and all assets of the Company or (iv) file any registration statement on
Form S-8.
4
ARTICLE VI.
Section 6.01 Notice. Notices regarding this Debenture shall be sent to
the parties at the following addresses, unless a party notifies the other
parties, in writing, of a change of address:
If to the Company, to: Videolocity International Inc.
1762A Prospector Avenue
Park City, Utah 84060
Attention: Robert E. Holt
President
Telephone: 435-615-8338
Facsimile: 435-615-9779
With a copy to: Kirkpatrick & Lockhart LLP
201 South Biscayne Boulevard - Suite 2000
Miami, Florida 33131-2399
Attention: Clayton E. Parker, Esq.
Telephone: (305) 539-3300
Facsimile: (305) 358-7095
If to the Holder: Cornell Capital Partners, LP
101 Hudson Street, Suite 3606
Jersey City, New Jersey 07302
Telephone: (201) 985-8300
Facsimile: (201) 985-8266
With a copy to: Butler Gonzalez LLP
1416 Morris Avenue - Suite 207
Union, New Jersey 07083
Attention: David Gonzalez, Esq.
Telephone: (908) 810-8588
Facsimile: (908) 810-0973
Section 6.02 Governing Law. This Debenture shall be deemed to be made
under and shall be construed in accordance with the laws of the State of Nevada
without giving effect to the principals of conflict of laws thereof. Each of the
parties consents to the jurisdiction of the U.S. District Court sitting in the
District of the State of New Jersey or the state courts of the State of New
Jersey sitting in Hudson County, New Jersey in connection with any dispute
arising under this Debenture and hereby waives, to the maximum extent permitted
by law, any objection, including any objection based on forum non conveniens to
the bringing of any such proceeding in such jurisdictions.
5
Section 6.03 Severability. The invalidity of any of the provisions of
this Debenture shall not invalidate or otherwise affect any of the other
provisions of this Debenture, which shall remain in full force and effect.
Section 6.04 Entire Agreement and Amendments. This Debenture represents
the entire agreement between the parties hereto with respect to the subject
matter hereof and there are no representations, warranties or commitments,
except as set forth herein. This Debenture may be amended only by an instrument
in writing executed by the parties hereto.
Section 6.05 Counterparts. This Debenture may be executed in multiple
counterparts, each of which shall be an original, but all of which shall be
deemed to constitute on instrument.
IN WITNESS WHEREOF, with the intent to be legally bound hereby, the
Company as executed this Debenture as of the date first written above.
VIDEOLOCITY INTERNATIONAL INC.
By: /s/ Robert E. Holt
-----------------------------------
Name: Robert E. Holt
Title: President & Chief Executive Officer
6
A-1
EXHIBIT "A"
-----------
NOTICE OF CONVERSION
--------------------
(To be executed by the Holder in order to Convert the Note)
TO:
The undersigned hereby irrevocably elects to convert $ of the principal
amount of the above Note into Shares of Common Stock of Videolocity
International Inc. according to the conditions stated therein, as of the
Conversion Date written below.
Conversion Date: ____________________________________
Applicable Conversion Price: ____________________________________
Amount to be converted: $___________________________________
Amount of Debenture unconverted: $___________________________________
Conversion Price per share: $___________________________________
Number of shares of Common Stock to be
issued: ____________________________________
Please issue the shares of Common Stock
in the following name and to the
following address: ____________________________________
Issue to: ____________________________________
Address: ____________________________________
Authorized Signature: ____________________________________
Name: ____________________________________
Title: ____________________________________
Phone Number: ____________________________________
Broker DTC Participant Code: ____________________________________
Account Number: ____________________________________