LICENSE AGREEMENT
This License Agreement is made and entered into effective as of the
29th day of May 2001, by and between Videolocity Direct, Inc., a Nevada
corporation ("Video Direct"), and Merit Studios, Inc., a Delaware corporation
("Merit"), upon the following:
Premises
WHEREAS, Merit and Video Direct entered into that certain Amended and
Restated License Agreement (the "WormHole-Video License Agreement") dated as of
March 6, 2001, pertaining to the WormHole Video System, which agreement
superseded and replaced the license agreement previously entered into between
Merit and Videolocity, Inc. dated as of October 27, 2000; and
WHEREAS, Merit desires to license to Video Direct and Video Direct
desires to license from Merit all aspects and applications of Merit's "WormHole
Technology" other than the application previously licensed by Video Direct under
the WormHole-Video License Agreement, upon and subject to the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants to be
performed and benefits to be received hereunder, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
the parties, Merit and Video Direct agree as follows:
Agreement
1. Grant of License. Merit hereby grants Video Direct an exclusive
license for the period commencing as of May 29, 2001 and expiring at midnight on
May 28, 2011 to use, and to sublicense others to use, the WormHole Technology
(as defined herein) in any and all countries in the world and the universe. Such
license shall continue on a non-exclusive basis from May 29, 2011 until the
expiration or termination of this Agreement. The term "WormHole Technology"
shall mean Merit's proprietary data compression/representation technology, which
is more particularly described in exhibit A attached hereto and incorporated
herein by reference, and all applications thereof except the application of such
technology to compress and deliver video content, which application is the
subject of the WormHole-Video License Agreement. The term WormHole Technology
shall refer to Merit's proprietary WormHole Technology as the same exists on the
date of this Agreement and as the same may be modified, improved or enhanced
during the term of this Agreement and shall include the system as a whole and
each component thereof. Upon the expiration or earlier termination of this
Agreement, any license or sublicense for the WormHole Technology granted by
Video Direct to a third party during the term of this Agreement shall continue
in full force and effect in accordance with its terms, except that Merit shall
be entitled to receive any payments payable to Video Direct under such agreement
from and after the expiration or earlier termination of this Agreement.
2. Term. The term of this Agreement shall commence on the date hereof
and expire at midnight on May 28, 2021.
3. License Fees. Video Direct shall make the following payments to
Merit in the amounts and at the times indicated as payment for the license
granted to Video Direct hereunder:
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A. Payment Upon Execution. Video Direct shall pay Merit Two Hundred
Thousand Dollars (&2000.000) on the date of execution hereof, the receipt of
which is hereby acknoledged by Merit.
B. Advance Royalty Payments. Video Direct shall make the following
advance royalty payments to Merit on the dates indicated below. Such advance
royalty payments shall be in addition to the Royalties payable by Video Direct
to Merit under Section 3.C below
(i) One Hundred Fifty Thousand Dollars ($150,000) on or before August
1, 2001
(ii) Two Hundred Fifty thousand Dollars ($250,000) on or before the end
of each of the four (4) calendar quarters commencing with the calendar
quarter ending September 30, 2001 and continuing through and including
the calendar quarter ending June 30, 2002.
(iii) Five Hundred Thousand Dollars ($500,000) on or before the end of
each of the sixteen (16) calendar quarters commencing with the calendar
quarter ending September 30, 2002 and continuing through and including
the calendar quarter ending June 30, 2006.
(iv) One Million Dollars ($1,000,000) on or before the end of each of
the twenty (20) calendar quarters commencing with the calendar quarter
ending September 30, 2006 and continuing through and including the
calendar quarter ending June 30, 2011.
In the event Video Direct fails to make the minimum advance royalty
payments to Merit in the respective amounts and by the respective dates
indicated above, then Merit may, upon written notice to Video Direct,
modify the exclusive license granted to Video Direct pursuant to
Sections 1 of this Agreement so that it constitutes a non-exclusive
license, and from and after the date of such notice, Merit shall be
entitled to grant non-exclusive licenses to the WormHole Technology to
third parties. In such event, this Agreement shall continue in full
force and effect on the terms and conditions set forth herein except
that the license granted to Video Direct hereunder shall be
non-exclusive and there shall be no further requirement under this
section with respect to the payment of advance royalties by Video
Direct. Notwithstanding the foregoing, in the event Video Direct fails
to make the advance Royalty payments to Merit specified in
subparagraphs 3.B (i) and (ii) above by their respective due dates, and
if such default is not cured within thirty (30) days after written
notice of such default by Merit, then Merit may in its sole discretion
terminate this Agreement upon written notice of termination to Video
Direct.
C. Royalty Payments. Video Direct shall make the following royalty
payments to Merit (collectively referred to herein as the "Royalties").
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(i) Twenty percent (20%) of the Net Revenue (as defined herein)
received by Video Direct from its use and sublicense of the WormHole
Technology, except initial, up- front payments from the sale of
sublicenses, which are addressed in subparagraph (ii) below (the
"Revenue Royalty"). The Revenue Royalty shall be paid by Video Direct
to Merit on a monthly basis within 30 days following the end of the
month in which the Revenue Royalty was earned. Each payment of the
Revenue Royalty shall be accompanied by a statement setting forth the
data and information used to calculate the Revenue Royalty and showing
the manner of calculation. For purposes of this Agreement, "Net
Revenue" shall mean the revenue derived by Video Direct from its use or
sublicense of the WormHole Technology less any direct costs (not
including Video Direct's general and administrative expenses) incurred
by Video Direct in connection with the implementation or operation of
the WormHole Technology.
(ii) Forty Percent (40%) of the initial, up-front payments received by
Video Direct from the sale of sublicenses of the WormHole Technology to
sub licensees (the "Sublicense Royalty). Such Sublicense Royalty shall
be paid by Video Direct to Merit on a monthly basis within 30 days
following the end of the month in which the subject sublicense payments
are received by Video Direct.
4. Obligations of Merit.
(a) Merit shall complete development of the WormHol Technology so it is
subject to commercialization and is fully operational on or before
September 30, 2001, and is capable of reducing and/or compressing any
and all electronic data files of any size to a size of Two Hundred
(200) Kilobytes or smaller and then restoring such data files to their
original form and format with no errors or alterations. Merit warrants
that the WormHole Technology will continue to perform to such
specifications, and in accordance with the description of the WormHole
Technology attached hereto as Exhibit A, during the term of this
Agreement.
(b) Merit shall devote all its resources to completion of the WormHole
Technology and shall not undertake any other activities or projects
(other than completion of the WormHole Video System) until the WormHole
Technology has become fully operational.
(c) Merit shall train Video Direct's employees to use and employ the
WormHole Technology to properly compress/reduce and uncompress/restore
data files as necessary to provide on-going services to its customers.
(d) Merit shall make its management and technical personnel (including its
President, Michael John) available as may be reasonably necessary to
assist Video Direct in demonstrating and/or deploying the WormHole
Technology.
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(e) During the term of this Agreement, Merit shall use its commercially
reasonable efforts to upgrade and improve the WormHole Technology to
maintain its competitiveness in the data compression market.
(f) All payments received by Merit under this Agreement shall be applied
first to the reduction of Merit's outstanding debt, including debt to
related parties, and none of such payments shall be utilized to pay
compensation or dividends until such time as all Merit's indebtedness
has been paid and satisfied.
5. Obligations of Video Direct. Video Direct shall use its commercially
reasonable efforts to expeditiously commercialize and market the WormHole
Technology in as many market sectors and in as many geographical areas as
practicable.
6. Warranties of Merit. Merit warrants that it has good and marketable
title to the WormHole Technology with full right, power and authority to enter
into this Agreement and perform its obligations hereunder without the consent or
authorization of any third party, and that the WormHole Technology is not
subject to any liens, security interests or other encumbrances.
7. Security Interest/Escrow. Merit hereby grants Video Direct a
continuing security interest in the WormHole Technology to secure the
performance of its obligations under this Agreement. During the term of this
Agreement, Merit: (a) shall maintain the first priority of Video Direct's lien
and security interest in the WormHole Technology; (b) shall defend and maintain
title to the WormHole Technology; (c) shall not create, incur, assume or suffer
to exist any mortgage, deed of trust, pledge, lien, security interest, charge or
encumbrance on the WormHole Technology; (d) shall immediately give notice to
Video Direct of any claim arising in connection with the WormHole Technology, or
of any condition or event which constitutes, or, with notice or the lapse of
time or both would constitute, a default by Merit in its material obligations
under this Agreement; (e) shall comply, and cause all activities with respect to
the business of Merit to comply, with all applicable laws, statutes, rules,
regulations, ordinances, decrees, judgments and orders; and (f) shall not move
the WormHole Technology from its current location at the current executive
offices of Merit in Las Vegas, Nevada without twenty (20) days advance written
notice to Video Direct. Merit shall not sell, assign, convey or otherwise
transfer, or suffer or permit the sale, assignment, conveyance or other transfer
of any of the WormHole Technology or any interest therein except those that are
specifically made subject and subordinate to this Agreement and the rights of
Video Direct hereunder. Merit shall execute and deliver such further documents
(including appropriate UCC-1 filings) and do such other acts and things as Video
Direct may reasonably request in order to effectuate the purposes of this
Agreement.
Within sixty (60) days of the date of this Agreement, Merit will
deliver to SourceFile or another escrow agent specializing in the escrow of
intellectual property chosen by Merit (and which is reasonably acceptable to
Video Direct), to hold in escrow: (i) one copy of each software program utilized
in connection with the WormHole Technology in machine readable form, including
source code; and (ii) one copy of any documentation, instruction manuals and
similar items for each such software program and with respect to any other
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intellectual property, proprietary information or aspect of the WormHole
Technology required to operate the same at peak capacity and efficiency (the
"Escrow Materials"). The escrow agent's fee shall be paid by Video Direct. The
escrow agreement shall provide that in the event Merit: fails to perform its
material obligations under this Agreement, and such failure continues for thirty
(30) days after notice from Video Direct (unless such failure cannot reasonably
be cured within thirty (30) days and Merit has begun good faith efforts to
resolve such failure); Merit makes a general assignment for the benefit of
creditors, suffers or permits the appointment of a receiver for its business or
assets, files, or has filed against it, an action under any state insolvency or
similar law for the purpose of seeking its bankruptcy, reorganization, or
liquidation, which action is not discharged within sixty (60) days of such
filing; enters an order for relief under the Bankruptcy Code, or has its
business affairs wound up or liquidated, voluntarily or involuntarily; or Merit
ceases business operations for any other reason whatsoever; upon delivery by
Video Direct of a certificate signed by its president certifying the occurrence
of one of the foregoing events and providing evidence of the same, the escrow
agent shall immediately report such delivery to Merit. Merit shall have ten (10)
business days to respond to such certificate. If Merit agrees with the request
for release of the Escrow Materials or fails to respond within the ten (10)
business day period, the Escrow Materials will be delivered to Video Direct,
together with a non-exclusive license to use the Escrow Materials as necessary
to effect the terms and conditions of this Agreement. If Merit disagrees with
the reasons stated for the release of the Escrow Materials, Merit shall set
forth in writing the reasons why its disagrees and shall provide copies of such
explanation to the escrow agent and Video Direct, and the escrow agent shall
promptly commence an expedited arbitration proceeding under the rules of the
American Arbitration Association for a determination as to whether or not (A)
the reason for release is accurate, and (B) the Escrow Materials should be
released to Video Direct. The costs of arbitration, including reasonable
attorney's fees, incurred by the prevailing party shall be paid by the
non-prevailing party. Notwithstanding any release of the Escrow Materials to
Video Direct, the terms and conditions of this Agreement shall remain in full
force and effect.
8. Audit Rights. Video Direct agrees to allow an independent certified public
accountant selected by Merit and reasonably acceptable to Video Direct, which
accountants shall not be compensated on a contingency basis and shall be bound
to keep all information confidential except as necessary to disclose
discrepancies to Merit, to audit and analyze relevant accounting records of
Video Direct to ensure compliance with all terms of this Agreement. Any such
audit shall be permitted within thirty (30) days of Video Direct's receipt from
Merit of a written request to audit, during normal business hours, at a time
mutually agreed upon. The cost of such an audit shall be borne by Merit unless a
material discrepancy is found, in which case the cost of the audit shall be
borne by Video Direct. A discrepancy shall be deemed material if it involves a
payment or adjustment of more than five percent (5%) of the amount actually due
from Video Direct in any given quarter. Audits shall occur no more frequently
than once per calendar year and shall not interfere unreasonably with Video
Direct's business activities and shall be conducted in Video Direct's facilities
during normal business hours on reasonable notice. An audit may cover any
period; provided that: (i) the period has not been previously audited; and (ii)
the period under audit is within a two-year period immediately preceding the
commencement of the audit. Video Direct shall promptly reimburse Merit for the
amount of any discrepancy arising out of such audit, which indicates that Merit
is owed amounts hereunder as well as the costs of the audit, if applicable, as
provided above.
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9. Scope of License. The exclusive license granted in this Agreement
shall be exclusive both as to Video Direct acting in its own name or for its own
account, and as to any third parties that may be licensed or otherwise acting
under authority of Video Direct. Specifically, but not by way of limitation of
the foregoing, Merit agrees that as long as the license granted to Video Direct
under this Agreement is exclusive, Merit will not in its own name or for its own
account, nor will it authorize any third party, to use, sell, lease, license or
otherwise market or sell the WormHole Technology anywhere in the world.
10. Patents, Trademarks Etc. Merit agrees to cooperate with Video
Direct in taking any steps the parties believe to be necessary or desirable to
protect Merits ownership of the WormHole Technology, including the filing of
patents and/or trademark applications.
11. Indemnification. Each party (the "Indemnifying Party") shall
defend, indemnify and hold harmless the other party (the "Indemnified Party")
and its agents, officers, board members and employees from and against any and
all claims, damages, losses and expenses (including reasonable attorney's fees)
for claims caused by (i) violation by the Indemnifying Party of any state,
federal or other governmental license or regulations, and (ii) violation by the
Indemnifying Party of any third party proprietary rights (including without
limitation, patent, copyright, trade secret and trademark rights); and (iii)
damages to property, injury or death to persons or for any other damage arising
due to the active or passive negligence of the indemnifying party.
12. Infringement. Merit represents and warrants that it is not aware of
any patent, copyright, trade secret or other property right of any third party
that would be infringed or violated by the development, manufacture, use,
license or sale of the WormHole Technology. In the event that any such
infringement or violation is alleged by any third party against Video Direct,
Merit agrees to indemnify and hold Video Direct harmless from and against all
damages, claims and liabilities arising in connection therewith and Video Direct
agrees to cooperate with Merit in the defense of such alleged infringement or
violation. Video Direct shall promptly notify Merit of any such claim of
infringement or violation. Video Direct shall refrain from making any admission
of liability or from settling such claim without the prior written consent of
Merit.
Merit shall promptly and decisively assert its patent or other
intellectual property rights against any third party infringer who is making,
using or selling a device that infringes on any of the intellectual property
rights pertaining to the WormHole Technology. Video Direct shall promptly notify
Merit of any such infringing activity of which it becomes aware.
13. Termination. This Agreement may be terminated only:
(a) By one party if the other party should be in default in any
material term or provision this Agreement (which term or provision does
not specify a remedy upon such default), and such defaulting party has
failed to cure such default within thirty (30) days following written
notice of such default from the non-defaulting party;
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(b) By one party, if the other party: makes a general assignment for
the benefit of creditors; suffers or permits the appointment of a
receiver for its business or assets; files, or has filed against it, an
action under any state insolvency or similar law for the purpose of
seeking its bankruptcy, reorganization, or liquidation, which action is
not discharged within sixty (60) days of such filing; enters an order
for relief under the Bankruptcy Code; or has its business affairs wound
up or liquidated, voluntarily or involuntarily.
(c) By Merit in the manner provided in Section 2.B of this Agreement.
The parties may exercise their rights to terminate under this Section 13 by
specifying in a written notice to the other party the nature and extent of the
other party's default(s) and by specifying a termination date, which shall be
not less than ten (10) days from the date of such notice (which ten days shall
be in addition to the applicable cure period).
14. Confidentiality. Confidential Information means all proprietary
data, concepts, projections, strategies, client lists, marketing plans, designs,
processes, methods of operation, innovations, and other information pertaining
to the business operations and other activities of Merit, on the one hand, and
Video Direct and its affiliated companies on the other hand. Each party shall,
during the term of this Agreement use the Confidential Information disclosed or
provided by the other party, whether orally, written, by demonstration, in
models or otherwise, only as permitted under this Agreement and shall maintain
all such Confidential Information in confidence and shall not disclose or
divulge such Confidential Information to any third party or to any of its own
personnel not having a need to know such information, provided that the parties
have informed their respective personnel of the parties' obligations under this
Section 13, and provided further that each third party to whom such disclosure
is made shall have entered into a non-disclosure agreement the terms of which
require such third party to maintain the confidentiality of the Confidential
Information. Notwithstanding the foregoing, a party shall not be liable for
disclosure of any such Confidential Information which:
(a) can be demonstrated by reasonable documentary evidence to have been
in the possession of such party prior to receipt from the other party, provided
that the source of such information was not known to the receiving party to be
bound by a confidentiality agreement with or other contractual or fiduciary
obligation of confidentiality to the delivering party or any other person with
respect to such information;
(b) is or becomes part of the public domain other than through an act
or omission attributable to employees or agents of the receiving party; or
(c) is or is made available to the receiving party by a third party
unaffiliated with the delivering party and which has no obligation to the
delivering party in respect thereof.
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Upon the termination of this Agreement, each party agrees to promptly return to
the other all Confidential Information provided by the other party hereunder,
and all copies thereof, in its possession.
15. Notices. Any notice, consent, approval, request, authorization,
direction or other communication under this Agreement ("Notice") that is
required to be given in writing will be deemed to have been delivered and given
for all purposes (i) on the delivery date if delivered by confirmed facsimile;
(ii) on the delivery date if delivered personally to the party to whom the same
is directed; (iii) one business day after deposit with a commercial overnight
carrier, with written verification of receipt; or (iv) five business days after
the mailing date, whether or not actually received, if sent by
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U.S. mail, return receipt requested, postage and charges prepaid, or any other
means of rapid mail delivery for which a receipt is available. Such notices
shall be addressed as follows:
If to Merit: Michael John
President
Merit Studios, Inc.
1930 Village Center Circle
PMB #402, Suite 3
Las Vegas, Nevada 89134
If to Video Direct: George Norman
Chairman
Videolocity Direct, Inc.
358 South 700 East, #B604
Salt Lake City, Utah 84102
or at such other address as any of the parties hereto may specify by notice to
the other parties hereto in accordance with this Section 15.
16. Publicity. The parties shall issue a joint press release in
mutually acceptable form announcing their execution of this Agreement.
Thereafter, neither party shall issue any press release, file any report or make
any other public communication that includes the name or describes the
activities of the other party without first providing the other party with a
copy of any such proposed release, filing or communication and providing such
party with an adequate opportunity to comment thereon.
17. Assignment. None of the rights or obligations under this Agreement
shall be assignable by either party without the prior written consent of the
other party, which consent shall not be unreasonably withheld.
18. No Partnership. No agency, partnership, joint venture, or
employment is created as a result of this Agreement and neither party nor its
agents shall have any authority of any kind to bind the other party in any
respect whatsoever.
19. Governing Law. This Agreement shall be deemed to have been entered
into, and shall be construed and enforced in accordance with the laws of the
State of Utah.
20. Expenses of Legal Proceedings. If any action, suit or proceeding is
brought by a party with respect to a matter or matters governed by this
Agreement, all costs and expenses of the prevailing party incurred in connection
with such proceeding, including reasonable attorneys' fees, shall be paid by the
nonprevailing party.
21. Severability. If any provision of this Agreement is or is deemed
invalid, illegal or unenforceable in any jurisdiction, such provision shall be
deemed amended to conform to applicable laws so as to be valid and enforceable
or, if it cannot be so amended without materially altering the intention of the
parties, it shall be stricken and the remainder of this Agreement shall remain
in full force and effect.
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22. Waiver. No waiver of any right under this Agreement shall be
effective unless contained in a writing signed by the party charged with such
waiver, and no waiver of any right arising from any breach or failure to perform
shall be deemed to be a waiver of any future breach or failure or of any other
right arising under this Agreement.
23. Section Headings. The headings of the sections contained herein are
for convenience only and are not deemed to limit or construe the contents
thereof.
24. Authorization/No Conflict. Each person signing this Agreement on
behalf of the corporate party represents and warrants that he or she is a duly
authorized and acting officer of the corporation on whose behalf he or she is
signing, that the corporation has full power and authority to execute and enter
into this Agreement, and that this Agreement has been duly and validly
authorized and approved by the board of directors of the corporation in
accordance with its charter, governing instruments and the provisions of
applicable law. Each corporate party warrants that the execution, delivery and
performance of this Agreement by it will not violate any provision of its
charter, bylaws or agreements governing it, or any applicable state or federal
law, statute, rule, regulation, ordinance, decree, judgment or order, and will
not conflict with or result in any breach of any provision of, or constitute a
default under, or result in the imposition of any lien or charge upon, any
assets of such party, or result in the acceleration of any obligation under the
terms of any agreement or document binding upon such party.
25. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter hereof, and
supersedes any and all prior agreements, understandings, promises and
representations made by either party to the other concerning the subject matter
hereof. This Agreement may not be released, discharged, amended or modified in
any manner except by an instrument in writing signed by duly authorized
representatives of both parties hereto.
26. Binding Effect. The rights and obligations of the parties under
this Agreement shall inure to the benefit of and shall bind the respective legal
representatives, successors and assigns of the parties.
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IN WITNESS HEREOF, Merit and Video Direct have caused this License
Agreement to be duly executed as of the date first written above.
Merit: Merit Studios, Inc.
A Delaware Corporation
By: /s/ Michael Jonh
--------------------
Michael John
President
Video Direct: Videolocity Direct, Inc.
A Nevada Corporation
By: /s/ George Norman
---------------------
George Norman
Chairman
Acknowledged and agreed to this 29th day of May, 2001.
By: /s/ Michael John
--------------------
Michael John,
an individual and the
inventor of the Worm
Hole Technology
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