LICENSE AND ROYALTY AGREEMENT THIS AGREEMENT, made and entered into this 6th day of April, 2000, by and between Richard L. Ballard and Janet J. Pettitt, husband and wife, (referred to herein as "Ballard"), and Knowledge Foundations, Inc., a Delaware corporation ("KFI"). WHEREAS, Ballard has developed technology, including computer software, related to knowledge engineering, which Ballard has named the Mark I, Mark II and Mark III Technology (collectively "Mark X"), and owns copyrights, confidential information, trade secrets, and proprietary know-how relating to such technology; and WHEREAS, Ballard seeks the expanded development and mass marketing of this technology as a commercial standard for knowledge capture, storage, and use; and WHEREAS, KFI desires an exclusive license under Ballard's Mark X technology for use in software implementations and Ballard is willing to grant such a license. NOW, THEREFORE, in consideration of the mutual covenants, terms, conditions and provisions set forth herein, the parties agree as follows: 1. DEFINITIONS 1.1. "Mark X Technology" shall mean all confidential or proprietary information, trade secrets and know how relating to the Mark X technology as such technology is further described on Exhibit A to this Agreement. The Mark X Technology is sometimes referred to herein as the "Licensed Technology"). 1.2. "Licensed Rights" means all rights under any patent, copyright, confidential or proprietary information, trade secrets and know-how relating to the Mark X Technology, and includes the Licensed Technology. 1.3. "Licensed Tool(s)" shall include coding systems, proprietary file systems, computer software program, communications protocols, development methodologies, and documentation that encompass or incorporate or are based on any of the Mark X Technology, but do not include software products, and services that result from "Authorized Use" of the Licensed Tools. Licensed Tools specifically excludes hardware implementations of the Mark X Technology. 1.4. "Authorized Use" refers to those activities and Licensed Rights granted by KFI under this Agreement to everyone who purchases or sub-licenses a Licensed Tool. 1.5. "Net Sales" means the gross amounts received by KFI worldwide, from the sales, license or disposal of Licensed Tools, less commissions, credit for returns, customary trade discounts, deductions for transportation charges, and taxes and duties directly imposed on the sale. Except for customary trade discounts, should KFI sell, rent or dispose of any Licensed Tool in a non arm's-length transaction, the Net Sales shall be computed based on proceeds from sales of a similar product in an arms-length transaction. 1.6. "Reasonable Effort" means a reasonable program of supporting technology improvements and marketing that expands industry adoptions, installed base, and commercial use of the Mark X Technology. 1.7. "Improvement(s)" shall mean inventions, modifications, adaptations or improvements, which relate to or are based on the Mark X Technology. 1.8. "Sublicensee" shall mean a person or entity to whom KFI has granted the right under the Licensed Technology to develop, manufacture, have manufactured, use, market and/or sell the Licensed Tools. 1.9. "Sublicense Income" shall mean the gross amount (net of tax withholdings for taxes which KFI is obligated to pay) received by KFI from Sublicensees for or on account of sublicenses of any of the rights granted KFI hereunder and the sale of Licensed Tools, including royalties, license fees, milestone payments, option fees and other amounts paid or other non-monetary financial benefit provided to KFI by Sublicensees. Sublicensee Income shall not include amounts received by KFI from a Sublicensee for an equity investment in KFI. 2. GRANT OF LICENSE 2.1. Exclusive License. Ballard hereby grants to KFI, subject to the conditions set forth in this Agreement, an exclusive transferable license under the Licensed Rights to make, have made, use, market, import, have imported, lease, sell, distribute, offer for sale, or otherwise dispose of Licensed Tools throughout the world, including the right to make copes of, make derivative works based on, and distribute any copyrighted works within the Mark X Technology. 2.2. Sublicense. KFI shall have the right to grant sublicenses to third parties, subject to the terms of this Agreement. 2.3. Reservation of Rights. Ballard expressly reserves all rights not granted to KFI in this Agreement for his own purposes. 3. CONSIDERATION 3.1. Royalty Payments. Commencing on the date of this Agreement, KFI shall pay to Ballard a royalty of two percent (2%) of Net Sales of the Licensed Tools in the manner described in Article 5. If a Licensed Tool is sold or otherwise disposed of by any Sublicensee of KFI, KFI shall pay to Ballard a royalty of 5% of all Sublicensee Income for sublicenses of any of the Licensed Technology. 3.2. Price List. KFI shall maintain a Board of Director's approved discernable price list of all Licensed Tools. Such listed prices, or other price actually obtained if higher, shall act as the basis for calculation of the royalty payable to Ballard. For a bundled product being delivered to KFI's customer without the specific pricing of Licensed Tools to the customer, the approved price list shall be the royalty base for the Licensed Tools delivered to customers. No more than one royalty payment shall be due with respect to a sale of a particular Licensed Tool. 3.3. Royalty Cap. The royalties paid by KFI to Ballard shall be payable until Ballard has received $50,000,000.00 at which time all royalties and other payments to Ballard pursuant to this Agreement shall terminate. 4. COMMITMENTS OF KFI. KFI agrees to use its reasonable efforts to achieve the development and commercialization of the Licensed Technology. 5. ACCOUNTING 5.1. Quarterly Report. Within forty-five days (45) after the end of each calendar quarter, KFI shall submit to Ballard a written report identifying the software tools, products, and components that shall be pertinent to a royalty accounting hereunder, stating the number sold or otherwise disposed of in the calendar quarter, the gross billing price for each, all pertinent deductions, and the amount of NET SALES during the quarter. Ballard agrees to hold all information in such royalty reports in confidence pursuant to the provisions of Section 9. 5.2. Quarterly Payment. Payment of the royalties shown to be due shall accompany each quarterly report. 5.3. Maintenance of Records. KFI shall keep records in sufficient detail to enable the royalties payable by KFI to be determined and verified. Records for each quarter shall be retained by KFI for a period of not less than three (3) years after the end of the fiscal year containing that quarter. 5.4. Audits. Upon reasonable notice and during regular business hours, KFI shall make available the records referred to in Section 5.3 for audit by an independent accountant acceptable to KFI to verify the accuracy of the reports and royalties provided to Ballard. If any such audit discloses an underpayment of royalties of more than 3% in any year, such audit shall be at the expense of KFI. Otherwise such audit shall be at the expense of Ballard. Audits shall occur no more frequently than once each calendar year. 6. OWNERSHIP 6.1. Licensed Rights. KFI acknowledges that Ballard is the sole owner of the Licensed Rights. Except as provided in this Agreement, KFI agrees not to take any action challenging or opposing, on any grounds whatsoever, Ballard's ownership of the Licensed Rights, or the validity thereof. 6.2. Improvements. Any Improvements and derivative works made by KFI, to or based on the Mark X Technology, whether or not patented or patentable, shall be the property of KFI and KFI shall be entitled to pursue intellectual property protection for such improvements, and no additional royalty shall be payable to Ballard for the Improvement portion of a Licensed Tool. Ballard agrees not to take any action challenging or opposing, on any grounds whatsoever, KFI's ownership of such Improvements or derivative works, or the validity of intellectual property rights therein. 6.3. New Inventions of Ballard: For new inventions or technology that relate to the Licensed Technology that were developed by Ballard (i) during his employment with KFI on Ballard's own time, without using KFI's equipment, supplies, facilities or trade secret information, or (ii) within two (2) years after Ballard's employment with KFI terminates, KFI shall have a right of first offer for a license under such new inventions. Failure of KFI to respond to a request from Ballard for an offer to pursue a license under any such new invention within 90 days of receipt of written disclosure from Ballard to KFI of such new invention, shall be deemed denial of such right of offer by KFI, and Ballard may pursue such technology without obligation to KFI. 7. TERM AND TERMINATION 7.1. Term. The term of the license granted hereunder shall commence as of the date of this Agreement and shall remain in force until terminated in accordance with the provisions of this Agreement. 7.2. Termination by KFI. KFI shall have the right to terminate this Agreement upon written notice delivered to Ballard. The effective date of termination shall be the end of the quarter in which notice was delivered, whereupon KFI shall be relieved of all further obligations under this Agreement and all rights granted to KFI under this Agreement shall be canceled and revert to Ballard. 7.3. Termination by Ballard; Conversion to Non-Exclusive License. 7.3.1. Should KFI fail to perform any material covenant of this Agreement on its part to be performed, then upon written notice of such failure from Ballard, KFI shall have thirty (30) days from the date of such notice to correct a breach which relates to the timely payment of funds to Ballard, and shall have ninety (90) days from the date of such notice to correct any other breach, and upon the failure of KFI to do so, Ballard may terminate this Agreement upon ten (10) days further written notice. 7.3.2. Should KFI fail to commence sales of Licensed Tools within three (3) years from the date of this Agreement, Ballard shall have the option to convert the license hereunder to a non-exclusive license upon sixty (60) days prior written notice to KFI. 7.3.3. In the event of a Loss of Founder Control- KFI's continued commitment to the development, mass marketing, and commercial acceptance of this technology will be assessed annually, given the failure of KFI to meet either of the following milestones, Ballard shall have the option to convert the license hereunder to a non-exclusive license upon sixty (60) days prior written notice: MILESTONES: Annual growth in sales of Licensed Tools > 10 % Annual Sales of Licensed Tools > 150,000,000 by 2008. For purposes of this Section 7.3.3, a Loss of-Founder Control shall mean any transaction or combination of events that cause the total combined voting power of KFI's founders to fall below 50% of the outstanding securities immediately following such transaction or events. 7.4. Rights After Termination. No termination of this Agreement shall affect the rights of Ballard to any royalties due and owing or to statements of account to and including the date of termination. Upon termination, all rights granted to KFI in this Agreement, shall revert to Ballard. Notwithstanding anything herein to the contrary, upon KFI's failure to meet the reasonable efforts requirements of Section 4, KFI shall maintain a non- exclusive license to the Licensed Technology., but shall not receive a license to new Improvements. Termination of this Agreement for any reason shall not release any party hereto from any liability which, at the time of such termination, has already accrued to the other party or which is attributable to a period prior to such termination, nor preclude either party from pursuing any rights and remedies it may have hereunder or at law or in equity which accrued or are based upon any event occurring prior to such termination. The rights provided for in this Section 7.4 shall be in addition and without prejudice to any other rights which the parties may have with respect to any breach or violations of the provisions of this Agreement. In the event that the license granted to KFI under this Agreement is terminated, any granted Sublicenses shall remain in full force and effect, provided that the Sublicensee is not then in breach of its sublicense agreement, in which case Ballard and Sublicense shall enter into appropriate agreements or amendments. 8. REPRESENTATIONS AND WARRANTIES 8.1. Representations and Warranties of Ballard. Ballard represents, warrants and covenants to KFI as follows: (a) Ballard has the full power and authority to execute and deliver this Agreement and to perform his obligations hereunder. This Agreement constitutes the valid and legally binding obligation of Ballard, enforceable in accordance with its terms and conditions. Ballard need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by this Agreement. (b) Ballard has heretofore developed the Licensed Technology and owns the Licensed Technology free and clear of all liens, claims and encumbrances. (c) Except for existing licenses which have been disclosed to KFI, the license granted to KFI under this Agreement is the only license granted with respect to the Licensed Technology, and during the term of this Agreement Ballard shall not grant any third party rights inconsistent with the rights granted KFI herein, and Ballard has the right to grant the rights and licenses granted herein. (d) There are no pending, and to the knowledge of Ballard as of the Effective Date, any threatened, actions, suits, investigations, claims or proceedings in any way relating to the Licensed Technology. 8.2. Representations and Warranties of KFI. KFI represents, warrants and covenants to Ballard that: (a) KFI is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware having full corporate power to conduct its business as presently conducted, and to enter into and consummate the transactions contemplated by this Agreement. (b) The execution, delivery and performance under this Agreement by KFI have been duly authorized by all required corporate action, do not constitute a breach, default or violation of any of the provisions of KFI's articles of incorporation, bylaws or other charter documents, or any indenture, agreement, contract, order, law or regulation to which it may be a party or by the terms of which it may be bound. 9. CONFIDENTIALITY 9.1. Confidential Information. . Except as expressly provided herein, or as agreed by the Board of Directors of KFI of which Ballard is a member, the parties agree that, for the term of this Agreement and for five (5) years thereafter, the receiving party shall keep completely confidential and shall not publish or otherwise disclose and shall not use for any purpose except for the purposes contemplated by this Agreement any Confidential Information furnished to it by the disclosing party hereto pursuant to this Agreement, except to the extent that it can be established by the receiving party by competent proof that such Confidential Information: (a) was already known to the receiving party, other than under an obligation of confidentiality, at the time of disclosure; (b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving party; (c) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving party in breach of this Agreement; (d) was independently developed by the receiving party as demonstrated by documented evidence prepared contemporaneously with such independent development; or (e) was subsequently lawfully disclosed to the receiving party by a person other than a party hereto. Each party hereto may use or disclose information disclosed to it by the other party to the extent such use or disclosure is reasonably necessary in filing or prosecuting patent applications, prosecuting or defending litigation, complying with applicable governmental regulations or otherwise submitting information to tax or other governmental authorities, or making a permitted sublicense or otherwise exercising its rights hereunder, provided that if a party is required to make any such disclosure of another party's Confidential Information, other than pursuant to a confidentiality agreement, it will give reasonable advance notice to the latter party of such disclosure and, save to the extent inappropriate in the case of patent applications or compliance with federal and state securities laws, will use its best efforts to secure confidential treatment of such information prior to its disclosure (whether through protective orders or otherwise.) As used herein, "Confidential Information" shall mean (i) any proprietary or confidential information or material in tangible form disclosed hereunder that is marked as "confidential" at the time it is delivered to the receiving party, and/or (ii) any written reports furnished by either party to the other pursuant to the terms of this Agreement. 10. ENFORCEMENT OF LICENSED RIGHTS 10.1. Notice. Each party shall promptly give the other party written notice of any apparent infringement of any of the Licensed Rights of which such party becomes aware. 10.2. Legal Action. KFI shall have the first right, but not the obligation, to bring any legal action with respect to any apparent infringement, at KFI's own expense and for its own benefit. In such event, Ballard agrees to cooperate with KFI and to join in such action as a party plaintiff if requested to do so by KFI, and at KFI'S reasonable request, to give KFI all needed information, assistance and authority to file and prosecute such suit; provided that KFI shall reimburse Ballard for all verified out-of-pocket expenses incurred by him in providing such assistance, including attorney's fees, expenses and expert witness fees. To ensure that no rights of Ballard are compromised in any such action, KFI shall not settle any such claim, or enter into any settlement agreement that admits that any third party product does not infringe the Licensed Rights or that any of the Licensed Rights is invalid or unenforceable, without Ballard's prior written consent, which consent shall not be unreasonable withheld. If there is a recovery in any such action, after recovery of all direct out of pocket expenses incurred by KFI and Ballard in connection with any such legal action, KFI shall pay Ballard an amount of monies received from any alleged infringer equivalent to royalties which Ballard would have received under this Agreement, if such alleged infringer had been a Sublicensee of KFI. 11. INDEMNIFICATION 11.1. Indemnification by KFI. KFI shall indemnify and hold Ballard harmless from and against all losses, claims and damages arising out of or based upon the sale of the Licensed Products by KFI. If a claim is made by any third party against Ballard and Ballard intends to seek indemnification from KFI with respect to such claim, (i) Ballard shall promptly notify KFI of such claim, and (ii) if KFI acknowledges such right to indemnification, KFI shall have sole control of the defense and all related settlement negotiations. 11.2. Indemnification by Ballard. Ballard shall indemnify and hold KFI harmless from and against all losses, claims and damages to the extent that such loss, claim or damage arises out of or is based upon the breach of the representations and warranties granted by Ballard in Section 8.1. If a claim is made by any third party against KFI and KFI intends to seek indemnification from Ballard with respect to such claim, (i) KFI shall promptly notify Ballard of such claim, and (ii) if Ballard acknowledges such right to indemnification, Ballard shall have sole control of the defense and all related settlement negotiations. 12. MISCELLANEOUS PROVISIONS 12.1. Prior Customer Projects. KFI may utilize prior customer projects for marketing referenceable deployments of the Mark X Technology. 12.2. Successors And Assigns. This Agreement shall be binding upon and inure to the benefit of the parties named herein and their respective successors and permitted assigns, including, without limitation, any corporation which is surviving corporation in the event of a merger involving KFI. 12.3. Waiver. Any failure by either party to enforce at any time any term or condition of this Agreement shall not be considered a waiver of that party's right thereafter to enforce each and every term and condition of this Agreement. 12.4. Patent Marking. If Ballard obtains any patents, on the Mark X Technology, KFI agrees to mark each Licensed Tool with a patent notice in compliance with applicable statutory requirements. 12.5. Entire Agreement. This Agreement and the exhibits and schedules referred to herein sets forth the entire intent of and understanding between the parties with respect to the subject matter of this Agreement and supersedes all prior discussions, negotiations, and agreements between them. Neither party shall be bound by any agreement or representation other than as expressly provided herein or as subsequently set forth in writing and executed by each party. 12.6. Bankruptcy. In the event that either KFI or Ballard is adjudged bankrupt, it is the intention of the parties that this Agreement shall be governed by and construed in accordance with the U.S. Bankruptcy Code. 12.7. Notices. All notices or other communications relating to this Agreement shall be deemed to be properly served when sent in written form by United States certified mail, postage prepaid, or, when delivered by courier to the respective party at the following address or to each substitute address as either party may from time-to-time designate in writing to the other. To KFI: Michael W. Dochterman CEO and President Knowledge Foundations, Inc. 5325 Glickman Avenue Temple City, CA 91784 To Ballard: Richard Ballard 7852 Colgate Avenue Westminster, CA 92683 cc: Stephen C. Jensen Knobbe, Martens, Olson & Bear 620 Newport Center Drive, Sixteenth Floor Newport Beach, CA 92660 12.8. Applicable Law. It is understood and agreed that this Agreement shall be construed, governed, and interpreted in accordance with the laws of the State of California. 12.9. Severability of Provisions: Reformation. If any term, clause, word, condition, provision or agreement in this Agreement or the application thereof or any portion thereof to any person or circumstance, shall be held invalid, void or unenforceable, the remainder of the term, clause, word, condition, provision or agreement and the application thereof shall remain in full force and effect, and the invalid, void or unenforceable term, clause, word, condition, provision or agreement shall be reformed to the extent possible in order to give its intended effect and/or meaning. 12.10. Construction. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, the Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. 12.11. Further Assurances/Cooperation. At any time or from time to time on and after the date of this Agreement, each party agrees to (i) deliver to the other party such records, data or other documents consistent with the provisions of this Agreement, (ii) execute, and deliver or cause to be delivered, all such consents, documents or further instruments of transfer or license, and (iii) take or cause to be taken all such actions, as each party may reasonably deem necessary or desirable in order for such party to obtain the full benefits of this Agreement and the transactions contemplated hereby. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed in duplicate by their respective duly authorized officers, effective this 6th day of April, 2000. BALLARD KNOWLEDGE FOUNDATIONS, INC. /s/ Richard L. Ballard /s/ Michael W. Dochterman Richard L. Ballard By: Michael W. Dochterman Its: CEO and President /s/ Janet J. Pettitt Janet J. Pettitt Date: Date: EXHIBIT A Documentation & Source Codes for Mark "X" Technologies Dr. Richard L. Ballard -- Business & Academic Vita (5/25/1999) -- provides a complete history of all employment, publications, software projects, fellow development team members, and their job descriptions (1970-1999). Legal History and Origins of Knowledge Foundations (KRHistry.doc 5/23/97) -- document tracing the history of Dr. Richard Ballard's software development and licensing agreements from earliest work through Mark 1 & 2 development and Mark 3 design. MARK 1 ARTIFACTS AND SOURCE CODES: Fiction Shell Block Design from TALMIS Fall 1984 Conference Presentation (35mm Slide Photos) Project Storyboard Proposals to Nichols Research Corporation: APIRS Algorithm Testbed Proposal (Apple Mac documents) Vita ref. 94 SURCON Feasibility Study (Lotus Manuscript, Micrografx Designer) ref. 98 [Manuscript & Designer documents accessed in past week] Detailed Design Documents and Drawings delivered to BRAT Project: Vita ref. 100-104 [Manuscript & Designer documents accessed in past week] -- primary value in (Natural Language) Dialog Engine, SuperSet Knowledge Representation, and Automated Trace Operation copyrights and prior practice. BRAT Source Codes (2-3 existing sets on 5.25" and 3.5" floppies, @ 16 floppies/set, possible hard copy, last accessed 1988-1990) Microsoft C and Windows 1 SDK -- little or no value assumed. MARK 2 ARTIFACTS AND SOURCE CODES: Project Storyboard & Pseudo-Code Proposals to Media Share/Joestens Learning: Natural Language Interface Module (NLIM) -- licensed, became Mark 2 Concept Finder Outliner -- not licensed, became Mark 2 EditForm Tool BookReader -- Media Share reorganized before license granted Detailed Mark 2 Design Documents & User Guides licensed to PSR, US Navy, USAF, & General Research, & Vector Data Systems. (Manuscript Fact Sheets converted to MS-Word, Micrografx Designer & BMP graphics.) [All recently accessed via hard disks] -- immediate departure point for Mark 3 implementation. Mark 2 Source Codes and Compile Environment Microsoft C and C++, Windows 2.00 through Windows 2000. -- Provides immediate licensable product for new development services contracts. Previously $50K - $100K per development seat per license. Knowledge Research Proposal Development Binder -- Multi-phase development system, statements of work, schedules, deliverables, work breakdown structure, job descriptions, and accounting for project development processes created by Knowledge Research -- models future KFI service projects and licensee income expectations. Existing Mark 2 license models. Knowledge Base Demonstrations, Project Boxes, AllDocs Legacy Work Products, and Production Macros -- legacy of operating systems and applications from decade of knowledge base and tool development 10 Demo Knowledge Bases -- operate in any Windows 2 + environment -- unmatchable demonstration of technologies unique capabilities 18 Project Boxes -- original source documents & databases used in prior projects, very valuable in government markets AllDocs Work Products Hard Disk @ 1 GB -- original sources, work products, macros, edited knowledge developed in previous projects - - used in modeling theory, practice, and training -- test cases for tool use Production Macros -- starting point for production services and Mark 3 tool definition [All recently accessed on hard discs] Mark 2.5 APT Virtual Database Detailed Design, Briefings, & Tool Source Codes -- Most recent technology project licensed to the Naval Air Systems Command. Feasibility test for future corporate database integration technology and systems integration "plug and play". Tests early Builder and VDB architectures for Mark 3. MARK 3 DESIGNS AND ARTIFACTS: Naval Air Warfare Browser Series Briefing 6/8/92 (Taylor01.DRW - Taylor05.DRW)-- briefing developed to demonstrate to PSR the creation of a new Mark 3 tool design during a previous 6 month unpaid leave. Led to a licensing agreement for copies of Mark 2 & 3, which they subsequently broke by not paying agreed 15% profit sharing on APT project. Mark 3 -- 91 Proprietary Design Notes Mark 3 -- 95 Proprietary Design Notes Mark 3 -- 96 Proprietary Design Notes Mark 3 -- 97 Proprietary Design Notes Mark 3 -- 99 Proprietary Design Notes (MS-Word & Micrografx Designer documents & binders -- electronic & hardcopy) -- detail the continuing design evolution in keeping with the system block diagram used to negotiate PSR license agreements. Mark 3 -- 99 & Mark 3 -- 2000 Fact Sheets, Architectural Drawings, & Screen Layouts (MS-Word & Micrografx Designer documents & binders -- electronic & hardcopy) -- working specifications and final designs to launch programming and patent applications. Sets framework for future KFI sponsored programming and modeling work. Knowledge Mapping System Versions (Mark 3 Components.doc) -- initial tool development plan and teaming assignments for first two years of releases.