MEMORANDUM OF AGREEMENT
BETWEEN AND AMONG
MADACY ENTERTAINMENT LP (a
Quebec limited partnership),
EZ-TRACKS, LP (a Quebec
limited partnership) and
TRAFFIX, INC. (a Delaware
corporation)
Dated March 13 ,
2007
WHEREAS EZ-Tracks, LP (“EZ LP”) is a
licensee of recorded music (“Masters”) pursuant to the
terms of a Marketing and Services Agreement dated January 22, 2005
(“M&S Agreement”) by and between EZ LP, Madacy
Entertainment LP, a limited partnership organized under the laws of
the Province of Québec (“Madacy”) as successor of
Madacy Entertainment Group, Limited (“Madacy”) and
Traffix Music, Inc., a copy of which is annexed hereto;
WHEREAS the M&S Agreement grants unto EZ a
non-exclusive (subject to certain restrictions) license to use the
Masters (as defined in the M&S Agreement) for certain
internet-based direct marketing entertainment purposes;
WHEREAS Madacy has licensed the San Juan Songs (as
defined in the M&S Agreement) from SJMG (as defined in the
M&S Agreement) and the License includes a sublicense of the San
Juan Songs.
WHEREAS The M&S Agreement provides that Madacy shall
not enter, directly or indirectly whether through an Affiliate or
otherwise, into another relationship or business enterprise which
is identical or materially similar to , and directly competitive
with, the relationship set out therein and the Business (as such
term is defined in the M&S Agreement); for greater certainty,
the M&S Agreement provides that Madacy will not make its
Masters available to any third party in any transaction or
relationship for zero or nominal cash consideration (the foregoing
restrictions described in this Whereas Clause are referred to as
the “Madacy Non-Competitive Relationship
Restrictions”).
WHEREAS the M&S Agreement was modified to extend the
License to include certain non-exclusive reciprocal mobile rights
and service obligations pursuant to a document entitled
“Marketing Agreement Modifications” (the
“Modification”) dated October 6, 2006, a copy of which
is annexed hereto.;
WHEREAS pursuant to the terms of the M&S Agreement,
the License is subject to automatic renewals until December 31,
2013 (subject to certain financial conditions) and is subject to a
further automatic five (5) year extension at any time up to an
including December 31, 2013 in the event of a sales transaction
involving EZ or Traffix, Inc. (“Traffix”);
WHEREAS Madacy and CIK Investments Inc. (formerly Madacy
sp Inc.) (“CIK Investments”) are parties to a Content
Support Agreement (the “Support Agreement”) dated
January 12, 2005 pursuant to which CIK Investments is obligated to
pay to Madacy ten percent (10%) of all distributions of profits
received by CIK Investments from its 49.5% partnership interest in
EZ LP (the “CIK Interest”) and ten percent (10%) of all
proceeds of any sale of the CIK Interest;
WHEREAS concurrently with the execution and delivery of
this Agreement Traffix has purchased from CIK Holdings Inc.
(“CIK”), the successor to CIK Investments, the CIK
Interest (the “CIK Transaction”) pursuant to an
agreement between CIK and Traffix (the “CIK Interest Purchase
Agreement”) and wishes the term of the License to be modified
to provide for a single term of ten (10) years from January 1, 2007
to December 31, 2016 (rather than the successive renewals set out
above), subject to certain renewal rights as set forth
herein;
WHEREAS Madacy shall be entitled to receive ten percent
(10%) of the proceeds received by CIK from the CIK Transaction and
considers such amount to be equal to the present value of the
amount which it would otherwise be entitled to receive on an annual
basis upon the automatic renewal of the License pursuant to the
terms of the M&S Agreement should such agreement continue to be
automatically renewed for its renewal terms;
WHEREAS Madacy is desirous of modifying the terms of the
License and the M&S Agreement in consideration of CIK’s
agreement to pay Madacy or insure that Madacy is paid ten percent
(10%) of the proceeds of the CIK Transaction and a continuation,
for the same ten (10) year term (subject to the renewals provided
for herein), of the obligations of Traffix which permit Madacy to
use certain services, websites and software of Traffix in providing
premiums and brick-and-mortar download and mobile services to its
customers; the whole as more fully set out in the M&S Agreement
and the Modification (the M&S Agreement as modified by the
Modification is referred to as the M&S
Agreement”);
WHEREAS Madacy has obtained a modification of its
internet license of the San Juan Songs from SJMC so as to permit it
to include such songs in the License for a concurrent term of ten
(10) years with five (5) one-year renewal options;
WHEREAS Madacy acknowledges that by virtue of the CIK
Transaction, the License shall be a direct license to Traffix in
addition to EZ LP.
NOW,
THEREFORE, IT IS AGREED AS FOLLOWS:
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1.
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Preamble : The preamble shall be deemed to form part of
this Agreement.
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2.
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Term : Article 5 of the M&S Agreement, other than
Sections 5.02 and 5.04 (a) which shall remain in full force and
effect, is hereby deleted and the term of the M&S Agreement is
hereby agreed to be a single fixed 10-year term commencing on
January 1, 2007 and terminating on December 31, 2016 (“the
“Fixed 10-Year Term”), subject to the renewal options
set forth in Section 3 below. The M&S Agreement is hereby
amended to provide a direct grant of the License to Traffix in
addition to EZ LP, and to further provide that Traffix may use the
License through any of its subsidiaries subject to all of the other
terms and conditions of the M&S Agreement as amended hereby and
Traffix agrees to be responsible for each subsidiary’s
performance in accordance with the terms and conditions of the
M&S Agreement. Traffix shall have no obligation to exploit the
License through EZ LP.
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3.
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Renewal Options : At the end of the ten (10) year term, Traffix
will be entitled, at its option, but subject to Section 6 hereof,
to extend the License and the M&S Agreement for five (5)
additional one-year terms in consideration of an annual royalty of
$500,000 per year (payable in 2 installments on January 1
st and July 1 st of each year). If Traffix
wishes to extend the License without the benefit of the Madacy
Non-Competitive Relationship Restrictions, the annual royalty will
be $350,000 per year (in lieu of $500,000 per year).
Notwithstanding the foregoing, in the event that there shall be, at
any time, a Traffix Bankruptcy Event, the foregoing extension
options shall be cancelled.
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4.
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Definitions : For the purposes of this Agreement, the
following definitions shall apply (in addition to those definitions
set out in the M&S Agreement and the Modification):
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a.
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“
Prohibited Business Activities ” shall mean
those uses of the Masters which are expressly prohibited under the
M&S Agreement. Notwithstanding and without limiting the
generality of the foregoing, the License shall not apply to, and
the Masters shall not be used for, any of the following
activities:
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i.
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sublicensing to
a third party or the downloading by an end-user of any of the
Masters from any website not owned by Traffix; and
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ii.
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any use which
is directly competitive with the brick-and-mortar business of
Madacy including, but not limited to, the use in, or associated
with, any product which is sold in brick-and-mortar retail stores
(e.g. a prepaid download or ringtone card).
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For greater
certainty, the marketing of a premium program on the website of a
third party which links to a Traffix website for the
redemption/downloading of a Master shall not be considered to be an
activity prohibited by clause (i) above provided the Master remains
on the servers of Traffix.
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b.
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“
EZ-Tracks Business ” means the
internet-based direct marketing business now or hereafter carried
on by EZ LP and Traffix under the trade name
“EZ-Tracks” (or such other trade names as Traffix may
use from time to time) and comprising the Permitted Business
Activities.
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c.
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“
Grey Business Activities ” are all
activities using the Masters permitted under the terms of the
License which are not Permitted Business Activities or Prohibited
Business Activities.
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d.
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“
License ” means the license of Madacy Songs
and Masters from Madacy during the Term hereof pursuant to the
terms of the M&S Agreement, as amended by the present
Agreement.
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e.
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“
Prohibited Transferee ” means Apple Corp.,
ITunes, any corporation controlled or affiliated with Apple Corp.
or ITunes or any successor thereto;
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f.
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“
Restricted Transferee ” means Napster,
Liquid Audio/Wal-Mart.com, Best Buy, AOL, RealNetworks/Rhapsody,
Musicnet and includes any successor to any Restricted Transferee
pursuant to a purchase of their business or change of business name
or otherwise.
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g.
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“
Traffix Bankruptcy Event ” means, Traffix
shall (i) apply for, shall consent to, or shall acquiesce in the
appointment of a custodian, trustee or receiver for itself or for a
substantial part of its property; or, in the absence of such
application, consent or acquiescence, a custodian, trustee or
receiver shall be appointed for Traffix or for a substantial part
of Traffix’s property, or (ii) make an assignment for the
benefit of creditors; or (iii) be the subject of any bankruptcy,
reorganization, debt arrangement or other proceedings under any
bankruptcy or insolvency law.
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h.
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“
Permitted Business Activities ” shall mean
the internet-based direct marketing activities of Traffix, using
the Masters, now or hereafter carried on by EZ LP or Traffix at any
time during the term of the License.
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5.
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Restriction on use of the
Masters : For
greater certainty and notwithstanding any other provision of the
M&S Agreement and the present Agreement, the License shall not,
at any time, permit the licensee to carry on, directly or
indirectly, in any manner whatever, a Prohibited Business
Activity.
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6.
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Assignability : The parties hereto acknowledge and agree that
the License of Masters is for the exclusive benefit of Traffix and
is not assignable to third parties except in connection with a
Traffix Sale Event (as such term is defined in the CIK Interest
Purchase Agreement). Notwithstanding the foregoing, Madacy hereby
agrees that the License shall be assignable by Traffix to a third
party, other than a Prohibited Transferee, in the context of an
EZ-Tracks Sale (as such term is defined in the CIK Interest
Purchase Agreement) subject to the following terms and
conditions:
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a.
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In the event
that the EZ-Tracks Sale occurs prior to January 1, 2014, the five
(5) one-year renewal options set out in Section 3 above shall be
cancelled;
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b.
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In the event
that the EZ-Tracks Sale occurs after December 31, 2013 and before
January 1, 2019, the five (5) one-year renewal options set out in
Section 8 below shall be reduced to permit such renewals as are
required to permit the transferee to have the benefit of the
License for a term of three (3) years commencing on the date of the
assignment and terminating on the third anniversary of such
date;
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c.
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In the event of
any EZ-Tracks Sale to a Restricted Transferee, the assignee of the
License shall be entitled to use the Masters for the exclusive
purpose of carrying on any Permitted Business Activity carried on
by Traffix on or prior to the date of the assignment. For greater
certainty, a Restricted Transferee shall not be entitled to use the
Masters for any Grey Business Activity.
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d.
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In the event of
any EZ-Tracks Sale to a third party (other than a Prohibited
Transferee or Restricted Transferee), should such third party use
the Masters for any Grey Business Activity, the transferee shall
pay a royalty to Madacy for such use as follows:
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i.
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From the date
of the assignment of the License to the third anniversary of such
assignment, such use of the Masters shall be royalty free;
and
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ii.
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From the third
anniversary to the end of the term, the assignee shall pay a
royalty to Madacy equal to ten percent (10%) of its net sales
(gross sales less bad debts) resulting from all Grey Business
Activity uses of the Masters.
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For greater
certainty, all Permitted Business Activity uses of the Masters
shall continue to be royalty free for the remaining term of the
License.
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e.
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Notwithstanding
any other provision of this Agreement, if at the time of any
assignment of the License by Traffix to a third party, such third
party is licensing the Masters from Madacy, the License shall be
deemed to expressly prohibit the use of the Masters in the business
for which the third party has licensed such Masters from Madacy
(e.g. Traffix shall not be entitled, by way of assignment or
otherwise, to supersede or interfere with any existing licensing
relationship between Madacy and a third party licensee).
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f.
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In the event
that Traffix shall, at any time, be the subject of any Traffix
Bankruptcy Event, Traffix shall have no further rights of
assignment of the License or of the benefits of the M&S
Agreement and the five (5) one-year renewal options set out in
Section 3 above shall be cancelled.
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g.
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In the event
that Madacy shall be, at any time, the subject of a merger,
acquisition or other corporate restructuring, the terms of the
present Agreement shall continue to apply mutatis mutandis
and bind any successor or assign of Madacy and the transfer of the
rights and obligations of Madacy hereunder pursuant to such event
shall not be considered to be a breach of the present
Agreement.
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7.
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San
Juan Music :
Section 1.01(i) of the M&S Agreement incorporates into the
License a sublicense from Madacy of the rights which Madacy has
obtained to use the SJ Masters; the whole in consideration of a
reimbursement by EZ LP of the internet license fee payable by
Madacy to SJMG. The license and sublicense includes the exclusive
right of use by Madacy of a limited number of the SJ Masters for
the purpose of sublicensing to internet retailers. Concurrently
with the present Agreement, CIK and Madacy have obtained a
modification of the terms of the license of SJ Masters to provide
for a modification of the term of such license to mirror the Fixed
10-Year Term. In addition, such modification provides that for the
duration of the initial 10-year term of the sublicense, no further
royalties are payable to SJMG and that during each of the five (5)
renewal option years, a royalty equal to ten percent (10%) of the
royalty payable to Madacy shall be payable for a continuation of
the sublicense. Accordingly, the parties hereto agree that Section
1.01(i) of the M&S Agreement is hereby amended to
provide:
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a.
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that the
license and sublicense of the SJ Masters shall be free of royalty
for the Fixed 10-Year Term;
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b.
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The license and
sublicense of the SJ Masters shall include all new recordings which
SJMC acquires or records.
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c.
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that, in the
event that Traffix elects to exercise any of its renewal options,
as set forth below, Traffix shall pay to Madacy, in addition to the
annual royalty set forth in Section 8 below (i.e. $500,000 or
$350,000, as the case may be), an additional royalty for SJMC equal
to five percent (5%) of the Madacy royalty (i.e. $25,000 or
$17,500, as the case may be, and Madacy shall be responsible for
the payment of the balance of any royalty payable to
SJMC).
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d.
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Traffix hereby
agrees that it shall prepare, for information purposes only, a
quarterly report to Madacy of all downloads, uses or other
disseminations of the Masters, with a separate report
regarding
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