[*CONFIDENTIAL TREATMENT REQUESTED]
Operating Agreement
of
VSC TECHNOLOGIES, LLC
(A Delaware Limited Liability Company)
DATED: October 10, 2002
THE LLC MEMBERSHIP INTERESTS REPRESENTED BY THIS OPERATING AGREEMENT HAVE NOT
BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR UNDER THE NORTH CAROLINA SECURITIES ACT, OR SIMILAR
LAWS OR ACTS OF OTHER STATES IN RELIANCE UPON EXEMPTIONS UNDER THOSE ACTS. THE
SALE OR OTHER DISPOSITION OF THE MEMBERSHIP INTERESTS IS RESTRICTED AS STATED IN
THIS OPERATING AGREEMENT, AND IN ANY EVENT IS PROHIBITED UNLESS THE LLC RECEIVES
AN OPINION OF COUNSEL SATISFACTORY TO IT AND ITS COUNSEL THAT SUCH SALE OR OTHER
DISPOSITION CAN BE MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND ANY APPLICABLE STATE SECURITIES ACTS AND LAWS. BY ACQUIRING THE
MEMBERSHIP INTEREST REPRESENTED BY THIS OPERATING AGREEMENT, THE MEMBER REPRE
SENTS THAT IT WILL NOT SELL OR OTHERWISE DISPOSE OF ITS MEMBERSHIP INTERESTS
WITHOUT REGISTRATION OR OTHER COMPLIANCE WITH THE AFORESAID ACTS AND THE RULES
AND REGULATIONS ISSUED THEREUNDER.
OPERATING AGREEMENT
OF
VSC TECHNOLOGIES, LLC
THIS OPERATING AGREEMENT of VSC TECHNOLOGIES, LLC (the
"Company"), a limited liability company organized pursuant to the
Delaware Limited Liability Company Act, is executed effective as
of the date set forth on the cover page of this Agreement, by and
among the Company and the Persons executing this Agreement as
Members (as defined below).
WHEREAS, the Members have entered into that certain
Master Agreement of even date herewith, pursuant to which the
Members, among other things, agreed to enter into this Operating
Agreement;
ARTICLE I
FORMATION OF THE COMPANY
1.1.Formation. The Company was formed on October 2, 2002,
upon the filing with the Secretary of State of the Certificate of
Formation of the Company. In consideration of the mutual premises
and covenants contained herein and other good and valuable
consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree that the rights and
obligations of the parties and the administration and termination
of the Company shall be governed by this Agreement, the Master
Agreement, Certificate of Formation and the Act.
1.2.Name. The name of the Company is VSC Technologies, LLC.
The Members may change the name of the Company from time to time
as they deem advisable, provided appropriate amendments to this
Agreement and the Certificate of Formation and necessary filings
under the Act are first obtained.
1.3.Registered Office and Registered Agent. The Company's
registered office within the State of Delaware and its registered
agent at such address shall be as determined by the Members.
1.4.Principal Place of Business. The principal place of
business of the Company shall be at such place or places as the
Members may from time to time deem necessary or advisable.
1.5. Purposes and Powers.
(a) The purpose and business of the Company shall be to
engage in the ownership, development, licensing and
commercialization of the VSCr Technology (as hereinafter
defined).
(b) The Company shall have any and all powers and
privileges which are necessary or convenient to the conduct,
promotion or attainment of the business, purposes or
activities of the Company as set forth in 1.5(a) above, to
the extent the same may be legally exercised by limited
liability companies under the Act.
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1.6.Term. The Company shall continue in existence until the
close of the Company's business on October 2, 2091, as specified
in the Company's Certificate of Formation, unless the Company is
earlier dissolved and its affairs wound up in accordance with the
provisions of this Agreement or the Act.
1.7.Nature of Members' Interests. The interests of the
Members in the Company shall be personal property for all purpos
es. Legal title to all Company assets shall be held in the name
of the Company. Neither any Member nor a successor, representa
tive, or assign of such Member, shall have any right, title, or
interest in or to any Company property except as expressly
provided in this Agreement, the License Agreements and the Escrow
Agreement or the right to partition any Property owned by the
Company.
ARTICLE II
DEFINITIONS
2.1.Definitions. The following terms used in this Agreement
shall have the following meanings (unless otherwise expressly
provided herein):
"Act" means the Delaware Limited Liability Company Act,
as amended from time to time.
[***]
"Additional Contribution" shall have the meaning given
such term in Section 6.2.2 and includes the payments referenced
in Section 7.10.4.
"Additional Technology" shall have the meaning given such
term in Section 7.1.3.
"Adjusted Capital Account Deficit" means, with respect to
any Member, the deficit balance, if any, in such Member's Capital
Account as of the end of the relevant fiscal year, after giving
effect to the following adjustments:
(i) Credit to such Capital Account any amounts to which
such Member is obligated to restore or is deemed to be
obligated to restore pursuant to the penultimate
sentences of Treasury Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5); and
(ii) Debit to such Capital Account the items described in
Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6) of
the Treasury Regulations.
The foregoing definition of Adjusted Capital Account Def
icit is intended to comply with the provisions of Section
1.704-1(b)(2)(ii)(d) of the Treasury Regulations and shall be
interpreted consistently therewith.
"Administrative Costs" shall mean general costs expended
by the Company for the operation of the Company (other than the
VSC Development Costs and the VSC Direct Development Costs), such
as attorneys and accountants fees, general filing fees, supplies,
rent, employees, and other costs directly attributable to
administration and operating costs of the Company, plus any
amounts the Members determine should be attributable to reserves.
[*CONFIDENTIAL TREATMENT REQUESTED]
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"Affiliate" of a specified Person means (i) any Person
directly or indirectly controlling, controlled by or under common
control with the specified Person; (ii) any Person owning or
controlling ten percent (10%) or more of the outstanding voting
securities of the specified Person; (iii) any officer, director,
or partner of the specified Person; or (iv) if the specified
Person is an officer, director, or partner, any entity for which
the specified Person acts in such capacity.
"Agreement" means this Operating Agreement, as it may be
amended from time to time.
"Certificate of Formation" means the Certificate of
Formation of the Company filed with the Secretary of State, as
amended or restated from time to time.
"Capital Account" means the account maintained by the
Company for each Member in accordance with the following provi
sions:
(i) A Member's Capital Account shall be credited with
the Member's Capital Contributions, the amount of any
Company liabilities assumed by the Member (or which are
secured by Company property distributed to the Member),
the Member's allocable share of Profit and any item in
the nature of income or gain specially allocated to
such Member pursuant to the provisions of Article VI
(other than Section 6.3.3); and
(ii) A Member's Capital Account shall be debited with the
amount of money and the fair market value of any Com
pany property distributed to the Member, the Member's
allocable share of Loss, and any item in the nature of
expenses or losses specially allocated to the Member
pursuant to the provisions of Article VI (other than
Section 6.3.3).
If any Membership Interest is transferred pursuant to the
terms of this Agreement, the transferee shall succeed to the
Capital Account of the transferor to the extent the Capital Ac
count is attributable to the transferred Membership Interest. If
the book value of Company property is adjusted pursuant to Sec
tion 6.3.3, the Capital Account of each Member shall be adjusted
to reflect the aggregate adjustment in the same manner as if the
Company had recognized gain or loss equal to the amount of such
aggregate adjustment. It is intended that the Capital Accounts of
all Members shall be maintained in compliance with the provisions
of Regulation Section 1.704-1(b), and all provisions of this
Agreement relating to the maintenance of Capital Accounts shall
be interpreted and applied in a manner consistent with that Regu
lation.
"Capital Contribution" means the total amount of cash and
the fair market value of any other assets or services contributed
(or deemed contributed under Regulation Section 1.704-1(b)(2)(iv)
(d)) to the Company by a Member, net of liabilities assumed or to
which any such assets are subject, including, but not limited to,
Program Capital Contributions.
"Capital Transaction" means any transaction not in the
ordinary course of business which results in the Company's re
ceipt of cash or other consideration other than Capital Contribu
tions, including, without limitation, proceeds of sales or ex
changes or other dispositions of property not in the ordinary
course of business, financings, refinancings, condemnations,
recoveries of damage awards, and insurance proceeds.
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"Cash Flow" shall mean cash flow from operations.
"Change in Control" means the occurrence of any of the
following:
(a) any Person hereinafter an "Acquiring Person"
becomes the beneficial owner directly or
indirectly, of securities of a Member representing
fifty percent (50%) or more of the combined voting
power of the then outstanding securities; or
(b) an Acquiring Person becomes the beneficial
owner, directly or indirectly of securities of a
Member representing twenty-five percent (25%) or
more of the combined voting power of the Member's
then outstanding securities and, during the two-
year period commencing at the time such Acquiring
Person becomes the beneficial owner of such
securities, individuals who at the beginning of
such period constitute the Board cease for any
reason to constitute at least a majority thereof.
"Code" shall mean computer programming code and any other
machine processable material necessary to complete the computer
programming code. "Object Code" and "Executable Code" shall each
mean the machine readable form of the Code. "Source Code" shall
mean the human readable form of the Code and shall include any
embedded explanatory comments.
"Company Cash Flow" for any period means the excess, if
any, of (A) the sum of (i) all cash revenues from any source for
such period, other than from Company loans, Capital Transactions,
Capital Contributions, and (ii) any funds released by the Company
from previously established reserves, over (B) the sum of (i) all
cash expenses paid by the Company for such period, (ii) all
amounts paid by the Company in such period on account of the
amortization of the principal of any debts or liabilities of the
Company (including loans from any Member), (iii) capital
expenditures of the Company, and (iv) a reasonable reserve for
future expenditures as provided by Section 12.2; PROVIDED, HOW
EVER, that the amounts referred to in (B) (i), (ii), and (iii)
above shall be taken into account only to the extent not funded
by Capital Contributions, loans, or paid out of previously estab
lished reserves. Such term shall also include all other funds
deemed available for distribution and designated as Company Cash
Flow by the Members.
"Contribution Percentage" for any particular Member in
any fiscal year means (a) the sum of that Member's Program
Capital Contributions and Revenue Contributions divided by (b)
the sum of Program Capital Contributions and Revenue
Contributions for all Members.
"Control" shall mean possession of the ability to grant a
license or sublicense.
[***]
"Costs" means the sum of (i) the VSC Development Costs,
(ii) the VSC Direct Development Costs, (iii) the Administrative
Costs, and (iv) the Marketing Costs.
[***]
"Disinterested Member" means a Member who is not related
(within the meaning of Section 267(b) of the IRC or Section
707(b)(1) of the IRC) to either the Member whose Membership
Interest is to be transferred as provided in Article VIII or the
proposed transferee of such Membership Interest.
"Documentation" shall mean textual and/or graphic
material, perceivable directly by humans and/or with the aid of a
device or machine.
"Education Market" shall mean customers (including, but
not limited to, educational testing companies, private and
governmental departments of education and colleges, universities
and similar institutions) which conduct testing, surveys or
otherwise collect and/or archive information in or for
educational systems or institutions.
"Encumbrance" shall mean any lien, pledge, encumbrance,
collateral assignment or hypothecation.
"Enforcement Action" shall have the meaning given such
term in Section 7.11.
"Escrow Agreement" shall mean the Escrow Agreement among
TMS, MI, the Company and DSI Technology Escrow Services, Inc.
"Executable Code" shall have the meaning given under the
term "Code" above.
"Field" means the market for delivering products and/or
services for the purpose of scoring and measuring the results of
constructed response and selected response answers against
predefined criteria and for archiving and exploiting stored
images.
"Fiscal Year" means an annual accounting period ending
December 31 of each year during the term of the Company, unless
otherwise specified by the Members.
"Improvements" means all modifications, variations and/or
Releases of VSC Technology.
"Invention" means any writings, inventions, discoveries
or Improvements.
"IRC" means the Internal Revenue Code of 1986, as amended
from time to time (and any corresponding provisions of succeeding
law).
"License Agreements" means the TMS VSC License Agreement,
MI VSC License Agreement, LLC DMR License Agreement, and the MI
DMR License Agreement.
[*CONFIDENTIAL TREATMENT REQUESTED]
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[***]
"LLC DMR License Agreement" means the LLC DMR License
Agreement between TMS and LLC as described in the Master
Agreement.
"Majority in Interest" means a combination of any Members
who, in the aggregate, own more than fifty percent (50%) of the
Membership Interests of all Members.
"Manager" means each Member of the Company in its capaci
ty as a manager of the Company. "Managers" refers to such Persons
as a group.
"Marketing Costs" means all costs incurred in connection
with the performance of Marketing Services, including, but not
limited to, costs related to direct calling, on-site
presentations, software demonstrations, pilot projects,
installation, training and contracting, but shall not include
general overhead and administrative services for the same.
"Marketing Services" means the services performed by
either Member in marketing and selling VSC Products to customers
in the Education Market, but does not include general overhead
and administrative costs for such services.
"Master Agreement" shall mean that certain Master
Agreement dated October 10, 2002, by and among TMS, MI and the
Company.
"Material Discrepancy" shall mean where, for any period
of reporting of Program Costs by TMS, the amount of Program Costs
stated by TMS are overstated by an amount greater than five
thousand dollars ($5,000) for any quarter; twenty thousand
dollars ($20,000) for any one calendar year; or fifty thousand
dollars ($50,000) for all fiscal years preceding the time of
determining the amount of overstatement.
"Member" means each Person designated as a member of the
Company in Section 4.1 or any other Person admitted as a member
of the Company in accordance with this Agreement. "Members"
refers to such Persons as a group.
"Membership Interest" means all of a Member's rights in
the Company, including without limitation, the ownership interest
set forth in Section 4.1, the right to receive distributions of
the Company's assets as provided in this Agreement, any right to
vote and any right to participate in the management of the
Company as provided in the Act and this Agreement.
[*CONFIDENTIAL TREATMENT REQUESTED]
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"MI" means Measurement Incorporated, a North Carolina
corporation.
"MI DMR License Agreement" means the MI DMR License and
Services Agreement between TMS and MI described in the Master
Agreement.
"MI Rights" shall have the meaning given in Section 11.3.
"MI VSC License Agreement" means the MI VSC License and
Services Agreement among the Company, TMS and MI described in the
Master Agreement.
"Minimum Gain" means gain as defined in Treasury Regula
tions Section 1.704-2(d).
"Non-VSC Software" shall mean the software identified as
such in Schedule I-B.
"Non-VSC Technology" means the Technology representing
Non-VSC Software.
"Non-VSC Trademarks" means trademarks associated with Non-
VSC Software.
"Offered Interest" shall have the meaning given in
Section 8.2.1.
"Patent Rights" shall mean any patents, patent
applications, certificates of invention, or applications for
certificates of invention, together with any extensions,
registrations, confirmations, reissues, divisions, continuations
or continuations-in-part, reexaminations or renewals thereof,
that may be sought throughout the world.
"Percentage Interest" means the percentage which the Capi
tal Contributions of a Member to the Company bears to the Capital
Contributions of all Members.
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"Person" means an individual, a trust, an estate, a do
mestic corporation, a foreign corporation, a professional corpo
ration, a partnership, a limited partnership, a limited liability
company, a foreign limited liability company, an unincorporated
association or another entity.
"Product Marks" means the VSC Trademarks and other
trademarks of the Company.
"Profit" and "Loss" mean, for each taxable year of the
Company (or other period for which Profit or Loss must be comput
ed) the Company's taxable income or loss determined in accordance
with IRC Section 703(a), with the following adjustments:
(i) All items of income, gain, loss, deduction, or
credit required to be stated separately pursuant to IRC
Section 703(a)(1) shall be included in computing
taxable income or loss;
(ii) Any tax-exempt income of the Company, not otherwise
taken into account in computing Profit or Loss, shall
be included in computing taxable income or loss;
(iii)Any expenditures of the Company described in IRC
Section 705(a)(2)(B) (or treated as such pursuant to
Regulation Section 1.704-1(b)(2)(iv)(i)), and not other
wise taken into account in computing Profit or Loss,
shall be subtracted from taxable income or loss;
(iv)Gain or loss resulting from any taxable disposition
of Company property shall be computed by reference to
the adjusted book value of the property disposed of,
notwithstanding the fact that the adjusted book value
differs from the adjusted basis of the property for
federal income tax purposes;
(v) In lieu of the depreciation, amortization, or cost
recovery deductions allowable in computing taxable
income or loss, there shall be taken into account the
depreciation computed based upon the adjusted book
value of the asset; and
(vi) Notwithstanding any other provision
of this definition, any items which are specially allo
cated pursuant to Section 6.3 hereof shall not be taken
into account in computing Profit or Loss.
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"Program" means the collaborative effort of TMS and MI, on
behalf of the Company, as set forth in Schedule II-A and Schedule
II-B for the development of Virtual Scoring Center software
products utilizing the VSC Technology, and as the Program may be
revised from time to time as may be agreed upon by TMS and MI.
"Program Budget" means the annual budget for the Program
as described in Section 5.2.1.
"Program Capital Contributions" means the capital
contributions by Members as provided in Section 5.2.2.
"Program Costs" means all VSC Development Costs, VSC
Direct Development Costs, Administrative Costs and Marketing
Costs. In no event shall Program Costs include costs associated
with development of image processing applications using TMS DMR
software development tool kits, which shall be solely the
responsibility of TMS.
"Program Management Team" shall have the meaning given in
Section 7.3.3.
"Program Patent Rights" means any Patent Rights related to
Program Technology which arise during the term of this Agreement
or owned or controlled by either Member prior to the effective
date of this Agreement and which are subject to any license
agreement.
"Program Inventions" means any Inventions made pursuant to
the Program.
"Program Technology" means Technology developed by either
Member pursuant to the Program.
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"Proposed Transferee" shall have the meaning given in
Section 8.2.1.
"Release" shall mean any official issuance of the VSC
Technology and the most recent version of the Non-VSC Technology
that is applicable to the VSC Technology, including any new
version, error correction, revision, enhancement, improvement,
and modification by the Company.
(i) Update Release shall mean issuance of the VSC Technology and
the most recent version of the Non-VSC Technology that is
applicable to the VSC Technology and that contains corrections to
errors ("bug fixes"). Update Release shall be denoted by a
change to the one-hundredths digit to the right of the decimal
point in the then current version of the VSC Technology and/or
the Non-VSC Technology (x.x(x)).
(ii) Upgrade/Enhancement Release shall mean an
improvement to an existing VSC Technology and/or the
most recent version of the Non-VSC Technology that is
applicable to the VSC Technology and that is intended
to extend the life or improve through enhanced
performance of features and functions and is denoted by
a change to the digit(s) to the right of the decimal
point (x.(x)x) or by a change to the digit(s) to the
left of the decimal point ((x.)xx) in the then current
version of the VSC Technology and/or the Non-VSC
Technology.
"Revenue Contributions" for any particular Member shall
mean, for any particular Company year, the sum of all royalties
or other payments by such Member to the Company during such year,
plus a percentage of all Company revenue derived outside of
royalties or other payments under licenses to Members equal to
such Member's Membership Interest.
"Revenue Rebate Allocation" shall have the meaning given
in Section 6.2.1.
"Securities Act" shall have the meaning given in Section
8.2.6.
"Secretary of State" means the Secretary of State of the
State of Delaware.
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"Source Code" shall have the definition given under the
term "Code" above.
"Tax Matters Manager" means the Member designated by the
Members as the "tax matters partner," as that term is defined in
the IRC.
"Technology" shall mean Inventions, whether patentable or
not, trade secrets, copyrights, Code, Source Code, know-how,
data, and Documentation.
"Territory" means the world.
"Third Party" shall mean any entity other than the LLC,
TMS or MI and their respective Affiliates.
"TMS" means TMS, Inc., an Oklahoma corporation, d/b/a TMS
Sequoia.
"TMS Distribution Deficiency" shall have the meaning
given in Section 6.2.2(a).
"TMS VSC License Agreement" means the TMS VSC License
Agreement by and between the Company and TMS as described in the
Master Agreement.
"TMS Patent Rights" means any worldwide Patent Rights of
TMS with respect to the VSC Technology.
"TMS Rights" shall have the meaning given such term in
Section 7.1.1.
"Transfer" means sell, assign, transfer, lease, or other
wise dispose of property, including without limitation an inter
est in the Company.
"Transfer Request" shall have the meaning given in
Section 8.2.1.
"Transferor" shall have the meaning given in Section
8.2.1.
"Treasury Regulations" means the Income Tax Regulations
and Temporary Regulations promulgated under the IRC, as such regu
lations may be amended from time to time (including corresponding
provisions of succeeding regulations).
"VSC Development Costs" shall mean the costs paid by the
Company for the continued development of the VSC Technology
pursuant to the Program. VSC Development Costs shall initially be
the cost of TMS's VSC Development Services as provided by TMS
pursuant to Section 5.1 of this Agreement. All VSC Development
Costs must be directly related to the VSC Technology.
"VSC Development Services" means the services performed
or to be performed by either Member in furtherance of the
Program.
"VSC Direct Development Costs" means the direct costs
expended by the Company for the continued development and
maintenance of the VSC Technology, excluding the VSC Development
Costs. VSC Direct Development Costs include, but are not limited
to, costs associated with patents, trademarks and intellectual
property rights, and other direct costs of the Company related to
the VSC Technology.
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"VSC Products" shall mean: (i) products which utilize or
incorporate VSC Technology and/or Program Technology, or (ii)
products that are within the coverage of one or more claims of
the Company's Patent Rights.
"VSC Services" means services performed utilizing VSC
Technology or VSC Products.
"VSC Technology" means the Technology and TMS Patent
Rights representing the "Virtual Scoring Center" (VSCr) listed in
Schedule I-A as of the date of this Agreement, and all
Improvements and Patent Rights thereto.
"VSC Technology Package" shall mean (a) a complete copy
in machine readable form of the Source Code and Executable Code
of the VSC Technology; (b) a complete copy of any existing
Documentation of the VSC Technology; and (c) complete
instructions for compiling and linking every part of the Source
Code of the VSC Technology into Executable Code, for purposes of
enabling verification of the completeness of the Source Code.
Such instructions shall include precise identification of all
compilers, library packages and linkers used to generate
Executable Code.
"VSC Trademarks" shall mean the trademarks set forth in
Schedule I-A and the goodwill associated therewith.
ARTICLE III
MANAGEMENT OF THE COMPANY
3.1. Management by Members. Each Member of the Company,
by virtue of its status as a Member, shall also be a Manager of
the Company for all purposes. [***]The Members may elect or re
tain one or more assistant Managers, agents, or officers who may,
but need not be, Members of the Company, with such titles, du
ties, and compensation as may be designated by the Members, sub
ject to any applicable restrictions specifically provided in this
Agreement or contained in the Act. The Members may delegate re
sponsibility for the day-to-day management of the Company to any
individual Member or other Person who shall have and exercise on
behalf of the Company all powers and rights necessary or conve
nient to carry out such management responsibilities.
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3.2. Representation. Unless otherwise agreed by a
unanimous vote of the Members, for purposes of any act or consent
of the Members acting as Members or Managers, MI shall be
represented by Dr. Henry H. Scherich, or such other person acting
in his or her capacity as President of MI, and TMS shall be
represented by Deborah L. Klarfeld, President, of TMS, or such
other person acting in his or her capacity as President of TMS.
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3.4. Compensation and Expenses.
3.4.1. In General. The Members shall not receive any
compensation from the Company for serving as Managers, but
the Company will reimburse Members for all direct, out of
pocket expenses reasonably incurred by the Members and paid
to third parties (who are not Affiliates thereof) in
connection with their service as Managers which are not
otherwise reimbursed pursuant to this Agreement. Nothing con
tained in this Section is intended to affect the Percentage
Interest of the Members or the amounts that may be payable
to them by reason of their respective Percentage Interests.
3.4.2. TMS Accounting Service Fee. The Company shall pay
TMS for its financial record keeping and reporting services
attributable to the Program and the operations of the
Company, so long as such services are provided by TMS. The
amount of compensation payable to TMS for such financial
services is $1,000 per month. TMS shall be paid no later
than thirty (30) days following the end of the prior month.
Nothing contained in this Section is intended to affect the
Percentage Interest of the Members or the amounts that may
be payable to them by reason of their respective Percentage
Interests.
3.5. Indemnification of Members for Management Services.
The Company shall indemnify the Members in connection with their
services as Managers of the Company to the fullest extent permit
ted or required by the Act, as amended from time to time, and the
Company may advance expenses incurred by a Member upon the ap
proval of the remaining Members and the receipt by the Company of
the signed statement of such Member agreeing to reimburse the
Company for such advance in the event it is ultimately determined
that such Member is not entitled to be indemnified by the Company
against such expenses.
3.6. Limitation on Liability. No Member of the Company
shall be liable to the Company for monetary damages for an act or
omission in such Member's capacity as a Manager, except as pro
vided in the Act for (i) acts or omissions which a Member knew at
the time of the acts or omissions were clearly in conflict with
the interests of the Company; (ii) any transaction from which a
Member derived an improper personal benefit; or (iii) acts or
omissions occurring prior to the date this provision becomes
effective. If the Act is amended to authorize further elimination
of or limitations on the liability of Members as Managers, then
the liability of Members shall be eliminated or limited to the
fullest extent permitted by the Act as so amended. Any repeal or
modification of this Section shall not adversely affect the right
or protection of a Member existing at the time of such repeal or
modification.
3.7. Liability for Return of Capital Contribution. The
Members shall not be liable for the return of the Capital
Contributions of the Members and upon dissolution of the Company
the Members shall look solely to the assets of the Company except
as provided in Section 10.5.
3.8. Consent. The Members hereby consent to the
execution and delivery by the Company of the License Agreements
and the Escrow Agreement. Each Member shall refer any Person
interested in the use or license of the VSC Technology within the
Education Market to the Company. A license agreement with such a
Person shall require the unanimous consent of the Members. In no
event shall a Transfer or a withdrawal by a Member affect the
License Agreements or the Escrow Agreement.
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ARTICLE IV
RIGHTS AND OBLIGATIONS OF MEMBERS
4.1. Names and Addresses of Members. The names,
addresses, and Membership Interests of the Members are as
follows:
Member Membership Interest
Measurement Incorporated 50%
423 Morris Street
Durham, North Carolina 27701
TMS, Inc., d/b/a TMS Sequoia 50%
206 West Sixth Avenue
Stillwater, Oklahoma 74074
4.2. Limited Liability. The Members shall not be
required to make any contribution to the capital of the Company
except as set forth in Article V, nor shall the Members in their
capacity as such be bound by, or personally liable for, any
expense, liability, or obligation of the Company except to the ex
tent of their interests in the Company and the obligation to
return distributions made to them under certain circumstances as
required by the Act. The Members shall be under no obligation to
restore a deficit capital account upon the dissolution of the
Company or the liquidation of any of their Membership Interests.
4.3. Bankruptcy or Incapacity of a Member.
Notwithstanding anything in this Agreement to the contrary, a
Member shall cease to have any power as a Member or Manager, any
voting rights or rights of approval hereunder upon bankruptcy,
insolvency, dissolution or assignment for the benefit of credi
tors or any Buy-Sell Event (as defined in Section 9.1); and the
Member, its personal representative, estate, or successor upon
the occurrence of any such event shall have only the rights,
powers, and privileges of a transferee enumerated in Section 8.3,
and shall be liable for all obligations of the Member under this
Agreement. In no event, however, shall a personal representative
or successor become a substitute Member unless the requirements
of Section 8.2 are satisfied.
[*CONFIDENTIAL TREATMENT REQUESTED]
14
ARTICLE V
CAPITAL CONTRIBUTIONS AND LOANS
5.1. Initial Capital Contributions.
5.1.1. MI Initial Capital Contribution. In exchange for
the Membership Interest set forth in Section 4.1, MI hereby
delivers to the Company a cash capital contribution of
$260,000, the receipt of which is acknowledged on behalf of
the Company by TMS. MI's Percentage Interest as of the date
hereof is fifty percent (50%).
5.1.2. TMS Initial Capital Contribution. TMS hereby
grants, transfers, conveys and assigns to the Company, all
of TMS' right, title and interest in and to the VSC
Technology and the VSC Trademarks and hereby delivers to
each of the Company and MI the VSC Technology Package, and
makes a cash capital contribution to the Company in the
amount of $10,000.00 (the receipt of each of which is
acknowledged on behalf of the Company by MI) in exchange
for: (a) the payment by the Company to TMS of the sum of
$250,000 in cash on the date of this Agreement (the receipt
of which is acknowledged by TMS), and (b) the Membership
Interest set forth in Section 4.1. TMS further assigns to
the Company all of TMS' right, title, and interest in and to
all future revenues from sales or licenses by TMS of VSC
Products or VSC Services prior to the date of this
Agreement. TMS' Percentage Interest as of the date hereof is
fifty percent (50%).
[***]
5.1.4. Deposit Into Escrow. Upon the execution of
this Agreement, TMS shall deposit the software required to
be deposited under the Escrow Agreement.
5.1.5 Assignment of Patent Application. Upon the
execution of this Agreement, TMS shall assign all of its TMS
Patent Rights and complete all documents as necessary to
effectuate such assignment, including but not limited to
filing with the U.S. Patent and Trademark Office Form
PTO/SB/15, attached hereto and incorporated by reference as
Exhibit 1.
5.1.6. Assignment of Trademarks. Upon the execution of
this Agreement, TMS shall assign all of its VSC Trademarks
and complete all documents as necessary to effectuate such
assignment, including, but not limited to the form attached
hereto and incorporated by reference as Exhibit 2.
[*CONFIDENTIAL TREATMENT REQUESTED]
15
5.2. Program Funding Commitments.
5.2.1. Program Budget. On or before January 31 of each
year, TMS and MI shall unanimously agree on an annual basis
on the Program Costs for that year, with a breakdown of the
VSC Development Costs, the VSC Direct Development Costs,
Administrative Costs and Marketing Costs. TMS and MI shall
each be responsible for 50% of all Marketing Costs,
Administrative Costs, VSC Development Costs, and VSC Direct
Development Costs as hereinafter provided.
5.2.2. Program Capital Contributions.
(a) Form of Contributions. MI hereby undertakes to
make Program Capital Contributions to the Company in an
amount equal to fifty percent (50%) of all Program Costs and
through the performance of Marketing Services in pursuit of
the Program. TMS hereby undertakes to make Program Capital
Contributions through its performance of the VSC Development
Services and Marketing Services in pursuit of the Program.
The Program Capital Contributions by TMS shall be made by
accepting, in lieu of payments from the Company for the full
amount of all VSC Development Costs and Marketing Costs
payable to it, payment from the Company equal to fifty
percent (50%) of the total amount of such VSC Development
Costs and Marketing Costs. The Program Capital Contributions
for MI Marketing Services shall be made by accepting, in
lieu of payments from the Company for the full amount of all
Marketing Costs payable to it, payment from the Company
equal to fifty percent (50%) of the total amount of such
Marketing Costs.
(b) Cash Contributions. If fifty percent (50%) of the
Company's total Program Costs exceed the amount of VSC
Development Costs and Marketing Costs contributed by TMS or
MI for the relevant measurement period, then TMS or MI shall
pay to the Company a cash Program Capital Contribution
sufficient that TMS and MI shall each have made cash and non-
cash capital contributions equal to fifty percent (50%) of
all Program Costs for such measurement period.
(c) Cost Tracking. TMS shall be responsible for
tracking the VSC Development Costs, VSC Direct Development
Costs and Marketing Costs incurred or advanced by TMS on
behalf of the Company, if any, and reporting to the Company
on a monthly basis. MI shall be responsible for tracking
Marketing Costs incurred or advanced by MI on behalf of the
Company, if any, and reporting Marketing Cost activity to
the Company on a monthly basis.
(d) VSC Development Costs. [***] The cost rate is
based on annual salaries for software engineers, project
managers and product managers, plus a factor for employer
taxes/benefits and general and administrative overhead
divided by the number of project hours expected to be
incurred for a year. Such cost rate shall be in effect until
each anniversary of this Agreement and at such time TMS will
update the VSC Development Cost rate using the calculation
described above for use in the following year. TMS VSC
Development Costs shall be costs attributable solely to work
performed directly for the Company and directly related to
the Program and shall not include general and administrative
costs of TMS (except as factored into the cost rate), or
marketing, selling or other costs of TMS.
(e) Marketing Costs. TMS and MI Marketing Costs shall
be measured on a monthly basis using the number of Marketing
Services hours incurred in pursuit of VSC Technology
customers in the Education Market, multiplied by a [***].
The Marketing Cost rate is based on TMS' non-commission
sales compensation plus a factor for employer taxes/benefits
and a factor for general and administrative overhead and
estimated sales travel divided by the number of working
hours per year per person using a forty-hour work week. The
Marketing Cost rates shall be in effect until each
anniversary of this Agreement and at such time each party
will update their respective Marketing Cost rate using the
calculation described above.
[*CONFIDENTIAL TREATMENT REQUESTED]
16
(f) Commissions. To the extent that the Company
receives revenues from a customer procured by either party
in the Education Market (other than sales by the Company to
MI), such procuring party will bill the Company for sales
commissions at a rate not to exceed ten percent (10%) of all
cash revenues received from such customer.
(g) Assumption of Program by MI. In the event MI
assumes the Program in accordance with Section 7.3.4, or as
otherwise provided in this Agreement, then MI shall be paid
by the Company under a similar cost reimbursement as
provided in this Section
5.2.3. Monthly Program Capital Contributions. With
respect to each calendar month during the term of the
Program:
(a) MI shall make its capital contribution to the
Company, not later than the fifteenth (15th) day following
receipt of an invoice detailing the Program Costs for the
previous month, in an aggregate amount equal to fifty
percent (50%) of the Program Costs incurred by TMS during
the previous month but no more than twenty-five percent
(25%) of the amount budgeted to be incurred by the Company
in the then-current Program for such prior month, unless
approved by MI. TMS shall deliver the invoice to MI for
each month no later than the fifteenth (15th) day of the
following calendar month. MI shall also make a capital
contribution to the Company, not later than the fifteenth
(15th) day of the following calendar month, by delivering an
invoice to the Company reflecting the Marketing Services
performed by it and the Marketing Costs incurred by it in
such calendar month.
(b) TMS shall make its capital contribution to the
Company, not later than the fifteenth (15th) day of the
following calendar month, by delivering an invoice to the
Company reflecting the VSC Development and Marketing
Services performed by it and the VSC Development Costs and
Marketing Costs incurred by it in such calendar month and by
delivering an aggregate amount equal to fifty percent (50%)
of any Program Costs not contributed by TMS through the
provision of services for such month.
(c) Upon receipt of the capital contribution from MI,
the Company shall promptly pay TMS an amount equal to fifty
percent (50%) of the VSC Development Costs and Marketing
Costs. Upon receipt of the capital contribution from TMS,
the Company shall promptly pay MI and amount equal to fifty
percent (50%) of the Marketing Costs.
5.2.4 Failure to Make Capital Contribution. In the event
that either TMS or MI fails to make a capital contribution
pursuant to this Section 5.2 and in accordance with Section
7.3 and the other Party does not elect to terminate the
Program pursuant to Section 7.3.4 hereof, then, in addition
to all other rights and remedies of the Members, the
Percentage Interests in the Company shall be adjusted such
that no distributions shall be made to the defaulting Member
until all capital contributions have been contributed in
full.
17
5.2.5 No Adjustment. Except as provided in Section
5.2.4, none of the Program Capital Contributions paid under
this Section 5.2 shall change the Percentage Interests of
the Members.
5.2.6 Right to Review. MI and the Company have the
right to review and evaluate the invoices submitted by TMS
for the Program Costs and the work performed thereunder to
determine if the work accomplished is consistent with the
amount billed and to evaluate the performance of TMS
thereunder.
5.3. Additional Contributions. In the event that at the end
of each of the first four fiscal years of the Company, TMS does
not receive a distribution from Company Cash Flow equal to or
greater than its contribution of VSC Development Costs and
accounting service fee to the Company for that fiscal year (the
"TMS Distribution Deficiency"), MI agrees to contribute to the
Company the difference between: (i) the amount contributed by TMS
for VSC Development Costs and accounting service fee and (ii) the
Cash Flow distribution to TMS for such fiscal year ("Additional
Contribution"). At the time of making the Additional
Contribution, the Company shall make a payment to TMS equal to
the Additional Contribution.
[***]
[*CONFIDENTIAL TREATMENT REQUESTED]
18
[***]
[***]
5.4. Books of Account; Audit. TMS shall keep and maintain
proper and complete books of account, and shall maintain a bank
account, on behalf of the Company. All books of account and bank
account shall be available and open to MI for review. In the
event that either TMS or MI reasonably deems the Program to be
material to TMS or MI, as the case may be, for financial
accounting purposes, then, upon such Member's request, audited
financial statements of the Company shall be prepared by KPMG
Peat Marwick, LLP or other qualified certified public accounting
firm agreed upon by the Members. Each Member shall keep and
maintain proper and complete records and books of account
documenting all Program Costs incurred by such Member. In the
event there has been discovered a Material Discrepancy, MI shall
have the right to require that an independent accounting firm
keep and maintain the books of account and bank account on behalf
of TMS in lieu of TMS and upon such request, TMS shall deliver
the records to the independent accountant and assist in the
transition. Each of the Company, TMS and MI shall permit
independent accountants retained by TMS or MI (the "Auditing
Party") to have access to its records and books for the sole
purpose of determining the appropriateness of Program Costs
charged by or accrued to the Member being audited hereunder. Such
examination shall be conducted during regular business hours and
upon reasonable notice, at the Auditing Party's own expense and
no more than once in each calendar year during the term of this
Agreement and during the seven (7) calendar years following the
expiration or termination hereof, provided, such limitation of no
more than once each calendar year shall not apply if a Material
Discrepancy has been discovered. If such examination reveals
that such Program Costs have been misstated, any adjustment shall
be promptly refunded or paid, as appropriate. The Auditing Party
shall pay the fees and expenses of the accountant engaged to
perform the audit, unless such audit reveals a Material
Discrepancy, in which case the Member who received such
overpayment shall pay all reasonable costs and expenses incurred
by the Auditing Party in the course of making such determination,
including the fees and expenses of the accountant and reimburse
the overpayment. The Company, TMS and MI shall each keep their
books and records relating to this Agreement and the Program for
a minimum of seven (7) years. The right to review records in this
Section 5.3 is in addition to and not in lieu of 18-305 of the
Act; provided no Manager shall have the right to keep
confidential any information from the other Manager.
[*CONFIDENTIAL TREATMENT REQUESTED]
19
5.5. Enforceability of Section 5.2. The agreements
regarding Program Capital Contributions set forth in Sections 5.1
and 5.2 hereof are by and between, and for the benefit of, MI and
TMS only, and are not enforceable by any Third Party.
5.6. Further Funding. In the event that the Members
determine at any time (or from time to time) that additional
funds in excess of the Program Costs and the initial capital
contributions are required by the Company for or in respect of
its business or to pay any of its obligations, expenses, costs,
liabilities, or expenditures (including, without limitation, any
operating deficits), then the Members may agree by unanimous
action to make additional contributions to the capital of the
Company or may, acting in their capacities as Managers, borrow
all or part of such additional funds on behalf of the Company,
with interest payable at then-prevailing rates, from one or more
of the Members or from commercial banks, savings and loan
associations, or other commercial lending institutions.
5.7. No Interest on Capital Contributions. No interest
shall be paid on any contribution to the capital of the Company.
5.8. Capital Accounts. A separate Capital Account shall
be established for each Member. Each Member's Capital Account
shall be subject to such adjustments as may be required in order
to comply with the capital account maintenance requirements of
Section 704(b) of the IRC.
ARTICLE VI
DISTRIBUTIONS AND ALLOCATIONS
6.1. Allocations of Profit or Loss. After giving effect to
the special allocations set forth in this Section 6.2 and in
Section 6.3, for any Fiscal Year of the Company, Profit or Loss
shall be allocated to the Members in proportion to their
Membership Interests until all Additional Contributions are
recouped as provided in Section 6.2.2, in which case the Profit
or Loss shall thereafter be allocated to the Members in
proportion to their Percentage Interests
20
[***]
[*CONFIDENTIAL TREATMENT REQUESTED]
21
[***]
6.3. Regulatory Allocations.
6.3.1. Qualified Income Offset. If any Member unexpected
ly receives an adjustment, allocation, or distribution as de
scribed in Treasury Regulations Section
1.704-1(b)(2)(ii)(d)(4) through (6) which causes or increas
es a deficit capital account balance in such Member's Capi
tal Account (as determined in accordance with such Regula
tions) items of Company income and gain shall be specially
allocated to each such Member in an amount and manner suffi
cient to eliminate, to the extent required by the Treasury
Regulations, the Adjusted Capital Account Deficit of such
Member as quickly as possible, provided that an allocation
pursuant to this Section 6.3.1 shall be made if and only to
the extent that such Member would have an Adjusted Capital
Account Deficit after all other allocations provided for in
this Article VI have been tentatively made as if this Sec
tion 6.3.1 were not in the Agreement. This provision is in
tended to be a "qualified income offset," as defined in
Treasury Regulations Section 1.704-1(b)(2)(ii)(d), such Reg
ulations being specifically incorporated herein by refer
ence.
6.3.2.Minimum Gain Chargeback. If there is a net de
crease in Minimum Gain during any Fiscal Year, each Member
shall be specially allocated items of Minimum Gain income
and gain for such year (and, if necessary, subsequent years)
in an amount equal to such Member's share of the net
decrease in Minimum Gain, determined in accordance with
Treasury Regulations Section 1.704-2(g). Allocations pursu
ant to the previous sentence shall be made in proportion to
the respective amounts required to be allocated to each Mem
ber pursuant thereto. The items to be so allocated shall be
determined in accordance with Treasury Regulations Sections
1.704-2(f) and 1.704-2(j)(2). This Section 6.3.2 is intended
to comply with the minimum gain chargeback requirement in
Treasury Regulations Section 1.704-2(f) and shall be inter
preted consistently therewith.
6.3.3.Contributed Property and Book-ups. In accordance
with IRC Section 704(c) and the Regulations thereunder, as
well as Regulation Section 1.704-1(b)(2)(iv)(d)(3), income,
gain, loss, and deduction with respect to any property
contributed (or deemed contributed) to the Company shall,
solely for tax purposes, be allocated among the Members so
as to take account of any variation between the adjusted
basis of the property to the Company for federal income tax
purposes and its fair market value at the date of
contribution (or deemed contribution). If the adjusted book
value of any Company asset is adjusted as provided herein,
subsequent allocations of income, gain, loss, and deduction
with respect to the asset shall take account of any
variation between the adjusted basis of the asset for
federal income tax purposes and its adjusted book value in
the manner required under IRC Section 704(c) and the
Regulations thereunder.
6.4. Liquidation and Dissolution.
6.4.1.Distribution of Assets. If the Company is
liquidated, the assets of the Company shall be distributed
to the Members in accordance with the positive balances in
their respective Capital Accounts, after taking into account
the allocations of Profit or Loss pursuant to Section 6.2,
if any, and distributions, if any, of cash or property,
pursuant to Section 6.1. Notwithstanding anything herein to
the contrary, certain assets of the Company shall be
distributed under, and the Members shall have certain rights
pursuant to, Section 10.5 of this Agreement.
6.4.2.No Capital Account Deficit Restoration. No Member
shall be obligated to restore a deficit Capital Account.
[*CONFIDENTIAL TREATMENT REQUESTED]
22
6.5. General.
6.5.1.Timing of Distributions. Except as otherwise
provided in this Agreement, the timing and amount of all
distributions shall be determined by the unanimous vote of
the Members.
6.5.2.Distributions in Kind. If any assets of the Company
are distributed in kind to the Members, those assets shall
be valued on the basis of their fair market value, and any
Member entitled to any interest in those assets shall
receive that interest as a tenant-in-common with all other
Members so entitled. Unless the Members otherwise agree, the
fair market value of the assets shall be determined by an
independent appraiser who shall be selected by the Members.
The Profit or Loss for each unsold asset shall be determined
as if the asset had been sold at its fair market value, and
the Profit or Loss shall be allocated as provided in Section
6.2 and shall be properly credited or charged to the Capital
Accounts of the Members prior to the distribution of the
assets in liquidation pursuant to Section 6.4.
6.5.3.Allocations of Profit and Loss. All Profit and Loss
shall be allocated, and all distributions shall be made, to
the Persons shown on the records of the Company to have been
Members as of the last day of the taxable year for which the
allocation or distribution is to be made. Notwithstanding
the foregoing, unless the Company's taxable year is
separated into segments, if there is a Transfer or an Invol
untary Withdrawal during the taxable year, the Profit or
Loss shall be allocated between the original Member and the
successor on the basis of the number of days each was a
Member during the taxable year; PROVIDED, HOWEVER, the
Company's taxable year shall be segregated into two or more
segments in order to account for Profit, Loss, or proceeds
attributable to any extraordinary nonrecurring items of the
Company.
6.5.4.Compliance Amendments. The Members are hereby
authorized, upon the advice of the Company's tax counsel, to
amend this Article VI to comply with the IRC and the
Regulations promulgated under IRC Section 704(b); PROVIDED,
HOWEVER, that no amendment shall materially affect distribu
tions to a Member without the Member's prior written
consent.
6.6 Capital Transactions. Company Cash Flow attributable to a
Capital Transaction shall be distributed to the Members in
proportion to their Percentage Interests.
23
ARTICLE VII
DEVELOPMENT PROGRAM; INTELLECTUAL PROPERTY
7.1. Initial Grants.
7.1.1.Grants/Assignments from TMS. In addition to the
assignment of the VSC Technology to the Company as provided
in Section 5.1, TMS grants to the Company a non-exclusive,
worldwide, perpetual, royalty-free right and license under
the Patent Rights of TMS and Technology Controlled by TMS,
and the Non-VSC Trademarks (collectively, the "TMS Rights")
(a) to use the Non-VSC Technology (specifically excluding
Source Code, except as otherwise provided under the Escrow
Agreement) to develop VSC Technology and VSC Products; and
(b) to the extent not already provided for in this
Agreement, to grant to Members and to other Persons under
the TMS Rights a license to make, have made, use, offer for
sale, sell, sublicense and otherwise exploit in any way, Non-
VSC Technology in conjunction with VSC Products and VSC
Services for use or performance in the Field and in the
Territory, however, the Company shall not have the right to
make, have made, use, offer for sale, sell, sublicense and
otherwise exploit in any way the Non-VSC Technology where
only selected response items in the Field are processed, it
being understood that the Company and its sublicensees may
only process selected response items pursuant to the LLC DMR
License Agreement and in addition to and along with
processing constructed response items. This license shall
survive termination of this Agreement and upon any
liquidation or dissolution shall be assumed by the Members
as provided in Section 10.5. TMS hereby represents and
warrants to MI and to the Company that (aa) all of its
employees and all other Persons who have worked on or
contributed to in any way to the creation or development of
the TMS Rights have assigned all of their rights in the TMS
Rights to TMS and will assign all of their rights to future
TMS rights to TMS in connection with the Program, (bb)
TMS is the exclusive owner of the TMS Rights and has the
exclusive right to license the TMS Rights to the Company,
(cc) the TMS Rights are free and clear of any claims, liens
and encumbrances, (dd) TMS has no knowledge of any claim of
infringement or unauthorized use made against the TMS
Rights, (ee) the TMS Rights and their proposed license and
use under this Agreement and the License Agreements do not
infringe on any copyright or trademark, misappropriate any
trade secret right, or to the best of TMS' knowledge
infringe any issued patent or rights claimed in any
published application or other intellectual property rights
of any Person or Persons, (ff) Schedule I-B is a true,
accurate and complete list of the Non-VSC Technology, which
along with the VSC Technology represented in the VSC
Technology Package, constitute all of the Technology
necessary to operate the VSC Technology with the exception
of the items listed in Schedule I-C, (gg) Except for the
third party software listed in Schedule I-C, TMS has
incorporated no third party software into the VSC Technology
or into the Non-VSC Technology.
7.1.2.Company Undertakings; Sublicenses. In consideration
of the licenses granted and assignments made by TMS in this
Agreement, the Company hereby undertakes to pay all
royalties, sublicense fees and other costs or expenses
payable to Third Parties under a Third Party Agreement (to
the extent attributable to the use of the VSC Technology by
the Company or by the Members pursuant to the License
Agreements) associated with the acquisition or exercise of
such licenses by or on behalf of the Company for use in
connection with the Program. Schedule I-D hereto lists all
of such obligations as of the date of this Agreement. The
licenses granted or to be granted under Section 7.1.1 above
shall include the right to grant and further authorize
sublicenses solely with respect to the commercialization of
VSC Technology and solely in conjunction with VSC
Technology.
7.1.3.Rights of the Company to Patent Rights or
Technology Developed Outside the Program. In the event that
either TMS or MI develops, acquires or otherwise Controls
Patent Rights or Technology after the date of this Agreement
other than in connection with the Program and such Patent
Rights or Technology are useful in the Field ("Additional
Technology"), the Company shall have no right, title or
interest in said Additional Technology. Except with regard
to MI as to the MI Rights, the Member developing such
Additional Technology shall, however, disclose such
development to the other Member and for a period of three
(3) months from such disclosure, the Members shall negotiate
in good faith for an exclusive license by the disclosing
Member to the Company, in the Field. If after the expiration
of said period the Members have not reached an agreement on
such license, the disclosing Member shall have the right to
license said Additional Technology to any party without
restriction.
24
7.2. Sublicenses of Rights from the Company to TMS. The
Company grants to TMS a worldwide, exclusive, fully-paid up
perpetual right and license under the Program Patent Rights, and
VSC Technology to make, have made, offer to sell, sell,
sublicense and otherwise exploit: (a) VSC Products and VSC
Services outside the Field, and (b) products utilizing Technology
identified in Schedule I-I, where only selected response items
are processed.
7.3. Conduct of the Program.
7.3.1.General. TMS agrees to use commercially reasonable,
diligent and consistent efforts in the development of VSC
Products, all in accordance with the Program. TMS shall
not, however, be required to undertake activities in
furtherance of the Program in the absence of funding from
the Company pursuant to the provisions of this Agreement. As
used in this Agreement, the phrase "commercially reasonable,
diligent and consistent efforts" will mean that level of
effort which, consistent with the exercise of prudent
technical and business judgment, is applied by TMS to its
other software products at a similar stage of development
and with similar commercial potential or by other companies
to their software in a similar stage of development and with
similar commercial potential.
7.3.2.Program. TMS shall timely perform the VSC
Development Services in accordance with the then-current
Program which shall describe the proposed overall program of
development for each VSC Product. The Program shall include
(i) a summary of estimated VSC Development Costs and VSC
Direct Development Costs expected to be incurred by each
Member hereunder in performing activities of the Program
assigned to such Member pursuant to this Section 7.3 and
(ii) a detailed budget for all development activities
proposed for the applicable period.
7.3.3.Initial and Updated Program. The Parties have
agreed to an initial budget for the development activities
of the Company for the period beginning on the Effective
Date and ending on December 31, 2003. The Program shall be
updated annually by the Members not later than sixty (60)
days prior to January 1 of each year during the Program.
Each such updated Program shall include a detailed
description and budget for the development activities
proposed for the forthcoming calendar year. TMS shall be
primarily responsible for preparing the annual updates to
the Program and, in connection with the preparation of such
updates, shall consult with MI regarding the identification,
timing and execution of and budget for the major tasks and
detailed activities required to perform the updated Program.
Each such updated Program shall be signed by an authorized
representative of each of TMS and MI, and MI and TMS shall
each designate their respective members who will work on the
Program (the "Program Management Team"). The members of the
Program Management Team shall actively consult with one
another throughout the term of the Program so as to adjust
the specific work performed under the Program to conform to
evolving developments in technology and the results of the
development work performed. While minor adjustments to the
Program may be made from time to time upon approval of the
members of the Program Management Team, significant changes
in the scope or direction of the work and any changes in
funding exceeding twenty-five percent (25%) of the total
amount budgeted in any calendar year for the Program must be
approved by all Members, in the absence of which approval
the most recently approved Program shall remain in effect.
25
7.3.4.Breach/Termination or Assumption of the Program.
In addition to all remedies available at law, under the Act
or under this Agreement, in the event that either Member is
in breach of their Program duties as specified hereunder
(including, but not limited to, the obligation under Section
5.2 and 7.3 of this Agreement) or fails to adequately or
consistently perform such duties, then the non-defaulting
Member shall have the right, upon thirty (30) days' prior
written notice, at its election, if the default has not been
remedied by the defaulting Member, to either terminate the
Program or assume the responsibilities of the defaulting
Member, in which event the last sentence of Section 7.3.5
shall apply. Termination of the Program shall not affect the
rights granted to the Members under the License Agreements
or the Escrow Agreement.
7.3.5.Transfer, Withdrawal or Failure to Perform by TMS.
In the event there is a Transfer or Encumbrance by TMS of
its Membership Interest or a withdrawal by TMS as a Member
of the Company or a Buy-Sell Event with regard to TMS, then
MI shall have the right to perform the VSC Development
Services and develop the Program and assume all the rights
and obligations of TMS under this Article VII and Section
5.2. In such event, TMS shall assist in the transition and
assign all rights to development work performed under the
Program and to VSC Products to the Company and MI. MI and
the Company shall be entitled to reverse assemble and
decompile the VSC Technology and VSC Products and shall be
entitled to modify the VSC Technology and VSC Products and
to make derivative work therefrom.
7.3.6.Delivery of VSC Technology Package. TMS shall
deliver the VSC Technology Package with regard to the
Program to each of the Company and MI on a mutually-
agreeable time upon each new version Release of the VSC
Technology and at such other time as it may be requested by
MI or the Company.
7.4. Assistance by MI. It is understood and agreed that
TMS has the ability to perform the services for which it is being
paid the VSC Development Costs, but needs certain assistance from
MI to perfect same. If TMS requests the assistance of MI for the
development and maintenance of the VSC Technology, and the cost
thereof is not covered by the then current Program Budget, the
Company shall reimburse MI for employee travel and other expense
costs and, in the event of active programming by MI which would
result in the modification of the computer code, all direct and
indirect costs relating thereto consistent with the provisions
set forth in Section 5.2.2 of this Agreement and Section 6 of
Schedule II-A to this Agreement.
7.5. Intellectual Property Ownership.
7.5.1.Ownership and Assignment of Discoveries and
Inventions. All right, title and interest in all Inventions
and other Technology, whether or not patentable or
copyrightable, and any patent applications, patents or
copyrights based thereon, that are discovered, made or
conceived during and in connection with the Program solely
by employees of either Member or others acting on behalf of
such Member, or jointly by employees of both Members, shall
be assigned to and owned by the Company. Each of TMS and MI
shall promptly disclose to the Company and the other Member
the making, conception or reduction to practice of Program
Inventions by employees or others acting on behalf of such
Member.
7.5.2. Ownership of Trademarks. The Company shall own
all Product Marks and all goodwill therein shall inure to
the benefit of the Company, and all expenses incurred by a
Member with respect thereto shall be considered Program
Costs. All Product Marks shall be registered in the name
of the Company if and when registered.
26
7.5.3.Cooperation of Employees. Each of TMS and MI
represents and agrees that all employees or Persons acting
on its behalf in performing its obligations under this
Agreement shall be obligated under a binding written
agreement to assign to such Member, or as such Member shall
direct, all Program Inventions made or conceived by such
employee or other person in performance of such Member's
obligations under this Agreement. In the case of
non-employees working for other companies or institutions on
behalf of TMS or MI, TMS or MI, as applicable, shall have
the right to obtain assignments and/or licenses for all
Program Inventions made by such non-employees on behalf of
TMS or MI, as applicable, in accordance with the policies of
said company or institution. TMS and MI agree to undertake
to enforce such agreements (including, where appropriate, by
legal action) considering, among other things, the
commercial value of such Inventions.
7.6. Filing, Prosecution and Maintenance of Patent
Rights.
7.6.1.Filing, Prosecution and Maintenance. TMS, on
behalf of the Company, shall be responsible for the filing,
prosecution and maintenance of all Program Patent Rights.
TMS shall provide MI with copies of same and MI shall have
the right to provide input and review and to approve all
such matters. If, however, with respect to any particular
Invention or the filing, prosecution or maintenance of any
particular patent application with respect thereto, TMS has
neglected to file, prosecute or maintain the same, then MI
shall have the right to assume the responsibility for
filing, prosecuting and maintaining the same. MI shall be
equally entitled with TMS to all attorney/client, patent
office and other communications relating to the Program
Patent Rights and MI shall be given a power to inspect all
Program Patent Rights, including a power to inspect all
pending patent applications in the United States Patent
Office and any other offices that otherwise would hold such
applications in secrecy.
7.6.2.Patent Filing Costs. All costs associated with
filing, prosecuting and maintaining patent applications and
patents covering the Program Patent Rights shall be deemed
VSC Direct Development Costs. For purposes of this Section
7.6, "prosecution and maintenance" of Patent Rights shall be
deemed to include, without limitation, the conduct of
interferences or oppositions, and/or requests for
re-examinations, reissues or extensions of patent terms. If,
pursuant to Section 7.6.1 above, MI assumes the
responsibility of filing, prosecuting and maintaining a
patent application, all costs and fees associated with such
filings made by MI shall be considered to be a VSC Direct
Development Cost to the Company.
27
7.7. Cooperation. MI and TMS shall each make its
personnel available to to the other Member (or the other Member's
authorized attorneys, agents or representatives) to the extent
necessary or appropriate to enable TMS or MI, as the case may be
to file, prosecute and maintain patent applications and resulting
patents with respect to Program Technology and for periods of
time sufficient for TMS or MI, as the case may be, to obtain the
assistance it needs from such personnel. Where appropriate, MI,
or TMS, as the case may be, shall sign or cause to have signed
all truthful documents relating to said patent applications or
patents at no charge to such Member for the other Member's
execution of same.
7.8. No Other Technology Rights. Except as otherwise
expressly provided in this Agreement, under no circumstances
shall a Member hereto, as a result of this Agreement, obtain any
ownership interest in or other right to the Patent Rights or
Technology of the other Member, including items owned, Controlled
or developed by the other Member, or transferred by the other
Member to said Member at any time pursuant to this Agreement. It
is understood and agreed that this Agreement does not grant
either Member, or the Company, any license or other right in the
Patent Rights of the other Member except as expressly provided in
Article 5 hereof and this Article 7.
[***]
[*CONFIDENTIAL TREATMENT REQUESTED]
28
[***]
[*CONFIDENTIAL TREATMENT REQUESTED]
29
7.11 Enforcement of Patent Rights.
7.11.1.Enforcement. Subject to the provisions of this
Section 7.11, in the event that TMS or MI reasonably
believes that any Program Patent Rights or Program
Technology necessary for the use or sale of VSC Products or
VSC Services is infringed or misappropriated by a Third
Party or is subject to a declaratory judgment action arising
from such infringement in a country, in each case with
respect to the manufacture, sale or use of a product
potentially competitive with a VSC Product or VSC Service
within the Field, MI or TMS (respectively) shall promptly
notify the other Member hereto. Promptly after such notice
the Members shall meet to discuss the course of action to be
taken with respect to an Enforcement Action (as defined
below) with respect to such infringement or
misappropriation, including the control thereof and sharing
of costs and expenses related thereto, for the purposes of
entering into a litigation agreement setting forth the same
("Litigation Agreement"). If the Parties do not enter such
Litigation Agreement, TMS shall have the initial right (but
not the obligation) to enforce the intellectual property
rights within such Patent Rights or Technology, or defend
any declaratory judgment action with respect thereto (for
purposes of this Section 7.11, an "Enforcement Action");
provided that TMS agrees to indemnify MI for any and all
liabilities and expenses (including, without limitation,
reasonable attorneys' fees and other expenses of litigation)
incurred by MI as a result of such Enforcement Action. If
TMS does not elect to commence the Enforcement Action, and
MI does so, then MI shall agree to indemnify TMS for the
foregoing liabilities and expenses.
7.11.2.Information. Absent a Litigation Agreement, the
Member initiating or defending any such Enforcement Action
shall keep the other Member hereto reasonably informed of
the progress of any such Enforcement Action, and such other
Member shall have the right to participate with counsel of
its own choice at its own expense.
7.11.3.Enforcement Costs; Recoveries. Unless otherwise
agreed under Section 7.11.1, the Member initiating an
Enforcement Action shall, at the option of such Member, have
the right to either: (i) assume responsibility for all costs
and expenses of such Enforcement Action, in which case all
amounts recovered in the Enforcement Action (including
without limitation amounts resulting from a settlement
thereof) shall be retained by such Member; or (ii) include
such costs and expenses within the Administrative Costs of
the Company, in which case all amounts recovered in the
Enforcement Action, after reimbursing the Member initiating
the Action for any costs and expenses not previously so
offset, shall be shared by TMS and MI in accordance with
their respective Membership Interests.
30
7.12. Third Party Rights. The foregoing provisions of
this Article 7 shall be subject to and limited by any agreements
pursuant to which TMS and MI, as the case may be, acquired any
particular Patent Rights or Technology.
7.13. Third Party Agreements; Reports. To the extent
that a Member is obligated to provide reports to a Third Party
pursuant to a Third Party Agreement as a result of or reporting
on the status of activities of the other Member hereunder, the
other Member hereto shall reasonably assist the reporting Member
by providing information in its possession or control and in
sufficient detail to complete and submit such reports as
required. Any information to be included in such reports shall be
subject to the provisions of the Master Agreement relating to
confidentiality.
ARTICLE VIII
TRANSFER OF INTERESTS - VOLUNTARY TRANSFERS
8.1. Restrictions on Transfer. No Member, voluntarily or
involuntarily, may Transfer, or create or suffer to exist any
Encumbrance against, any Membership Interest, except as expressly
allowed either in this Article VIII or in Article IX.
Notwithstanding any other provision of this Agreement, any
purported Transfer or Encumbrance of any Membership Interest in
violation of this Agreement shall be void, and shall not transfer
any interest or title to the purported transferee. The Company
shall not be required to transfer on its books any Membership
Interest Transferred or Encumbered in violation of this
Agreement, or to treat the transferee as owner of the Membership
Interest in any manner.
31
8.2. Third-party Transfers by Members. A Member may
Transfer all or part of its Membership Interest to a third-party
in accordance with the provisions of this Section 8.2.
8.2.1. Transfer Request. If a Member intends to
transfer all or part of its Membership Interest (the
"Offered Interest") to any Person, the Member (the
"Transferor") first shall submit to the Company a written
request to transfer the Offered Interest (the "Transfer
Request"). The Transfer Request shall name specifically the
Person to whom the Transferor intends to transfer the
Offered Interest (the "Proposed Transferee") and the price
and other terms upon which the intended transfer is to be
made, and shall include copies of the written offer and
pertinent documentation.
8.2.2. Approval of Request. If all of the
Disinterested Members approve the proposed Transfer in
writing within thirty (30) days after receipt by the Company
of the Transfer Request, then, for a period of thirty (30)
days thereafter, the Transferor may Transfer its economic
rights in the Offered Interest to the Proposed Transferee,
on the terms specified in the Transfer Request; provided,
however, TMS' rights to transfer its economic interest shall
be subject to MI's rights under Section 7.3.5. If the
Transferor does not Transfer its economic rights in the
Offered Interest to the Proposed Transferee on the terms
specified in the Transfer Request within such thirty (30)
day period, the Offered Interest again shall be subject to
all of the restrictions on Transfer and other terms of this
Agreement. The transferee of an Offered Interest (i) shall
have only those rights specified in Section 8.3 (subject to
Section 7.3.5), (ii) shall be admitted as a Member only upon
full compliance with Section 8.2.6; and (iii) shall be
subject to all the restrictions on transfer imposed under
this Operating Agreement. The decision by a Disinterested
Member whether to approve a proposed Transfer of an Offered
Interest shall be in such Member's sole and absolute
discretion.
8.2.3. Denial of Request / Right of First Refusal. If
the Disinterested Members do not approve unanimously the
proposed Transfer as set forth in Section 8.2.2 within
thirty (30) days after receipt by the Company of the
Transfer Request, then the Transfer Request shall be deemed
an offer to sell the Offered Interest to the Company at the
lower of (i) the price offered by the Proposed Transferee or
(ii) the price as determined under Section 8.5, each upon
the other terms offered by the Proposed Transferee (the
"Transfer Offer"). The Company may accept the Transfer
Offer with respect to part or all of the Offered Interest by
resolutions approved by a Majority in Interest of the
Disinterested Members, delivered to the Transferor and all
other Members within forty-five (45) days following receipt
by the Company of the Transfer Request. If the Company does
not accept the Transfer Offer, each of the Members, except
the Transferor, may accept the Transfer Offer by giving
written notice thereof to the Transferor and all other
Members within sixty (60) days following receipt by the
Company of the Transfer Request. The Transfer Offer will be
allocated among the Members who accept it (the "Accepting
Members") in the proportion they mutually agree upon, or, in
the absence of agreement, in the ratio that each of the
Accepting Members' Percentage Interest, at the time of the
Company's receipt of the Transfer Request, bears to the
aggregate Percentage Interests, at the time of the Company's
receipt of the Transfer Request, of all the Accepting
Members. The parties that accept the Transfer Offer, if
any, whether the Company or Members, shall be referred to
hereinafter individually and collectively as the
"Transferee." Notwithstanding anything herein to the
contrary, the Transferor shall not be obligated to sell any
part of the Offered Interest to the Company or the Accepting
Members unless all of the Offered Interest is purchased
either by the Company, one or more other Members or a
combination of any of them. If the Transfer Offer is not
accepted with respect to the entire Offered Interest by the
Company and/or other Members within sixty (60) days
following receipt by the Company of the Transfer Request,
then the Transfer shall be deemed to have been approved, and
the provisions of Section 8.2.2 shall be applicable to the
Transfer.
32
8.2.4. Closing. The closing of the purchase of an
Offered Interest pursuant to this Section 8.2 shall take
place on a date agreed upon by the Transferor and the
Transferee, but not later than ninety (90) days after the
later of receipt by the Company of the Transfer Request or
determination of the purchase price under Section 9.5, as
the case may be. Upon payment of the purchase price, the
Transferor shall execute and deliver such assignments and
other instruments as are reasonably necessary to evidence
and carry out the transfer of the Offered Interest to the
Transferee, including a certificate dated as of the date of
closing containing a representation and warranty that the
Transferor has transferred to the Transferee good and
marketable title to the Offered Interest free and clear of
all Encumbrances. In connection with the sale of an Offered
Interest pursuant to this Section 8.2, unless otherwise
agreed by the Transferee and the Transferor, the Transferee
will assume the Transferor's allocable portion of Company
obligations, to the extent related to the Offered Interest,
as well as the Transferor's individual obligations, to the
extent related to the Offered Interest, other than income
tax liabilities of the Transferor.
8.2.5. Non-cash Consideration. If any consideration
to be received by the Transferor for the Offered Interest is
property other than cash, then the price shall be measured
to that extent by the fair market value of such non-cash con
sideration. Fair market value for purposes of this Section
8.2.5 shall mean the sum of (i) the fair market value of any
non-cash consideration offered for the Offered Interest,
plus (ii) the value of any special benefits to the
Transferor of such non-cash consideration to the extent they
reasonably can be identified and valued, plus (iii) the
amount of any additional expense or cost, including
additional taxes, incurred by the Transferor in accepting
cash instead of such non-cash consideration, in each case
based upon a realistic appraisal of such non-cash
consideration, special benefits, expense or cost agreed upon
by the Transferor and the Transferee. If the Transferor and
the Transferee are unable to agree, then they shall select
an independent qualified appraiser, whose determination
shall be final and conclusive, and the cost of the appraiser
shall be divided equally between the Transferor and the
Transferee. If the Transferor and the Transferee are unable
to agree on a single appraiser, then the Transferor shall
select and pay for an independent qualified appraiser, and
the Transferee shall select and pay for an independent
qualified appraiser. If the two appraisers agree, then their
determination shall be final and conclusive. If the two
appraisers are unable to agree, then they shall select a
third appraiser, and the determination of two of the three
appraisers shall be final and conclusive. The cost of the
third appraiser shall be divided equally between the
Transferor and the Transferee.
8.2.6. Additional Requirements for Valid Transfer. No
purported Transfer otherwise complying with this Section 8.2
will be effective until the Transferor and the Transferee
furnish to the Company such instruments and assurances as
the Members request, including, if requested, an opinion of
counsel satisfactory to the Company that the interest in the
Company being Transferred has been registered or is exempt
from registration under the Securities Act of 1933, as
amended (the "Securities Act"), and applicable state
securities laws. No Transfer will be effective if it would
result in the "termination" of the Company under 708 of the
IRC unless the Members give their prior written consent to
the Transfer. The approval required under this Section 8.2.6
will be the unanimous approval of the Disinterested Members.
No Transferee shall be admitted as a Member of the Company
unless the Disinterested Members give their prior written
consent.
33
8.2.7. Effect on Transferor's Interest. From the date
of the receipt by the Company of the Transfer Request to the
date of the Transfer of the Offered Interest pursuant to
this Article VIII, (i) the Percentage Interest represented
by the Transferor's Membership Interest will be excluded
from any calculation of aggregate Percentage Interests for
purposes of any approval required of Members under this
Agreement; and (ii) the Transferor shall take no action in
its capacity as Manager and the other Member shall act as
the sole Manager.
8.3. Rights of Transferee. Unless admitted as a Member
of the Company in accordance with Section 8.2.6, the transferee
of a Membership Interest or a part thereof shall not be entitled
to any of the rights, powers or privileges of its predecessor in
interest, except that such transferee shall be entitled to
receive and be credited or debited with its proportionate share
of the Company's Distributions and tax allocations.
8.4. Rights Remain with Company. In the event of a
Transfer by a Member, (i) the obligations of the Company under
the LLC DMR License Agreement, the MI VSC License Agreement, the
TMS VSC License Agreement and the Escrow Agreement shall remain
in full force and effect, (ii) all licenses and grants made by
the Transferring Member to the Company shall remain in full force
and effect, and (iii) prior to such Transfer, the Transferring
Member shall have complied in full with its obligations under
Section 7.5. In the event of a Transfer by TMS, MI shall have the
right to perform the TMS obligations under Article VII in
accordance with the terms of Section 5.2.
ARTICLE IX
INVOLUNTARY TRANSFERS
9.1. Buy-Sell. Each of the following events shall consti
tute a "Buy-Sell Event" under this Agreement:
(a) The dissolution of a Member or the revocation of its
charter;
(b) Any purported Transfer or Encumbrance of all or any
part of a Membership Interest in a manner not expressly permitted
by this Agreement;
(c) Any material breach of this Agreement by a Member
that is not cured within thirty (30) days after the Company or a
Member gives written notice of such breach to the Member;
(d) Any withdrawal by a Member from the Company in a
manner that is not expressly permitted by this Agreement;
(e) A judicial determination of the insolvency of any
Member;
[***]
[***]
(i) The Member makes an assignment for the benefit of
creditors;
(j) The Member files a voluntary petition of bankruptcy;
(k) The Member is adjudged bankrupt or insolvent or
there is entered against the Member an order for relief in any
bankruptcy or insolvency proceeding;
(l) The Member files a petition seeking for the Member
any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any statute, law
or regulation;
(m) The Member seeks, consents to or acquiesces in the
appointment of a trustee for, receiver for, or liquidation of the
Member or of all or any substantial part of the Member's
properties;
(n) The Member files an answer or other pleading
admitting or failing to contest the material allegations of a
petition filed against the Member in any proceeding described in
subsections (i) through (l);
(o) Any proceeding against the Member seeking
reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any statute, law
or regulation continues for one hundred twenty (120) days after
the commencement thereof, or the appointment of a trustee,
receiver or liquidator of the Member or all or any substantial
part of the Member's properties without the Member's agreement or
acquiescence, which appointment is not vacated or stayed for one
hundred twenty (120) days or, if the appointment is stayed, for
one hundred twenty (120) days after the expiration of the stay,
during which period the appointment is not vacated;
(p) An execution against a Member's Membership
Interest is initiated and not discharged within twenty (20) days
after initiation; or
(q) A foreclosure against a Member's Membership Interest
is initiated and not discharged within the earlier of thirty (30)
days after initiation or three (3) days prior to the final order.
[*CONFIDENTIAL TREATMENT REQUESTED]
34
9.2. Buy-Sell Notice. Upon the occurrence of a Buy-Sell
Event, the Member to whom such event has occurred (the "Withdraw
ing Member"), shall give notice of the Buy-Sell Event (the "Buy-
Sell Notice") to the Members within ten (10) days after its
occurrence. If the Withdrawing Member fails to give the Buy-Sell
Notice, any Member may give the notice at any time thereafter,
and by so doing commence the buy-sell procedure provided for in
this Article IX. The date on which the Buy-Sell Notice is
delivered to the Company shall be referred to herein as the
"Notice Date." The Withdrawing Member's Membership Interest, in
whole and in part, shall be referred to herein as the
"Withdrawing Interest." For purposes of this Article IX, a
Withdrawing Member shall also mean the owner of a Withdrawing
Interest.
9.3. Purchase Option. Upon the occurrence of a Buy-Sell
Event, the Company shall have an option to purchase the
Withdrawing Interest on the terms and conditions set forth in
this Article IX (the "Purchase Option"). The Company may elect
to exercise the Purchase Option by resolutions approved by a
Majority in Interest of the Disinterested Members, delivered to
the Withdrawing Member and all Members within thirty (30) days
after the Notice Date. If the Company does not elect to exercise
the Purchase Option, each of the Members, except the Withdrawing
Member and any other Withdrawing Member, may exercise the
Purchase Option. The Purchase Option will be allocated among the
Members who elect to purchase (the "Purchasing Members") in the
proportion they mutually agree upon, or, in the absence of
agreement, in the ratio that each of the Purchasing Members'
Percentage Interest, at the time of the Buy-Sell Event, bears to
the aggregate Percentage Interests of all Purchasing Members, at
the time of the Buy-Sell Event. The Purchasing Members must give
notice of their election to exercise the Purchase Option to the
Withdrawing Member and all other Members within forty-five
(45) days after the Notice Date. The party or parties that
exercise the Purchase Option, if any, whether the Company or
Members or a Purchase Option Assignee (as defined in Section
9.4), shall be referred to hereinafter individually and
collectively as the "Purchaser."
35
9.4. Assignment of Purchase Option. If, at the
occurrence of a Buy-Sell Event, there exist only two (2) then-
current Members, including the Withdrawing Member, the Member
that is not withdrawing shall have the option during the thirty
(30) day period after the Notice Date to assign its Purchase
Option to any Person other than the Withdrawing Member (the
"Purchase Option Assignee") by notifying the Withdrawing Member
and the Company of such assignment in writing. After delivery of
such notice, the Purchase Option Assignee shall have the option
to purchase the Withdrawing Interest on the same terms and
conditions as would apply to the Member from which the Purchase
Option was assigned. However, the Purchase Option Assignee shall
not have the right of assignment set forth in this Section 9.4.
In the event the Purchase Option Assignee does not exercise the
Purchase Option, the Purchase Option Assignee shall have no
further rights under this Agreement.
9.5. Agreement on Valuation. Unless otherwise agreed in
writing by the Withdrawing Member and the Purchaser within sixty
(60) days after the Notice Date, the purchase price for the
Withdrawing Interest shall be the value of the Withdrawing
Interest as of the Buy-Sell Event, as determined by an
independent qualified appraiser agreed upon by the Withdrawing
Member and the Purchaser. The appraiser's determination shall be
final and conclusive, and the cost of the appraiser shall be
divided equally between the Withdrawing Member and the Purchaser.
If the Withdrawing Member and the Purchaser are unable to agree
on a single appraiser, then the Withdrawing Member shall select
and pay for an independent qualified appraiser, and the Purchaser
shall select and pay for an independent qualified appraiser. If
the two appraisers agree, then their determination shall be final
and conclusive. If the two appraisers are unable to agree, then
they shall select a third appraiser, and the determination of two
of the three appraisers shall be final and conclusive. The cost
of the third appraiser shall be divided equally between the
Withdrawing Member and the Purchaser.
36
9.6. Closing. The closing (the "Closing") of the
purchase of a Withdrawing Interest pursuant to this Article IX
shall take place on a date agreed upon by the Withdrawing Member
and the Purchaser, but not later than ninety (90) days after the
later of the Notice Date or the date the purchase price is
determined by the appraisal process if the purchase price has not
been agreed upon. The purchase price for the Withdrawing
Interest will be payable at Closing in the manner set forth in
Section 9.7. Upon payment of the purchase price, the Withdrawing
Member shall execute and deliver such assignments and other
instruments as are reasonably necessary to evidence and carry out
the transfer of the Withdrawing Interest to the Purchaser,
including a certificate dated as of the date of Closing
containing a representation and warranty that the Withdrawing
Member has transferred to the Purchaser good and marketable title
to the Withdrawing Interest free and clear of all Encumbrances.
In connection with the sale of a Withdrawing Interest pursuant to
this Article IX, unless otherwise agreed by the Withdrawing
Member and the Purchaser, the Purchaser will assume the
Withdrawing Member's allocable portion of Company obligations, to
the extent related to the Withdrawing Interest, as well as the
Withdrawing Member's individual obligations, to the extent
related to the Withdrawing Interest, other than income tax
liabilities of the Withdrawing Member.
9.7. Payment of Purchase Price. The purchase price for
the Withdrawing Interest shall be paid as follows:
9.7.1.Purchase Price. The purchase price for the
Withdrawing Interest purchased pursuant to this Article IX
shall be paid, at the option of the Purchaser, by cash or by
the delivery of a promissory note (the "Note") and a cash
down payment; provided, however, if the purchase price is
$100,000 or less, the entire purchase price shall be paid in
cash. The cash down payment shall equal at least twenty
percent (20%) of the purchase price. The Note shall provide
for equal quarterly installments of principal and accrued
interest over a two (2) year term. The term shall begin on
the Closing, and the Note shall bear interest at the minimum
applicable rate allowed at the time under the imputed
interest rules of the IRC. The Note may be prepaid in whole
or in part at any time without penalty.
9.7.2.Security Interest. If part of the purchase price
is paid by delivery of the Note, then, as security for
payments due under the terms of the Note, the Purchaser
shall grant to the Withdrawing Member a security interest in
the Withdrawing Interest by executing a pledge and escrow
agreement and whatever additional documents may be necessary
to perfect the security interest of the Withdrawing Member.
The security documents shall provide that the Purchaser
shall deposit the Withdrawing Interest with an escrow agent
and that if the Purchaser defaults under the terms of the
Note or the security documents, the Withdrawing Member shall
have the right to receive possession of the Withdrawing
Interest and to exercise all other rights of a secured party
under the North Carolina Uniform Commercial Code.
37
9.8. Effect on Withdrawing Member's Interest. From the
date of the occurrence of the Buy-Sell Event and thereafter, (i)
the Withdrawing Member shall have only the rights of a transferee
of a Membership Interest set forth in Section 8.3; (ii) the
Withdrawing Member shall not be considered a Member for any
purpose under this Agreement; (iii) the Percentage Interest
represented by the Withdrawing Interest, if any, will be excluded
from any calculation of aggregate Percentage Interests for
purposes of any approval required of Members under this
Agreement; (iv) the Withdrawing Member shall take no action in
its capacity as Manager; and (v) if the Withdrawing Member is
TMS, Section 7.3.5 shall apply. If the Withdrawing Interest is
purchased pursuant to the Purchase Option, after Closing, the
Purchaser, if not the Purchasing Member, shall have only those
rights specified in Section 8.3 with respect to the Withdrawing
Interest, and shall be admitted as a Member with respect to the
Withdrawing Interest only upon full compliance with Section
8.2.6.
9.9. Failure to Exercise Purchase Option. Notwith
standing anything to the contrary in this Agreement, the
Withdrawing Member shall not be obligated to sell the Withdrawing
Interest pursuant to this Article IX unless the Company, the
Members or a combination of any of them exercise the Purchase
Option with respect to the entire Withdrawing Interest. If the
Purchase Option is not exercised with respect to the entire
Withdrawing Interest by the Company and/or Members within forty-
five (45) days after the Notice Date, then, by giving written
notice to the Company and all of the Members within sixty (60)
days after the Notice Date, the Withdrawing Member may decline to
sell the Withdrawing Interest to the Purchaser. In such event,
the Purchase Option shall be deemed terminated with respect to
the Buy-Sell Event that triggered the Purchase Option. However,
the Withdrawing Interest shall continue to be subject to all of
the restrictions on Transfer and other terms of this Agreement,
except with respect to the Buy-Sell Event that triggered the
terminated Purchase Option, and the Person owning the Withdrawing
Interest shall have only those rights specified in Section 8.3
with respect to the Withdrawing Interest, and shall be admitted
(or re-admitted) as a Member with respect to the Withdrawing
Interest only upon full compliance with Section 8.2.6.
9.10. 18-304 of the Act. Nothing in this Article IX
shall effect the provisions of 18-304 of the Act, which shall
remain in full force and effect notwithstanding the exercise or
failure to exercise a Purchase Option.
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9.11. Rights Remain with Company. In the event of a
Buy-Sell Event by a Member or a Member ceases to be a Member
pursuant to 18-304 of the Act, (i) the obligations or rights of
the Company and Members under the MI VSC License Agreement, the
TMS VSC License Agreement, the LLC DMR License Agreement and the
Escrow Agreement shall remain in full force and effect, and (ii)
all licenses and grants made by the Withdrawing Member to the
Company shall remain in full force and effect. In the event of a
Buy-Sell Event by TMS, the terms of Section 7.3.5 shall apply.
ARTICLE X
DISSOLUTION AND LIQUIDATION OF THE COMPANY
10.1. Dissolution Events. The Company will be
dissolved upon the happening of any of the following events:
(a) All or substantially all of the assets of the Company
are sold, exchanged, or otherwise transferred (unless the
Members have elected to continue the business of the
Company);
(b) All Members sign a document stating their election to
dissolve the Company;
(c) The entry of a final judgment, order, or decree of a
court of competent jurisdiction adjudicating the Company to
be bankrupt and the expiration without appeal of the period,
if any, allowed by applicable law in which to appeal;
(d) The expiration of the term of the Company (as set
forth in Section 1.6); or
(e) The entry of a decree of judicial dissolution or the
issuance of a certificate for administrative dissolution
under the Act.
10.2. Continuation. Upon the occurrence of any of the
events described in Section 10.1(e) above with respect to any of
the Members, the business of the Company will be continued if
within ninety (90) calendar days a Majority in Interest of the
remaining Members elect to continue the business of the Company.
If the Members fail to continue the Company's business as
provided in this Section, the Company will be liquidated under
Section 10.3.
10.3. Liquidation. Upon the happening of any of the
events specified in Section 10.1 and, if applicable, the failure
to continue the business of the Company under Section 10.2, the
Members, or any liquidating trustee elected by a Majority in
Interest of the Members, will commence as promptly as practicable
to wind up the Company's affairs unless the Members or the
liquidating trustee (either, the "Liquidator") determines that an
immediate liquidation of Company assets would cause undue loss to
the Company, in which event the liquidation may be deferred for a
time determined by the Liquidator to be appropriate. Assets of
the Company may be liquidated or distributed in kind, as the
Liquidator determines to be appropriate. The Members will
continue to share Company Cash Flow, Profits, and Losses during
the period of liquidation in the manner set forth in Article VI.
The proceeds from liquidation of the Company, including repayment
of any debts of Members to the Company, and any Company assets
that are not sold in connection with the liquidation will be
applied in the following order of priority:
(a) To payment of the debts and satisfaction of the other
obligations of the Company, including without limitation
debts and obligations to Members;
(b) To the establishment of any reserves deemed appropri
ate by the Liquidator for any liabilities or obligations of
the Company, which reserves will be held for the purpose of
paying liabilities or obligations and, at the expiration of
a period the Liquidator deems appropriate, will be distribut
ed in the manner provided in Section 10.3(c); and
(c) To the payment to the Members of the positive bal
ances in their respective capital accounts, pro rata, in
proportion to the positive balances in those capital
accounts after giving effect to all allocations and distri
butions under Article VI for all prior periods, including
the period during which the process of liquidation occurs.
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10.4. Articles of Dissolution. Upon the dissolution
and commencement of the winding up of the Company, the Members
shall cause Articles of Dissolution to be executed on behalf of
the Company and filed with the Secretary of State, and the
Members shall execute, acknowledge, and file any and all other
instruments necessary or appropriate to reflect the dissolution
of the Company.
10.5. Effect of Liquidation. Notwithstanding Section
6.4.1, Section 10.1 or Section 10.3, in the event of a
dissolution or liquidation of the Company, (i) each Member shall
own an undivided interest in the VSC Technology, Product Marks,
Program Technology and all Company Patent Rights, subject to the
rights of MI under the MI DMR License Agreement and the MI VSC
License Agreement and TMS under the TMS VSC License Agreement,
with no obligation to account to or pay royalties or other funds
to the other Member or to account to or pay the other Member for
future exploitation or use of the VSC Technology and any
derivative works, (ii) each Member shall grant to the other
Member a perpetual, paid-up, non-exclusive license to whatever
licenses are necessary to implement the VSC Technology,
including, but not limited to, those licenses under Section
7.1.1, and (iii) each Member shall own an undivided interest in
the licenses granted to the Company under Section 7.1.1 with no
obligation to account to or pay royalties or other funds to the
other Member, (iv) each Member shall be entitled to reverse
assemble and decompile the VSC Technology and shall be entitled
to modify the VSC Technology and make derivative works therefrom,
and (v) each Member shall own an undivided interest in, and be a
joint owner of, the Product Marks and shall thereafter be free to
use and exploit the Product Marks on and in connection with the
VSC Technology and the VSC Products without obligation to the
other Member except that (aa) each Member shall adopt and
thereafter use one or more distinctive additional words in
conjunction with each Product Mark so as to distinguish the
Product Mark as used by such Member from the equivalent Product
Mark as used by the other Member in order to avoid confusion
amongst members of the public; and (bb) each Member agrees that
the goods and services it thereafter provides under the Product
Marks shall on the whole be of workmanlike quality that is
generally considered acceptable in the Education Market or, in
the alternative, shall not be significantly lower in quality
than the products and services provided under the Product Marks
before dissolution or liquidation of the Company. Each Member
shall be entitled to register its distinctive variations of the
Product Marks in its individual name, and the other Member shall
not oppose any such application for registration and shall
cooperate by signing truthful affidavits in support of such
application if requested to do so.
40
ARTICLE XI
COVENANTS
11.1. Covenants. For and in consideration of the
issuance of the Membership Interest by the Company to the
Members, all of the matters contained in this Operating
Agreement, and the information each Member will obtain as a
Member of the Company, each Member acknowledges and agrees to
comply with the terms of this Article XI. Each Member recognizes
and agrees that it would be detrimental to its investment in the
Company for another Member to compete with the Company, either
during or after a Member's ownership of its Membership Interest.
Therefore, for and in consideration of the mutual covenants
contained herein and all the matters in this Agreement, the
Members agree to the provisions of this Article XI. Each Member
recognizes and agrees that the restrictions and covenants
contained in this Article XI are reasonable and necessary for the
protection of the legitimate business interests and good will of
the Company, and each Member acknowledges that the mutual
covenants and restrictions contained in this Article XI are full
and adequate consideration for the covenants and restrictions
binding that Member.
11.2. Acknowledgment. Each Member acknowledges that the
Company develops and licenses the VSC Technology, and that a
Member's status as a Member will give the Member access to client
names, file information and work, and the agreements and
covenants in this Article XI are essential to protect the
business and good will of the Company.
11.3. Competing Business. During the time a Member owns a
Membership Interest of the Company, a Member will not, directly
or indirectly, compete with the Company in the Territory in the
sale or license of VSC Technology to third parties; provided MI
shall be entitled to create, develop, license, sell, utilize and
otherwise exploit other Technology or systems to accomplish the
same or similar purpose as the VSC Technology, including, but not
limited to, online testing and other scoring systems (the "MI
Rights"). This Section 11.3 shall not prohibit permitted
activities under the MI DMR License Agreement, the MI VSC License
Agreement or the TMS VSC License Agreement.
11.4. Extended Restrictions. A Member who ceases to be
a Member for any reason other than liquidation or dissolution of
the Company shall comply with the restrictions set forth in
Section 11.3 in the Territory for a period of twenty-four (24)
months after the closing of the transfer of the Member's
Membership Interest in accordance with the provisions of this
Agreement.
11.5. Ownership of Information. Except as otherwise
provided in this Agreement, all memoranda, notes, lists, records
and other documents or papers (and all copies thereof), including
such items stored in computer memory, microfiche, or by any other
means, made or compiled by or on behalf of Member or made
available to a Member relating to the Company are and shall be
the Company's property and shall be delivered to the Company
promptly upon the termination of a Member's status as a Member of
the Company or at any other time upon request by the Company.
41
11.6. Validity. The provisions and clauses of this
Article XI are separate and independent covenants and the
invalidity or unenforceability of any one or more of the
provisions or clauses hereof shall not affect the validity or
enforceability of the remaining provisions or clauses. If the
court determines that any other covenants or any part thereof is
unenforceable because of the duration or geographic scope, such
court shall have the power to reduce the duration or scope of
such provision, as the case may be, and in its reduced form such
provision shall then be enforceable.
11.7. Tolling. The Term shall be tolled during any
period of violation by a Member and/or any period of litigation
required to enforce the Member's obligations under this Article
XI.
ARTICLE XII
MISCELLANEOUS
12.1. Master Agreement. Unless specifically provided
otherwise herein, the Master Agreement shall govern this
Agreement to the extent provided therein.
12.2. Records. The records of the Company will be
maintained at the Company's principal place of business or at any
other place the Members select, provided the Company keeps at its
principal place of business the records required by the Act to be
maintained there. Appropriate records in reasonable detail will
be maintained to reflect income tax information for the Members.
Each Member, at its expense, may inspect and make copies of the
records maintained by the Company and may require an audit of the
books of account maintained by the Company to be conducted by the
independent accountants for the Company.
12.3. Reserves. The Members may cause the Company to
create reasonable reserve accounts to be used exclusively to fund
Company operating deficits and for any other valid Company
purpose. The Members shall in their sole discretion determine the
amount of payments to such reserve accounts.
12.4. Amendments. No amendment to this Agreement or to
the Certificate of Formation will be valid or binding upon the
Members or the Company, nor will any waiver of any term of this
Agreement be effective, unless in writing and signed by each
Member.
12.5. Additional Documents. Each party hereto agrees
to execute and acknowledge all documents and writings which the
Members may deem necessary or expedient in the creation of the
Company and the achievement of its purposes, including but not
limited to, the Certificate of Formation and any amendments or
cancellation thereof.
42
12.6. Representations of Members. Each Member
represents and warrants to the Company and every other Member
that it:
(i) is fully aware of, and is capable of bearing, the risks
relating to an investment in the Company;
(ii) understands that its interest in the Company has not
been registered under the Securities Act or the securities law of
any jurisdiction in reliance upon exemptions contained in those
laws;
(iii) has acquired its interest in the Company for its own
account, with the intention of holding the interest for
investment and without any intention of participating directly or
indirectly in any redistribution or resale of any portion of the
interest in violation of the Securities Act or any applicable
law;
(iv) it has the requisite capacity, power and authority to
enter into this Agreement and to carry out its obligations
hereunder;
(v) this Agreement has been duly and validly executed and
delivered by it and constitutes a valid and binding Agreement of
it enforceable in accordance with its terms; and
(vi) this Agreement has been approved by its Board of
Directors and it has all other requisite corporate power and
authority to enter into this Agreement and to carry out the
transactions and obligations contemplated hereby.
12.7. Survival of Rights. Except as provided herein to
the contrary, this Agreement shall be binding upon and inure to
the benefit of the parties, their successors and assigns.
12.8. Interpretation and Governing Law. When the
context in which words are used in this Agreement indicates that
such is the intent, words in the singular number shall include
the plural and vice versa. The masculine gender shall include the
feminine and neuter. The Article and Section headings or titles
shall not define, limit, extend, or interpret the scope of this
Agreement or any particular Article or Section.
12.9. Severability. If any provision, sentence,
phrase, or word of this Agreement or the application thereof to
any person or circumstance shall be held invalid, the remainder
of this Agreement, or the application of such provision,
sentence, phrase, or word to persons or circumstances, other than
those as to which it is held invalid, shall not be affected there
by.
12.10. Agreement in Counterparts. This Agreement may be
executed in several counterparts, each of which shall be deemed
an original, and all of which shall constitute one and the same
instrument. In addition, this Agreement may contain more than one
counterpart of the signature pages and this Agreement may be
executed by the affixing of the signatures of each of the Members
to one of such counterpart signature pages; all of such signature
pages shall be read as though one, and they shall have the same
force and effect as though all of the signers had signed a single
signature page.
43
12.11. Tax Matters Manager. For purposes of this Agree
ment, the Members may designate one Member as the Tax Matters
Manager.
12.12. No Third Party Beneficiaries. This Agreement is
made and entered into for the sole protection and benefit of the
parties hereto, and no other Person, including, but not limited
to, any creditor of the Company or of any Member, shall be a
direct or indirect beneficiary of, or shall have any direct or
indirect cause of action or claim in connection with, this
Agreement. No creditor of the Company or of any Member will be
entitled to require the Members to solicit or accept any loan or
additional capital contribution for the Company or to enforce any
right which the Company or any Member may have against a Member,
whether arising under this Agreement or otherwise.
12.13. Additional Members. Additional Members may be
admitted to the Company only with the unanimous consent of the
Members.
44
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, the undersigned, being all of the
Members of the Company, have caused this Agreement to be duly
adopted by the Company and do hereby assume and agree to be bound
by and to perform all of the terms and provisions set forth in
this Agreement.
COMPANY:
VSC TECHNOLOGIES, LLC
BY: MEASUREMENT INCORPORATED, Member/Manager
BY: /s/ Henry H. Scherich
------------------------------
Title President
BY: TMS, INC., Member/Manager
BY: /s/ Deborah L. Klarfeld
------------------------------
Title President
MEMBERS:
MEASUREMENT INCORPORATED
BY: /s/ Henry H. Scherich
------------------------------
Title President
TMS, INC.
BY: /s/ Deborah L. Klarfeld
------------------------------
Title President