BINDING MEMORANDUM OF UNDERSTANDING
BINDING
MEMORANDUM OF UNDERSTANDING
THIS
BINDING MEMORANDUM OF UNDERSTANDING (this “Memorandum”) is made and entered into
as of August 7, 2009 (the “Effective Date”) by and between National Quality
Care, Inc., a Delaware corporation (“NQCI”), Xcorporeal, Inc., a Delaware
corporation (“Xcorp”), and Xcorporeal Operations, Inc., a Delaware corporation
(“Xcorp Ops” and, together with Xcorp, “XCR”). NQCI and XCR will be
collectively referred to herein as “the Parties.”
1. Background;
Effect of Memorandum.
1.1 Arbitration;
Award. NQCI and Xcorp Ops were parties to an arbitration
proceeding filed on December 1, 2006, in connection with which the arbitrator
issued a Partial Final Award on April 13, 2009 (the
“Award”). Pursuant to the Award, XCR was issued a perpetual exclusive
license to certain technology owned by NQCI (the “License”), and NQCI was
granted a royalty with respect to certain income received by XCR. The
Parties desire to enter into this Memorandum to clarify, resolve and settle
certain issues and any disputes that have arisen with respect to the
Award.
1.2 Polymer Technology; Joint
Venture. In order to settle and compromise all issues that
have arisen with respect to the status and ownership of rights to certain
intellectual property comprised of U.S. Patent Application No. 12/479,513 and
related inventions, technology, intellectual property, patents, products and
know how (the “Polymer Technology”), the Parties have agreed to convey, assign
and transfer all of their rights, title and interest in and to the Polymer
Technology to a limited liability company to be formed under the laws of the
State of Delaware (the “Joint Venture”), which will be jointly owned by the
Parties and through which the Parties will jointly pursue the development and
exploitation of the Polymer Technology. The Parties covenant and
agree that the terms and conditions set forth herein constitute their respective
final understandings and agreements with respect to ownership and control of the
Polymer Technology.
1.3 Definitive
Agreement. As more fully described in Section 2 below, the
Parties shall use their best efforts to negotiate and enter into a full-length
written limited liability company agreement (the “Operating Agreement”)
containing terms and conditions governing the Joint Venture consistent with the
provisions of this Memorandum, together with such other terms and conditions
upon which the Parties shall mutually agree. Notwithstanding the
foregoing, and regardless of whether the Parties ultimately enter into the
Operating Agreement, all of the terms of this Memorandum shall be fully
effective and binding as of the Effective Date.
2. Formation
of Joint Venture. The Parties shall use their commercially
reasonable efforts to execute and deliver the Operating Agreement within 60 days
following the Shareholder Vote Date (as defined below) and, in connection
therewith, shall form or cause to be formed a Delaware limited liability company
to be named as mutually agreed by the Parties. Notwithstanding the
foregoing, such limited liability company may be formed prior to the execution
and delivery of the Operating Agreement, provided that in such event, the Joint
Venture shall be operated in a manner consistent with this Memorandum and
provided, further, that any amounts reasonably incurred by any Party in
connection therewith shall be treated as expenses that have been advanced on
behalf of, and will be reimbursed by, the Joint Venture. The
Operating Agreement shall set forth the terms and conditions of the Joint
Venture and shall include, in addition to such terms and conditions upon which
the Parties may mutually agree, the following provisions:
2.1 Members of the Joint
Venture. The Joint Venture initially will have two members
(the “Members”): NQCI, which will have a 60% membership interest in
the Joint Venture, and XCR, which shall have a 40% membership interest in the
Joint Venture (which interest shall be held of record by either Xcorp or Xcorp
Ops, as determined by XCR).
2.2 Board of Managers;
Officers. The Joint Venture shall be managed by a three-member
Board of Managers (the “Board”). Until such time as NQCI fails to
hold a greater percentage of the membership interests in the Joint Venture than
XCR, two members of the Board (each, a “Manager”) shall be designated by NQCI
and until such time as XCR fails to hold at least 10% of the membership
interests in the Joint Venture, one Manager shall be designated by
XCR. The initial NQCI Managers shall be Xxxxxx Xxxxxx and Xxxxxx
Xxxxxx, and the initial XCR Manager shall be Xxxxx XxXxxxx or such other person
as the board of directors of Xcorp shall appoint. Subject to the
second sentence of this Section 2.2, a Manager may be removed or replaced only
by the Member that designated or elected such Manager. At any time
and from time to time, any of the Parties shall be entitled to replace one or
more of its designees with an observer. NQCI may appoint a Chairman
and/or a Chief Executive Officer, who will have day-to-day management authority
with respect to the Joint Venture, subject to oversight by the Board and the
terms and conditions of this Memorandum and the Operating Agreement, and a Chief
Scientific Officer, who may be employed by the Joint Venture upon customary and
reasonable terms and conditions. No member of the Board will be
compensated by the Joint Venture for service as a Manager. If a
Manager provides additional services to the Joint Venture as an employee or a
consultant, he or she may be compensated for such additional services pursuant
to such employment or consulting agreement as is mutually reasonably approved in
writing by the Parties, provided that with the exception of reimbursement of
reasonable expenses incurred in connection with their services performed for the
Joint Venture in their official officer capacity, neither Xxxxxx Xxxxxx nor
Xxxxx XxXxxxx (or such other persons as may be appointed or elected in their
place) shall in any event receive a salary or other compensation from the Joint
Venture.
2.3 Governance; Restrictive
Covenants. Except as otherwise required by law, all decisions
related to the operation of the Joint Venture shall be made by a majority of the
Board, except that the following actions by the Joint Venture or any of its
subsidiaries shall require the affirmative vote or written consent of the
holders of at least 90.1% of the membership interests of the Joint Venture then
outstanding:
(i) Except as
otherwise expressly set forth in the Operating Agreement, payment of dividends
or distributions, unless XCR receives its pro rata share.
(ii) Purchase
of membership interests or other securities by the Joint Venture, unless XCR is
offered the opportunity to sell its membership interests on the same
terms.
(iii) Mergers,
significant acquisitions or divestitures of a material portion of the Joint
Venture’s assets.
(iv) Recapitalizations,
reorganizations or liquidations.
(v) Any
transaction resulting in a change of control of the Joint Venture (including any
parent holding company organized for the purpose of controlling the Joint
Venture) or any of its subsidiaries.
(vi) Entry
into new lines of business.
(vii) Transactions
with affiliates.
(viii) Amendments
to the Joint Venture’s or any of its subsidiary’s constitutive documents;
provided that any such amendment that adversely affects any Member in a manner
different than other Members shall require the consent of such
Member.
(ix) Increases
in compensation or benefits for senior management.
(x) Other
activities outside the ordinary course of business.
2.4 Capital
Contributions. In exchange for their respective membership
interests as specified in Section 2.1 hereof, NQCI shall contribute, convey,
assign and transfer to the Joint Venture any and all of its right, title and
interest in and to the Polymer Technology, and XCR shall contribute, convey,
assign and transfer (i) to the Joint Venture any and all right, title and
interest that it may have in and to the Polymer Technology and (ii) $500,000 in
cash to the bank account established by the Joint Venture, on the later of (a)
three business days of the consummation of the first to occur of the Proposed
Transaction or another Transaction (as such terms are defined below) and (b) the
date on which the Joint Venture establishes such bank account, for which the
Parties (or their representatives) shall be joint signatories. In
addition, provided that a Transaction has been consummated, NQCI shall
contribute on XCR’s behalf an additional $500,000 in cash to the Joint Venture
at such time as the Board reasonably determines that such funds are required to
facilitate the Joint Venture’s development of the Polymer Technology, which
amount will be reimbursed to NQCI by XCR from the first funds distributed to XCR
by the Joint Venture (other than pursuant to the quarterly tax distributions, as
provided below). All capital contributions to the Joint Venture in
excess of those provided above shall be made pro rata by the Parties in
accordance with their respective membership interests in the Joint Venture as of
the time of such additional contribution(s).
2.5 Liquidity
Rights. Except for transfers to affiliates of the Members who
remain bound by the terms and conditions of the Operating Agreement, transfers
by the Members of their membership interests in the Joint Venture shall be
subject to customary rights of first refusal and co-sale rights, as shall be set
forth with greater particularity in the Operating Agreement. All such
rights shall terminate upon a registered public offering of the Joint Venture’s
securities (an “IPO”) or a sale, merger or other change of control of the Joint
Venture (a “Change of Control”), or at such time as both of the Members fail to
hold at least 10% of the membership interests of the Joint
Venture. In addition, following an IPO, and for so long as a Member
may not sell all of its equity interests in the Joint Venture within a
three-month period pursuant to Rule 144 under the Securities Act of 1933, as
amended, the Members shall have unlimited piggyback registration rights and the
right to up to two demand registrations (subject to lock-ups and other
underwriter requirements).
2.6 Preemptive Rights;
Anti-Dilution Rights. In the event that the Joint Venture
shall at any time prior to an IPO or a Change of Control propose to offer, issue
or sell additional membership interests or other equity securities (including
any debt or other securities convertible into equity of the Joint Venture), each
Member who holds at least 10% of the membership interests then outstanding shall
receive at least 30 days’ prior written notice of the proposed offer, issuance
or sale, which notice shall include the number of membership interests or other
equity securities proposed to be offered, issued or sold, the proposed price and
the name of the proposed investor(s), if any, and an opportunity to purchase its
pro rata share thereof on the terms proposed in such
offer/issuance. In addition, the Operating Agreement shall contain
customary anti-dilution protections for the Members in connection with any
split, dividend or recapitalization of the Joint Venture, or in the event of any
issuance of any membership interests or other equity securities for a price or
on the basis of a value that is less than the fair market value thereof as of
the date of such issuance.
2.7 Distributions. The
Board shall cause to be distributed to the Members, at least quarterly, an
amount of cash sufficient to permit each Member to satisfy its federal, state
and local taxes (as calculated on the basis of applicable statutory rates)
incurred as a result of income allocated to such Member by the Joint
Venture. Subject to Section 2.3, all other distributions shall be
made at such times and in such amounts as shall be determined by the Board;
first, to the extent of the Members’ unreturned capital contributions, which
contributions will be submitted to the Board for review and agreed upon
unanimously, and, thereafter, pro rata in accordance with the Members’
respective membership interests in the Joint Venture.
2.8 Information
Rights. Each Party shall be entitled to customary information
rights, including monthly, quarterly and annual financial statements and
budgets, inspection of books and records and access to personnel and outside
auditors of the Joint Venture. No Party shall not be entitled to such
information that is not otherwise available, provided that such Party or its
designated Manager(s) (or observer(s), if applicable) shall in all events
contemporaneously receive all information that is provided or made available to
the other Party or to its designated Manager(s) (or observer(s)).
3. Cooperation
with respect to Transactions. In accordance with the terms of
a letter of intent reviewed by the Parties, XCR is currently pursuing an
exclusive license to a third party (the “Proposed Transaction”) of all or
substantially all of the technology and other intellectual property rights
subject to the License, other than the Polymer Technology (the “Licensed
Technology”). NQCI covenants and agrees to cooperate as reasonably
required by XCR in order to consummate the Proposed Transaction or any other
transaction (a “Transaction”) involving the sale, license or other disposition
by XCR of all or substantially all of the Licensed Technology. XCR
covenants and agrees to provide to NQCI, promptly upon receipt thereof, copies
of all letters of intent and drafts of all definitive agreements proposed to be
entered into between XCR and a third party with respect to a Transaction (the
“Transaction Agreements”).
4. Allocation
of Transaction Proceeds.
4.1 Proposed
Transaction. Upon the consummation of the Proposed
Transaction, XCR will receive a license fee and certain additional consideration
(which may include, for example, the value of obligations assumed by the other
party to the Proposed Transaction), all of which will be paid over time in
accordance with the terms and conditions of the Transaction
Agreements. The Parties agree to allocate such consideration between
themselves as provided in this Section 4.1.
a. Transaction
Proceeds. The aggregate amount of consideration to be paid by
the third party is referred to herein as the “Proceeds”.
b. Determination of Agreed
Amount. NQCI shall receive 36.96% of the Proceeds (which
amount is intended to represent an amount equal to 39% of the Proceeds following
the deduction therefrom of XCR’s investment banking fees and reasonable legal
fees incurred in connection with the Proposed Transaction), plus $1,871,430 in
attorneys’ fees and costs payable pursuant to the terms of the Award
(collectively, the “Agreed Amount”).
c. Payment of Agreed
Amount. Pursuant to the terms of the Proposed Transaction, the
third party will pay XCR $250,000 upon the earlier of the signing of a letter of
intent and an acquisition agreement providing for the Proposed Transaction,
approximately 50% (less the foregoing $250,000) of the Proceeds payable in cash
to XCR upon the closing of the Proposed Transaction (the “First Installment”),
approximately 25% of such Proceeds such number of months after the consummation
of the Proposed Transaction as is specified in the Transaction Agreements (the
“Second Installment”) and 25% of such Proceeds
about 12 months after the payment of the Second Installment) (the “Third
Installment”, and collectively with the First Installment and the Second
Installment, the “Installments”). The Proceeds shall be allocated as
follows:
(i) $250,000 to XCR, payable to XCR on
the earlier of the signing of a letter of intent and an acquisition agreement
providing for the Proposed Transaction;
(ii) to NQCI, an amount equal to the
Agreed Amount less the sum of the Second Installment and the Third Installment,
payable to NQCI within seven business days of receipt of the First
Installment;
(iii) to XCR, the remainder of the
First Installment;
(iv) to NQCI, the amount of the Second
Installment, payable to NQCI within three business days of receipt of the Second
Installment;
(v) to NQCI, the amount of the Third
Installment, payable to NQCI within three business days of receipt of the Third
Installment (the “Third NQCI Payment”); and
(vi) the remainder of the Proceeds
shall be retained by XCR.
Notwithstanding the foregoing or
anything else set forth in this Memorandum, NQCI shall not be entitled to and
shall not receive from the Proceeds an amount greater than the Agreed Amount; in
the event that the payments to NQCI pursuant to this Section 4.1(c) exceed the
Agreed Amount, XCR shall reduce the amount of the Third NQCI Payment by the
amount that such payments exceed the Agreed Amount. In the event any
of the Installments are paid by the third party in other than cash, NQCI shall
receive its proportionate share of such consideration in accordance with the
terms of this Section 4.
d. Royalties and other
Amounts. XCR shall also pay to NQCI (as promptly as is
practicable) 39% of any royalty or other payments received by XCR in excess of
the Proceeds in connection with the Proposed Transaction.
4.2 Adjustments. In
the event that the timing or the amount of the payments from the third party
under the Transaction pursuant to the Transaction Agreements is other than as
contemplated by Section 4.1(c) of this Memorandum, the Parties shall make such
equitable adjustments as are required to preserve, to the maximum extent
possible, the intent of the foregoing provisions of this Section 4.
4.3 Other
Transactions. In the event that XCR does not consummate the
Proposed Transaction or if the terms of the Proposed Transaction change and XCR
instead consummates an alternative Transaction, the Parties shall apply the
methodology specified in this Section 4 to the maximum extent possible in order
to allocate between them the proceeds of such Transaction.
5. Technion
Agreement. NQCI shall use its best efforts to enter into an
agreement with The Technion Research and Development Foundation Ltd.
(“Technion”), pursuant to which Technion and NQCI will each (a) confirm and
acknowledge (i) their joint ownership of the Polymer Technology, (ii) the
existence and validity of the exclusive license to NQCI (on the terms and
conditions set forth in Appendix C to the Research Agreement and Option for
License dated as of June 16, 2005, as amended, between Technion and NQCI (the
“Technion Agreement”)) of the medical applications of the Polymer Technology and
(iii) the existence and validity of the exclusive license to Technion (on the
terms and conditions set forth in Appendix C to the Technion Agreement) of the
non-medical applications of the Polymer Technology; and (b) agree to prepare,
execute and deliver as promptly as practicable upon request by either of such
parties a definitive license agreement reflecting the terms and conditions of
the foregoing exclusive licenses. NQCI represents and warrants that, as of the
Effective Date of this Agreement and as of the date of the execution of the
Transaction Documents, it has and will have an exclusive license to the medical
applications of the Polymer Technology (on the terms and conditions in Appendix
C to the Technion Agreement) and entry into this Memorandum and the Operating
Agreement (to the extent one is entered into by the Parties) will not breach any
of the terms of such license.
6. Intellectual
Property Maintenance Costs. From and after August 1, 2009, XCR
shall pay 61% and NQCI shall pay 39% of the reasonable costs and expenses
related to protecting, preserving and exploiting the Licensed Technology,
provided that the Parties shall confer regularly with respect to such costs and
expenses and cooperate as reasonably required to minimize same.
7. Representations,
Warranties, Indemnification and Disclaimers.
7.1 Representations and
Warranties by Each Party. Each Party represents and warrants
that it (i) has full right, power and authority to enter into and to perform its
obligations under this Memorandum, (ii) has not made any prior commitment that
would prevent it from performing its obligations under this Memorandum and (iii)
will comply with all laws, rules and regulations in its performance of its
obligations hereunder.
7.2 Indemnity. Each
Party shall defend, indemnify and hold harmless the other party and its
employees, agents, directors, officers, shareholders, affiliates and
representatives from and against any and all claims, actions, suits,
proceedings, damages, liabilities, costs and expenses (including reasonable
attorneys’ fees and costs) (collectively, “Claims”) incurred in connection with
any suit or proceeding brought against them insofar as such Claim is based upon
a claim alleging facts or circumstances that, if true, would constitute a breach
of (i) its representations and warranties made in this Memorandum or (ii) any
covenant in any existing confidentiality and non-circumvention agreements
between the parties.
7.3 DISCLAIMERS. EACH
PARTY HEREBY DISCLAIMS ANY AND ALL REPRESENTATIONS AND WARRANTIES NOT EXPRESSLY
CONTAINED IN THIS MEMORANDUM. NEITHER PARTY SHALL BE LIABLE FOR ANY
PUNITIVE, CONSEQUENTIAL OR INCIDENTAL DAMAGES, OR FOR OTHER INDIRECT OR SPECIAL
DAMAGES (INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS OR
REVENUES).
8. Term. The term of this
Memorandum will commence as of the Effective Date and, unless terminated by the
mutual written consent of the Parties or expressly superseded by the Operating
Agreement or by another written agreement, will remain in full force and effect
until such time as all of the obligations hereunder of each Party to each other
Party have been satisfied in full.
9. Public
Announcements. Except to the extent required in connection
with compliance with securities and other applicable laws, each Party shall
obtain the prior approval of the other Party, which approval shall not be
unreasonably withheld, delayed or conditioned, to any press releases or other
public announcements regarding the existence or terms of this Agreement or the
transactions contemplated hereunder.
10. Force
Majeure. Neither Party shall be liable for delays in
performance or for non-performance to the extent that such delays or
non-performance were caused by acts of God, war, terrorism or other criminal
conduct or threats thereof, strikes or other labor or civil disturbances,
interruption or disruption of transportation, utility or other services, or any
other circumstances, events or causes beyond a Party’s reasonable control,
whether similar or dissimilar to any of the foregoing. Affected
performance may be suspended for an appropriate period of time upon notice to
the other Party in the event of any of the foregoing, but the remainder of this
Memorandum shall otherwise remain unaffected.
11. General.
11.1 Additional
Definitions.
(a) “Shareholder Vote Date”
means the date of the special or annual meeting of Xcorp at which the
stockholders of Xcorp shall vote on the Proposed Transaction or a Transaction
pursuant to a proxy or information statement to be filed by Xcorp with the U.S.
Securities and Exchange Commission in connection therewith.
11.2 Applicable Law;
Jurisdiction. This Memorandum shall be governed by and
construed and enforced in accordance with and subject to the laws of the State
of California applicable to contracts entered into and fully to be performed
therein, without regard to its conflict of laws rules. Each of the
Parties hereby irrevocably submits to the jurisdiction of any California state or
federal court sitting in the County of Los Angeles in respect of any suit,
action or proceeding arising out of, relating to, or connected with this
Memorandum, and irrevocably accepts for itself and in respect of its property,
generally and unconditionally, jurisdiction of the aforesaid
courts. Each of the Parties to this Memorandum hereby irrevocably
waives, to the fullest extent such party may effectively do so under applicable
law, any objection that such Party may now or hereafter have to the laying of
venue of any such suit, action or proceeding brought in any such court and any
claim that such suit, action or proceeding has been brought in an inconvenient
forum.
11.3 Assignment. Either
Party shall be entitled to assign this Memorandum in connection with any merger,
acquisition, sale of substantially all of its assets or business, or similar
transaction without the consent of the other party upon 30 days prior written
notice to the other party. Additionally, each Party may assign the
Memorandum upon the written consent of the other party, which consent may not be
unreasonably withheld, conditioned or delayed.
11.4 Severability. If
any provision of this Memorandum is invalid or unenforceable, the balance of the
Memorandum shall remain in effect.
11.5 Miscellaneous. This
Memorandum contains the entire understanding of the Parties regarding its
subject matter, and supersedes all prior and contemporaneous agreements and
understandings between the Parties regarding its subject matter, with the
exception of any existing confidentiality and non-circumvention agreements
between the Parties. Each term of this Memorandum may be modified,
supplemented, amended or waived only by a writing signed by all Parties that
expressly modifies, supplements, amends or waives such term. This
Memorandum shall bind and inure to the benefit of the Parties, their respective
successors and permitted assigns. The prevailing Party in any
proceeding under this Memorandum shall be entitled to recover from the other
Party its reasonable attorneys’ fees and costs incurred in any such
proceeding.
11.6 Signatures. This
Memorandum may be executed in two or more counterparts, each of which shall be
considered an original, but all of which together shall constitute the same
instrument.
[Remainder
of Page Left Intentionally Blank]
IN
WITNESS WHEREOF, the parties have executed this Memorandum as of the Effective
Date.
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NATIONAL
QUALITY CARE, INC.
By: /s/ Xxxxxx Xxxxxx
Name:
Xxxxxx Xxxxxx
Title:
CEO
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By:
/s/ Xxxxx XxXxxxx
Name:
Xxxxx XxXxxxx
Title:
Chairman and CEO
|
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XCORPOREAL
OPERATIONS, INC.
By:
/s/ Xxxxx XxXxxxx
Name:
Xxxxx XxXxxxx
Title:
Chairman and CEO
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