OPERATING AGREEMENT OF ESSI PROBE 1 LC
Among
EARTH SEARCH SCIENCES, INC.,
and
FRANCISCO ELMUDESI,
and
ARTHUR W. MCCLAIN TRUST
Dated June 3, 1997
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Table of Contents
Page
1. Organization of the Company........................................1
1.1 Organization..............................................1
1.2 Purposes; Scope of Activities.............................1
2. Management of the Company..........................................1
2.1 Management by Manager; Authority..........................1
2.2 Term; Resignation and Removal.............................1
2.3 Approval of Members.......................................2
2.4 Payment to Integrated Spectronics ........................2
2.4 Competitive Activities....................................3
3. Capital Contributions; Percentage Interests........................3
3.1 Initial Capital Contributions.............................3
3.2 Additional Capital........................................3
4. Capital Accounts...................................................3
4.1 Capital Accounts..........................................3
4.2 Withdrawals...............................................3
4.3 No Interest on Capital....................................3
5. Distributions......................................................4
5.1 Net Cash Flow.............................................4
5.2 Special Distributions of Cash.............................4
5.3 Special Distribution of Royalties.........................4
6. Allocation of Profits and Losses...................................5
6.1 Tax Allocations...........................................5
6.2 Minimum Gain..............................................5
7. Transfer of Company Interests......................................5
7.1 Restriction on Transfers..................................5
7.2 Permitted Transfers.......................................5
8. Dissolution and Liquidation........................................5
8.1 Dissolution...............................................5
8.2 Liquidation Generally.....................................6
9. Miscellaneous......................................................6
9.1 Application of Idaho Law..................................6
9.2 Construction..............................................6
9.3 Counterparts; Facsimiles..................................6
9.4 Headings..................................................6
9.5 Heirs, Successors and Assigns.............................7
9.6 Notices and Consents, etc.................................7
9.7 Severability..............................................7
9.8 Survival..................................................7
9.9 Waivers...................................................7
9.10 Attorneys'Fees, etc.......................................7
9.11 Entire Agreement..........................................7
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ESSI PROBE 1 LC
Operating Agreement
This Operating Agreement of ESSI Probe 1 LC, an Idaho limited liability
company (the "Company"), is among Earth Search Sciences, Inc., a Utah
corporation ("ESSI"), and Francisco Elmudesi and the Arthur W. McClain Trust
(together, the "Woodstock Memebers"), effective as of June 3, 1997.
1. Organization of the Company.
1.1 Organization. The Company was created by the execution and filing
of the Articles of Organization (the "Articles") under the Idaho Limited
Liability Company Act (the "Act"). ESSI and the Woodstock Members (collectively,
the "Members") hereby organize the Company and agree to conduct the Company's
business and affairs consistent with this Agreement, the Act and the Articles.
1.2 Purposes; Scope of Activities. The business and purpose of the
Company is to acquire, own, use and sell an airborne hyperspectral scanner for
remote sensing applications from Integrated Spectronics, an Australia company,
serial no. _____________ (the "Probe"), to receive royalties from the
exploitation of minerals discovered through use of the Probe, and to engage in
all other activities which are reasonably necessary or appropriate for the
foregoing purposes.
2. Management of the Company.
2.1 Management by Manager; Authority. The Company shall have one
manager (the "Manager"). The Manager shall have the sole and exclusive right to
manage the business and affairs of the Company and all of the rights and powers
that may be possessed by a manager under the Act, the Articles and this
Agreement. The initial Manager shall be ESSI.
2.2 Term; Resignation and Removal. The Manager shall hold office until
the Manager resigns or is removed in accordance with this Section 2.2. The
Manager may resign at any time by giving notice to the Members. The resignation
of the Manager shall take effect upon receipt of notice thereof or at such later
time as shall be specified in such notice. Unless otherwise specified in any
notice of resignation, the acceptance of such resignation shall not be necessary
to make it effective. The Manager may be removed by a majority in number of the
Members but only for Acause,@ which shall mean the occurrence of any of the
following circumstances:
(a) Any misappropriation of funds or property of the Company
by the Manager, or the Manager's engagement in illegal, dishonest, or fraudulent
conduct with respect to the Company or the Members; or
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(b) The Manager's "gross dereliction of duty" in the sense of
persistent neglect or material or cumulative negligence by the Manager in the
Manager=s performance of duties under this Agreement, or willful and repeated
failure by the Manager to perform the Manager's obligations under this
Agreement; provided that the Company or one of the Members shall have first
given the Manager written notice of such gross dereliction of duty specifying a
period of at least 30 days (or such longer period as may be reasonable under the
circumstances) to cure such gross dereliction of duty and such gross dereliction
of duty shall not have been cured within such period.
The resignation or removal of a Manager who is also a Member shall not affect
the Manager's rights as a Member and shall not constitute a withdrawal of the
Manager in any capacity as a Member. A majority of the Members in interest shall
elect a successor Manager or Managers upon any resignation or removal of a
Manager.
2.3 Approval of Members.
(a) Vote by Majority in Interest. Any action or transaction
that requires the approval of the Members under the Act, the Articles or this
Agreement shall be authorized upon the affirmative vote, implementing action or
written consent of a majority in interest of the Members unless either the Act,
the Articles or this Agreement expressly imposes a different standard for
approval by the Members, in which case the specified approval of the Members
shall be required for such action or transaction. All Members shall be entitled
to vote on or consent to any matter submitted to a vote of, or requiring consent
from, the Members.
(b) Arbitration in Event of Deadlock. In the event any vote of
Members required under Section 2.3(a) results in an even split of Members in
interest for and against such action or transaction, any Member may provide
written notice (ADeadlock Notice@) to the other Members that such Member
believes a deadlock to exist. For a period of 30 days after a Deadlock Notice is
delivered to the other Members, the Members shall negotiate in good faith among
themselves in an attempt to resolve the dispute. If the matter is not resolved
within that 30-day period, upon the demand of any Member the dispute shall be
submitted to arbitration to be conducted in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. The decision of the
arbitrator shall be final and binding, and judgment upon the arbitration award
may be entered in any court of competent jurisdiction. The arbitration shall be
held before a single arbitrator in a city selected by a majority in interest of
the Members, other than the Member that sent the Deadlock Notice.
2.4 Payment to Integrated Spectronics. The Members acknowledge that the
Company shall pay One Million Dollars ($1,000,000) to Integrated Spectronics,
the manufacturer of the Probe, in partial payment of the approximately
$1,500,000 balance presently owed for the purchase of the Probe.
2.5 Competitive Activities. Nothing in this Agreement nor the fact of
formation of the Company shall be construed or interpreted to limit other
activities of the Members, even if such other activities are or may be construed
to be in competition with the business of the Company.
3. Capital Contributions; Percentage Interests.
3.1 Initial Capital Contributions. The Members will make the
contributions to the Company set forth for each Member on Exhibit A. Except as
set forth in Section 3.2, no Member will be required to contribute any
additional amount to the Company or loan funds to the Company without the
agreement of all Members. The value of the initial contributions by the Members,
the initial Capital Accounts of the Members and the percentage interests
("Percentage Interests") of the Members are as set forth in Exhibit A. Unless
otherwise agreed by all the Members, subsequent contributions or distributions
shall not result in a change in a Member's Percentage Interest.
3.2 Additional Capital. ESSI shall make an additional capital
contribution of Five Hundred Thousand Dollars ($500,000), or such other property
as may be required, to enable the Company to complete the purchase of the Probe
pursuant to that certain Agreement dated September 11, 1995, between ESSI and
Integrated Spectronics Pty Ltd., an Australia company (the "Purchase
Agreement"), a copy of which is attached as Exhibit B to this Agreement. Prior
to making the contribution specified in this Section 3.2, the Manager shall
provide each Member with reasonable details concerning such planned
contribution, including the date on which it will be made and the amount of cash
or description of other property to be contributed. In addition, upon completion
of the purchase of the Probe, the Manager shall provide each Member with a copy
of a bill of sale or other document evidencing the fact that the Company has
satisfied in full its obligations under the Purchase Agreement and the Probe has
been conveyed free and clear of all liens and encumbrances to the Company.
4. Capital Accounts.
4.1 Capital Accounts. A separate capital account ("Capital Account")
shall be maintained for each Member in accordance with the capital accounting
rules of Section 704(b) of the Internal Revenue Code of 1986, as amended (the
"Code") and the income tax regulations thereunder (the "Regulations") including
particularly Reg. ss 1.704-1(b)(2)(iv).
4.2 Withdrawals. No Member shall have the right to withdraw any part of
its Capital Account or receive any distribution of capital except upon the
agreement of all Members.
4.3 No Interest on Capital. No interest shall be paid on any capital
contributed to the Company.
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5. Distributions.
5.1 Net Cash Flow. All net cash flow of the Company in excess of cash
needs and reserves shall be distributed by the Manager at least annually. Net
cash flow shall be distributed to the Members in accordance with their
Percentage Interests. Net cash flow shall mean (i) all cash received by the
Company from Company operations for a fiscal period, including without
limitation royalties received for use of the Probe, income from invested
reserves, and proceeds from the sale of the Probe, but not including capital
contributions by the Members; minus (ii) all cash disbursed in such period in
the ordinary course of the business of the Company, including, without
limitation, (a) all operating expenses of the Company, (b) debt service on debt
obligations of the Company, (c) reserves established during such period by the
Manager, and (d) the special distributions described in Section 5.2.
5.2 Special Distributions of Cash.
(a) Proceeds of Warranty Claim. In the event the Probe fails
to function as warranted by the manufacturer and the Company recovers monetary
damages from the manufacturer on a breach of warranty or similar claim, the
proceeds of such claim shall be distributed as follows:
(i) in the event the amount of monetary damages
recovered are less than $1,000,000, the proceeds of such claim shall be
distributed to the Members in proportion to their then-current
Percentage Interests; and
(ii) in the event the amount of monetary damages
recovered are greater than or equal to $1,000,000, the proceeds of such
claim shall be distributed first to the Woodstock Members, to the
extent of and in proportion to the positive balance of their respective
Capital Accounts, and second, remaining proceeds shall be distributed
to the other Members, to the extent of and in proportion to the
positive balance of their respective Capital Accounts.
(b) Upon Sale of Probe. In the event of a sale of the Probe to
ESSI, a special distribution shall be made to the Woodstock Members in the
aggregate amount of Two Hundred Fifty Thousand Dollars ($250,000), to be paid to
the Woodstock Members (or their permitted successors) in proportion to their
then-current Percentage Interests.
5.3 Special Distribution of Royalties. In the event of a sale of the
Probe to ESSI, the Company shall use reasonable efforts to transfer to the
Members their pro-rata share (based on the Members= Percentage Interest in the
Company at the time the Probe is purchased) of all royalties then being received
by the Company so that the Members are thereafter entitled to receive such
royalties directly and not as a Member of the Company.
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6. Allocation of Profits and Losses.
6.1 Tax Allocations. Net profits and losses of the Company, and each
item of Company income, gain, loss, deduction or credit (including items
required to be separately stated pursuant to Section 703(a)(1) of the Code)
shall be allocated between the Members in accordance with their Percentage
Interests.
6.2 Minimum Gain. To the extent that the Company has "nonrecourse
deductions", as determined pursuant to Section 1.704-1(b)(iv) of the
Regulations, such nonrecourse deductions, to the maximum extent permitted by
such Regulations, shall be allocated among the Members in accordance with their
Percentage Interests.
7. Transfer of Company Interests.
7.1 Restriction on Transfers. Except as expressly provided in this
Agreement, no Member shall have the right to transfer his or its interest in the
Company, nor shall any third party be admitted as a Member, without the
unanimous consent of the Members. The term Atransfer@ shall include voluntary or
involuntary sales, assignments, hypothecations, pledges, gifts, encumbrances or
any other manner of transfer (whether by operation of law or otherwise).
7.2 Permitted Transfers. Notwithstanding the provisions of Section 7.1,
transfers shall be permitted without the consent of the Members among (a) the
Members, (b) ESSI and affiliates of ESSI, and (c) a Member and the immediate
family members, trustee of a trust for the benefit of a Woodstock Member, or the
estate of such Member; provided, that with respect to any of such transfers
described in this Section 7.2, (i) the liability of the transferor under this
Agreement shall not be affected by such transfer, (ii) the transferee shall
agree in writing to be jointly and severally liable to the extent of the
responsibilities of the transferor under this Agreement, and (iii) written
notice of any such transfer shall be given to the other Members upon the
consummation thereof, together with a copy of the agreement described in Section
7.2(ii). For purposes of this Section 7.2, the term Aaffiliate@ shall mean any
individual, firm, corporation, Membership, joint venture, association, limited
liability company, trust or other entity directly or indirectly controlling or
controlled by or under direction or joint, direct or indirect common control
with ESSI.
8. Dissolution and Liquidation.
8.1 Dissolution. The Company shall dissolve and commence winding up:
(a) Upon the agreement of all Members to dissolve the Company; or
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(b) In the event of a sale of the Probe, provided that
dissolution shall not be required upon sale of the Probe if the Manager
determines that the Company then has the right to receive more than de minimis
royalties with respect to minerals discovered through use of the Probe and that
such rights cannot be transferred to the Members.
8.2 Liquidation Generally. Upon the dissolution of the Company pursuant
to Sections 8.1(a) or (b), the Company shall continue solely for the purposes of
winding up its affairs in an orderly manner, satisfying the claims of its
creditors and Members and liquidating or distributing its assets to the extent
necessary therefor. Neither the Manager nor any Member shall take any action
that is inconsistent with, or not necessary to or appropriate for, the orderly
winding up of the Company=s business and affairs. The Manager shall oversee the
winding up and dissolution of the Company, provide a full accounting of the
Company=s liabilities and property, cause the Company property to be distributed
in kind or to be liquidated as promptly as is consistent with obtaining the fair
value thereof and cause the proceeds therefrom and any remaining property, to
the extent sufficient therefor, to be applied and distributed in the following
order:
(a) First, to the payment and discharge of all of the Company's
debts and liabilities to creditors other than Members;
(b) Second, to the payment and discharge of all of the Company's
debts and liabilities to Members; and
(c) Third, to the Members in accordance with the positive
balances in their Capital Accounts, after giving effect to all contributions,
distributions and allocations for all periods.
9. Miscellaneous.
9.1 Application of Idaho Law. The parties intend that this Agreement
shall be governed by and construed in accordance with the laws of the State of
Idaho.
9.2 Construction. Whenever required by the context in this Agreement,
the singular number shall include the plural and vice versa, and any gender
shall include the masculine, feminine and neuter genders.
9.3 Counterparts; Facsimiles. This Agreement may be executed in
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument. Facsimile signatures of the parties on
this Agreement or any amendment of this Agreement shall be deemed original
signatures, and each Member or other party shall forward the original signed
version of such document promptly following facsimile transmission.
9.4 Headings. The headings in this Agreement are inserted for
convenience only and are in no way intended to describe, interpret, define or
limit the scope, extent or intent of this Agreement or any provision hereof.
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9.5 Heirs, Successors and Assigns. Each and all of the covenants,
terms, provisions and agreements contained in this Agreement shall be binding
upon and inure to the benefit of the parties and, to the extent permitted by
this Agreement, their respective heirs, legal representatives and permitted
successors and assigns.
9.6 Notices and Consents, etc. Any notice, demand or communication
required or permitted to be given by any provision of this Agreement shall be in
writing and shall be deemed to have been sufficiently given or served for all
purposes if delivered personally to the party or to an executive officer of the
party to which the same is directed or, if sent by registered or certified mail
or national express carrier, postage and charges prepaid, addressed to the
Manager's, Member's or Company's address, as shown in the records of the
Company. Except as otherwise provided herein, any such notice shall be deemed to
be given five business days after the date on which the same was deposited for
delivery.
9.7 Severability. If any provision of this Agreement or the application
thereof to any person or circumstance shall be invalid, illegal or unenforceable
to any extent, the remainder of this Agreement and the application thereof shall
not be affected and shall be enforceable to the fullest extent permitted by law.
9.8 Survival. All provisions which are intended to survive the
termination or rescission of this Agreement and/or the dissolution and winding
up of the Company shall do so for the longest period provided by law.
9.9 Waivers. The failure of any party to seek redress for violation of
or to insist upon the strict performance of any covenant or condition of this
Agreement shall not prevent a subsequent act, which would have originally
constituted a violation, from having the effect of an original violation.
9.10 Attorneys= Fees, etc. If a suit, action, arbitration or other
proceeding of any nature whatsoever (including, without limitation, any
bankruptcy proceeding) is instituted in connection with any controversy arising
out of this Agreement or to interpret or enforce any rights under this
Agreement, the prevailing party shall be entitled to recover its attorneys= fees
and all other fees, costs and expenses actually incurred and reasonably
necessary in connection therewith, as determined by the arbitrator or by the
court at trial or on any appeal or review, in addition to all other amounts
provided by law.
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9.11 Entire Agreement. The Articles, this Agreement, that certain
Equipment Usage Agreement, dated as of the date hereof, between the Company and
ESSI and Arthur W. McClain Trust, and Francisco Elmudesi, and any other document
to be furnished pursuant to the provisions hereof embody the entire agreement
and understanding of the parties as to the subject matter contained herein.
There are no restrictions, promises, representations, warranties, covenants or
undertakings other than those expressly set forth or referred to in such
documents. This Agreement and such documents supersede all prior agreements and
understandings among the parties with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Members have executed this Agreement
as of the date first above written.
MEMBERS: EARTH SEARCH SCIENCES, INC.,
a Utah corporation
By: /s/ Larry F. Vance
Larry F. Vance
Chairman and Chief Financial Officer
/s/ Francisco Elmudesi
Francisco Elmudesi
ARTHUR W. MCCLAIN TRUST
By: /s/ Arthur W. McClain
Arthur W. McClain, Trustee
Under Declaration of Trust dated 12/19/85
