EXHIBIT 10.20
WHISPERING PINES LLC
LIMITED LIABILITY COMPANY AGREEMENT
DATED AS OF SEPTEMBER 4, 1997
TABLE OF CONTENTS
ARTICLE I
Definitions............................................................................... 1
ARTICLE II
General................................................................................... 10
2.01 Name of the Limited Liability Company......................................... 10
2.02 Office of the Limited Liability Company; Agent for Service of
Process; Initial Principal Place of Business.................................. 10
2.03 Organization.................................................................. 10
2.04 Purposes...................................................................... 10
2.05 Members....................................................................... 10
2.06 Designation of Managers....................................................... 11
2.07 Term.......................................................................... 11
2.08 Liability of Members.......................................................... 11
ARTICLE III
Capital Contributions; Additional Financing; Representations and Warranties............... 11
3.01 Capital Accounts.............................................................. 11
3.02 Capital Contributions and Assumption of Liabilities........................... 11
3.03 No Other Contributions; No Withdrawal of or Interest on Capital............... 12
3.04 Third Party and Other Loans................................................... 12
3.05 Representations and Warranties................................................ 12
3.06 Further Assurances............................................................ 21
ARTICLE IV
Cash Distributions........................................................................ 22
4.01 Distribution of Distributable Cash and Net Proceeds Upon Liquidation.......... 22
4.02 Distribution of Assets in Kind................................................ 22
ARTICLE V
Allocation of Net Profits and Net Losses.................................................. 23
5.01 Basic Allocations............................................................. 23
ARTICLE VI
Management................................................................................ 23
6.01 Management of the LLC......................................................... 23
6.02 Managers...................................................................... 23
6.03 Officers...................................................................... 26
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6.04 Interpretation of Rights and Duties of Managers and Members.................. 27
6.05 Binding the LLC.............................................................. 28
6.06 Contracts with Members....................................................... 28
6.07 Voluntary Loans.............................................................. 28
6.08 Indemnification and Exculpation.............................................. 29
6.09 Other Activities and Business Opportunities.................................. 30
ARTICLE VII
Fiscal Matters........................................................................... 30
7.01 Books and Records............................................................ 31
7.02 Reports...................................................................... 31
7.03 Bank Accounts................................................................ 31
7.04 Fiscal Year.................................................................. 31
7.05 Tax Matters Partner.......................................................... 31
ARTICLE VIII
Transfers of Interests................................................................... 32
8.01 Transfers of Interests by Members............................................ 32
8.02 First and Second Purchase Options............................................ 33
8.03 Calculation of First and Second Option Exercise Price........................ 34
8.04 Form of Payment.............................................................. 36
8.05 Manner of Exercise........................................................... 37
8.06 Payment...................................................................... 38
8.07 Rights With Respect to Cornerstone Shares.................................... 38
8.08 Transfer of Title............................................................ 39
8.09 Assignment of Option......................................................... 39
8.10 CLI Purchase Option.......................................................... 39
ARTICLE IX
Dissolution and Liquidation.............................................................. 41
9.01 Events Causing Dissolution................................................... 41
9.02 Events Causing Dissolution under the Act..................................... 41
9.03 Procedures on Dissolution.................................................... 41
9.04 Distributions Upon Liquidation............................................... 41
ARTICLE X
General Provisions....................................................................... 42
10.01 Notices...................................................................... 42
10.02 Word Meanings; Schedules..................................................... 42
10.03 Binding Provisions........................................................... 43
10.04 Applicable Law............................................................... 43
10.05 Counterparts................................................................. 43
10.06 Separability of Provisions................................................... 43
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10.07 Section Titles............................................................... 43
10.08 Amendments................................................................... 43
10.09 Third Party Beneficiaries.................................................... 43
10.10 Entire Agreement............................................................. 44
10.11 Offset....................................................................... 44
10.12 Waiver of Partition.......................................................... 44
10.13 Expenses..................................................................... 44
Schedule A - Members
Schedule B - Certain Tax Matters
Schedule C - CLI Assumed Liabilities -- Third Parties
Schedule D - CLI Assumed Liabilities -- CLI
Schedule E - Assumed Contacts
Schedule F - Excluded Assets
Disclosure Schedule
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WHISPERING PINES LLC
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LIMITED LIABILITY COMPANY AGREEMENT
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LIMITED LIABILITY COMPANY AGREEMENT, dated as of the 4th day of September,
1997, by and between The International Cornerstone Group, Inc., a Delaware
corporation ("Cornerstone"), and Cabin Life Studios, Inc., a New York
corporation ("CLI").
WHEREAS, CLI desires to contribute the CLI Assets and the CLI Assumed
Liabilities (as defined below) to a newly-formed limited liability company (such
contribution of assets and liabilities shall be referred to herein as the "CLI
Contribution") in exchange for a 49% interest therein; and
WHEREAS, Cornerstone desires to contribute cash to the newly-formed limited
liability company in exchange for a 51% interest therein, together with the
right to acquire all other equity interests in such entity at a future date.
NOW, THEREFORE, Cornerstone and CLI desire to organize a Delaware limited
liability company, and for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and in consideration of the
agreements hereinafter set forth, the parties hereby agree as follows:
ARTICLE I
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Definitions
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The following capitalized terms used in this Agreement shall have the
respective meanings ascribed to them below:
"Accounts Receivable" means accounts, accounts receivable, notes and notes
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receivable existing immediately prior to the CLI Contribution which are payable
to CLI, including any security held by CLI for the payment thereof.
"Act" means the Delaware Limited Liability Company Act in effect at the
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time of the initial filing of the Certificate with the office of the Secretary
of State of the State of Delaware, and as thereafter amended from time to time.
"Additional Payment" has the meaning ascribed to it in Section
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8.03(a)(i)(B).
"Adjusted Capital Account" has the meaning ascribed to it in Schedule B.
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"Affiliate" shall mean, with respect to any specified person or entity, (i)
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any person or entity that directly or indirectly controls, is controlled by, or
is under common control with such specified person or entity; (ii) any person or
entity that
directly or indirectly controls 10% or more of the outstanding equity securities
of the specified entity or of which the specified person or entity is directly
or indirectly the owner of 10% or more of any class of equity securities; (iii)
any person or entity that is an officer of, director of, manager of, partner in,
or trustee of, or serves in a similar capacity with respect to, the specified
person or entity or of which the specified person or entity is an officer,
director, partner, manager or trustee, or with respect to which the specified
person or entity serves in a similar capacity; or (iv) any person that is a
member of the immediate family of the specified person.
"Agreement" means this Limited Liability Company Agreement as it may be
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amended, supplemented, or restated from time to time.
"Board of Managers" or "Board" means the Board of Managers described in
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Article VI of this Agreement.
"Business Day" has the meaning ascribed to it in Section 8.02(a).
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"Capital Account" has the meaning ascribed to it in Schedule B.
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"Capital Contribution" means any contribution by a Member to the capital of
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the LLC.
"Capital Transaction" means a sale or other disposition of all of a portion
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of the LLC's property in a single transaction or in a series of related
transactions, other than such a sale or disposition in the ordinary course of
the LLC's business.
"Carrying Value" has the meaning ascribed to it in Schedule B.
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"CERCLA" means in the federal Comprehensive Environmental Compensation,
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Liability and Response Act of 1980.
"Certificate" means the Certificate of Formation of the LLC filed under and
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pursuant to the Act with the office of the Secretary of State of the State of
Delaware, as it may from time to time be amended in accordance with the Act.
"Chairman" means the person occupying the office of the Chairman (as
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provided in Section 6.03) of the LLC at any time or from time to time.
"CLI" has the meaning ascribed to it in the recital to this Agreement.
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"CLI Assets" means all of CLI's right, title and interest in and to the
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assets of CLI existing immediately prior to the CLI Contribution (other than the
CLI Excluded Assets), including, without limitation, the following:
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(i) all Inventory of CLI;
(ii) all Accounts Receivable;
(iii) all prepaid expenses, deposits, bank accounts and other similar
assets of CLI, including the cash represented by such assets;
(iv) all Contract Rights;;
(v) all books, records and accounts, correspondence, production
records, technical, accounting, manufacturing and procedural manuals,
customer lists, employment records, studies, reports or summaries relating
to any environmental conditions or consequences of any operation, present
or former, as well as all studies, reports or summaries relating to any
environmental aspect or the general condition of the CLI Assets, and any
confidential information which has been reduced to writing relating to or
arising out of the business of CLI;
(vi) all rights of CLI under express or implied warranties from the
suppliers of CLI;
(vii) the motor vehicles and other rolling stock owned by CLI;
(viii) all Fixed Assets;
(ix) all of CLI's right, title and interest in and to all Intangible
Property, including the name "Whispering Pines" or any derivation thereof,
either owned or, where not owned, used by CLI in its business and all licenses
and other agreements to which CLI is a party (as licensor or licensee) or by
which CLI is bound relating to any of the foregoing kinds of property or rights
to any "know-how" or disclosure or use of ideas; and
(x) all other assets, properties, claims, rights and interests of CLI,
of every kind and nature and description, whether tangible or intangible,
real, personal or mixed.
"CLI Assumed Liabilities" means the following liabilities which exist
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immediately prior to the CLI Contribution:
(i) payables of CLI which have been incurred in the Ordinary Course
of Business in connection with the September 1997 catalog, which are listed
on Schedule C attached hereto;
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(ii) a payable owed to CLI in the amount of $72,144.69, which
represents the amount of the liabilities incurred by CLI in the Ordinary
Course of Business in connection with the September 1997 catalog and paid
by CLI prior to the CLI Contribution, which liabilities are listed on
Schedule D attached hereto; and
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(iii) obligations which arise from and after the CLI Contribution
with respect to the contracts, agreements, leases or licenses listed on
Schedule E attached hereto.
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"CLI Balance Sheet" means the June 30, 1997 balance sheet of CLI.
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"CLI Balance Sheet Date" means June 30, 1997.
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"CLI Contribution" has the meaning ascribed to it in the recital to this
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Agreement.
"CLI Excluded Assets" means the assets listed on Schedule F.
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"CLI Excluded Liabilities" means any and all liabilities or obligations of
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CLI, whether known or unknown, whether absolute or contingent, whether
liquidated or unliquidated, whether due or to become due, and whether claims
with respect thereto are asserted before or after the CLI Contribution, other
than the CLI Assumed Liabilities.
"CLI Financial Statements" means the financial statements for the period
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ending June 30, 1997 as described in Section 3.05(c)(i).
"CLI Intellectual Property" has the meaning ascribed to it in Section
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3.05(g)(i).
"CLI Material Adverse Effect" has the meaning ascribed to it in Section
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3.05(a).
"CLI Related Party Transaction" has the meaning ascribed to it in Section
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3.05(u).
"CLI Stockholders" means ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ and
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▇▇▇▇▇▇ ▇▇▇▇▇▇.
"Code" means the Internal Revenue Code of 1986, as amended from time to
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time.
"Contract Rights" means all rights of CLI under the contracts, agreements,
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leases and licenses listed on Schedule E attached hereto.
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"Cornerstone" has the meaning ascribed to it in the recital to this
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Agreement.
"Cornerstone Appraiser" has the meaning ascribed to it in Section 8.04.
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"Cornerstone Appraisal Report" has the meaning ascribed to it in Section
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8.04.
"Cornerstone Fair Market Value" has the meaning ascribed to it in Section
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8.04.
"Cornerstone IPO Date" has the meaning ascribed to it in Section 8.02(a).
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"Depreciation Adjustments" has the meaning ascribed to it in Code Section
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1250(b)(1) and (4).
"Disclosure Schedule" has the meaning ascribed to it in Section 3.05 of
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this Agreement.
"Distributable Cash" means, with respect to any fiscal period, the excess
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of all cash receipts of the LLC from any source whatsoever, including normal
operations, sales of assets, proceeds of borrowings, Capital Contributions of
the Members, proceeds from a Capital Transaction, and any and all other sources
over the sum of the following amounts:
(i) cash disbursements for advertising and promotion expenses,
salaries, employee benefits (including profit-sharing, bonus and similar
plans), fringe benefits, accounting and bookkeeping services and equipment,
costs of sales of assets, utilities, rental payments with respect to
equipment or real property, management fees and expenses, insurance, real
estate, income, sales, franchise and other taxes, legal expenses, costs of
repairs and maintenance, and any and all other items which are customarily
considered to be operating expenses, corporate overhead expenses, Taxes,
depreciation and amortization;
(ii) payments of interest, principal and premium and points and other
costs of borrowing under any indebtedness of the LLC, including, without
limitation, all outstanding principal and interest due under any Voluntary
Loans made by Cornerstone to the LLC;
(iii) payments made to purchase inventory or capital assets, and for
capital construction, rehabilitation, acquisitions, alterations and
improvements; and
(iv) amounts set aside as reserves for working capital, contingent
liabilities, replacements or for any of the expenditures described in
clauses (i), (ii) and (iii) above which are deemed by the Board of Managers
in good faith to be necessary to meet the current and anticipated future
needs of the LLC.
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"EBIT" has the meaning ascribed to it in Section 8.03(a)(ii)(B)(1).
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"Economic Risk of Loss" has the meaning ascribed to it in Schedule B.
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"Encumbrances" has the meaning ascribed to it in Section 3.05(e)(ii).
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"Environment" shall have the meaning set forth in CERCLA.
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"Environmental Law" has the meaning ascribed to it in Section 3.05(r).
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"Excess Negative Balance" has the meaning ascribed to it in Schedule B.
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"First CLI Valuation Amount" has the meaning ascribed to it in Section
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8.03(a).
"First Closing Date" has the meaning ascribed to it in Section 8.05(a)
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"First Exercise Period" has the meaning ascribed to it in Section 8.02(a).
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"First Option Exercise Price" has the meaning ascribed to it in Section
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8.03(a).
"First Purchase Option" has the meaning ascribed to it in Section 8.02(a).
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"First Record Date" has the meaning ascribed to it in Section 8.05(a).
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"Fiscal 1999" means the fiscal year ending January 31, 2000.
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"Fiscal 2002" means the fiscal year ending January 31, 2003.
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"Fixed Assets" means all of the machinery, equipment, tools, production
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reels and spools, tooling, dies, production fixtures, maintenance machinery and
equipment, furniture, leasehold improvements and construction in progress owned
by CLI immediately prior to the CLI Contribution whether or not reflected as
capital assets in the accounting records of CLI.
"GAAP" has the meaning ascribed to it in Section 3.05(c)(i).
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"Governmental Entity" has the meaning ascribed to it in Section 3.05(b).
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"Gross Income" has the meaning ascribed to it in Schedule B.
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"Intellectual Property" means all (i) patents and patent applications, (ii)
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trademarks, service marks, logos, trade names and corporate names and
registrations and applications for registration thereof, (iii) copyrights and
registrations and applications for registration thereof, (iv) computer software,
data and
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documentation, (v) trade secrets and confidential business information, customer
and mailing lists, designs, copyrightable works, financial, marketing and
business data, pricing and cost information, business and marketing plans, and
supplier lists and information and (vi) other proprietary rights relating to any
of the foregoing.
"Inventory" means all inventories of raw materials, work in process,
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finished goods, office supplies, maintenance supplies, packaging materials,
spare parts and similar items.
"LLC" means the limited liability company formed upon filing of the
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Certificate, as it may from time to time be constituted.
"LLC Appraisal Report" has the meaning ascribed to it in Section 8.10(c).
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"LLC Appraiser" has the meaning ascribed to it in Section 8.10(b).
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"LLC Fair Market Value" has the meaning ascribed to it in Section 8.10(b).
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"Majority Interest" means one or more Members owning, in the aggregate,
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Percentage Interests greater than 50%.
"Manager" shall refer to any person named as a Manager in this Agreement
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and any person who becomes an additional, substitute or replacement Manager as
permitted by this Agreement, but such term does not include any person who has
ceased to be a manager of the LLC.
"Materials of Environmental Concern" means any chemicals, pollutants or
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contaminants, hazardous substances (as such term is defined under CERCLA), solid
wastes and hazardous wastes (as such terms are defined under the federal
Resources Conservation and Recovery Act), toxic materials, oil or petroleum and
petroleum products, or any other material subject to regulation under any
Environmental Law.
"Members" means any person or entity executing this Agreement as of the
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date of this Agreement as a member or hereafter admitted to the LLC as a member
as provided in this Agreement, but such term does not include any person or
entity which has ceased to be a member of the LLC.
"Membership Interest" means all of a Member's interest in the LLC,
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including, without limitation, the rights to allocations of Net Profits, Net
Losses, Gross Income and Nonrecourse Deductions, and distributions of
Distributable Cash or other property, to designate Managers and officers of the
LLC, to vote, and to consent to or approve any matter as provided herein or in
the Act.
"Minimum Gain" has the meaning ascribed to it in Schedule B.
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"Minimum Payment" means the One Million Dollars referenced in Section
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8.03(a)(i)(A).
"Net Profits" and "Net Losses" have the meanings ascribed to them in
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Schedule B.
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"NMS" means the Nasdaq National Market Service.
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"Nonrecourse Debt" has the meaning ascribed to it in Schedule B.
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"Nonrecourse Deductions" has the meaning ascribed to it in Schedule B.
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"Ordinary Course of Business" has the meaning ascribed to it in
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3.05(c)(ii).
"Partner Nonrecourse Debt" has the meaning ascribed to it in Schedule B.
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"Percentage Interest" means, with respect to each Member, the following
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percentages:
Cornerstone 51%
CLI 49%
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100%
provided, that, the Percentage Interests of the Members are subject to
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adjustment as a result of the acquisition by Cornerstone of the Membership
Interests of CLI pursuant to and in accordance with the rights granted to
Cornerstone in Section 8.02 below.
"Permit" has the meaning ascribed to it in Section 3.05(t).
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"Permitted Encumbrances" has the meaning ascribed to it in Section
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3.05(e)(ii).
"Personal Property" has the meaning ascribed to it in Section 3.05(e)(iii).
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"President" means the person occupying the office of the President (as
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provided in Section 6.03) of the LLC at any time or from time to time.
"Recapture Income" has the meaning ascribed to it in Schedule B.
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"Release" shall have the meaning set forth in CERCLA.
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"Resigning Member" has the meaning ascribed to it in Section 2.05(b).
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"Second Closing Date" has the meaning ascribed to it in Section 8.05(b).
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"Second Exercise Period" has the meaning ascribed to it in Section 8.02(b).
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"Second Option Exercise Price" has the meaning ascribed to it in Section
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8.03(b).
"Second Purchase Option" has the meaning ascribed to it in Section 8.02(b).
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"Second Record Date" has the meaning ascribed to it in Section 8.05(b).
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"Share of Minimum Gain" has the meaning ascribed to it in Schedule B.
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"Statutory Dissolution Event" has the meaning ascribed to it in Section
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9.02.
"Straight Line Method of Adjustment" has the meaning ascribed to it in Code
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Section 1250(b)(5).
"Taxes" means all taxes, charges, fees, levies or other similar assessments
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or liabilities, including without limitation income, gross receipts, ad valorem,
premium, value-added, excise, real property, personal property, sales, use,
transfer, transfer gains, withholding, employment, payroll, unemployment
insurance, social security, business license, occupation, business organization,
stamp, environmental and franchise taxes imposed by the United States of America
or any state, local or foreign government, or any agency thereof, or other
political subdivision of the United States or any such government, and any
interest, fines, penalties, assessments or additions to tax resulting from,
attributable to or incurred in connection with any tax or any contest or dispute
thereof.
"Tax Returns" means all reports, returns, declarations, statements or other
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information required to be supplied to a taxing authority in connection with
Taxes.
"Transfer" and any grammatical variation thereof shall refer to any sale,
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exchange, redemption, assignment, conveyance, encumbrance, hypothecation, gift,
pledge, grant of a security interest, or other transfer, disposition or
alienation in any way (whether voluntarily, involuntarily or by operation of
law). Transfer shall specifically, without limitation of the above, include
assignments and distributions resulting from death, incompetency, bankruptcy,
liquidation and dissolution.
"Treasurer" means the person occupying the office of the Treasurer (as
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provided in Section 6.03) of the LLC at any time or from time to time.
"Voluntary Loan" has the meaning ascribed to it in Section 6.07 of this
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Agreement.
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ARTICLE II
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General
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2.01 Name of the Limited Liability Company. The name of the LLC is
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Whispering Pines LLC. The name of the LLC may be changed at any time or from
time to time with the approval of the Board of Managers.
2.02 Office of the Limited Liability Company; Agent for Service of
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Process; Initial Principal Place of Business. The address of the registered
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office of the LLC in the State of Delaware is Corporation Trust Center, ▇▇▇▇
▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇. The name and address of the resident
agent for service of process on the LLC in the State of Delaware is The
Corporation Trust Company, Corporation Trust Center, ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇. The Board of Managers may establish places of
business of the LLC within and without the State of Delaware, as and when
required by the LLC's business and in furtherance of its purposes set forth in
Section 2.04 hereof, and may appoint agents for service of process in all
jurisdictions in which the LLC shall conduct business. The Board of Managers
may cause the LLC to change from time to time its resident agent for service of
process, or the location of its registered office in the State of Delaware. The
initial principal place of business of the LLC shall be ▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇,
▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇. The LLC shall not continue to conduct operations
at any of the facilities in the State of New York owned or leased by CLI.
2.03 Organization. The Board of Managers shall cause to be filed such
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certificates and documents as may be necessary or appropriate to comply with the
Act and any other applicable requirements for the operation of a limited
liability company in accordance with the laws of the State of New York and any
other jurisdictions in which the LLC shall conduct business, and shall continue
to do so for so long as the LLC conducts business therein.
2.04 Purposes. The general character of the business of the LLC is to
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engage in the direct-mail order catalog business, including without limitation
both domestic and foreign sales of products that promote and enhance the theme
of rustic Americana; to engage in any lawful activities directly or indirectly
related or incidental thereto (including, without limitation, the borrowing of
money); and to engage in any other activity in which a limited liability company
organized under the laws of the State of Delaware may lawfully engage.
2.05 Members.
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(a) No Member shall have the right to resign, withdraw or retire from
the LLC, without the prior written approval of the Board of Managers. If any
Member (a "Resigning Member") obtains the prior approval of the Board of
Managers
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and thereafter resigns, the Resigning Member shall not have any rights to any
distributions under Section 18-604 of the Act.
(b) No Member may be expelled or required to resign, withdraw or
retire from the LLC (except upon a Transfer of all of such Member's Membership
Interest in accordance with the provisions of Article VIII).
2.06 Designation of Managers. The persons specified in Section
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6.02(a) have been designated to serve as the initial managers of the LLC. Any
Manager may withdraw or be removed as a manager of the LLC, and other persons
may be substituted as Managers, only in the manner specified in Section 6.02.
2.07 Term. The LLC shall commence upon the filing and effectiveness
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of the Certificate and shall have a perpetual existence, unless and until it is
dissolved and terminated in accordance with Article IX.
2.08 Liability of Members. The liability of the Members for the
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losses, debts and obligations of the LLC shall be limited to their capital
contributions; provided, however, that each Member acknowledges that, under
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applicable law, the Members may under certain circumstances be liable to the LLC
to the extent of previous distributions made to them in the event that the LLC
does not have sufficient assets to discharge its liabilities. Without limiting
the foregoing, (i) no Member, in such Member's capacity as a Member, shall have
any liability to restore any negative balance in such Member's Capital Account,
and (ii) the failure of the LLC to observe any formalities or requirements
relating to exercise of its powers or management of its business or affairs
under this Agreement or the Act shall not be grounds for imposing personal
liability on the Members or Managers for liabilities of the LLC.
ARTICLE III
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Capital Contributions; Additional Financing; Representations and Warranties
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3.01 Capital Accounts. For each Member (and each permitted assignee),
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the LLC shall establish and maintain a separate Capital Account.
3.02 Capital Contributions and Assumption of Liabilities. On the date
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of this Agreement: (a) CLI shall contribute the CLI Assets to the LLC and the
LLC shall assume the CLI Assumed Liabilities from the CLI (the CLI
Contribution); and (b) Cornerstone shall contribute (as a capital contribution
and not as a loan) to the LLC the amount of One Million Dollars ($1,000,000.00)
payable in cash. The Members agree that as a result of these contributions, the
opening balances of their Capital Accounts are in the same ratio as their
respective Percentage Interests, and their opening Capital Accounts are as
reflected on Schedule A attached hereto. CLI shall remain liable for the CLI
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Excluded Liabilities.
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3.03 No Other Contributions; No Withdrawal of or Interest on Capital.
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Except as otherwise provided in this Article III, no Member shall be obligated
or permitted to contribute any additional capital to the LLC. No interest shall
accrue on any Capital Contributions, and no Member shall have the right to
withdraw or to be repaid any Capital Contribution made by it or to receive any
other payment in respect of its Membership Interest, including, without
limitation, as a result of the withdrawal or resignation of such Member from the
LLC, except as specifically provided in this Agreement.
3.04 Third Party and Other Loans. It in the event that the LLC
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requires additional funds to carry out its purposes, to conduct its business and
affairs, or to meet its obligations, or to make any expenditure authorized by
this Agreement, the LLC may borrow funds from such persons and entities, and on
such terms and conditions as may be acceptable to the Board of Managers.
Cornerstone may, but shall not be obligated to, make Voluntary Loans to the LLC
pursuant to and in accordance with the provisions of Section 6.07.
3.05 Representations and Warranties. Each of CLI and the CLI
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Stockholders represents and warrants to the LLC and Cornerstone that the
statements contained in this Section 3.05 are true and correct as of the date of
this Agreement, except as set forth in the disclosure schedule attached hereto
(the "Disclosure Schedule"). The Disclosure Schedule shall be arranged in
paragraphs corresponding to the numbered and lettered paragraphs contained in
this Section 3.05, and the disclosures in any paragraph of the Disclosure
Schedule shall qualify other paragraphs in this Section 3.05 only to the extent
it is clear from a reading of the disclosure that such disclosure is applicable
to such other paragraphs. The representations and warranties set forth in this
Section 3.05 shall survive until the date 18 months after the date of this
Agreement, and no claim may be made by the LLC or Cornerstone for a breach of
any such representation or warranty after such date.
(a) Organization, Qualification and Corporate Power. CLI is a
-----------------------------------------------
corporation duly organized, validly existing and in corporate and tax good
standing under the laws of the State of New York. CLI is duly qualified to
conduct business and is in corporate and tax good standing under the laws of
each jurisdiction in which the nature of its businesses or the ownership or
leasing of its properties requires such qualification, except where the failure
to be so qualified or to be in good standing would not have a material adverse
effect on the business, results of operations or financial condition of CLI as
in effect immediately prior to the CLI Contribution (a "CLI Material Adverse
Effect"). CLI has all requisite corporate power and authority to carry on the
business in which it is engaged and to own and use the properties owned and used
by it. CLI does not own any capital stock of or other equity interest in any
corporation, partnership or other entity.
12
(b) Noncontravention. The consummation of the transactions
----------------
contemplated by this Agreement do not: (i) violate the provisions of any law,
rule or regulation applicable to CLI; (ii) violate the provisions of the charter
or by-laws of CLI; (iii) violate any judgment, decree, order or award of any
court, governmental, regulatory or administrative agency, commission or
instrumentality (a "Governmental Entity") or arbitrator applicable to CLI; (iv)
require that CLI obtain any consent, approval, authorization, waiver or permit
from, or that CLI make any filing with or notification to, any Governmental
Entity; or (v) conflict with or result in the breach or termination of, or
require any notice, consent or waiver (other than those notices, consents or
waivers listed in Section 3.05(b) of the Disclosure Schedule, all of which have
been obtained and copies of which have been delivered to Cornerstone) under, or
cause the creation of any Security Interest upon the CLI Assets pursuant to, any
agreement or instrument to which CLI is a party or by which CLI or any of its
assets is bound.
(c) Financial Statements and Information.
------------------------------------
(i) CLI has previously delivered to Cornerstone its unaudited
balance sheets, statements of operations and statements of cash flows as of
and for the year ended December 31, 1996 and the six-month period ended
June 30, 1997. For purposes of this Agreement, such financial statements
shall be referred to as the "CLI Financial Statements," the June 30, 1997
balance sheet of CLI shall be referred to as the "CLI Balance Sheet" and
June 30, 1997 shall be referred to as the "CLI Balance Sheet Date." The
CLI Financial Statements (i) have been prepared in accordance with
generally accepted accounting principles consistently applied ("GAAP")
(except that the unaudited interim financial statements do not contain
footnotes and are subject to normal, recurring year-end adjustments which
will not be material), and (ii) fairly present, as of the dates and for the
periods therein indicated, the financial condition and the results of
operations of CLI.
(ii) CLI has no liability or obligation whatsoever, whether
accrued, absolute or contingent, other than (i) the liabilities shown on
the CLI Balance Sheet, (ii) liabilities, similar in nature to those shown
on the CLI Balance Sheet, which have arisen after the CLI Balance Sheet
Date in the ordinary course of business consistent with past practice (the
"Ordinary Course of Business") and (iii) contractual liabilities which are
not required to be reflected on a balance sheet under GAAP.
(iii) Since CLI Balance Sheet Date, there has occurred no event
or development which has had as of the date hereof, or may reasonably be
foreseen to have in the future a CLI Material Adverse Effect.
(d) Tax Matters.
-----------
13
(i) CLI has filed all Tax Returns that it was required to file
and all such Tax Returns were true, complete and accurate in all material
respects. CLI has paid all Taxes due on or before the date hereof. The
aggregate unpaid Taxes of CLI for tax periods since the CLI Balance Sheet
Date do not exceed the accruals and reserves for Taxes set forth on the CLI
Balance Sheet. CLI has no liability for any Tax obligation of any taxpayer
(including, without limitation, any affiliated group of corporations or
other entities that included CLI during a prior period) other than itself.
All Taxes that CLI is or was required by law to withhold or collect have
been duly withheld or collected and, to the extent required, have been paid
to the proper Governmental Entity. There are no liens, Security Interests
or other encumbrances of the CLI Assets that arose as a result of CLI's
failure or alleged failure to pay any Taxes.
(e) Assets.
------
(i) Each tangible asset included in the CLI Assets is free from
material defects, has been maintained in accordance with normal industry
practice, is in good operating condition and repair (subject to normal wear
and tear and obsolescence) and is suitable for the purposes for which it
presently is used.
(ii) Section 3.05(e)(ii) of the Disclosure Schedule sets forth a
true, correct and complete list of all claims, liabilities, liens, pledges,
charges, encumbrances and equities of any kind affecting the CLI Assets
(collectively, ("Encumbrances"). CLI is, immediately prior to the CLI
Contribution, the true and lawful owner of the CLI Assets, free and clear
of all Encumbrances of any kind the, except as set forth on Section
3.05(e)(ii) of the Disclosure Schedule (the "Permitted Encumbrances"). The
delivery by CLI to the LLC of the instruments of transfer of ownership
contemplated by this Agreement will vest good and marketable title to the
CLI Assets in the LLC, free and clear of all liens, mortgages, pledges,
security interests, restrictions, prior assignments, encumbrances and
claims of any kind or nature whatsoever, except for the Permitted
Encumbrances.
(iii) Section 3.05(e)(iii) of the Disclosure Schedule sets forth
(i) a list of all items of tangible personal property included in the CLI
Assets, including items not previously owned by CLI but in the possession
of or used in the business of CLI (the "Personal Property"), other than
individual assets which are not material to the business of CLI, and (ii) a
description of the owner of, and any agreement relating to the use of, each
item of Personal Property in the possession of, but not owned by, CLI and
the circumstances under which such Personal Property is used. Each item of
Personal Property not owned by CLI is in such condition that upon the
return of such property
14
to its owner in its present condition at the end of the relevant lease term
or as otherwise contemplated by the applicable agreement between CLI and
the owner or lessor thereof, the obligations of CLI (or its successor) to
such owner or lessor will be discharged.
(f) Inventory. All Inventory included in the CLI Assets, including,
---------
without limitation, all products described in CLI's current catalogues and those
which are to be shipped in the 120-day period following CLI Contribution,
consist of a quality and quantity usable and saleable in the Ordinary Course of
Business, except for obsolete, damaged or overstocked Inventory, which has been
written-off, or for which an adequate reserve has been taken on the CLI Balance
Sheet. All Inventories not written-off were recorded on the CLI Balance Sheet
at the lower of cost or market, in accordance with GAAP applied consistently
with past practice. Since the CLI Balance Sheet Date, there has been no material
change in the accounting policies or procedures applicable to the Inventory of
CLI.
(g) Intellectual Property.
---------------------
(i) Immediately following the CLI Contribution, each item of
Intellectual Property used in or necessary for the operation of CLI's
business as presently conducted ("CLI Intellectual Property"), will either
be owned or available for use by the LLC on the same terms and conditions
as enjoyed by CLI prior to the CLI Contribution. CLI has taken all
reasonable measures to protect the proprietary nature of each item of CLI
Intellectual Property owned by CLI, and to maintain in confidence all trade
secrets and confidential information of CLI. To the knowledge of the CLI
Stockholders, no other person or entity has any rights to any of the CLI
Intellectual Property (except pursuant to agreements or arrangements listed
in Section 3.05(g) of the Disclosure Schedule) and no other person or
entity is infringing, violating or misappropriating any of the CLI
Intellectual Property.
(ii) None of the activities or business conducted by CLI
infringes or violates, or constitutes a misappropriation of, any
Intellectual Property rights of any other person or entity. CLI has not
received any complaint, claim or notice alleging any such infringement,
violation or misappropriation.
(iii) Section 3.05(g) of the Disclosure Schedule lists each
registered trademark or service ▇▇▇▇, registered copyright and patent which
has been issued to CLI with respect to any of its Intellectual Property and
each pending application for trademark or service ▇▇▇▇ registration or
copyright or patent application which CLI has made with respect to any of
its Intellectual Property.
15
(h) Mailing Lists. CLI is entitled to the unrestricted use of all
-------------
direct mailing lists used by CLI, without any payment obligations other than
royalties, license fees or other charges pursuant to the agreements described in
Section 3.05(h) of the Disclosure Schedule. Section 3.05(h) of the Disclosure
Schedule describes any obligation that CLI had at June 30, 1997 to provide a
mailing list to any other party (net of any obligation of such party to provide
a mailing list to CLI).
(i) Owned Real Property. CLI does not own, nor has it ever owned, any
-------------------
real property.
(j) Real Property Leases. Section 3.05(j) the Disclosure Schedule
--------------------
lists all leases or subleases of real property to which CLI is a party. CLI has
delivered to Cornerstone true, complete and accurate copies of the leases and
subleases (each as amended to date) listed in Section 3.05(j) of the Disclosure
Schedule. With respect to each such lease and sublease:
(i) the lease or sublease is legal, valid, binding, enforceable
and is in full force and effect;
(ii) the lease or sublease will continue to be legal, valid,
binding, enforceable and in full force and effect immediately following the
CLI Contribution in accordance with the terms thereof as in effect prior to
the CLI Contribution;
(iii) neither CLI nor, to the knowledge of the CLI Stockholders,
any other party to the lease or sublease is in breach or default thereof,
and, to the knowledge of the CLI Stockholders, no event has occurred which,
with notice or lapse of time, would constitute a breach or default or
permit termination, modification, or acceleration thereunder;
(iv) there are no material disputes or oral agreements in effect
as to the lease or sublease; and
(v) CLI has not assigned, transferred, conveyed, mortgaged,
deeded in trust or encumbered any interest in the leasehold or
subleasehold.
(k) Contracts. Section 3.05(k) of the Disclosure Schedule lists each
---------
of the following contracts to which CLI is a party immediately prior to the CLI
Contribution:
(i) any contract (or group of related contracts) for the lease of
personal property from third parties providing for lease payments in excess
of $10,000 per annum;
16
(ii) any contract or purchase commitment (or group of related
contracts or purchase commitments) for the purchase of raw materials,
commodities, supplies, products or other personal property or for the
receipt of services (i) which calls for performance over a period of more
than one year, (ii) which involves more than the sum of $15,000, or (iii)
in which CLI has agreed to purchase a minimum quantity of goods or services
or has agreed to purchase goods or services exclusively from a certain
party;
(iii) any contract establishing a partnership or joint venture;
(iv) any contract (or group of related contracts) under which CLI
has created, incurred, assumed, or guaranteed indebtedness (including
capitalized lease obligations) involving more than $10,000 or under which
it has imposed a Security Interest on any of its assets;
(v) any contract concerning confidentiality, non-solicitation or
non-competition;
(vi) any contract relating to the purchase, rental, use, exchange
or disclosure of mailing lists;
(vii) any contract involving any Affiliate of CLI;
(viii) any contract under which the consequences of a default or
termination could have a CLI Material Adverse Effect; and
(ix) any other contract (or group of related contracts) either
involving more than $15,000 or not entered into in the Ordinary Course of
Business.
CLI has delivered to Cornerstone a true, complete and accurate copy of each
contract (as amended to date) listed in Section 3.05(k) of the Disclosure
Schedule. With respect to each such contract: (i) the contract is legal, valid,
binding and enforceable, and is in full force and effect; (ii) the contract will
continue to be legal, valid, binding and enforceable, and in full force and
effect immediately following the CLI Contribution in accordance with the terms
thereof as in effect prior to the CLI Contribution; and (iii) neither CLI nor,
to the knowledge of the CLI Stockholders, any other party to such contract is in
breach or default thereof, and, to the knowledge of the CLI Stockholders, no
event has occurred which with notice or lapse of time would constitute a breach
or default or permit termination, modification, or acceleration, under such
contract.
(l) Books and Records; Bank Accounts.
--------------------------------
17
(i) The corporate minute books, financial and accounting records
and other business records of CLI are true, complete and accurate in all
material respects.
(ii) Section 3.05(l)(ii) of the Disclosure Schedule lists all
bank accounts and safe deposits of CLI, and all authorized signatories
thereto.
(m) Accounts Receivable and Accounts Payable. All Accounts Receivable
----------------------------------------
have arisen in bona fide transactions in the Ordinary Course of Business. All
Accounts Receivable are collectible at the recorded amounts thereof, and are not
subject to any setoffs or counterclaims (subject to the reserve on the CLI
Financial Statements for uncollectibility and sales returns). All accounts
payable are accurately recorded on the books and records of CLI and no account
payable is overdue by more than 30 days.
(n) Insurance. Section 3.05(n) of the Disclosure Schedule sets forth
---------
a true and complete list of all claims made under each insurance policy
(including fire, theft, casualty, general liability, workers compensation,
business interruption, environmental, product liability and automobile insurance
policies and bond and surety arrangements) to which CLI has been a party, a
named insured, or otherwise the beneficiary of coverage at any time within the
past three years and the amount of coverage.
(o) Litigation. Section 3.05(o) of the Disclosure Schedule
----------
identifies, and contains a brief description of, (a) any unsatisfied judgement,
order, decree, stipulation or injunction and (b) any claim, complaint, action,
suit, proceeding, hearing or investigation of or in any court or Governmental
Entity or before any arbitrator to which CLI is a party or, to the knowledge of
the CLI Stockholders, is threatened to be made a party. None of the complaints,
actions, suits, proceedings, hearings, and investigations set forth in Section
3.05(o) of the Disclosure Schedule would have a CLI Material Adverse Effect.
(p) Product Warranty. No product manufactured or sold by CLI is
----------------
subject to any guaranty, warranty, right of return or other indemnity other than
WPI's standard terms and conditions of sale, which are set forth in Section
3.05(p) of the Disclosure Schedule. Section 3.05(p) of the Disclosure Schedule
sets forth the aggregate expenses incurred by CLI in fulfilling its obligations
under its guaranty, warranty, right of return and indemnity provisions during
each of the fiscal years and the interim period covered by the CLI Financial
Statements; CLI knows of no reason why such expenses should increase as a
percentage greater than the percentage increase in sales in the future; and the
CLI Balance Sheet contains adequate reserves for CLI's liability for such
expenses as of the CLI Balance Sheet Date.
18
(q) Employees.
---------
(i) To the knowledge of the CLI Stockholders, no key employee or
group of employees has any plans to terminate employment with CLI. Section
3.05(q) of the Disclosure Schedule lists all employees of CLI who are a
party to a non-competition agreement with the CLI. CLI has furnished to
Cornerstone true, complete and accurate copies of all non-compete
agreements between CLI and its employees, and such agreements are in full
force and effect.
(ii) No employees of CLI are represented by any labor
organization and, as of the date hereof no labor organization or group of
employees of CLI has made a demand on CLI for recognition, has filed a
petition seeking a representation proceeding or given CLI notice of any
intention to hold an election of a collective bargaining representative.
There is no strike, work stoppage, or labor disturbance pending or, to the
knowledge of the CLI Stockholders, threatened against CLI.
(r) Environmental Matters.
---------------------
(i) CLI has complied with all applicable Environmental Laws (as
defined below). There is no pending or, to the knowledge of the CLI
Stockholders, threatened civil or criminal litigation, written notice of
violation, formal administrative proceeding, or investigation, inquiry or
information request by any Governmental Entity, relating to any
Environmental Law involving CLI. For purposes of this Agreement,
"Environmental Law" means any federal, state or local law, statute, rule or
regulation or the common law relating to the environment or occupational
health and safety, including, without limitation, any statute, regulation
or order pertaining to (i) treatment, storage, disposal, generation and
transportation of industrial, toxic or hazardous substances or solid or
hazardous waste; (ii) air, water and noise pollution; (iii) groundwater and
soil contamination; (iv) the release or threatened release into the
environment of industrial, toxic or hazardous substances, or solid or
hazardous waste, including, without limitation, emissions, discharges,
injections, spills, escapes or dumping of pollutants, contaminants or
chemicals; (v) the protection of wild life, marine sanctuaries and
wetlands, including, without limitation, all endangered and threatened
species; (vi) storage tanks, vessels and containers; (vii) underground and
other storage tanks or vessels, abandoned, disposed or discarded barrels,
containers and other closed receptacles; (viii) health and safety of
employees and other persons; and (ix) manufacture, processing, use,
distribution, treatment, storage, disposal, transportation or handling of
pollutants, contaminants, chemicals or industrial, toxic or hazardous
substances or oil or petroleum products or solid
19
or hazardous waste. As used in this Section 3.05(r), the terms "release"
and "environment" shall have the meaning set forth in CERCLA.
(ii) There have been no releases by CLI or any other party of any
Materials of Environmental Concern into the environment at any parcel of
real property or any facility formerly or currently owned, operated or
controlled by CLI. To the knowledge of the CLI Stockholders, there have
been no releases of Materials of Environmental Concern at parcels of real
property or facilities other than those owned, operated or controlled by
CLI that could reasonably be expected to have an impact on the real
property or facilities owned, operated or controlled by CLI.
(iii) Section 3.05(r)(iii) of the Disclosure Schedule lists all
environmental reports, investigations and audits (whether conducted by or
on behalf of CLI or a third party, and whether done at the initiative of
CLI or directed by a Governmental Entity or other third party) in CLI's
possession or control that were issued or conducted during the past five
years relating to premises currently or previously owned or operated by
CLI. True, complete and accurate copies of each such report, or the
results of each such investigation or audit, have been provided to
Cornerstone.
(s) Legal Compliance. CLI, and the conduct and operations of its
----------------
business, are in compliance with all laws (including rules and regulations
thereunder) of any federal, state, local or foreign government or Governmental
Entity which are applicable to CLI or its business, except for any violation of,
or default under, a law which would not have a CLI Material Adverse Effect.
(t) Permits. Section 3.05(t) of the Disclosure Schedule lists all
-------
permits, licenses, registrations, certificates, orders or approvals from any
Governmental Entity ("Permits") issued to or held by CLI. Such listed Permits
are the only Permits that are required for CLI to conduct its business as
presently conducted, except for those the absence of which would not have a CLI
Material Adverse Effect. CLI, and the conduct and operations of its business,
comply in all material respects with each such Permit; each such Permit is in
full force and effect; and, to the knowledge of the CLI Stockholders, no
suspension or cancellation of such Permit is threatened and there is no basis
for believing that such Permit will not be renewable upon expiration. The
consummation of the transactions contemplated by this Agreement will not result
in the suspension or cancellation of any such Permit.
(u) Certain Business Relationships With Affiliates. No Affiliate of
----------------------------------------------
CLI (a) owns any property or right, tangible or intangible, which is used in the
business of CLI, (b) has any claim or cause of action against CLI, (c) is a
party to any contract or other arrangement, written or verbal, with CLI or (d)
owes any money to CLI or is owed any money by CLI (other than salary and other
employee benefits
20
accrued in the Ordinary Course of Business) (the agreements, arrangements and
relationships described in this sentence are hereinafter referred to as "CLI
Related Party Transactions"). Section 3.05(u) of the Disclosure Schedule
describes any CLI Related Party Transactions which are reflected in the
statements of operations of CLI included in the CLI Financial Statements. Each
of the CLI Stockholders agrees that the LLC shall not assume or otherwise
acquire from CLI any obligation or liability to any of the CLI Stockholders
other than those (if any) set forth on Schedule C attached hereto.
----------
(v) Suppliers. No significant supplier or contractor has indicated
---------
within the past year that it will stop, or decrease the rate of, supplying
materials, commodities, supplies or other products or services to CLI other than
at the direction of CLI. Section 3.05(v) of the Disclosure Schedule lists each
supplier or contractor that is the sole supplier of any significant item or
service to CLI.
(w) Brokers' Fees. Neither CLI nor the CLI Stockholders have any
-------------
liability or obligation to pay any fees or commissions to any broker, finder or
agent with respect to the contribution of the CLI Assets to the LLC as
contemplated by this Agreement.
(x) Acquired Assets Complete. The CLI Assets are, when utilized by a
------------------------
labor force substantially similar to that employed by CLI on the date hereof,
adequate to conduct the business and operations of CLI as presently conducted.
(y) Disclosure. No statement by CLI or the CLI Stockholders contained
----------
in this Agreement, the Disclosure Schedule or any certificate to be delivered by
or on behalf of CLI or the CLI Stockholders pursuant to this Agreement contains
or will contain any untrue statement of a material fact or omits or will omit to
state any material fact necessary, in light of the circumstances under which it
was or will be made, in order to make the statements herein or therein not
misleading.
3.06 Further Assurances. At any time and from time to time after the
------------------
date of this Agreement, at the LLC's request and without further consideration,
CLI shall promptly, or shall promptly cause CLI to, execute and deliver such
instruments of sale, transfer, conveyance, assignment and confirmation, and take
such other action, as the LLC may reasonably request to more effectively
transfer, convey and assign to the LLC, and to confirm the LLC's title to, all
of the CLI Assets, to put the LLC in actual possession and operating control
thereof, to assist the LLC in exercising all rights with respect thereto and to
carry out the purpose and intent of this Agreement. At any time and from time to
time after the date of this Agreement, at CLI's request and without further
consideration, the LLC shall promptly execute and deliver such instruments of
assumption, and take such other actions, as CLI may reasonably request to more
effectively evidence and effectuate the assumption by the LLC of the CLI Assumed
Liabilities.
21
ARTICLE IV
----------
Cash Distributions
------------------
4.01 Distribution of Distributable Cash and Net Proceeds Upon
--------------------------------------------------------
Liquidation. Subject to any limitations and restrictions set forth in the Act:
-----------
(a) Distributable Cash of the LLC shall be distributed at such times,
and in such amounts, as shall be determined by the Board of Managers.
(b) Any and all net proceeds upon liquidation of the LLC shall be
distributed to the Members at the time or times, and in the amounts, determined
by the Board of Managers or a liquidator in accordance with Sections 9.03 and
9.04.
(c) Distributable Cash and net proceeds upon liquidation of the LLC
shall be distributed to the Members, at the times and in the amounts specified
above, as follows:
(i) First, in the case of Distributable Cash arising from a
Capital Transaction and net proceeds upon liquidation of the LLC only, to
all Members with positive Adjusted Capital Account balances (after such
balances have been adjusted to reflect the allocation of Gross Income, Net
Profits, Net Losses and Nonrecourse Deductions arising from such event
pursuant to Section 5.01 and Section B of Schedule B), in proportion to and
----------
to the extent of such positive balances; and
(ii) The balance, if any, to the Members in accordance with their
respective Percentage Interests.
Amounts distributed pursuant to clause (i) above shall be considered to
have been distributed pursuant to clause (ii) to the extent that they would have
been distributed pursuant to clause (ii) had clause (i) not been contained in
this Agreement.
4.02 Distribution of Assets in Kind. Except as set forth in Section
------------------------------
8.10, the Board of Managers shall have the right to make distributions of assets
of the LLC in kind, but no Member shall have the right to require any
distribution of any assets of the LLC in kind. If any assets of the LLC are
distributed in kind, such assets shall be distributed on the basis of their fair
market value as determined by the Board of Managers in good faith and with
fairness to all Members. Any Member entitled to any interest in such assets
shall, unless otherwise determined by the Board of Managers in good faith and
with fairness to all Members, receive separate assets of the LLC and not an
interest as a tenant-in-common with any other Member.
22
ARTICLE V
----------
Allocation of Net Profits and Net Losses
----------------------------------------
5.01 Basic Allocations.
-----------------
(a) Except as provided in Section B of Schedule B (which shall be
----------
applied first), the Net Profits and Net Losses of the LLC for any year (or other
fiscal period) shall be allocated among the Members as follows:
(i) First, among the Members in such proportions and such amounts
as may be necessary so that following such allocation the balances in their
respective Adjusted Capital Accounts are in the same ratio as their
respective Percentage Interests; and
(ii) The balance, if any, to the Members in accordance with their
Percentage Interests.
(b) Allocations of Net Profits and Net Losses provided for in this
Section 5.01 shall generally be made as of the end of the fiscal year of the
LLC.
ARTICLE VI
----------
Management
----------
6.01 Management of the LLC. The business and affairs of the LLC shall
---------------------
be managed by or under the direction of a Board of Managers, who may exercise
all of the powers of the LLC except as otherwise provided by law or this
Agreement. All management and other responsibilities not specifically reserved
to the Members in this Agreement shall be vested in the Board of Managers, and
the Members shall have no voting rights except as specifically provided in this
Agreement or required by non-waivable provisions of applicable law. It in the
event of a vacancy on the Board of Managers, the remaining Managers, except as
otherwise provided by law, may exercise the powers of the full Board until the
vacancy is filled.
6.02 Managers.
--------
(a) The number of Managers who shall constitute the whole Board of
Managers shall be determined from time to time by the Board of Managers, and
shall initially be five (5). Two (2) of the Managers shall be elected by CLI.
The remaining Managers shall be elected by Cornerstone. Each of CLI and
Cornerstone shall consult with the other concerning the identity of the Managers
to be elected by CLI and Cornerstone, respectively; provided that such
consultation obligation shall in no way limit the right of CLI and Cornerstone
to elect such Managers as it in its sole
23
discretion determines. ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ and ▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ shall serve
as the Managers initially elected by CLI. ▇▇▇▇▇▇▇ ▇. End, ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇ and
▇▇▇▇ ▇▇▇▇▇▇ shall serve as the Managers initially elected by Cornerstone.
Managers need not be Members of the LLC. The LLC shall permit CLI to designate,
by delivery of written notice to Cornerstone, a representative of CLI, who must
be reasonably acceptable to Cornerstone, who shall be permitted to attend, as a
non-voting observer, meetings of the Board of Managers, provided such person
executes an appropriate confidentiality agreement. CLI hereby designates ▇▇▇▇▇▇▇
▇▇▇▇▇ as its initial non-voting observer representative.
(b) Each Manager shall hold office until his or her death, resignation
or removal in accordance with the provisions hereof.
(c) Any Manager may resign by delivering his or her written
resignation to (i) the President or any other officer of the LLC designated by
the Board of Managers to receive such resignations, and (ii) each Member. Such
resignation shall be effective upon receipt unless it is specified to be
effective at some other time or upon the happening of some other event.
(d) Any Manager may be removed at any time, with or without cause, by
action of the Member (or Members, as the case may be) who appointed such Manager
pursuant to Section 6.02(a), by delivery by such Member (or Members, as the case
may be) of written notice of such removal to (i) the Manager being so removed
and (ii) all other Members. Such removal shall be effective upon the giving of
the notice specified in the preceding sentence to each person or entity entitled
thereto, unless such notice is specified to be effective at some other time or
upon the happening of some other event.
(e) Any vacancy on the Board of Managers resulting from the death,
resignation or removal of any Manager shall be filled, as promptly as
practicable, by the Member (or Members, as the case may be) entitled to appoint
such Manager pursuant to Section 6.02(a), by designating a replacement Manager
in a written notice given to all other Members and all Managers. Such
designation of a replacement Manager shall be effective upon the giving of the
notice specified in the preceding sentence to each person or entity entitled
thereto, unless such notice is specified to be effective at some other time or
upon the happening of some other event.
(f) Regular meetings of the Board of Managers may be held without
notice at such time and place as shall be determined from time to time by the
Board of Managers; provided that any Manager who is absent when such a
determination is made shall be given prior notice of such meeting. Special
meetings of the Board of Managers may be held at any time and place designated
in a call by the Chairman or President. Notice of any special meeting of
Managers shall be given to each Manager by whichever of the Chairman or
President called the meeting and shall specify the
24
purpose thereof and, to the extent practicable, the matters to be voted on at
such meeting. Notice shall be duly given to each Manager (i) by giving notice to
such Manager in person or by telephone at least 48 hours in advance of the
meeting, (ii) by sending a telegram, telex or facsimile transmission, or
delivering written notice by hand, to his or her last known business or home
address at least 48 hours in advance of the meeting, or (iii) by mailing written
notice to his or her last known business or home address at least five business
days in advance of the meeting. Except as required in this Section 6.02(f), a
notice or waiver of notice of a meeting of the Board of Managers need not
specify the purposes of the meeting.
(g) At any meeting of the Board of Managers, the vote of the greater
of (x) three Managers or (y) a majority of all Managers then in office (whether
or not present at the relevant meeting) shall be sufficient to take any action,
unless a different vote is specified by law, the Certificate or this Agreement.
(h) Managers or any members of any committee designated by the
Managers may participate in a meeting of the Board of Managers or such committee
by means of telephone conference or similar communications equipment by means of
which all persons participating in the meeting can hear each other, and
participation by such means shall constitute presence in person at such meeting.
Any action required or permitted to be taken at any meeting of the Board of
Managers or of any committee of the Board of Managers may be taken without a
meeting, if at least 80% of the members of the Board or committee, as the case
may be, consent to the action in writing, and the written consents are filed
with the minutes of proceedings of the Board or committee.
(i) The Board of Managers may, by resolution, designate one or more
committees, each committee to consist of one or more of the Managers of the LLC.
Any such committee, to the extent provided in the resolution of the Board of
Managers and subject to the provisions of the Act, shall have and may exercise
all the powers and authority of the Board of Managers in the management of the
business and affairs of the LLC. Each such committee shall keep minutes and
make such reports as the Board of Managers may from time to time request.
Except as the Board of Managers may otherwise determine, any committee may make
rules for the conduct of its business, but unless otherwise provided by the
Managers or in such rules, its business shall be conducted as nearly as possible
in the same manner as is provided in this Agreement for the Board of Managers.
(j) Managers shall not be paid any compensation for their services as
Managers, other than reimbursement for expenses of attendance at meetings of the
Board of Managers. No such payment shall preclude any Manager from serving the
LLC or any of its parent or subsidiary entities in any other capacity and
receiving compensation for such service.
25
(k) The LLC shall not be obligated to pay any compensation to any
officer or employee of Cornerstone with respect to advice or consultation
services provided by such person to the LLC. Notwithstanding the foregoing, the
LLC and Cornerstone acknowledge and agree that they may from time to time enter
into business arrangements pursuant to which Cornerstone provides services to
the LLC, for compensation to be agreed upon, relating to matters such as order
fulfillment, order taking, customer service, computerized operating systems,
management reporting systems, inventory management systems and negotiation of
service contracts with third parties; provided that any such agreement between
the LLC and Cornerstone (or any Affiliate thereof), that the Managers elected by
CLI believe is not upon arms-length terms or does not contain customary terms
and conditions, must be approved by at least one of the Managers elected by CLI.
6.03 Officers.
--------
(a) The officers of the LLC shall consist of a Chairman of the Board
of Managers (the "Chairman"), a President and Chief Executive Officer (the
"President"), a Treasurer and such other officers with such other titles as the
Board of Managers shall determine; provided, however, that, if the Board
-------- -------
determines to establish any such other officer position with a title expressly
referenced in the General Corporation Law of the State of Delaware, such officer
shall, to the maximum extent possible, have the duties and responsibilities
associated with such officer position under the General Corporation Law of the
State of Delaware.
(b) The Chairman shall be selected by the Board of Managers, from
among the members of the Board of Managers, and shall preside at all meetings of
the Board of Managers. The President shall (i) be the Chief Executive Officer
of the LLC, (ii) subject to the direction of the Board of Managers, have general
charge and supervision of the business of the LLC, and (iii) perform such other
duties and have such other powers as the Board of Managers may from time to time
prescribe. The Treasurer shall perform such duties and shall have such powers
as may from time to time be assigned to him or her by the Board of Managers or
the President. It in addition, the Vice President-Finance shall perform such
duties and have such powers as are incident to the office of treasurer of a
corporation organized under the General Corporation Law of the State of
Delaware.
(c) The Chairman, the President, the Treasurer and any other officer
position established by the Board of Managers shall be filled by a designee of
the Board of Managers. The initial officers of the LLC shall be as follows:
Chairman ▇▇▇▇▇▇▇ ▇. End
President ▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
Founder Merchandising Marketing Director ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
Vice President ▇▇▇▇▇▇ ▇▇▇▇▇▇
26
Treasurer ▇▇▇▇ ▇▇▇▇▇▇
Secretary ▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
(d) No officer need be a Member or a Manager. Subject to any duly
authorized written agreement between the LLC and such officer to the contrary,
any two or more offices may be held by the same person.
(e) Except as otherwise provided by law, by the Certificate or by this
Agreement, (i) each officer designated by a Member as set forth in Section
6.03(c) shall hold office until his or her death, resignation or removal, and
(ii) each officer designated by the Board of Managers shall hold office until
his or her death, resignation or removal, unless a different term is specified
in the action of the Board of Managers designating him. Any officer may resign
by delivering his or her written resignation to the President, any other officer
designated by the Board of Managers to receive such resignations, or any
Manager. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event. Any officer may be removed at any time, with or without cause, by action
of the Board of Managers.
(f) Except as the Board of Managers may otherwise determine, no
officer who resigns or is removed shall have any right to any compensation as an
officer for any period following his or her resignation or removal, or any right
to damages on account of such removal, whether his or her compensation be by the
month or by the year or otherwise, unless such compensation is expressly
provided in a duly authorized written agreement with the LLC.
(g) The Board of Managers may fill any vacancy occurring in any other
office for any reason and may, in its discretion, leave unfilled for such period
as it may determine any such other office.
(h) Officers of the LLC shall be entitled to such salaries,
compensation or reimbursement as shall be fixed or allowed from time to time by
the Board of Managers, subject to the terms of any duly authorized written
agreement between the LLC and such officer and subject further to the provisions
of Section 6.02(k).
6.04 Interpretation of Rights and Duties of Managers and Members. To
-----------------------------------------------------------
the fullest extent permitted by the Act and other applicable law, and to the
extent not inconsistent with the specific provisions of this Agreement or the
Certificate, it is the intention of the parties that:
(a) the Board of Managers shall act collectively, and no Manager
acting individually in his or her capacity as such, shall have any right or
authority to bind the LLC (provided that nothing shall prohibit a Manager
27
who is also an officer from binding the LLC in his or her capacity as an
officer); and
(b) the Members shall have no power or authority whatsoever with
respect to the management of the business and affairs of the LLC.
6.05 Binding the LLC. Except as the Board of Managers may generally
---------------
or in any particular case or cases otherwise authorize, and subject to the other
provisions of this Agreement and the Certificate, all deeds, leases, contracts,
bonds, notes, checks, drafts or other obligations made, accepted or endorsed by
the LLC shall be signed by the Chairman, the President or the Treasurer, or any
of them acting singly.
6.06 Contracts with Members. Subject to Section 6.02(k), the LLC may
----------------------
engage in business with, or enter into one or more agreements, leases, contracts
or other arrangements for the furnishing to or by the LLC of goods, services or
space with any Manager, any Member or any Affiliate of a Manager or Member, and
may pay compensation in connection with such business, goods, services or space,
on such terms and conditions as the Board of Managers may in its sole discretion
determine; provided that any such agreement between the LLC and a Member or an
Affiliate of such Member, that the other Member believes is not an arms-length
terms or does not contain customary terms and conditions, must be approved by at
least one of the Managers elected by the other Member.
6.07 Voluntary Loans.
---------------
(a) It in the event the LLC requires additional funds to carry out its
purposes, to conduct its business, to meet its obligations, or to make any
expenditure authorized by this Agreement or by the Board of Managers,
(regardless of whether additional funds are available from third parties on
terms acceptable to the Board of Managers), Cornerstone may, but shall not be
obligated to, loan such funds to the LLC. Any loan made pursuant to this
Section 6.07 (a "Voluntary Loan") shall be nonrecourse to the Members, shall be
evidenced by a promissory note, and shall bear interest at such rate and be
payable at such time or times as is agreed between the LLC and Cornerstone.
(b) Cornerstone acknowledges that (i) it is its current intention
to support the growth of the LLC's business, provided such growth can be
accomplished in accordance with a business plan Cornerstone, in its sole
discretion, deems acceptable, and (ii) the LLC is likely to need additional
funding to support such growth. Cornerstone agree to use commercially
reasonable efforts to cause the LLC to be designed as an "eligible subsidiary"
under Cornerstone's Loan Agreement with Fleet National Bank and certain other
banks dated July 22, 1997 (the "Cornerstone Credit Agreement"), provided that
the LLC shall execute such documents and take such actions as may be reasonably
requested by Fleet Bank or
28
Cornerstone in connection therewith (including executing documents and taking
actions for the purpose of pledging the LLC's assets to Fleet Bank). Such
arrangement shall permit Cornerstone to cause Fleet Bank to advance funds to the
LLC, which advances shall be considered borrowings under the Cornerstone Credit
Agreement and shall be upon the terms and subject to the conditions of the
Cornerstone Credit Agreement. Although Cornerstone shall not be obligated to
cause Fleet Bank to advance funds to the LLC under the Cornerstone Credit
Agreement, Cornerstone agrees that (i) at the beginning of each fiscal year of
the LLC, it shall discuss in good faith with management of the LLC the LLC's
borrowing needs for such fiscal year and attempt to reach agreement with
management on the LLC's borrowing needs for such fiscal year and (ii) it shall
use commercially reasonable efforts to maintain during such fiscal year
borrowing availability under the Cornerstone Credit Agreement in an amount equal
to the agreed upon amount of the LLC's borrowing needs for such fiscal year.
6.08 Indemnification and Exculpation.
-------------------------------
(a) No Manager shall have any liability to the LLC or to any Member
for any loss suffered by the LLC which arises out of any action or inaction of
such Manager if such Manager determined in good faith that such course of
conduct was (i) in accordance with the provisions of this Agreement or (ii) in,
or not opposed to, the best interests of the LLC, and, in either case, such
course of conduct did not constitute gross negligence or willful misconduct of
such Manager.
(b) Subject to the provisions of Section 6.09, each Manager and Member
shall be subject to the fiduciary duties of care and loyalty to the full extent
that such duties would be imposed upon a director or a stockholder,
respectively, of a corporation organized and existing under the General
Corporation Law of the State of Delaware; provided that (i) to the extent the
provisions of this Agreement, or any other agreement entered into between or
among the LLC and one or more Members and/or Managers, restrict or modify the
duties and liabilities a Member or a Manager otherwise existing at law or in
equity, such provisions shall supersede (to the extent of such restriction or
modification) such duties and liabilities, and (ii) no Member or Manager shall
have any liability or obligation to the LLC or any other Member or Manager for
any action or omission permitted (or which such Member or Manager believes in
good faith is permitted) under the terms of this Agreement or any other
agreement entered into between or among the LLC and one or more Members and/or
Managers.
(c) Each Manager shall be indemnified by the LLC against any losses,
judgments, liabilities, expenses and amounts paid in settlement of any claims
sustained by it with respect to actions taken by such Manager on behalf of the
LLC, provided that no indemnification shall be provided for any person with
respect to any matter as to which he shall have been adjudicated in any
proceeding not to have
29
acted in good faith in the good faith belief that his or her action was in, or
not opposed to, the best interest of the LLC. Without limiting the foregoing,
the Board of Managers may elect (on a case by case basis) to permit such
indemnification to include payment by the LLC of expenses incurred in defending
a civil or criminal action or proceeding in advance of the final disposition of
such action or proceeding, upon receipt of an undertaking by the person
indemnified to repay such payment if he shall be adjudicated not to be entitled
to indemnification under this Section 6.08, which undertaking may be accepted
without reference to the financial ability of such person to make repayment. Any
indemnification to be provided hereunder may be provided although the person to
be indemnified is no longer a Manager.
(d) Any indemnity under this Section 6.08 shall be paid from, and only
to the extent of, LLC assets, and no Member shall have any personal liability on
account thereof in the absence of a separate written agreement to the contrary.
The LLC shall not incur the cost of that portion of any insurance, other than
public liability insurance, which insures any party against any liability as to
which such party is herein prohibited from being indemnified.
6.09 Other Activities and Business Opportunities. Subject to the
-------------------------------------------
terms of any separate contractual arrangements between the LLC and any Manager
or any Member (such as an employment, consulting or noncompetition agreement),
the Members, Managers and any Affiliates of any of them may engage in and
possess interests in other business ventures and investment opportunities of
every kind and description, independently or with others, including serving as
directors, officers, stockholders, managers, members and general or limited
partners of corporations, partnerships or other limited liability companies with
purposes similar to those of the LLC. Neither the LLC nor any other Member or
Manager shall have, by virtue of their affiliation with the LLC, any rights in
or to such ventures or opportunities or the income or profits therefrom.
Without limiting the foregoing, the LLC and CLI acknowledge that Cornerstone
currently operates, through subsidiaries, a number of businesses which may be
deemed competitive with that of the LLC, and may acquire and operate additional
competitive businesses in the future. The LLC and CLI acknowledge that there
shall be no restriction upon the right of Cornerstone or its Affiliates
(including any who serve as Managers of the LLC) to engage in businesses which
may be deemed competitive with that of the LLC, and neither Cornerstone nor any
Affiliate thereof (including any Manager elected by Cornerstone) shall have any
liability or obligation (whether based upon breach of a fiduciary duty,
usurpation of corporate opportunity or any other theory whatsoever) to the LLC
or any Member by reason of the participation of Cornerstone or any Affiliate
thereof in such businesses.
ARTICLE VII
-----------
Fiscal Matters
--------------
30
7.01 Books and Records. The Board of Managers shall keep or cause an
-----------------
officer of the LLC or a designated third party to keep, at the principal office
of the LLC or in such other location as the Board of Managers may designate,
complete and accurate books and records of the LLC, maintained in such form and
manner as the Board of Managers may determine, as well as any other documents
and information required to be furnished to the Members under the Act. If and
to the extent required under the Act, such books, records and information shall
be available for examination and copying by any Member, at its reasonable
request, subject to such standards as the Board of Managers may reasonably
require, as required by the Act.
7.02 Reports. The LLC shall prepare and deliver to each Member: (i)
-------
unaudited monthly and quarterly financial statements of the LLC, as promptly as
practicable following the completion of each month and quarter, and (ii) audited
annual financial statements of the LLC, as promptly as practicable following
completion of each fiscal year. The LLC shall prepare and furnish to all
Members such other financial statements and reports as the Board of Managers in
its sole and absolute discretion may determine necessary or advisable.
7.03 Bank Accounts. The Board of Managers shall (or shall authorize
-------------
and direct one or more officers of the LLC to) cause the LLC to open and
maintain one or more accounts with such one or more financial institutions as
the Board of Managers or such officers may determine to be necessary or
advisable. The Board of Managers shall adopt such resolutions (including
resolutions concerning withdrawal authority of officers and employees of the
LLC) as may be necessary to implement the provisions of this Section 7.03. No
funds belonging to any person or entity other than the LLC (whether or not a
Member) shall in any way be deposited or kept in any such account of the LLC or
otherwise be commingled with any funds of the LLC.
7.04 Fiscal Year. The fiscal year of the LLC shall end on the last
-----------
Saturday of January of each year.
7.05 Tax Matters Partner. Cornerstone shall serve as the "tax matters
-------------------
partner" of the LLC. If at any time Cornerstone is not eligible under the Code
to serve, or refuses to serve, as the "tax matters partner," then another Member
selected by Cornerstone shall serve as the "tax matters partner." The "tax
matters partner" is hereby authorized to and shall perform all duties of a "tax
matters partner" under the Code and such other duties as are reasonably
delegated to the "tax matters partner" by the Board of Managers, and shall serve
as "tax matters partner" until its resignation or until the designation of its
successor, whichever occurs sooner. CLI shall provide to the LLC all
information relating to tax matters (including without limitation information as
to tax bases of the CLI Assets and the depreciation of such assets) as may be
reasonably requested by the LLC. The "tax matters partner" shall be reimbursed
by the LLC for all reasonable out-of-pocket expenses actually incurred by the
"tax matters partner" in connection with its performance of its duties as such
31
(such as filing fees and the fees of any third party engaged by the "tax matters
partner"), and the LLC shall indemnify and hold harmless the "tax matters
partner," to the maximum extent permissible under the Act, from and against any
and all losses, claims, liabilities, costs and expenses incurred by the "tax
matters partner" in connection with its performance of its duties as such,
except insofar as the same may have been incurred by reason of gross negligence
or willful misconduct of such "tax matters partner."
ARTICLE VIII
------------
Transfers of Interests
----------------------
8.01 Transfers of Interests by Members.
---------------------------------
(a) All Transfers (except for Transfers effected pursuant to Section
8.02) shall be subject to the provisions of this Section 8.01. No Member may
Transfer all or any part of its Membership Interest (including the interest of
an assignee within the meaning of Section 18-702 of the Act) to any person or
entity except with the prior written approval of the Board of Managers, the
granting or denying of which approval shall be in the Board's sole and absolute
discretion. Any Transfer in contravention of the foregoing sentence or any
other provision of this Agreement shall be null and void and ineffective to
transfer all or any part of any Membership Interest (including the interest of
an assignee within the meaning of Section 18-702 of the Act), and shall not
bind, or be recognized by, or on the books of, the LLC, and any transferee or
assignee in such transaction shall not be or be treated as or deemed to be a
Member (or an assignee) for any purpose. It in the event any Member shall at
any time attempt or purport to Transfer a Membership Interest, or any part
thereof, in contravention of any of the provisions of this Agreement, then the
LLC shall, in addition to all rights and remedies at law and equity, be entitled
to a decree or order restraining and enjoining such transaction, and the
offending Member shall not plead in defense thereto that there would be an
adequate remedy at law, it being expressly hereby acknowledged and agreed that
damages at law would be an inadequate remedy for a breach or threatened breach
of the provisions of this Agreement concerning such transactions.
(b) No assignment of the interest of a Member shall be made if, in the
opinion of counsel to the LLC, such assignment (i) may not be effected without
registration under the Securities Act, (ii) would result in the violation of any
applicable state securities laws, (iii) unless approved by the Board of Managers
would result in a termination of the LLC under Section 708 of the Code or (iv)
unless approved by the Board of Managers, would result in the treatment of the
LLC as an association taxable as a corporation or as a "publicly-traded limited
partnership" for tax purposes. The LLC shall not be required to recognize any
such assignment until the instrument conveying such interest has been delivered
to the Board of Managers
32
for recordation on the books of the LLC. Unless an assignee becomes a
substituted Member in accordance with the provisions of Section 8.01(c), it
shall not be entitled to any of the rights granted to a Member hereunder, other
than the right to receive all or part of the share of the Gross Income, Net
Profits, Net Losses, Nonrecourse Deductions, distributions of cash or property
or returns of capital to which its assignor would otherwise be entitled.
(c) An assignee of the interest of a Member, or any portion thereof,
shall become a substituted Member entitled to all the rights of a Member if, and
only if:
(i) the assignor gives the assignee such right;
(ii) the Board of Managers consents to such substitution, which
consent may be granted or withheld in its sole and absolute discretion;
(iii) the assignor or the assignee pays to the LLC all costs and
expenses incurred in connection with such substitution, including
specifically, without limitation, costs incurred in the review and
processing of the assignment and in amending the LLC's then current Limited
Liability Company Agreement, and if required, the Certificate; and
(iv) the assignee executes and delivers an amendment to this
Agreement (and to the Certificate, if required), which amendment shall be
executed by an officer of the LLC (other than the assignor, if he is an
officer of the LLC), and such assignee, and such other instruments, in form
and substance satisfactory to the Board of Managers, as may be necessary,
appropriate or desirable to effect such substitution and to confirm the
agreement of the assignee to be bound by the terms and provisions of this
Agreement.
(d) The LLC and the Board of Managers shall be entitled to treat the
record owner of any LLC interest as the absolute owner thereof in all respects,
and shall incur no liability for distributions of cash or other property made in
good faith to such owner until such time as a written assignment of such
interest has been received and accepted by the Board of Managers and recorded on
the books of the LLC. The Board of Managers may refuse to accept an assignment
until the end of the next successive quarterly accounting period. It in no
event shall any Membership Interest, or any portion thereof, be sold,
transferred or assigned to a minor or incompetent, and any such attempted sale,
transfer or assignment shall be void and ineffectual and shall not bind the LLC
or the Board of Managers.
8.02 First and Second Purchase Options.
---------------------------------
33
(a) First Purchase Option. CLI hereby grants to Cornerstone an
---------------------
exclusive, irrevocable option (the "First Purchase Option") to purchase 59.18%
of CLI's Membership Interest (which constitutes 29.0% of the total Membership
Interests held by all Members). The First Purchase Option is exercisable at any
time during the period (the "First Exercise Period") beginning on the earlier to
occur of (i) the date of the closing of an initial public offering of
Cornerstone Common Stock pursuant to a Registration Statement on Form S-1 (or
any successor form thereto) that is declared effective by the U.S. Securities
and Exchange Commission (the "Cornerstone IPO Date") and (ii) February 1, 2000,
and ending at 11:59 p.m., Boston time, on the date 90 days following such date;
provided that if the Cornerstone IPO Date occurs prior to February 1, 2000 and
Cornerstone does not exercise the First Purchase Option within 90 days following
the Cornerstone IPO Date, Cornerstone may exercise the First Purchase Option at
any time during the 90-day period beginning on February 1, 2000 and such period
shall also constitute part of the "First Exercise Period." If the last day of
the First Exercise Period is not otherwise a Business Day (as defined below),
then the last day of the First Exercise Period shall be the next succeeding
Business Day. "Business Day" shall mean any day, other than a Saturday, Sunday
or holiday, during which banks are open for business in Boston, Massachusetts.
(b) Second Purchase Option. Subject to the exercise by Cornerstone of
----------------------
the First Purchase Option and the timely payment therefor by Cornerstone in
accordance with Section 8.06, CLI hereby grants to Cornerstone an exclusive,
irrevocable option (the "Second Purchase Option") to purchase all but not less
than all of CLI's remaining Membership Interest. The Second Purchase Option is
exercisable at any time during the period (the "Second Exercise Period")
beginning on February 1, 2003, and ending at 11:59 p.m., Boston time, on the
date 90 days following such date. If the last day of the Second Exercise Period
is not otherwise a Business Day, then the last day of the Second Exercise Period
shall be the next succeeding Business Day.
8.03 Calculation of First and Second Option Exercise Price.
-----------------------------------------------------
(a) Upon exercise of the First Purchase Option, Cornerstone shall make
an aggregate payment to CLI (the "First Option Exercise Price"), determined in
accordance with the following formula:
(i) If the Cornerstone IPO Date occurs prior to January 31, 2000,
the First Option Exercise Price shall be an amount equal to
(A) One Million Dollars ($1,000,000) (the "Minimum
Payment"), plus;
(B) the amount, if any, by which the First CLI Valuation
Amount (as defined below) exceeds the Minimum
34
Payment (such additional amount, if any, being
hereinafter referred to as the "Additional Payment").
(ii) If the Cornerstone IPO Date has not occurred by January 31,
2000, the First Option Exercise Price shall be an amount equal to the
greater of (A) or (B), where :
(A) equals the Minimum Payment; and
(B) equals an amount equal to twenty-nine percent (29%), of
the greater of:
(1) the amount of the LLC's earnings for the fiscal
year ending January 31, 2000 ("Fiscal 1999"),
before deducting interest expense, taxes and
amortization of goodwill ("EBIT"), multiplied by
seven (7); or
(2) the sum of:
(a) the LLC's EBIT for Fiscal 1999, multiplied by
three (3);
plus
(b) the LLC's net sales for Fiscal 1999,
multiplied by twenty-five percent (25%).
The amount calculated pursuant to this Section 8.03(b)(ii) being referred
to herein as the "First CLI Valuation Amount."
(b) Upon exercise of the Second Purchase Option, Cornerstone shall
make an aggregate payment to CLI (the "Second Option Exercise Price"), in an
amount equal to twenty percent (20%) of the greater of (i) and (ii) where:
(i) equals the amount of the LLC's EBIT for the fiscal year ended
January 31, 2003 ("Fiscal 2002"), multiplied by seven (7);
and
(ii) equals the amount equal to the sum of:
(A) the LLC's EBIT for Fiscal 2002, multiplied by three
(3);
35
plus
(B) the LLC's net sales for Fiscal 2002, multiplied by
twenty-five percent (25%).
(c) All calculations of the LLC's EBIT and net sales shall be based
upon the financial statements for the relevant fiscal year as audited by the
LLC's independent certified public accountants. Any determination of a purchase
price based on the financial results for a particular fiscal year shall be made
by the first Business Day in April following the end of such fiscal year.
8.04 Form of Payment. The First Option Exercise Price and the Second
---------------
Option Exercise Price, each calculated in accordance with Section 8.03, shall be
paid to CLI in cash, in Cornerstone Common Stock, or in any combination thereof,
at the election of CLI. The number of shares of Cornerstone Common Stock to be
delivered in payment of all or a portion of the First Option Exercise Price or
the Second Option Exercise Price shall be determined by dividing the portion of
the First Option Exercise Price or the Second Option Exercise Price, as the case
may be, to be paid in Cornerstone Common Stock by the Cornerstone Fair Market
Value. "Cornerstone Fair Market Value" shall mean: (a) if the Cornerstone IPO
Date occurs 20 or more days before the First Closing Date or the Second Closing
Date (each as defined below), as the case may be, the average of the closing
prices of the Cornerstone Common Stock quoted on the Nasdaq National Market (the
"NMS") (or, if then traded on a national securities exchange, the average of the
closing prices of the Cornerstone Common Stock on the principal national
securities exchange on which listed or, if quoted on the Nasdaq over-the-counter
system, the average of the mean of the closing bid and ask prices) on each of
the twenty (20) trading days immediately preceding the First Closing Date or the
Second Closing Date, as the case may be; or (b) if the Cornerstone IPO Date
occurs after, or less than 20 days before, the First Closing Date or the Second
Closing Date, as the case may be, the per-share fair market value of the
Cornerstone Common Stock determined in good faith by a broker, dealer or
investment banker of national reputation in the United States having expertise
in making such determinations and selected by Cornerstone and approved by CLI
(whose approval may not be unreasonably withheld or delayed) (the "Cornerstone
Appraiser"), based on what it believes to be the most appropriate methodology
for valuing Cornerstone. In determining the Cornerstone Fair Market Value, the
Cornerstone Appraiser may consider (i) the valuations of comparable privately or
publicly held companies and (ii) the valuations of Cornerstone in both a private
sale scenario and an initial public offering scenario, based on its sole opinion
of the suitability of a private sale of Cornerstone and the suitability of an
initial public offering for Cornerstone. Upon its determination of Cornerstone
Fair Market Value, the Cornerstone Appraiser shall prepare and deliver to each
of Cornerstone and CLI a report (the "Cornerstone Appraisal Report") stating its
determination of the Cornerstone Fair Market Value and setting forth in
reasonable detail the method by
36
which the same was determined. Cornerstone shall cause the Cornerstone
Appraiser to submit the Cornerstone Appraisal Report within thirty (30) days
after CLI gives the notice required by the last sentence of Section 8.05(a) or
8.05(b), as the case may be. The Cornerstone Fair Market Value set forth in the
Cornerstone Appraisal Report shall be binding on both Cornerstone and CLI.
8.05 Manner of Exercise.
------------------
(a) The First Purchase Option shall be exercised by delivery, during
the First Exercise Period, of a written notice from Cornerstone to CLI (i)
fixing a closing date (the "First Closing Date") on which date such Membership
Interest of CLI will be purchased, which date shall be no earlier than forty
(40) days after, and no later than ninety (90) days after, the date of such
notice (the "First Record Date"), (ii) stating that the First Purchase Option is
being exercised and setting forth the First Option Exercise Price, determined in
accordance with Section 8.03(a) hereof; provided, however, that (A) in the event
-------- -------
that the First Purchase Option is exercised prior to the completion of Fiscal
1999, such notice shall state that the First Option Exercise Price shall be
equal to the Minimum Payment subject to adjustment pursuant to Section
8.03(a)(i)(B) following the LLC's completion of Fiscal 1999 and the closing of
the books and records of the LLC for such year and (B) if such notice is given
before the First Option Exercise Price can be determined, Cornerstone shall
deliver a subsequent notice setting forth the First Option Exercise price
promptly following its determination; and (iii) setting forth any instructions
that CLI will need to obtain such payment. The First Purchase Option shall be
deemed to be exercised on the First Record Date, at which time the decision to
exercise the First Purchase Option shall be deemed irrevocable. CLI, within 10
days following notice of Cornerstone's exercise of the First Purchase Option,
shall notify Cornerstone in writing as to the portion, if any, of the First
Option Exercise Price to be paid in cash and the portion, if any, of the First
Option Exercise Price to be paid in Cornerstone Common Stock.
(b) The Second Purchase Option shall be exercised by delivery, during
the Second Exercise Period, of a written notice from Cornerstone to CLI (i)
fixing a closing date (the "Second Closing Date") on which date such Membership
Interest of CLI will be purchased, which date shall be no earlier than forty
(40) days after, and no later than ninety (90) days after, the date of such
notice (the "Second Record Date"); (ii) stating that the Second Purchase Option
is being exercised and setting forth the Second Option Exercise Price,
determined in accordance with Section 8.03(b) hereof; provided, however, that if
-------- -------
such notice is given before the Second Option Exercise Price can be determined,
Cornerstone shall deliver a subsequent notice setting forth the Second Option
Exercise price promptly following its determination; and (iii) setting forth any
instructions that CLI will need to obtain such payment. The Second Purchase
Option shall be deemed to be exercised on the Second Record Date, at which time
the decision to exercise the Second Purchase
37
Option shall be deemed irrevocable. CLI, within 10 days of receipt of notice of
Cornerstone's exercise of the Second Purchase Option, shall notify Cornerstone
in writing as to the portion, if any, of the Second Option Exercise Price to be
paid in cash and the portion, if any, of the Second Option Exercise Price to be
paid in Cornerstone Common Stock.
8.06 Payment.
-------
(a) On the First Closing Date Cornerstone shall pay to CLI, in
immediately available funds, the portion, if any, of the First Option Exercise
Price to be paid in cash, and certificates representing the portion, if any, of
the First Option Exercise Price to be paid in Cornerstone Common Stock. Payment
shall be mailed to CLI at the address set forth in the LLC's records or at the
address provided by CLI. If applicable, Cornerstone shall pay the Additional
Payment to CLI, in the same proportion of cash and stock as previously elected
by CLI, promptly upon calculation of the Additional Payment and in no event
later than May 1, 2000. All shares of Cornerstone Common Stock, at the time of
delivery to CLI, shall be duly authorized, validly issued, fully paid and
nonassessable.
(b) On the Second Closing Date, Cornerstone shall pay to CLI, in
immediately available funds, the portion, if any, of the Second Option Exercise
Price to be paid in cash, and certificates representing the portion, if any, of
the Second Option Exercise Price to be paid in Cornerstone Common Stock.
Payment shall be mailed to CLI at the address set forth in the LLC's records or
at the address provided by CLI. All such shares of Cornerstone Common Stock, at
the time of delivery to CLI, shall be duly authorized, validly issued, fully
paid and nonassessable.
8.07 Rights With Respect to Cornerstone Shares. If any portion of the
-----------------------------------------
First Option Exercise Price or the Second Option Exercise Price is to be paid in
the form of shares of Cornerstone Common Stock, then (a) either (i) such shares
of Cornerstone Common Stock shall be registered under the Securities Act of
1933, as amended (the "Securities Act"), at the time of issuance or (ii)
Cornerstone shall grant to CLI registration rights with respect to such shares
of Cornerstone Common Stock substantially equivalent to the registration rights
granted to the former stockholders of Garnet Hill, Inc. at the time of its
acquisition by Cornerstone in July 1997, and (b) Cornerstone shall cause such
shares of Cornerstone Common Stock to be listed, at the time they are registered
under the Securities Act, on such stock exchange or stock market (if any) as the
outstanding shares of Cornerstone Common Stock are then listed. In addition, if
such shares of Cornerstone Common Stock are issued to CLI prior to the
Cornerstone IPO Date, CLI shall enter into a Cornerstone Stockholders Agreement
with respect to such shares of Cornerstone Common Stock upon terms substantially
equivalent to the Cornerstone Stockholders Agreement entered into by the former
stockholders of Garnet Hill, Inc. at the time of its acquisition by Cornerstone
in July 1997.
38
8.08 Transfer of Title. Transfer of title to Cornerstone of the
-----------------
Membership Interest of CLI shall be deemed to occur automatically on the First
Closing Date or the Second Closing Date, as the case may be, subject to the
payment by Cornerstone on such date of the amount owing to CLI as determined in
accordance with Section 8.03 hereof. Thereafter the LLC shall be entitled to
treat Cornerstone as the holder of record of the Membership Interest of CLI to
be acquired by Cornerstone pursuant to the First Purchase Option or the Second
Purchase Option, as the case may be. After the Second Closing Date, CLI shall
have no rights in the LLC. At any time and from time to time after the First
Closing Date or the Second Closing Date, as the case may be, at Cornerstone's
request and without further consideration, CLI shall promptly execute and
deliver such instruments of sale, transfer, conveyance, assignment and
confirmation, and take such other action, as Cornerstone may reasonably request
to more effectively transfer, convey and assign to Cornerstone, and to confirm
Cornerstone's title to, the Membership Interest of CLI acquired by Cornerstone
on the First Closing Date or the Second Closing Date, as the case may be.
8.09. Assignment of Option. Cornerstone may not assign, delegate,
--------------------
transfer or sell any or all of its rights or obligations under this Article
VIII, in whole or in part, to any person or entity without the prior approval of
CLI, except that Cornerstone may, without the prior approval of CLI, make such
assignment, delegation, transfer or sale, by operation of law or otherwise, to
(a) any person or entity to which Cornerstone has assigned, sold, leased,
transferred or otherwise disposed of all or substantially all of the assets of
Cornerstone, (b) any successor corporation resulting from any merger or
consolidation of Cornerstone with or into another corporation; or (c) any wholly
owned subsidiary of Cornerstone; provided, however, that, with respect to
-------- -------
clauses (a) and (b) above, Cornerstone will not, without such approval, merge or
consolidate with any person or entity or agree to sell, lease, transfer or
otherwise dispose of all or substantially all of its assets to any person or
entity, unless the person or entity formed by or surviving such consolidation or
merger or to which Cornerstone effects such sale, lease, transfer or other
disposition shall have agreed in writing to be bound by the terms of this
Agreement, except that it shall have the right to deliver its stock in
substitution for Cornerstone Common Stock; provided, however, that in the event
-----------------
of any assignment, delegation, transfer or sale under clause (c) above,
Cornerstone shall provide written notice to CLI of any such assignment,
delegation, transfer or sale not later than thirty (30) days after such
assignment, delegation, transfer or sale setting forth the identity and address
of the assignee and summarizing the terms of the assignment, delegation,
transfer or sale.
8.10 CLI Purchase Option.
-------------------
(a) If Cornerstone does not exercise the First Purchase Option or the
Second Purchase Option, then CLI shall have an option to purchase all of, but
not less than all of, Cornerstone's Membership Interest in the LLC from
Cornerstone,
39
which option shall be exercisable at any time during the ninety (90) days
following the First Expiration Date (if Cornerstone elects not to exercise the
First Purchase Option) or the Second Expiration Date (if Cornerstone has
exercised the First Purchase Option but elects not to exercise the Second
Purchase Option). The exercise price for CLI's option to purchase Cornerstone's
Membership Interest shall be the price determined according to the provisions of
this Section 8.10. CLI must give written notice that is received by Cornerstone
within the ninety (90) days following the First Expiration Date or the Second
Expiration Date, as the case may be, in order to exercise its option to purchase
Cornerstone's Membership Interest.
(b) The exercise price for CLI's option to purchase Cornerstone's
Membership Interest shall be the LLC Fair Market Value (as defined below) as
determined by a broker, dealer or investment banker who shall be jointly
selected by Cornerstone and CLI (the "LLC Appraiser"). "LLC Fair Market Value"
shall mean the value of Cornerstone's Membership Interest in the LLC determined
in good faith by the LLC Appraiser based on what it believes to be the most
appropriate methodology for valuing Cornerstone's Membership Interest in the
LLC. In determining the LLC Fair Market Value, the LLC Appraiser may consider
(i) the valuations of comparable privately or publicly held companies and (ii)
the valuations of the LLC in both a private sale scenario and an initial public
offering scenario, based on its sole opinion of the suitability of a private
sale of the LLC and the suitability of an initial public offering for the LLC.
(c) Upon its determination of LLC Fair Market Value, the LLC Appraiser
shall prepare and deliver to each of Cornerstone and CLI a report (the "LLC
Appraisal Report") stating its determination of the LLC Fair Market Value and
setting forth in reasonable detail the method by which the same was determined.
Cornerstone and CLI shall cause the LLC Appraiser to submit the LLC Appraisal
Report within thirty (30) days after its appointment. The LLC Fair Market Value
set forth in the LLC Appraisal Report shall be binding on both Cornerstone and
CLI.
(d) The consummation of CLI's purchase of Cornerstone's Membership
Interest shall take place on a mutually agreeable date within sixty (60) days
following the submission of the LLC Appraisal Report. Upon such consummation,
Cornerstone shall execute such instruments of conveyance as may be reasonably
requested by CLI to transfer Cornerstone's Membership Interest to CLI, and CLI
shall pay to Cornerstone, in immediately available funds, the LLC Fair Market
Value. At any time and from time to time after such closing, at CLI's request
and without further consideration, Cornerstone shall promptly execute and
deliver such instruments of sale, transfer, conveyance, assignment and
confirmation, and take such other action, as CLI may reasonably request to more
effectively transfer, convey and assign to CLI, and to confirm CLI's title to,
the Membership Interest of Cornerstone so acquired by CLI .
40
ARTICLE IX
----------
Dissolution and Liquidation
---------------------------
9.01 Events Causing Dissolution. The LLC shall be dissolved and its
--------------------------
affairs wound up upon:
(a) The sale or other disposition of all or substantially all of the
assets of the LLC, or any transaction authorized by or subject to Section 18-209
of the Act as a result of which the LLC is not the surviving entity;
(b) The election to dissolve the LLC made in writing by Members owning
a Majority Interest; or
(c) The entry of a decree of judicial dissolution under Section 18-802
of the Act.
9.02 Events Causing Dissolution under the Act. If, pursuant to the
----------------------------------------
Act, any event not specified in Section 9.01 dissolves the LLC (a "Statutory
Dissolution Event"), upon the occurrence of any such event, each Member hereby
elects to continue the LLC and its business, and notwithstanding the occurrence
of a Statutory Dissolution Event, the LLC shall not be dissolved and its
business and affairs shall not be discontinued, and the LLC shall remain in
existence as a limited liability company under the laws of the State of
Delaware.
9.03 Procedures on Dissolution. Dissolution of the LLC shall be
-------------------------
effective on the day on which occurs the event giving rise to the dissolution,
but the LLC shall not terminate until the Certificate shall have been cancelled
and the assets of the LLC shall have been distributed as provided herein.
Notwithstanding the dissolution of the LLC, prior to the termination of the LLC,
as aforesaid, the business of the LLC and the affairs of the Members, as such,
shall continue to be governed by this Agreement. The Board of Managers or a
liquidator appointed by the Board of Managers shall liquidate the assets of the
LLC, apply and distribute the proceeds thereof as contemplated by this Agreement
and cause the cancellation of the Certificate; provided that any one or more
persons charged with liquidating the assets of the LLC and applying and
distributing the proceeds thereof as set forth herein shall be deemed a
"liquidating trustee" within the meaning of the Act for all purposes.
9.04 Distributions Upon Liquidation.
------------------------------
(a) After payment of liabilities owing to the LLC's creditors,
including, without limitation, any Members that are creditors, the Board of
Managers or such liquidator may, in its sole discretion, set up such reserves as
it deems
41
reasonably necessary for any contingent or unforeseen liabilities or obligations
of the LLC. Said reserves may be paid over by the Board of Managers or such
liquidator to a bank, to be held in escrow for the purpose of paying any such
contingent or unforeseen liabilities or obligations and, at the expiration of
such period as the Board of Managers or such liquidator may deem advisable, such
reserves, if any, shall be distributed to the Members or their assigns in the
manner set forth in paragraph (b) below.
(b) After paying such liabilities and providing for such reserves, if
any, the Board of Managers or liquidator shall cause the remaining net assets of
the LLC to be distributed to and among the Members in the order of priority set
forth in Section 4.01. It in the event that any part of such net assets
consists of notes or accounts receivable or other noncash assets, the Board of
Managers or liquidator may take whatever steps it deems appropriate to convert
such assets into cash or into any other form which would facilitate the
distribution thereof. If any assets of the LLC are to be distributed in kind,
such assets shall be distributed on the basis of their fair market value net of
any liabilities.
ARTICLE X
---------
General Provisions
------------------
10.01 Notices. Except for notices of meetings of the Board of
-------
Managers, notice of which shall be given in the manner provided in Section
6.02(f), any and all notices under this Agreement shall be deemed given (a) on
the first business day after being sent by express mail, receipt confirmed
telecopy, or commercial overnight delivery service providing a receipt for
delivery, (b) on the date of hand delivery or (c) on the date actually received,
if sent by any other method. In order to be effective, all such notices shall
be addressed, if to the LLC (or a specified officer thereof), at its principal
office, and if to a Member or Manager, at the last address of record on the
books of the LLC, and copies of such notices shall also be sent to the last
address for the recipient which is known to the sender, if different from the
address so specified.
10.02 Word Meanings; Schedules. The words such as "herein,"
------------------------
"hereinafter," "hereof," and "hereunder" refer to this Agreement as a whole and
not merely to a subdivision in which such words appear unless the context
otherwise requires. The singular shall include the plural and the masculine
gender shall include the feminine and neuter, and vice versa, unless the context
otherwise requires. References to Articles, Sections and Schedules shall be
construed as references to the Articles and Sections of, and the Schedules to,
this Agreement, in each case unless the context otherwise requires. All such
Schedules shall be deemed to be, and constitute, an integral part hereof for all
purposes.
42
10.03 Binding Provisions. Subject to the restrictions on Transfers set
------------------
forth herein, the covenants and agreements contained herein shall be binding
upon, and inure to the benefit of, the parties hereto, their heirs, legal
representatives, successors and assigns.
10.04 Applicable Law. This Agreement shall be construed and enforced
--------------
in accordance with the laws of the State of Delaware, including the Act, as
interpreted by the courts of the State of Delaware, notwithstanding any rules
regarding choice of law to the contrary.
10.05 Counterparts. This Agreement may be executed in several
------------
counterparts and as so executed shall constitute one agreement binding on all
parties hereto, notwithstanding that all of the parties have not signed the same
counterpart.
10.06 Separability of Provisions. Each provision of this Agreement
--------------------------
shall be considered separable. To the extent that any provision of this
Agreement is prohibited or ineffective under the Act, this Agreement shall be
considered amended to the smallest degree possible in order to make the
Agreement effective under the Act (and, if the Act is subsequently amended or
interpreted in such manner as to make effective any provision of this Agreement
that was formerly rendered invalid, such provision shall automatically be
considered to be valid from the effective date of such amendment or
interpretation).
10.07 Section Titles. Section titles are for descriptive purposes only
--------------
and shall not control or alter the meaning of this Agreement as set forth in the
text.
10.08 Amendments. Except for amendments which are otherwise
----------
specifically provided for herein, (i) this Agreement may be amended or modified
only by a writing executed by Cornerstone and CLI, and (ii) the Certificate of
Formation of the LLC may not be amended in a manner inconsistent with this
Agreement unless such amendment is approved in writing by both Cornerstone and
CLI. Any such amendment shall be binding upon all of the Members.
10.09 Third Party Beneficiaries. The provisions of this Agreement,
-------------------------
including, without limitation, Article III, are not intended to be for the
benefit of any creditor (other than a Member or Manager who is a creditor) or
other person (other than a Member or Manager in his, her or its capacity as
such) to whom any debts, liabilities or obligations are owed by (or who
otherwise has any claim against) the LLC or any of the Members or Managers.
Moreover, notwithstanding anything contained in this Agreement, including
without limitation Article III, no such creditor or other person shall obtain
any rights under this Agreement or shall, by reason of this Agreement, make any
claim in respect of any debt, liability or obligation (or otherwise) against the
LLC or any Member or Manager.
43
10.10 Entire Agreement. This Agreement embodies the entire agreement
----------------
and understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to such
subject matter. The Members and Managers hereby agree that each Member and each
Manager shall be entitled to rely on the provisions of this Agreement, and no
Member or Manager shall be liable to the LLC or any other Member or Manager for
any action or refusal to act taken in good faith reliance on the terms of this
Agreement.
10.11 Offset. Whenever the LLC is to pay any sum to any Member, any
------
amounts owed by such Member to the LLC may be deducted from such sum before
payment.
10.12 Waiver of Partition. Each Member agrees that irreparable damage
-------------------
would be done to the LLC if any Member brought an action in court to dissolve
the LLC. Accordingly, each Member agrees that it shall not, either directly or
indirectly, take any action to require partition or appraisal of the LLC or of
any of the assets or properties of the LLC, and notwithstanding any provisions
of this Agreement to the contrary, each Member (and its successors and assigns)
accepts the provisions of the Agreement as its sole entitlement on termination,
dissolution and/or liquidation of the LLC and hereby irrevocably waives any and
all right to maintain any action for partition or to compel any sale or other
liquidation with respect to its interest, in or with respect to, any assets or
properties of the LLC. Each Member agrees that it will not petition a court for
the dissolution, termination or liquidation of the LLC.
10.13 Expenses. Cornerstone shall be responsible for its own costs and
--------
expenses, including counsel fees, incurred in connection with the transactions
contemplated by this Agreement. CLI shall be responsible for the costs and
expenses of CLI or the CLI Stockholders incurred in connection with the
transactions contemplated by this Agreement (none of which shall be considered
CLI Assumed Liabilities).
44
IT IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal as of the day and year first above written.
THE INTERNATIONAL CORNERSTONE GROUP, INC.
By: /s/ ▇▇▇▇▇▇▇ ▇. End
--------------------------
Name: ________________________
Title: _______________________
CABIN LIFE STUDIOS, INC.
By: /s/ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
--------------------------
Name: ▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
------------------------
Title: President
-----------------------
With respect to Section 3.05 only:
/s/ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
------------------------------
▇▇▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
/s/ ▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
------------------------------
▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇
/s/ ▇▇▇▇▇▇ ▇▇▇▇▇▇
------------------------------
▇▇▇▇▇▇ ▇▇▇▇▇▇
45
Schedule A
----------
Members
-------
Name and Business
Address of Member Capital Contribution Percentage Interest
----------------- -------------------- --------------------
The International Cornerstone $1,000,000 51.0%
Group, Inc.
▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Cabin Life Studios, Inc. $ 960,784 49.0%
▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
A-1
Schedule B
----------
Certain Tax Matters
-------------------
A. Certain Definitions. The following capitalized terms used in this
-------------------
Agreement shall have the respective meanings ascribed to them below:
"Adjusted Capital Account" means, for each Member, such Member's Capital
------------------------
Account balance increased by such Member's Share of Minimum Gain.
"Capital Account" means a separate account maintained for each Member and
---------------
adjusted in accordance with Treasury Regulations under Section 704 of the Code.
To the extent consistent with such Treasury Regulations, the adjustments to such
accounts shall include the following:
(i) There shall be credited to each Member's Capital Account the
amount of any cash (which shall not include imputed or actual interest on
any deferred contributions) actually contributed by such Member to the
capital of the LLC, the fair market value (without regard to Code Section
7701(g)) of any property contributed by such Member to the capital of the
LLC, the amount of liabilities of the LLC assumed by the Member or to which
property distributed to the Member was subject and such Member's share of
the Net Profits and Gross Income of the LLC and of any items in the nature
of income or gain separately allocated to the Members; and there shall be
charged against each Member's Capital Account the amount of all cash
distributions to such Member, the fair market value (without regard to Code
Section 7701(g)) of any property distributed to such Member by the LLC, the
amount of liabilities of the Member assumed by the LLC or to which property
contributed by the Member to the LLC was subject and such Member's share of
the Net Losses and Nonrecourse Deductions of the LLC and of any items in
the nature of losses or deductions separately allocated to the Members.
(ii) If the LLC at any time distributes any of its assets in-kind to
any Member, the Capital Account of each Member shall be adjusted to account
for that Member's allocable share of the Net Profits, Net Losses or Gross
Income that would have been realized by the LLC had it sold the assets that
were distributed at their respective fair market values (taking Code
Section 7701(g) into account) immediately prior to their distribution.
(iii) It in the event any interest in the LLC is transferred in
accordance with the terms of this Agreement, the transferee shall succeed
to the Capital Account of the transferor to the extent it relates to the
transferred interest.
B-1
(iv) If elected by the LLC, upon (A) any increase in a Member's
interest in the LLC resulting from the contribution of cash or property by
such Member to the LLC, (B) any reduction in a Member's interest in the LLC
resulting from a distribution to such Member in redemption of all or a
portion of such Member's interest in the LLC and (C) whenever else allowed
under Treasury Regulation Section 1.704-1(b)(2)(ii)(f), the Capital Account
balance of each Member shall be adjusted to the extent allowable under such
Treasury Regulation to reflect the Member's allocable share (as determined
under Article V) of the Net Profits, Net Losses or Gross Income that would
be realized by the LLC if it sold all of its property at its fair market
value (taking Code Section 7701(g) into account) on the day of the
adjustment. It in the case of an adjustment to Capital Accounts pursuant
to clause (A) of the preceding sentence, the aggregate fair market value of
the LLC's assets shall be considered to be equal to the amount determined
by dividing (X) the amount of the Capital Contribution of the Member made
in connection with the acquisition of the increased interest in the LLC by
(Y) the increase in the Percentage Interest of the Member attributable to
such Capital Contribution.
"Carrying Value" means, with respect to any asset, the asset's adjusted
--------------
basis for federal income tax purposes; provided, however, that (i) upon a
-------- -------
contribution of an asset in-kind, such asset's Carrying Value and (ii) in the
circumstances described in paragraph (ii) of the definition of "Capital
Account," the Carrying Value of all of the LLC's assets shall be adjusted to
their respective fair market values and shall thereafter be adjusted in
accordance with the provisions of Treasury Regulation Section 1.704-
1(b)(2)(iv)(g).
"Economic Risk of Loss" means the risk as determined under Treasury
---------------------
Regulation Section 1.752-2 (taking all applicable "grandfathering" rules into
account) that a Member or person related to a Member will suffer an economic
loss as a result of the failure of the limited liability company to repay a
liability.
"Excess Negative Balance" for a Member means the excess, if any, of (i) the
-----------------------
negative balance in a Member's Capital Account after reducing such balance by
the net adjustments, allocations and distribution described in Treasury
Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6) which, as of the end of
the LLC's taxable year are reasonably expected to be made to such Member, over
(ii) the sum of (A) the amount, if any, which the Member is required to restore
to the LLC upon liquidation of such Member's interest in the LLC (or which is so
treated pursuant to Treasury Regulations Section 1.704-1(b)(2)(ii)(c)), (B) the
Member's Share of Minimum Gain and (C) that portion of any indebtedness of the
LLC (other than Partner Nonrecourse Debt) with respect to which the Member bears
the Economic Risk of Loss that such indebtedness would not be repaid out the
LLC's assets if all of the LLC's assets were sold at their respective Carrying
Values as of the end of the fiscal year or other
B-2
period and the proceeds from the sales together with any amounts described in
clause (A) above, were used to pay the LLC's liabilities.
"Gross Income" means, for each fiscal year or other period, an amount equal
------------
to the LLC's gross income as determined for federal income tax purposes for such
fiscal year or period but computed with the adjustments specified in clauses
(i), (ii) and (iii) of the definition of "Net Profits" and "Net Losses".
"Minimum Gain" means the amount determined by computing with respect to
------------
each Nonrecourse Debt of the LLC, the amount of Gross Income, if any, that would
be realized by the LLC if it disposed of the property securing such debt in full
satisfaction thereof, and by then aggregating the amounts so computed. For
purposes of determining the amount of such Gross Income with respect to a
liability, the Carrying Value of the asset securing the liability shall be
allocated among all the liabilities that the asset secures in the manner set
forth in Treasury Regulation Section 1.704-2(d)(2).
"Net Profits" and "Net Losses" mean the taxable income or loss, as the case
----------- ----------
may be, for a period as determined in accordance with Code Section 703(a)
computed with the following adjustments:
(i) Items of gain, loss, and deduction shall be computed based upon
the Carrying Values of the LLC's assets rather than upon the assets'
adjusted bases for federal income tax purposes (in accordance with Treasury
Regulation Sections 1.704-1(b)(2)(iv)(g) and 1.704-3(d));
(ii) Any tax-exempt income received by the LLC shall be included as an
item of gross income;
(iii) The amount of any adjustments to the Carrying Values of any
assets of the LLC pursuant to Code Section 743 shall not be taken into
account;
(iv) Any expenditure of the LLC described in Code Section 705(a)(2)(B)
(including any expenditures treated as being described in Section
705(a)(2)(B) pursuant to Treasury Regulations under Code Section 704(b))
shall be treated as a deductible expense; and
(v) The amount of Gross Income and Nonrecourse Deductions specifically
allocated to any Member pursuant to Section 5.01 and Section B.1 and 2 of
this Schedule B shall not be included in the computation.
----------
"Nonrecourse Debt" means any liability of a limited liability company to
----------------
the extent that the liability is nonrecourse for purposes of Treasury Regulation
Section 1.1001-2.
B-3
"Nonrecourse Deductions" for a taxable year means deductions funded by
----------------------
Nonrecourse Debt (as determined under Treasury Regulation Sections 1.704-2(c)
and 1.704-2(i)(2)) for such year and are generally equal to the excess, if any,
of (i) the net increase in Minimum Gain during such year over (ii) the sum of
(A) the aggregate distributions of proceeds from Nonrecourse Debts attributable
to increases in Minimum Gain during such year and (B) increases in Minimum Gain
during such year attributable to conversions of liabilities into Nonrecourse
Debts.
"Partner Nonrecourse Debt" means any Nonrecourse Debt to the extent that a
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Member bears the Economic Risk of Loss associated with the debt.
"Share of Minimum Gain" means, for each Member, the sum of such Member's
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share of Minimum Gain attributable to Nonrecourse Debt other than Partner
Nonrecourse Debt (computed in accordance with Treasury Regulation Section 1.704-
2(g)) and such Member's share of Minimum Gain attributable to Partner
Nonrecourse Debt (computed in accordance with Treasury Regulation Section 1.704-
2(i)(5)).
B. Allocations.
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1. Allocations of Nonrecourse Deductions and Minimum Gain.
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Notwithstanding the provisions of Section 5.01 above, the following allocations
of Gross Income and Nonrecourse Deductions shall be made in the following order
of priority:
(a) If in any year there is a net decrease in the amount of Minimum
Gain attributable to either (i) Nonrecourse Debt that is not Partner Nonrecourse
Debt or (ii) Partner Nonrecourse Debt, then each Member shall first be allocated
items of Gross Income for such year (and, if necessary, subsequent years) in an
amount equal to such Member's share of the net decrease in such Minimum Gain
(determined in accordance with Treasury Regulation Sections 1.704-2(g)(2) and
1.704-2(i)(5)) to the minimum extent required by, and in the manner specified
in, Treasury Regulation Sections 1.704-2(f) and 1.704-2(i)(4).
(b) All Nonrecourse Deductions of the LLC for any year other than
Nonrecourse Deductions attributable to Partner Nonrecourse Debt shall be
allocated to the Members in accordance with their Percentage Interests.
(c) All Nonrecourse Deductions of the LLC for any year attributable to
Partner Nonrecourse Debt shall be allocated to the Member who bears the Economic
Risk of Loss with respect to the debt.
2. Overriding Allocations of Net Profits and Net Losses. Notwithstanding
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the provisions of Section 5.01 above, but subject to the provisions of Section
B.1 of
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this Schedule B, the following allocations of Net Profits and Net Losses
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and items thereof shall be made:
(a) If, during any year a Member receives any adjustment, allocation
or distribution described in Treasury Regulation Section 1.704-
1(b)(2)(ii)(d)(4), (5) or (6), and, as a result of such adjustment, allocation
or distribution, such Member's Capital Account has an Excess Negative Balance,
then items of Gross Income for such year (and, if necessary, subsequent years)
shall first be allocated to such Member in an amount equal to such Member's
Excess Negative Balance.
(b) It in no event shall Net Losses of the LLC be allocated to a
Member if such allocation would cause or increase an Excess Negative Balance in
such Member's Capital Account.
(c) It in the event that Gross Income, Net Profits, Net Losses or
items thereof are allocated to one or more Members pursuant to subsection (a)
above, subsequent Gross Income, Net Profits and Net Losses from operations will
first be allocated (subject to the provisions of subsection (a) above) to the
Members in a manner designed to result in each Member having a Capital Account
balance equal to what it would have been had the original allocation of Gross
Income, Net Profits, Net Losses or items thereof pursuant to subsection (a) not
occurred.
(d) Except as otherwise provided herein or as required by Code Section
704, for tax purposes, all items of income, gain, loss, deduction or credit
shall be allocated to the Members in the same manner as are Net Profits and Net
Losses; provided, however, that if the Carrying Value of any property of the LLC
differs from its adjusted basis for tax purposes, then items of income, gain,
loss, deduction or credit related to such property for tax purposes shall be
allocated among the Members so as to take account of the variation between the
adjusted basis of the property for tax purposes and its Carrying Value in the
manner provided for under Code Section 704(c).
(e) To the extent that any portion of any Net Profits realized upon a
sale or other disposition of any asset of the LLC is treated as ordinary income
pursuant to Code Sections 1245 or 1250 ("Recapture Income"), such Recapture
Income shall be allocated (prior to any allocation of Net Profits from such
event pursuant to Section 5.01 above) as follows:
(i) It in the case of Recapture Income arising under Code Section
1245, to each Member in an amount equal to the amount of depreciation
deductions allocated to such Member with respect to such asset; and
(ii) It in the case of Recapture Income arising under Code Section
1250, to each Member in an amount equal to the excess of the amount of
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"depreciation adjustments" (as defined in Code Section 1250(b)(1) and (4))
allocated or attributable to such Member with respect to such asset over
the amount of depreciation adjustments that would have been allocated or
attributable to such Member had the "straight-line method of adjustment"
(as described in Code Section 1250(b)(5)) been used with respect to such
asset;
provided, however, that in the event the amount of Recapture Income arising from
the sale or disposition is less than the aggregate amount set forth in clause
(i) or (ii) (whichever is applicable), the Recapture Income shall be allocated
to Members based on the order in time in which they were allocated depreciation
deductions or adjustments with respect to such asset.
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