UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
Commission File number 0-27646
GUM TECH INTERNATIONAL, INC.
(Exact name of small business issuer as specified in it charter)
UTAH 87-0482806
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
246 EAST WATKINS STREET
PHOENIX, AZ 85004
(Address of principal executive offices)
(602) 252-1617
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No[ ]
There are 7,273,087 shares of the registrant's common stock, no par value
outstanding as of May 5, 1999.
<PAGE>
GUM TECH INTERNATIONAL, INC.
FORM 10-QSB
INDEX
Part I Financial Information Page
Item 1. Condensed Balance Sheet as of
March 31, 1999 1
Condensed Statements of Operations
for the three months ended March 31, 1999
and 1998 3
Condensed Statements of Cash Flows
for the three months ended March 31, 1999
and 1998 4
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Part II Other Information and Signatures 9
Item 1. Legal Proceedings 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
GUM TECH INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
MARCH 31, 1999
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 246,264
Restricted cash 20,286
Accounts receivable, net of allowance for
doubtful accounts of $35,284 2,024,971
Inventories 1,585,767
Prepaid expenses and other 60,606
-----------
Total Current Assets 3,937,894
-----------
Property and Equipment, at cost:
Machinery and production equipment 4,391,897
Office furniture and equipment 238,919
Leasehold improvements 364,593
-----------
Total Property and Equipment 4,995,409
Less accumulated depreciation (1,409,018)
-----------
Net Property and Equipment 3,586,391
-----------
Other Assets:
Intangible assets, net of accumulated
amortization of $198,179 73,202
Deposits and other 513,593
-----------
Total Other Assets 586,795
-----------
Total Assets $ 8,111,080
===========
The accompanying notes are an integral part of
these condensed financial statements.
1
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED BALANCE SHEET
MARCH 31, 1999
(Continued)
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,077,668
Accrued interest 38,738
Customer deposits 48,167
Reserve for customer returns 116,790
Current portion of long-term debt 390,622
------------
Total Current Liabilities 1,671,985
------------
Long Term Debt, net of current portion above:
Financial institutions and other 2,147,087
Obligations under capital leases 21,807
Less current portion above (390,622)
------------
Total Long Term Debt 1,778,272
------------
Commitments and Contingencies --
Stockholders' Equity:
Preferred stock: no par value, 1,000,000 shares authorized,
none issued or outstanding --
Common stock: no par value, 10,000,000 shares authorized,
7,144,061 shares issued and outstanding 16,655,703
Additional paid in capital 2,915,152
Accumulated deficit (14,910,032)
------------
Total Stockholders' Equity 4,660,823
------------
Total Liabilities and Stockholders' Equity $ 8,111,080
============
The accompanying notes are an integral part of
these condensed financial statements.
2
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended March 31,
----------------------------
1999 1998
----------- -----------
Net sales $ 2,445,556 $ 1,104,431
Cost of sales 1,840,879 789,828
----------- -----------
Gross Profit 604,677 314,603
Operating expenses 951,171 3,269,269
Research and development 119,769 114,471
----------- -----------
Income (Loss) From Operations (466,263) (3,069,137)
----------- -----------
Other Income (Expense):
Interest and other income 8,769 42,808
Interest expense (110,154) (123,926)
----------- -----------
Total Other Income (Expense) (101,385) (81,118)
----------- -----------
Income (Loss) Before Provision For Income Taxes (567,648) (3,150,255)
Provision (benefit) for income taxes -- --
----------- -----------
Net Income (Loss) $ (567,648) $(3,150,255)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic:
Weighted Average Number of Common Shares
Outstanding 6,999,928 5,857,571
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.08) $ (0.54)
=========== ===========
Diluted:
Weighted Average Number of Common Shares
Outstanding 6,999,928 5,857,571
=========== ===========
Net Income (Loss) Per Share of Common Stock $ (0.08) $ (0.54)
=========== ===========
The accompanying notes are an integral part of
these condensed financial statements.
3
<PAGE>
GUM TECH INTERNATIONAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (567,648) $(3,150,255)
Adjustments to reconcile net income (loss) to net
cash (used) by operating activities:
Depreciation 113,676 67,323
Amortization 41,653 13,939
Compensation from forgiveness of note receivable -- 66,000
Compensation from issuance of stock options -- 1,478,750
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (562,332) 248,186
Decrease in employee receivable -- 61,054
Decrease in current portion of notes receivable -- 148,012
(Increase) decrease in inventories 310,394 (48,130)
Decrease in prepaid expenses and other 245 8,074
(Increase) decrease in deposits and other (234,599) 53,313
Increase (decrease) in accounts payable and
accrued expenses (235,110) 29,183
Increase in customer returns and allowances 81,790 --
Increase in customer deposits 13,404 34,549
----------- -----------
Net Cash (Used) By Operating Activities (1,038,527) (990,002)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (151,840) (21,780)
----------- -----------
Net Cash (Used) By Financing Activities (151,840) (21,780)
----------- -----------
Cash Flows From Financing Activities:
Principal payments on notes payable (91,892) (80,487)
Issuance of common stock upon exercise of options
and warrants 1,010,671 36,000
Debt issuance costs incurred -- (11,733)
----------- -----------
Net Cash Provided (Used) By Financing Activities 918,779 (56,220)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (271,588) (1,068,002)
Cash and Cash Equivalents at Beginning of Period 517,852 3,607,913
----------- -----------
Cash and Cash Equivalents at End of Period $ 246,264 $ 2,539,911
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 72,212 $ 125,451
Income taxes -- --
Supplemental Disclosure of Non Cash Investing and
Financing Activities:
Conversion of notes payable into common stock $ 499,995 $ --
</TABLE>
The accompanying notes are an integral part of
these condensed financial statements.
4
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying financial information of the Company is prepared in
accordance with the rules prescribed for filing condensed interim financial
statements and, accordingly, does not include all disclosures that may be
necessary for complete financial statements prepared in accordance with
generally accepted accounting principles. The disclosures presented are
sufficient, in management's opinion, to make the interim information
presented not misleading. All adjustments, consisting of normal recurring
adjustments, which are necessary so as to make the interim information not
misleading, have been made. Results of operations for the three months
ended March 31, 1999 are not necessarily indicative of results of
operations that may be expected for the year ending December 31, 1999. It
is recommended that this financial information be read with the complete
financial statements included in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1998 previously filed with the Securities
and Exchange Commission.
2. As of December 31, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share", which specifies
the method of computation, presentation and disclosure of earnings per
share. SFAS No. 128 requires the presentation of two earnings per share
amounts, basic and diluted. Basic earnings per share is calculated using
the average number of common shares outstanding. Diluted earnings per share
is computed on the basis of the average number of common shares outstanding
plus the dilutive effect of outstanding stock options using the "treasury
stock" method. The basic and diluted earnings per share are the same since
the Company had a net loss for all periods presented and the inclusion of
stock options and other incremental shares would be antidilutive. Options,
warrants and other incremental shares to purchase 1,371,668 and 2,819,812
shares of common stock at March 31, 1999 and 1998, respectively, were not
included in the computation of diluted earnings per share because the
Company had a net loss and their effect would be antidilutive.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Gum Tech develops and manufactures specialty chewing gum products for
branded and private label customers, as well as products marketed under its own
brand labels. Specialty chewing gums include vitamins, herbals and active
over-the-counter drug ingredients formulated to provide specific health-related
benefits to the user. Gum Tech currently targets four market segments: oral
care, smoking cessation, dietary supplement, and over-the-counter (OTC) drug. A
substantial majority of Gum Tech's sales currently are attributable to products
developed, manufactured and packaged by Gum Tech for marketing and sale by major
branded and private label consumer products companies.
Gum Tech recently announced a joint venture with BioDelivery Technologies,
Inc. to manufacture, market and distribute Zicam(TM), a nasal gel formula. Under
an operating agreement that was signed on May 6, 1999, Gum Tech and BioDelivery
Technologies transferred their respective interest in the patent rights to the
nasal gel technology in exchange for membership interests in Gel Tech LLC, a
recently formed Arizona limited liability company. Gum Tech has a 60% interest
in the capital and profits of the joint venture and has agreed to provide $3.5
million of capital to the joint venture.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1998
Although the Gel Tech operating agreement was not signed until May 6, 1999
Gum Tech and Gel Tech Inc., the predecessor to Gel Tech LLC, began initial
marketing and distribution of Zicam in the first quarter of 1999. For the three
months ended March 31,1999, revenues and expenses for Zicam incurred by Gum Tech
are included in Gum Tech's results of operations for the period. However,
expenses incurred by Gel Tech Inc. of approximately $75,000 during the period on
behalf of this venture are not reflected. Pursuant to the operating agreement,
both parties will be reimbursed by Gel Tech LLC immediately following Gum Tech's
infusion of capital into Gel Tech LLC, for their net out-of-pocket expenses
incurred prior to the date of the operating agreement. For future periods, Gum
Tech will be reporting financial results of Gel Tech LLC on a consolidated
basis, but will identify certain information by its two business segments
chewing gum operations and Zicam operations.
6
<PAGE>
The following table details certain financial information for Gum Tech's
chewing gum operations and Zicam operations for the three months ended March 31,
1999:
Chewing gum Zicam Consolidated
----------- --------- ------------
Net sales $ 2,077,464 $ 368,092 $ 2,445,556
Cost of sales 1,661,193 179,686 1,840,879
----------- --------- -----------
Gross profit 416,271 188,406 604,677
Operating expenses 622,562 328,609 951,171
Research and development 119,769 0 119,769
----------- --------- -----------
Income (Loss) from operations (326,060) (140,203) (466,263)
Interest and other income 8,769 0 8,769
Interest expense 110,154 0 110,154
----------- --------- -----------
Net income (loss) $ (427,445) $(140,203) $ (567,648)
=========== ========= ===========
Net Assets $ 7,862,553 $ 248,727 $ 8,111,080
=========== ========= ===========
The remainder of this discussion addresses Gum Tech's chewing gum
operations compared to those operations in the prior year period. Certain
information is set forth below, expressed in dollars and as a percentage of net
sales for the periods indicated:
Three Months Ended March 31,
---------------------------------------------
1999 1998
-------------------- ---------------------
Net sales $ 2,077,464 100% $ 1,104,431 100%
Cost of sales 1,661,193 80 789,828 72
----------- --- ----------- ----
Gross profit 416,271 20 314,603 28
Operating expenses 622,562 30 3,269,269 296
Research and development 119,769 6 114,471 10
----------- --- ----------- ----
Income (Loss) from operations (326,060) (16) (3,069,137) (278)
Interest and other income 8,769 -- 42,808 4
Interest expense 110,154 5 123,926 11
Provision (benefit) for income
taxes -- -- -- --
----------- --- ----------- ----
Net income (loss) $ (427,445) (21)% $(3,150,255) (285)%
=========== === =========== ====
NET SALES. Net sales increased to approximately $2.1 million for the three
months ended March 31, 1999, or 88% above the prior year's level of $1.1
million. The majority of gum sales in the first quarter were attributable to
sales of Accutrim(TM), Chooz(R) and Aspergum(R) to Heritage Consumer Products,
dental gum for two Ranir/DCP private label customers, Breath Asure Dental Gum
(TM) , and several different gum products for PharmaGreen Ltd. Principal sales
in the 1998 period were attributable to sales of energy and diet gums to
Herbalife and retail sales of Cigarest, a smoking cessation product.
7
<PAGE>
COST OF SALES. Cost of sales increased to approximately $1.7 million
principally reflecting the higher level of sales.
GROSS PROFIT. Gross profit increased by approximately $100,000 in 1999 over
the prior year due to the increase in sales. The increase was reduced in part by
a reduced profit margin realized on the products sold in 1999 versus the prior
year. Sales in the first quarter of 1998 included a substantial amount of sales
of Cigarest gum which were sold at relatively higher retail profit margins.
OPERATING EXPENSES. Operating expenses were approximately $623,000, or $2.6
million below the prior year's level. The 1998 period included approximately
$2.1 million of one-time expenses associated with the extension of options to a
former board member and severance costs associated with Gum Tech's
re-structuring in early 1998. Adjusting for these two items, 1998 expenses were
$1.19 million. The $568,000 decrease in 1999 from this level of expense is
largely attributable to decreases in marketing and advertising expenses
associated with the aforementioned change in corporate strategy.
INTEREST AND OTHER INCOME. Interest and other income decreased due to a
lower level of cash balances.
INTEREST EXPENSE. Interest expense for the first quarter was $110,000,
approximately $13,000 below the 1998 level due to a reduction in the amount of
debt outstanding. The decrease in interest for the first three months of 1999
was offset in part by the conversion into common stock of approximately $500,000
of Gum Tech's convertible debt, resulting in an accelerated expensing of debt
issuance costs of $32,000.
NET INCOME (LOSS). Net loss for the 1999 period was approximately $427,000.
Exclusive of the one- time operating expense items in 1998 noted above, the loss
in 1998 was $1,072,000. The improvement in net loss is attributable to the
increase in sales and decreased operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1999 Gum Tech's working capital was approximately $2.3
million compared to $2.2 million at December 31, 1998. During the period, Gum
Tech experienced a decrease in cash used by operating activities of $1.0
million. Of this decrease, approximately $400,000 was attributable to the net
loss incurred for the period, $370,000 in losses and start-up costs of Zicam and
a $200,000 reduction in accounts payable.
Investing activities consumed $152,000 of cash for the three months ended
March 31, 1999 compared to $22,000 of cash used in the same period in 1998. The
amount for 1999 reflects capital expenditures incurred for the continuing
improvement and expansion of Gum Tech's gum production capability.
8
<PAGE>
Financing activities provided approximately $900,000 in cash for the three
months ended March 31, 1999 compared to a small amount used in 1998. The 1999
amount largely reflects cash received through the exercise of common stock
options and warrants in the period.
In February 1999, Gum Tech entered into a $2.0 million financing
arrangement with a commercial bank for the sale of accounts receivable submitted
to the bank. To date, Gum Tech has not borrowed under this facility, and may
cancel the facility, at any time, without penalty. Gum Tech intends to cancel
this facility if the financing arrangement with Citadel Investment Group is
completed.
On March 30, 1999, Gum Tech announced that it had entered into a letter of
intent with Citadel Investment Group L.L.C. for $6 million of combined senior
debt and preferred equity. The letter of intent provides that Gum Tech may
redeem the debt and repurchase the preferred stock with common stock rather than
cash, at Gum Tech's option, within the next two years. The primary purpose of
the private placement is to raise funds to finance the initial development and
operations of Gel Tech LLC. The proposed private placement is subject to the
negotiation and delivery of a definitive purchase agreement and related
documents and the completion of satisfactory due diligence by the purchaser. As
a result, there can be no assurance that Gum Tech will be able to successfully
complete this proposed private placement or that the principal terms will not be
materially different then outlined above. The securities to be offered in this
proposed private placement will not be registered under the Securities Act of
1933 and may not be offered or sold in the United States absent registration or
an applicable exemption from registration requirements.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain written or oral forward-looking statements may be made by the
Company from time to time in filings with the Securities & Exchange Commission
or otherwise. Such forward-looking statements are within the meaning of that
term in Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Act of 1934, as amended. Such statements may include, but may
not be limited to, projections of revenues, income or loss, estimate of capital
expenditures, plans for future operations, products or services, and financing
needs or plans, as well as assumptions relating to the foregoing. The words
"believe," "expect," "anticipate," "estimate," "project," and similar
expressions identify forward-looking statements, which speak only as of the date
the statement was made. Specifically, this report contains forward-looking
statements concerning plant efficiencies and capacities, capital spending,
research and development, and other projected expenses, among others.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. Future events and actual
results could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements. The statements included in this
report, particularly those contained in this Item 2, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and in the Notes
to the Company's Financial Statements, describe factors that could contribute to
or cause such differences. These factors include, among others, less than
anticipated demand for Gum Tech's chewing gum products, a lack of market
9
<PAGE>
acceptance for or uncertainties concerning the efficacy of Zicam, a failure to
complete the proposed financing with Citadel, a decrease in the level of
reorders from existing customers, financial difficulties encountered by one or
more of Gum Tech's principal customers, difficulties in obtaining additional
capital for marketing, research and development, and other expenses, the
possibility of material charges incurred as a result of prior activities,
aggressive pricing and marketing efforts by rival gum manufacturers,
unavailability of third-party material products at reasonable prices, inventory
obsolescence due to shifts in market demand, and material litigation involving
product liabilities and consumers issues. These potential risks and
uncertainties, together with those mentioned below and elsewhere in this report,
could affect Gum Tech's future operating results, financial condition, and the
market price of its common stock.
DATA PROCESSING AND TECHNOLOGY AND YEAR 2000
Gum Tech recognizes the potential business impacts related to the Year 2000
computer system issue and has implemented a plan to assess and improve the
Company's state of readiness with respect to such issues. The "Year 2000 issues"
refers to the risk that systems, products, and equipment having date-sensitive
components will not recognize dates after December 31, 1999. These risks are
derived predominantly from the fact that many software programs have
historically categorized the "year" in a two-digit format. The Year 2000 issue
creates potential risks for Gum Tech in it information technology and
non-information technology systems used in its business operations. Gum Tech
also may be exposed to risks from third parties with whom Gum Tech interacts
that fail to adequately address their own Year 2000 issue.
In recognition of the Year 2000 issue, Gum Tech has started a comprehensive
review of all information technology and non-information technology systems that
it uses. This review includes testing and analysis of third parties supplying
information technology and non-information technology systems, computer hardware
and software products and components, and other equipment to Gum Tech.
As a result of its review to date, Gum Tech has determined that certain of
its internal software systems may be inadequate for its future business needs,
and may need to be updated, because of various considerations, including Year
2000 non-compliance. Gum Tech expects to make necessary modifications or changes
to its computer information systems, related to Year 2000 non-compliance, prior
to the Year 2000. Gum Tech believes the costs of modification to the current
information technology systems will not have a material affect on its financial
position or results of operations.
At this time, Gum Tech has not developed Year 2000 contingency plans, other
than the review and remedial actions described above, and does not intend to do
so unless the Company believes such plans are merited by the results of its
continuing Year 2000 review.
10
<PAGE>
If Gum Tech or the third parties with which it has relationships were to
cease or not successfully complete their Year 2000 re-mediation efforts, Gum
Tech could encounter disruptions to its business that could have a material
adverse effect on its business, financial position and results of operations.
Gum Tech also could be materially and adversely impacted by widespread economic
or financial market disruption caused by Year 2000 computer system failures.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 16, 1996, a lawsuit was filed against the Company in the United
States District Court for the Central District of California, CV-95-9784. The
action is entitled GCN Products, Inc. vs. Roy Kelly, et al. The complaint, as it
relates to the Company, principally alleges that the Company engaged in unlawful
rebates, appropriations and overcharges, commercial bribery, fraud and unjust
enrichment. On September 4, 1998, the court granted a motion for summary
judgment in Gum Tech's favor, and dismissed the plaintiff's claims against Gum
Tech and its current and former directors. The ruling remains subject to appeal.
On July 2, 1998, Kirk Gossett, a former employee of Gum Tech, filed a
lawsuit against Gum Tech and three officers and employees of Gum Tech, and their
spouses, alleging violation of overtime requirements of the Fair Labor Standards
Act. Mr. Gossett is claiming damages of over $80,000, in addition to seeking
treble damages permitted under the Fair Labor Standards Act. Gum Tech denies all
allegations and intends to vigorously defend the suit.
On January 27, 1999, an action was filed against Gum Tech and certain other
parties in the Superior Court of the State of Arizona in and for the County of
Maricopa, CV-99-01528, by Paul F. Janssens-Lens. As it relates to Gum Tech, the
complaint alleges intentional interference with business relations, intentional
misrepresentation, negligent misrepresentation, securities fraud, and consumer
fraud. The plaintiff seeks compensatory damages of $720,000, unspecified
punitive damages, and attorneys' fees and costs. Gum Tech denies the plaintiff's
allegations and intends to vigorously defend the action.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER
None
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
3.1 Amended and Restated Articles of Incorporation of the
Company, dated March 24, 1995 (incorporated by reference
to Exhibit 3.01 to Registrant's Registration Statement on
Form SB-2, file number 333-870)
3.2 Articles of Amendment of the Company, dated July 17, 1998.
3.3 Amended Bylaws of the Company (incorporated by reference to
Exhibit 3.02 to Registrant's Registration Statement on
Form SB-2, file number 333-870)
3.4 Amended Bylaws of the Company, dated April 24, 1998.
10.1 Operating Agreement of Gel Tech, L.L.C.
27 Financial Data Schedule
99.1 Press Release relating to Gel Tech, L.L.C. Operating
Agreement dated May 6, 1999
B. Reports on Form 8-K
None
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Gum Tech International, Inc.
/s/ Gary S. Kehoe
----------------------------
Gary S. Kehoe
President and
Chief Operating Officer
/s/ William J. Hemelt
----------------------------
William J. Hemelt
Chief Financial Officer,
Treasurer & Secretary
May 15, 1999
14
ARTICLES OF AMENDMENT
OF
GUM TECH INTERNATIONAL, INC.
Pursuant to the provisions of Section 16-10a-1006 of the Utah Revised Business
Corporation Act, the corporation hereinafter named (the "Corporation") does
hereby adopt the following Articles of Amendment.
1. The name of the Corporation is Gum Tech International, Inc.
2. Article IV of the Articles of Incorporation of the Corporation is hereby
amended so as henceforth to read as follows:
"The total number of shares of capital stock that may be issued by the
Corporation is Twenty One Million (21,000,000). Of these 21,000,000
shares, Twenty Million (20,000,000) shares shall be designated "Common
Stock" and One Million (1,000,000) shares shall be designated
"Preferred Stock." Subject to any prior rights of the shares of the
Preferred Stock, each share of Common Stock shall be entitled to one
vote per share and shall be entitled to receive the net assets of the
Corporation upon dissolution. The Board of Directors shall have the
authority to amend the Corporation's Articles of Incorporation, without
the need for shareholder approval, to designate the rights and
preferences of the shares of Preferred Stock and to otherwise take any
other action with respect to such shares of Preferred Stock as is
allowed by Section 16-10a-602(1) of the Act."
3. The date of adoption of the aforesaid amendment was July 17, 1998.
4. The designation, the number of outstanding shares, the number of shares
entitled to be cast by the voting group entitled to vote on the said amendment,
and the number of votes of the voting group indisputably represented at the
meeting at which the said amendment was approved are as follows:
(a) Designation of voting group: Common Stock
(b) Number of outstanding shares of voting group: 6,136,460
(c) Number of shares of voting group entitled to vote on the
amendment: 6,136,460
(d) Number of shares of voting group indisputably represented at
the meeting: 5,707,136
5. The total number of votes cast for and against the said amendment by the
voting group entitled to vote on the said amendment is as follows:
<PAGE>
(a) Designation of voting group: Common Stock
(b) Number of votes of voting group cast for the amendment:
5,343,040
(c) Number of votes of voting group cast against the amendment:
317,861
6. The said number of votes cast for the said amendment was sufficient for the
approval thereof by the said voting group.
Executed on December __, 1998.
GUM TECH INTERNATIONAL, INC.
By __________________________________
Name of officer: William Hemelt
Title of officer: CFO
RESOLVED: The Section 3.5 of the Bylaws of the Corporation is hereby amended and
restated as follows:
3.5 SPECIAL MEETINGS: A special meeting of the Board of Directors may be
called at any time by the Chairman of the Board or the President (or
by the Secretary, if no President is then serving). A special meeting
of the Board of Directors shall be called by the President (or, in the
absence of action by the President, by the Secretary) upon the written
request of a majority of the directors then serving.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 246,264
<SECURITIES> 0
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0
0
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<OTHER-EXPENSES> 0
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</TABLE>
THURSDAY MAY 6, 4:07 PM EASTERN TIME
COMPANY PRESS RELEASE
SOURCE: GUMTECH INTERNATIONAL, INC.
GUM TECH EXECUTES OPERATING AGREEMENT
WITH BIODELIVERY TECHNOLOGIES FOR GEL TECH
LLC
PHOENIX, May 6 /PRNewswire/ -- Gum Tech International, Inc. (Nasdaq: GUMM -
news) announced today that it has signed an operating agreement with BioDelivery
Technologies, Inc. governing the terms and conditions of their joint venture
through Gel Tech LLC, a limited liability company formed in January 1999.
BioDelivery Technologies, Inc. (formerly Gel Tech, Inc.) is a privately-held
biotechnology company which specializes in the development of unique systems for
the delivery of bioactive compounds.
The joint venture will market and distribute ZICAM (TM) , a new homeopathic cold
remedy. ZICAM (TM) uses a nasal gel to deliver its active ingredient, Zinullose
(TM), a patent-pending ionic zinc emulsification formula. Initial research has
shown that ZICAM (TM) reduces the duration of the common cold from an average of
10- 14 days to an average of 1 - 3 days. Under the terms of the operating
agreement, Gum Tech will own a 60 % interest and BioDelivery Technologies will
own a 40% interest in Gel Tech LLC.
"The completion of our joint venture involving Gel Tech LLC is a significant
step for Gum Tech, " said Gum Tech President Gary Kehoe. "The development of
ZICAM (TM), a non-chewing gum product, is the result of BioDelivery
Technologies' expertise in nasal gels combined with Gum Tech's research related
to chewing gums. Thus far, the response we have received from both retail buyers
and consumers as a separate entity to realize the commercial potential of ZICAM
(TM), will allow Gum Tech to capitalize on this opportunity while remaining
focused on our core business of developing and manufacturing superior functional
chewing gums."
R. Steven Davidson, CEO of BioDelivery Technologies, and newly appointed CEO of
Gel Tech, added, "The completion of this operating agreement allows us to move
forward rapidly with the marketing effort during the end of this year's cold
season in Eckerd Drug stores and Albertson's nationwide, as well as a number of
other regional chains, has been a success, and we are preparing for much wider
distribution. We have received a significant amount of interest from other
retailers and feel confident that ZICAM (TM) will be available in most major
drug, grocery and mass retail chains in the United States during the coming cold
season."
"We also have received a significant amount of unsolicited interest in the
product from companies overseas," said Davidson. "As a result, we intend to
begin international distribution sooner than we had originally anticipated."
OPERATING AGREEMENT
OF
GEL TECH, L.L.C.
<PAGE>
TABLE OF CONTENTS
ARTICLE I: FORMATION, NAME, PURPOSES, DEFINITIONS.............................1
1.1 FORMATION..................................................1
1.2 TREATMENT AS PARTNERSHIP...................................1
1.3 NAME.......................................................1
1.4 REGISTERED OFFICE..........................................1
1.5 PURPOSE AND POWERS.........................................1
1.6 AGENT FOR SERVICE OF PROCESS...............................1
1.7 TERM.......................................................2
1.8 DEFINITIONS................................................2
ARTICLE II: CAPITAL CONTRIBUTIONS.............................................4
2.1 INITIAL CAPITAL CONTRIBUTION...............................4
2.2 ADDITIONAL CAPITAL CONTRIBUTIONS...........................4
2.3 MEMBER LOANS...............................................4
2.4 USE OF CAPITAL CONTRIBUTIONS...............................5
2.5 WITHDRAWAL OF CONTRIBUTIONS................................5
2.6 INCLUSION OF AN ASSIGNEE...................................5
ARTICLE III: MANAGEMENT.......................................................5
3.1 MANAGEMENT BY MANAGERS.....................................5
3.2 INITIAL MANAGERS, NUMBER, TENURE. AND QUALIFICATIONS.......5
3.3 AUTHORITY TO BIND THE COMPANY..............................5
3.4 MANAGEMENT POWERS AND RESPONSIBILITIES.....................6
3.5 CERTAIN ACTIONS REQUIRING UNANIMOUS MANAGER CONSENT........7
3.6 AFFIRMATIVE MANAGER RESPONSIBILITIES.......................8
3.7 MANAGERS HAVE NO EXCLUSIVE DUTY TO COMPANY.................8
3.8 EXCULPATION OF A MANAGER...................................9
3.9 INDEMNIFICATION OF MANAGERS; INSURANCE.....................9
3.10 RESIGNATION................................................9
3.11 REMOVAL....................................................9
3.12 VACANCIES..................................................9
3.13 SALARY AND EXPENSES........................................9
3.14 RECORDS....................................................9
3.15 FISCAL YEAR AND ACCOUNTING. ............................10
3.16 FINANCIAL STATEMENTS......................................10
3.17 PREPARATION OF INCOME TAX RETURNS.........................11
` 3.18 TAX ELECTIONS.............................................11
3.19 TAX CONTROVERSIES.........................................11
3.20 AUDIT.....................................................11
i
<PAGE>
ARTICLE IV: RIGHTS AND OBLIGATIONS OF MEMBERS.................................12
4.1 LIMITATION OF LIABILITY...................................12
4.2 REIMBURSEMENTS. ..........................................12
4.3 ACCESS TO COMPANY RECORDS.................................12
4.4 LIMITATION ON BANKRUPTCY PROCEEDINGS......................12
4.5 PROHIBITION ON CREATION OF SECURITY INTEREST..............12
4.6 NON - COMPETE COVENANT ...................................12
4.7 OPERATIONAL FUNCTIONS.....................................12
4.8 REASONABLE COMPENSATION...................................12
ARTICLE V: MEETINGS OF MEMBERS...............................................12
5.1 REGULAR MEETINGS..........................................12
5.2 SPECIAL MEETINGS..........................................12
5.3 PLACE OF MEETINGS.........................................13
5.4 MEETINGS BY TELEPHONE.....................................13
5.5 NOTICE OF MEETINGS OF MEMBERS.............................13
ARTICLE VI: DISTRIBUTIONS PRIOR TO LIQUIDATION...............................13
6.1 DISTRIBUTIONS OF NET AVAILABLE CASH FLOW..................13
6.2 DISTRIBUTIONS IN LIQUIDATION..............................13
6.3 AMOUNTS WITHHELD..........................................14
6.4 INCLUSION OF AN ASSIGNEE..................................14
ARTICLE VII: ALLOCATION OF PROFITS AND LOSSES................................14
7.1 PROFITS AND LOSSES........................................14
7.2 TAX ALLOCATIONS...........................................14
7.3 INCLUSION OF AN ASSIGNEE..................................15
ARTICLE VIII: ADMISSIONS AND WITHDRAWALS.....................................15
8.1 ADMISSION OF MEMBER.......................................15
8.2 EXPULSION OF MEMBER.......................................15
8.3 RIGHT TO WITHDRAW.........................................15
8.4 RIGHTS OF WITHDRAWN MEMBER................................15
8.5 DISTRIBUTION UPON WITHDRAWAL..............................16
ARTICLE IX: RESTRICTIONS ON TRANSFERABILITY..................................17
9.1 RESTRICTION ON TRANSFERS..................................17
9.2 GUM TECH'S OPTION TO ACQUIRE BDT'S INTEREST. .............17
9.3 RIGHTS OF ASSIGNEE........................................17
ARTICLE X: DISSOLUTION AND TERMINATION.......................................18
10.1 DISSOLUTION...............................................18
10.2 NOTICE OF WINDING UP......................................18
10.3 LIQUIDATION, WINDING UP AND DISTRIBUTION OF ASSETS........18
ii
<PAGE>
10.4 DEFICIT CAPITAL ACCOUNTS..................................19
10.5 ARTICLES OF TERMINATION...................................19
10.6 RETURN OF CONTRIBUTION NON-RECOURSE TO OTHER MEMBERS......19
10.7 IN KIND DISTRIBUTIONS.....................................19
10.8 INCLUSION OF AN ASSIGNEE..................................20
ARTICLE XI: ARBITRATION.....................................................20
11.1 BINDING ARBITRATION.......................................20
11.2 ARBITRATION PANEL.........................................20
11.3 SERVICE OF PROCESS........................................20
11.4 FORM OF AWARD.............................................20
11.5 ATTORNEYS' FEES AND COSTS.................................20
11.6 ENTRY AND REVIEW OF AWARD.................................20
ARTICLE XII: MISCELLANEOUS PROVISIONS........................................20
12.1 NOTICES...................................................20
12.2 APPLICATION OF ARIZONA LAW................................21
12.3 WAIVER OF ACTION FOR PARTITION............................21
12.4 AMENDMENTS................................................21
12.5 EXECUTION OF ADDITIONAL INSTRUMENTS.......................21
12.6 HEADINGS..................................................21
12.7 SEVERABILITY..............................................21
12.8 CREDITORS AND OTHER THIRD PARTIES.........................21
12.9 COUNTERPARTS. ............................................21
12.10 ENTIRE AGREEMENT..........................................21
EXHIBIT A.....................................................................23
EXHIBIT B.....................................................................24
EXHIBIT C.....................................................................25
EXHIBIT D.....................................................................26
EXHIBIT E.....................................................................27
EXHIBIT F.....................................................................28
APPENDIX A
3
<PAGE>
OPERATING AGREEMENT
OF
GEL TECH, L.L.C.
THIS OPERATING AGREEMENT (this "Agreement") is made and entered into
as of May 6, 1999 and will be effective as of the Effective Date, by and among
the "Managers" as identified in Exhibit A to this Agreement and Gum Tech
International Inc. ("Gum Tech"), a Utah corporation, and BioDelivery
Technologies, Inc. ("BDT"), a California corporation (Gum Tech and BDT together,
the "Members").
For the consideration of their mutual covenants hereinafter set forth,
the parties hereto hereby agree as follows:
ARTICLE I: FORMATION, NAME, PURPOSES, DEFINITIONS
1.1 FORMATION. The Members hereby have formed a limited liability
company (the "Company") pursuant to the Arizona Limited Liability Company Act
(the "Act") that will be effective as of the Effective Date. The Members agree
to execute and acknowledge any and all certificates and instruments and do all
filing, recording, and other acts as may be appropriate to comply with the
requirements of the Act relating to the operation and maintenance of the Company
in accordance with the terms of this Agreement.
1.2 TREATMENT AS PARTNERSHIP. The Members intend that the Company will
be operated in a manner consistent with its treatment as a partnership for
federal and state income tax purposes. No Member shall take any action
inconsistent with the express intent of the parties hereto.
1.3 NAME. The name of the Company is "Gel Tech, L.L.C."
1.4 REGISTERED OFFICE. The Company's registered office will be located
at 246 E. Watkins Street, Phoenix, Arizona 85004, for the purpose of maintaining
the records required to be maintained under the Act, or at such other location
as a Majority of the Managers shall determine.
1.5 PURPOSE AND POWERS. The general purpose of the Company is to
develop, market, and sell cold remedies utilizing zinc-based nasal gels and
other cold remedies based on nasal gels. In addition, the general purpose of the
Company includes the developing, marketing, and selling of other nasal gels as
may be agreed upon by the Members. The Company may exercise all powers
reasonable or necessary to pursue this general purpose. The Company will have
all of the powers permitted by law.
1.6 AGENT FOR SERVICE OF PROCESS. The name and business address of the
Company's initial agent for service of process is CT Corporation System, 3225 N.
Central Avenue, Phoenix, Arizona 85012. A Majority of the Managers may remove
and replace the Company's agent for service of process at any time.
1
<PAGE>
1.7 TERM. The Company shall commence upon the filing of its Articles
of Organization and shall expire on December 31, 2024 or such other later date
established by amendment to the Company's Articles of Organization, unless
sooner terminated under the provisions of Article X hereof or in accordance with
the Act.
1.8 DEFINITIONS. Appendix A hereof sets forth the definitions of
certain terms relating to the maintenance of Capital Accounts and accounting
rules. The following terms, which are used generally throughout this Agreement,
shall have the following meanings:
"ACT" means the Arizona Limited Liability Company Act, Chapter
4 of Title 29, Arizona Revised Statutes.
"AGGREGATE DISTRIBUTIONS" means the sum of all distributions
received by each Member in the current and all prior Fiscal Years.
"AGREEMENT" means this agreement including all exhibits and
appendixes attached hereto, as amended from time to time.
"CAPITAL ACCOUNT" has the meaning set forth in Section A.1 of
Appendix A hereto.
"CAPITAL CONTRIBUTION" means the contribution to the capital of
the Company in cash, property, or services by a Member whenever made. "INITIAL
CAPITAL CONTRIBUTION" means the initial contributions to the capital of the
Company made pursuant to Section 2.1 of this Agreement. "ADDITIONAL CAPITAL
CONTRIBUTIONS" means the contributions made pursuant to Section 2.2 of this
Agreement.
"CODE" means the Internal Revenue Code of 1986, as amended from
time to time.
"COMPANY" means "Gel Tech, L.L.C." or any other name selected
by the Members.
"EFFECTIVE DATE" means January 27, 1999, the day the Articles
of Organization for the Company were filed with the Arizona Corporation
Commission.
"FISCAL YEAR" means the Company's fiscal year, which will be a
calendar year.
"INTEREST" in the Company means the economic rights of a Member
(and his, her or its permitted assignees and successors) to share in
distributions of cash and other property from the Company pursuant to the Act
and this Agreement, together with his, her or its distributive share of the
Company's net income or loss for federal and state income taxes.
"MAJORITY-IN-INTEREST" means Members owning in the aggregate
more than half of the combined Percentage Interests held by all the Members.
2
<PAGE>
"MAJORITY OF THE MANAGERS" means more than half of the
Managers.
"MANAGER" means the Persons as set forth in Exhibit A to this
Agreement or any other Person that becomes a manager pursuant to this Agreement.
"MEMBER" means each Person identified in the first paragraph of
this Agreement as a Member and any other Person who acquires an Interest in the
Company and executes a counterpart of this Agreement as a Member unless and
until that Person becomes a Withdrawn Member.
"NET AVAILABLE CASH FLOW" means, for any period, the Company's
gross cash receipts derived from any source including, but not limited to, gross
receipts from sales and licensing of the Products (excluding only the proceeds
from the Sale of all or substantially all of the Company's assets), less the
portion thereof used to pay or establish reasonable reserves for all Company
expenses, debt and interest payments, asset acquisitions, capital improvements,
expansions, repairs, replacements, contingencies, and any other proper cash
expenditure of the Company as reasonably determined by a Majority of the
Managers. "Net Available Cash Flow" will not be reduced by depreciation,
amortization, cost recovery deductions or similar allowances. "Net Available
Cash Flow" may not exceed the amount by which the fair value of the assets of
the Company exceeds all liabilities of the Company, other than interest or
principal due with respect to member loans, to be determined in accordance with
Section 29-706 of the Act.
"OFFICER" means those Persons as set forth in Exhibit F to this
Agreement or any other Person who becomes an officer pursuant to this Agreement.
"PERCENTAGE INTEREST" means the percentage interests in the
Profits and Losses of the Company. The initial Percentage Interests of each
Member are set forth on Exhibit B attached hereto.
"PERSON" means any individual and any legal entity.
"PRIME RATE" means the prime rate of interest in the "money
rate" section of the Wall Street Journal from time to time.
"PRODUCTS" mean the cold remedy known as "Zicam" and any other
cold remedies based on nasal gels as set forth and described in Section 2.1,
together with other health related products which the Company subsequently
develops or licenses, as may be agreed upon by the Members.
"PROFITS AND LOSSES" have the meaning set forth in Section A.1
of Appendix A hereto, except as otherwise provided in this Agreement.
"REIMBURSABLE EXPENSES" mean direct, out-of-pocket expenses
incurred and paid by the Members, net of any revenue or advances received,
before the date of this Agreement, in
3
<PAGE>
connection with the development of any Product up to the date of this Agreement,
as set forth in Exhibit D.
"REGULATIONS" mean the Treasury Regulations issued by the
Treasury Department under the Code.
"SALE" means the transfer, exchange, or other disposition of
any assets (excluding the sale of inventory in the normal course of business) of
the Company to any Person who is not a Member.
"WITHDRAWAL EVENT" means those events and circumstances listed
in Section 29-733 of the Act.
"WITHDRAWN MEMBER" means a Member following the occurrence of a
Withdrawal Event with respect to that Member.
ARTICLE II: CAPITAL CONTRIBUTIONS
2.1 INITIAL CAPITAL CONTRIBUTION. Gum Tech will contribute $3,500,000
in cash to the Company within five business days of the closing of a private
placement by Gum Tech of at least $5,000,000 in gross proceeds. In addition, as
of the date of this Agreement, both Gum Tech and BDT shall contribute to the
Company all intellectual property rights in cold remedies based on nasal gels
associated with the patent applications listed in Exhibit C, in the United
States and all foreign countries, together with the right of priority under the
International Convention for the Protection of Industrial Property,
Inter-American Convention Relating to Patents, Designs and Industrial Models,
and any other international agreements to which the United States adheres, and
shall include a like interest in and to any improvements and applications for
patents based thereon, growing out of or relating to cold remedies based on
nasal gels, and Gum Tech and BDT shall provide all reasonable assistance and
execute any relevant papers for the full protection and title in and to the
technology hereby transferred. Both Gum Tech and BDT shall also contribute all
rights that they may own with respect to the trademarks and service marks listed
in Exhibit C and applications for registration thereof, together with the
goodwill of the business symbolized by said trademarks and service marks and
said applications to register said trademarks and service marks, to the Company.
2.2 ADDITIONAL CAPITAL CONTRIBUTIONS. If a Majority of the Managers
including at least one Manager designated by Gum Tech and one Manager designated
by Bio Delivery Technologies reasonably determines at any time that the Company
requires additional Capital Contributions in order to pay the obligations and
expenses of the Company or otherwise to accomplish the Company's purposes, the
Managers shall give written notice to each of the Members of the amount(s) and
date(s) on which such additional contributions are required. The Members'
respective shares of each additional contribution required in such notice will
be in proportion to their relative Percentage Interests on the date of such
notice unless otherwise unanimously agreed to by the Managers. Unless otherwise
unanimously agreed to by the Managers, the relative Percentage Interests of the
Members as of the
4
<PAGE>
date of this Agreement will not be changed as a result of any additional Capital
Contributions jointly made by the Members. On or before each due date specified
in such notice, each Member shall contribute to the capital of the Company its
relative share of the total amount to be contributed on
that date.
2.3 MEMBER LOANS. Subject to the restrictions provided in Section
3.4(b), the Company may borrow additional funds from any Member. Unless a
Majority of the Managers not designated by the Member making the loan agrees
otherwise, the interest rate payable with respect to such loans may not exceed
the Prime Rate plus one (1) percentage point and the terms of such loan may not
be less than one year.
2.4 USE OF CAPITAL CONTRIBUTIONS. All Capital Contributions must be
spent in furtherance of the business of the Company. Pending the use of Capital
Contributions in Company operations, Capital Contributions may not be commingled
with the funds of any other Person or entity, except that the funds may be
deposited in an account in the name of the Company in such bank or other
financial institution as a Majority of the Managers may deem appropriate.
2.5 WITHDRAWAL OF CONTRIBUTIONS. No Member may withdraw or demand the
return of all or any part of his, her or its Capital Contributions except as
agreed in writing by a Majority of the Managers not designated by the Member
attempting to withdraw or demanding the return of all or any part of its Capital
Contribution.
2.6 INCLUSION OF AN ASSIGNEE. For purposes of this Article II, the
term "Member" shall include an assignee.
ARTICLE III: MANAGEMENT
3.1 MANAGEMENT BY MANAGERS. The business and affairs of the Company
will be managed exclusively by its designated Managers. The Managers will
direct, manage, and control the business of the Company to the best of their
abilities and have full and complete authority, power, and discretion to make
any and all decisions and to do any and all things that the Managers deem to be
reasonably required to accomplish the business and objectives of the Company in
performing their duties under this Agreement. The Managers must act in good
faith and in a manner that the Managers reasonably believe to be in the best
interests of the Company and its Members.
3.2 INITIAL MANAGERS, NUMBER, TENURE. AND QUALIFICATIONS. The initial
Managers shall consist of four Persons, two of whom will be designated by Gum
Tech in its sole discretion, and two of whom will be designated by BDT in its
sole discretion. One additional Manager will be selected by and with the
unanimous consent of the initial Managers within 30 days from the date this
Agreement is signed and executed. The names of the Managers initially designated
by the Members are set forth in Exhibit A. The Company will have five Managers,
unless all of the Managers unanimously consent to increase the number of
Managers, or unless a Manager dies, resigns, or is
5
<PAGE>
removed. Each Manager will hold office until the earlier of his, her, or its
death, resignation, or removal. A Manager may be removed only with the consent
of the Member or Members that designated such person as a Manager. If any
Manager dies, resigns, or is removed, resulting in a vacancy of a Manager
position, such vacancy will be filled pursuant to Section 3.12. Managers need
not be residents of the State of Arizona or be Members of the Company.
3.3 AUTHORITY TO BIND THE COMPANY. Unless authorized in writing to do
so by this Agreement or by a Majority of the Managers or such other vote as is
expressly provided by this Agreement, no Member, agent, or employee of the
Company shall have any power or authority to bind the Company in any way, to
pledge its credit or to render it liable for any purpose.
3.4 MANAGEMENT POWERS AND RESPONSIBILITIES. Without limiting the
generality of Section 3.1 hereof, and subject to the provisions of Section 3.5
and any other provision in this Agreement, upon the consent of a Majority of the
Managers, the Managers shall have power and authority, on behalf of the Company:
(a) To open accounts in the name of the Company with banks and
other financial institutions and designate and remove from time to time, at
their discretion, all signatories on such bank accounts;
(b) To borrow money from banks, other lending institutions, the
Members, or affiliates of the Members on such terms as a Majority of the
Managers deems appropriate, and in connection therewith to hypothecate,
encumber, and grant security interests in the assets of the Company to secure
repayment of the borrowed sums, PROVIDED that any borrowing will require the
consent of at least one Manager designated by Gum Tech and at least one Manager
designated by BDT. No debt or other obligation may be contracted or liability
incurred by or on behalf of the Company except by the Managers;
(c) To purchase policies of comprehensive general liability
insurance and to purchase such other insurance coverage as a Majority of the
Managers shall determine to be necessary or desirable to insure the Members or
to protect the Company's assets;
(d) To acquire, own or lease real and/or personal property in
the name of the Company;
(e) To invest any Company funds temporarily in time deposits,
short-term governmental obligations, or commercial paper;
(f) To execute on behalf of the Company all instruments and
documents including, without limitation, checks, drafts, notes and other
negotiable instruments, mortgages or deeds of trust, security agreements,
financing statements, documents providing for the acquisition, mortgage or
disposition of the Company's property, assignments, bills of sale, leases,
partnership agreements,
6
<PAGE>
and any other instruments or documents necessary, in the opinion of a Majority
of the Managers, to the business of the Company;
(g) To employ accountants, managing agents or other experts to
perform services for the Company and to compensate them from Company funds;
(h) To employ employees to perform services for the Company;
(i) To enter into any and all other agreements on behalf of the
Company, unless otherwise prohibited by this Agreement, with any other Person
for any reason related to the purpose of the Company as set forth in Section
1.5, in such form and on such terms as a Majority of the Managers may approve;
and
(j) To conduct any clinical trials with respect to the Products
including, without limitation, the approval of protocols and individuals
selected to conduct such clinical trials, provided that any such approval will
require the consent of at least one Manager designated by Gum Tech and at least
one Manager designated by BDT.
3.5 CERTAIN ACTIONS REQUIRING UNANIMOUS MANAGER CONSENT.
Notwithstanding any other provision or provisions of this Agreement relating to
the authority of the Managers, the following actions may not be taken without
the unanimous consent of all Managers:
(a) Performing any act that is unrelated to the purpose of the
Company as provided in Section 1.5 or that otherwise contravenes any provision
of this Agreement;
(b) Making an assignment for the benefit of creditors of the
Company, filing a voluntary petition in bankruptcy, or appointing a receiver for
the Company;
(c) Permitting a Member to create a security interest in a
Member's Interest or otherwise encumbering a Member's Interest;
(d) Paying any Member or affiliate of a Member any commissions,
fees or remuneration, other than reasonable compensation for services rendered,
unless expressly permitted by the terms of this Agreement;
(e) Increasing the number of Managers of the Company;
(f) Admitting any Person as a Member;
(g) Amending this Agreement in any respect;
7
<PAGE>
(h) Merging the Company with or consolidating the Company with
any other entity, or selling, leasing, or otherwise disposing of any of the
assets with the exception of the sale of inventory in the ordinary course of
business;
(i) Making any investment in any other entity or individual
excluding the investment of Company funds temporarily in time deposits,
short-tem governmental obligations, or commercial paper;
(j) Establishing the overall marketing and advertising strategy
relating to the Products;
(k) Taking any actions on behalf of the Company involving
significant legal matters related to the Products, except that day-to-day
decisions implementing the agreed upon legal strategy may be decided by a
Majority of the Managers;
(l) Making any distributions to the Members under the
provisions of Article VI and Article X of this Agreement, except for
distributions for the purpose of making payments for applicable federal and
state income tax liabilities pursuant to Section 6.1;
(m) Appointing, removing and determining the compensation of
Officers of the Company (the initial Officers of the Company are set forth in
Exhibit F);
(n) Making any expenditure individually, or in the aggregate,
that is more than $25,000 greater than an amount authorized in the Budget
approved under Section 3.6(h); and
(o) Making any single expenditure more than $10,000 in the
absence of the approval of a Budget under Section 3.6(h).
3.6 AFFIRMATIVE MANAGER RESPONSIBILITIES. Notwithstanding any other
provision or provisions in this Agreement, the Managers shall be required to
perform the following functions:
(a) Maintain adequate records and books of account;
(b) Maintain sufficient insurance customary to the operations
carried on by the Company;
(c) Comply with all applicable laws and obtain all permits
necessary to conduct the Company's business;
(d) Comply with the terms of all material agreements entered
into by the Company;
(e) Maintain the Company's physical facilities in good
condition and repair;
8
<PAGE>
(f) Obtain proprietary information and confidentiality
agreements from each employee;
(g) Protect the Company's intellectual property rights; and
(h) Prepare and approve a monthly operating budget of the
Company with monthly breakdowns of revenues and expenses by category, for each
Fiscal Year or quarter (the "Budget"), including an income statement and
statement of cash flows. The Budget must be approved by a Majority of the
Managers including at least one Manager designated by Gum Tech. Any expenditures
that materially deviate from the Budget must be approved by a Majority of the
Managers including at least one Manager designated by Gum Tech and one manager
designated by BDT.
3.7 MANAGERS HAVE NO EXCLUSIVE DUTY TO COMPANY. No Manager is required
to manage the Company as his, her or its sole and exclusive function and may
have other business interests and engage in other activities in addition to
those relating to the Company, provided such functions and business interests do
not compete with the Company in violation of the non-compete covenant provided
in Section 4.6.
3.8 EXCULPATION OF A MANAGER. Any act or the failure to do any act by
any Manager or any stockholder, officer, director or employee of any Manager,
the effect of which results in loss or damage to the Company, will not give rise
to any liability to the Company or another Manager if done in good faith to
promote the best interest of the Company or if done pursuant to advice of
independent legal counsel, accountants or other experts selected, engaged or
retained by the Company with reasonable care. The preceding sentence will not
relieve any person of liability for gross negligence, bad faith, dishonesty or
misappropriation of Company assets.
3.9 INDEMNIFICATION OF MANAGERS AND OFFICERS; INSURANCE. The Company
will fully indemnify any Manager or Officer to the same and fullest extent
permitted by applicable law in effect on the date hereof and to such greater
extent as applicable law may hereinafter from time to time permit. The Company
will also have the power to purchase and maintain insurance on behalf of a
Manager or Officer against any liability asserted against a Manager or Officer
and incurred by a Manager or Officer in any such capacity or arising out of his,
her or its status as a Manager or Officer, whether or not the Company would have
the power to indemnify any Manager or Officer against such liability under the
provisions of this Section 3.9 or applicable law.
3.10 RESIGNATION. Any or all of the Managers may resign at any time by
giving written notice to the Members. The resignation of a Manager will take
effect upon receipt of notice thereof or at such later time as may be specified
in such notice; and, unless otherwise specified therein, the acceptance of such
resignation will not be necessary to make it effective. In the event a Manager
is also a Member, such resignation will not affect such Manager's rights and
liabilities as a Member.
3.11 REMOVAL. Any or all of the Managers may be removed at any time,
with or without cause, with the unanimous consent of all the Members. Any or all
of the Managers designated by a
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Member may be removed by such Member at any time, with or without cause, without
the consent of any other Member.
3.12 VACANCIES. Subject to the requirements in Section 3.2, if a
Manager designated by Gum Tech vacates his, her, or its Manager position for any
reason, Gum Tech will designate a new Manager to fill the vacated Manager
position. If a Manager designated by BDT vacates his, her, or its Manager
position for any reason, BDT shall designate a new Manager to fill the vacated
Manager position. In the event a Manager designated jointly by Gum Tech and BDT
vacates his, her, or its Manager position, Gum Tech and BDT shall jointly
designate a new Manager to fill the vacated Manager position. A Manager
designated to fill a position shall hold office until the earlier of his, her or
its death, resignation or removal.
3.13 SALARY AND EXPENSES. Any Manager(s) may receive reasonable
compensation for services rendered as determined by the Majority of the Managers
which shall include at least one Manager designated by Gum Tech and at least one
Manager designated by BDT. Managers also will be entitled to have the Company
pay, or be reimbursed by the Company for, reasonable and necessary out-of-pocket
expenses incurred by any Manager on behalf of the Company.
3.14 RECORDS. At the expense of the Company, Gum Tech's accounting
personnel will maintain the following records at the Company's registered
office:
(a) A current list of the full name and last known business,
residence, or mailing address of each Member, both past and present;
(b) A copy of the Articles of Organization of the Company and
all amendments thereto, together with executed copies of any powers of attorney
pursuant to which any amendment has been executed;
(c) Copies of the Company's currently effective written
Operating Agreement and all amendments thereto, copies of any prior written
Operating Agreement no longer in effect, and copies of any writings permitted or
required with respect to a Member's obligation to contribute cash, property, or
services;
(d) Copies of the Company's federal, state, and local income
tax returns and reports for the three most recent years;
(e) Copies of financial statements of the Company, if any, for
the three most recent years;
(f) Minutes of every annual, special, and court-ordered meeting
of the Members; and
(g) Any written consents obtained from Members for actions
taken by Members without a meeting.
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3.15 FISCAL YEAR AND ACCOUNTING. The Fiscal Year of the Company will
be the calendar year. All amounts computed for the purposes of this Agreement
and all applicable questions concerning the rights of Members will be determined
using generally accepted accounting principles. All decisions as to other
accounting matters, except as specifically provided to the contrary herein, will
be as recommended by the independent public accountant as set forth in Exhibit E
as determined in their reasonable discretion with the consent of a Majority of
the Managers including at least one Manager designated by Gum Tech and at least
one Manager designated by BDT.
3.16 FINANCIAL STATEMENTS.
(A) ANNUAL REPORTS. Within ninety (90) days after the close of
each Fiscal Year, the Company will cause to be furnished to the Members reports
containing financial statements of the Company for the Fiscal Year, presented in
accordance with generally accepted accounting principles, including a balance
sheet, a statement of income, a statement of Members' equity and a statement of
cash flows, which financial statements shall be audited at the expense of the
Company by an independent public accountant to be selected by a Majority of the
Mangers including at least one Manager designated by Gum Tech and at least one
Manager designated by BDT. Until otherwise changed by the Members, the
independent public accountant agreed upon by the parties to audit the financial
statements for each Fiscal Year will be as provided in Exhibit E to this
Agreement.
(B) QUARTERLY REPORTS. Within forty-five (45) days after the
close of each quarter, the Company will cause to be furnished to the Members
reports containing financial statements of the Company for the preceding
quarter, presented in accordance with generally accepted accounting principles,
including a balance sheet, a statement of income, a statement of Members' equity
and a statement of cash flows.
(C) MONTHLY REPORTS. Within thirty (30) days after the close of
each month, the Company will cause to be furnished to the Members reports
containing financial statements of the Company for the preceding month,
presented in accordance with generally accepted accounting principles, including
a balance sheet, a statement of income, a statement of Members' equity and a
statement of cash flows.
3.17 PREPARATION OF INCOME TAX RETURNS. The Company shall arrange for
the preparation and timely filing of all returns of Company income, gains,
deductions, losses and other items necessary for federal and state income tax
purposes and shall cause to be furnished to the Members the tax information
reasonably required for federal and state income tax reporting purposes. The
classification, realization and recognition of income, gain, losses and
deductions and other items, for federal income tax purposes, will be on that
method of accounting as recommended by the independent public accountant as set
forth in Exhibit F, as determined in their reasonable discretion with the
consent of a Majority of the Managers including at least one Manager designated
by Gum Tech and at least one Manager designated by BDT.
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3.18 TAX ELECTIONS. The Majority of the Managers may in their
reasonable discretion determine whether to make any available elections pursuant
to the Code.
3.19 TAX CONTROVERSIES. Subject to the provisions hereof, Gum Tech is
designated the "tax matters partner" (within the meaning of Section 6231 of the
Code), and is authorized and required to represent the Company in connection
with all examinations of the Company's affairs by tax authorities, including
resulting administrative and judicial proceedings, and to expend Company funds
for professional funds for professional services and costs associated therewith.
The Members agree to cooperate with the tax matters partner and to do or refrain
from doing any or all things reasonably required by the tax matters partner to
conduct those proceedings. The tax matters partner agrees to promptly notify the
Members upon the receipt of any correspondence from any federal, state or local
tax authorities relating to any examination of the Company's affairs. The tax
matters partner shall be prohibited from entering into any settlement or
arrangement on behalf of the Company with respect to any federal, state or local
tax authorities without the express written approval of a Majority of the
Managers, which shall include the approval of at least one Manager designated by
Gum Tech and at least one Manager designated by BDT.
3.20 AUDIT. Any Manager may, at his, her or its option and expense,
cause an audit to be performed of the Company.
ARTICLE IV: RIGHTS AND OBLIGATIONS OF MEMBERS
4.1 LIMITATION OF LIABILITY. Each Member's liability for the debts and
obligations of the Company shall be limited as set forth in Section 29-651 of
the Act and other applicable law.
4.2 REIMBURSEMENTS. Each Member shall be reimbursed its Reimbursable
Expenses as set forth in Exhibit D.
4.3 ACCESS TO COMPANY RECORDS. Upon written request, each Member shall
have the right, during ordinary business hours, to inspect and copy the
Company's records required to be maintained by Section 3.14 of this Agreement.
4.4 LIMITATION ON BANKRUPTCY PROCEEDINGS. No Member, without the
consent of all the Members, shall file or cause to be filed any action in
bankruptcy involving the Company.
4.5 PROHIBITION ON CREATION OF SECURITY INTEREST. No Member shall
grant a security interest in the Member's Interest or otherwise encumber the
Member's Interest in any manner except with the unanimous written consent of all
the Managers.
4.6 NON - COMPETE COVENANT. Neither the Members nor any of the
Managers nor any of their affiliates may develop, market, or sell cold remedies
that utilize zinc-based nasal gels or other cold remedies based on nasal gels
other than on behalf and for the benefit of the Company.
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4.7 OPERATIONAL FUNCTIONS. Except as otherwise provided in the
Agreement, all Members agree that any Member or an affiliate may be retained to
provide services to the Company in exchange for reasonable compensation as set
forth in Section 4.8.
4.8 REASONABLE COMPENSATION. Upon the approval of a Majority of the
Managers, which shall include the approval of at least one Manager designated by
Gum Tech and at least one Manager designated by BDT, any Member may receive
reasonable compensation for services rendered to the Company in connection with
the services described in Section 4.7.
ARTICLE V: MEETINGS OF MEMBERS
5.1 REGULAR MEETINGS. There shall be no regular meetings of the
Members.
5.2 SPECIAL MEETINGS. Special meetings of the Members, for any purpose
or purposes, unless otherwise prescribed by statute, may be called by a Majority
of the Managers or a Majority-In- Interest of the Members. The Managers shall
prescribe procedural standards governing matters relating to such meetings,
including the requisite notices for such meetings and the necessary quorums for
such meetings.
5.3 PLACE OF MEETINGS. Special meetings will be held at the place
designated in the notice of the meeting. If no designation is made, the place of
the meeting shall be the principal office or location of the Company in the
State of Arizona.
5.4 MEETINGS BY TELEPHONE. Any Member may participate in a Special
Meeting by means of a conference telephone or similar communication equipment.
5.5 NOTICE OF MEETINGS OF MEMBERS. Written notice stating the place,
day, and hour of the Special Meeting and the purpose or purposes for which the
meeting is called must be delivered not less than five nor more than thirty days
before the date of the meeting, either personally or by mail, by or at the
direction of a Majority of the Managers or a Majority-In-Interest of the Members
calling the meeting, to each Member entitled to vote at such meeting. Any Member
may waive notice of any meeting. The attendance of a Member at any meeting shall
constitute a waiver of notice of such meeting except where a Member attends a
meeting for the express purpose of objecting to the transaction of any business
on the grounds that the meeting is not lawfully called or convened.
ARTICLE VI: DISTRIBUTIONS PRIOR TO LIQUIDATION
6.1 DISTRIBUTIONS OF NET AVAILABLE CASH FLOW. Upon the approval of a
Majority of the Managers, the Company shall make minimum distributions of the
Company's Net Available Cash Flow in the amount of 40% of estimated taxable
income, at such times as are required to pay the
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Members' income tax liabilities and estimated taxes, if any, arising by virtue
of their ownership of the Interests. Except as otherwise provided in this
Section 6.1, prior to the dissolution of the Company and the commencement of the
liquidation of its assets and winding up of its affairs, upon the unanimous
consent of all Managers, within 90 days following the end of each fiscal year,
the Managers shall determine and distribute the Company's Net Available Cash
Flow 60% to Gum Tech and 40% to BDT. In the event Gum Tech fails to make its
Initial Capital Contribution of $3,500,000 in cash to the Company as set forth
in Section 2.1, the Managers shall determine and distribute the Company's Net
Available Cash Flow 50% to Gum Tech and 50% to BDT.
6.2 DISTRIBUTIONS IN LIQUIDATION. Following the dissolution of the
Company and the commencement of winding up and the liquidation of its assets,
all distributions to the Members shall be governed by Article X hereof.
6.3 AMOUNTS WITHHELD. All amounts withheld pursuant to the Code or any
provisions of state or local tax law with respect to any payment or distribution
to the Members and assignees from the Company shall be treated as amounts
distributed to the relevant Member(s) or assignee(s) pursuant to this Section.
6.4 INCLUSION OF AN ASSIGNEE. For purposes of this Article VI, the
term "Member" shall include an assignee.
ARTICLE VII: ALLOCATION OF PROFITS AND LOSSES
7.1 PROFITS AND LOSSES. After making any special allocations required
under Sections A.2 or A.3 of Appendix A hereof, the Profits and Losses of the
Company for each Fiscal Year shall be allocated among the Members in proportion
to their Percentage Interests.
7.2 TAX ALLOCATIONS.
(a) Except as otherwise provided in Section 7.2(b) hereof, for
income tax purposes, all items of income, gain, loss, deduction and credit of
the Company for any tax period shall be allocated among the Members in
accordance with the allocations of Profit and Loss prescribed in this Article
VII and Appendix A hereto.
(b) In accordance with Code Section 704(c) and the Regulations
thereunder, income, gain, loss and deduction with respect to any property
contributed to the capital of the Company shall, solely for federal income tax
purposes, be allocated among the Members in accordance with Regulations Section
1.704-3(b) unless another method set forth in Regulations Section 1.704.3(c) or
(d) is elected by all the Members to take account of any variation between the
adjusted basis of such property to the Company for federal income tax purposes
and its initial Book Value. In the event the Book Value of any Company asset is
adjusted pursuant to subsection (b) of the definition of "Book Value" in Section
A.1 of Appendix A hereto, subsequent allocations of income, gain, loss
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and deduction with respect to such asset shall take account of any variation
between the adjusted basis of such asset for federal income tax purposes and its
Book Value in the same manner as under Code Section 704(c) and the Regulations
thereunder. Any elections or other decisions relating to such allocations shall
be made by a Majority of the Managers, which shall include at least one Manager
designated by Gum Tech and at least one Manager designated by BDT, in any manner
that reasonably reflects the purpose and intention of this Agreement.
Allocations pursuant to this Section 7.2(b) are solely for purposes of federal,
state and local taxes and shall not affect, or in any way be taken into account
in computing, any Member's Capital Account or share of Profits, Losses or other
items or distributions pursuant to any provision of this Agreement.
(c) The Members are aware of the income tax consequences of the
allocations made by this Article VII and Appendix A hereto and hereby agree to
be bound by the provisions of this Article VII and Appendix A hereto in
reporting their distributive shares of the Company's taxable income and loss for
income tax purposes.
7.3 INCLUSION OF AN ASSIGNEE. For purposes of this Article VII, the
term "Member" shall include an assignee.
ARTICLE VIII: ADMISSIONS AND WITHDRAWALS
8.1 ADMISSION OF MEMBER. A Person may be admitted as a Member of the
Company after the date of formation of the Company with the unanimous consent of
all the Managers. Upon admission, the Member shall execute a counterpart of this
Agreement. Upon the admission of a new Member, Gum Tech and BDT's respective
Percentage Interests shall remain in proportion to their relative Percentage
Interests as of the date of this Agreement, unless otherwise unanimously agreed
to by all the Managers.
8.2 EXPULSION OF MEMBER. Upon any material breach by any Member of any
of his, her or its obligations under the terms of this Agreement, which remains
uncured for a period of 90 days after written notice thereof from the Company,
the Member may be expelled effective upon the delivery, prior to the cure of
such breach, of written notice of expulsion signed by a Majority of the
Managers.
8.3 RIGHT TO WITHDRAW. A Member may withdraw from the Company at any
time by mailing or delivering a written notice of withdrawal to the other
Members at their last known address set forth in the list maintained by the
Company. However, if a Member withdraws prior to the termination of this
Agreement, the withdrawal will be considered to be a breach of this Agreement.
The Company may recover damages for the breach and may offset the damages
against any amount otherwise distributable to the withdrawn Member.
8.4 RIGHTS OF WITHDRAWN MEMBER. Following the death, expulsion, or
withdrawal of a Member, the Member (and his, her or its successor, personal
representatives and assigns) shall
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cease to have any rights of a Member except only the right to receive
distributions to the same extent as an assignee of the Member's Interest in the
Company in accordance with the terms of this Agreement, until such time as the
Company is wound up and terminated or a withdrawal distribution
is paid pursuant to Section 8.5 hereof.
8.5 DISTRIBUTION UPON WITHDRAWAL. If, following a Withdrawal Event not
involving a transfer or assignment subject to Article IX hereof, an election is
made to continue the Company pursuant to Section 10.1(f) hereof, the Interest of
a Withdrawn Member in the Company may be liquidated and redeemed in exchange for
a withdrawal distribution that has been agreed upon by the Withdrawn Member and
a Majority of the Managers. If the amount of the withdrawal distribution has not
been agreed upon within 90 days after the Withdrawal Event, then, at the option
of the Company, the Interest of the Withdrawn Member may be liquidated by
payment of a withdrawal distribution equal to the Withdrawn Member's positive
Capital Account Balance as of the date of liquidation, payable in ten equal
annual installments or principal, plus interest calculated at the Prime Rate per
annum, the first such installment to be paid on the date of liquidation. The
amount of such withdrawal distribution shall be reduced by an amount equal to
the damages suffered or likely to be suffered by the Company over the remaining
term of the Agreement specified in Section 1.7 hereof or in any then current
amendment to the Company's Articles of Organization in any case in which the
withdrawing member voluntarily withdraws in breach of this Agreement or is
expelled pursuant to Section 8.2 hereof. The Members recognize that , if any
Member voluntarily withdraws from the Company in breach of this Agreement, it
will be impossible to compute with reasonable accuracy the damages that will
result over the remaining term of this Agreement to the Company and to the other
Members. Consequently, if any Member voluntarily withdraws from the Company in
breach of this Agreement, in lieu of any other remedies and as liquidated
damages, such withdrawing Member's withdrawal distribution shall be reduced by
the following percentage of his or her Capital Account balance as liquidated
damages:
(a) If the remaining term of this Agreement set forth in
Section 1.7 hereof or in any then current amendment to the Company's Articles of
Organization exceeds 30 years, the amount of the reduction shall be 50%.
(b) If the remaining term of this Agreement set forth in
Section 1.7 hereof or in any then current amendment to the Company's Articles of
Organization exceeds 20 years, the amount of reduction shall be 45%; and
(c) If subparagraph (a) or (b) does not apply, the amount of
reduction shall be 30%.
Effective upon the receipt of the first installment of a withdrawal
distribution on the date of liquidation, the withdrawn Member shall cease to own
any Interest in the Company or to be entitled
to any rights under Section 8.4 hereof.
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ARTICLE IX: RESTRICTIONS ON TRANSFERABILITY
9.1 RESTRICTION ON TRANSFERS. Each Member agrees and covenants not to
sell, pledge, encumber or otherwise transfer or dispose of, and not to permit to
be sold, encumbered, attached, or otherwise disposed of or transferred in any
manner, either voluntarily or by operation of law (individually and collectively
referred to herein as a "Transfer"), all or any portion of the Member's Interest
now owned or hereafter acquired by such Member, except in accordance with and
subject to the terms of this Agreement.
9.2 GUM TECH'S OPTION TO ACQUIRE BDT'S INTEREST. Notwithstanding any
other provision in this Agreement, Gum Tech will have an option to purchase
BDT's Interest in the Company at Gum Tech's discretion at any time after (i) two
years from the Effective Date of this Agreement, or (ii) the date on which
cumulative sales of the Company's Products have exceeded $50,000,000. If Gum
Tech exercises its option, Gum Tech shall issue Gum Tech stock to BDT in
exchange for BDT's Interest in the Company. The fair market value of the shares
of Gum Tech stock to be issued to BDT shall equal the fair market value of BDT's
Interest in the Company at the time Gum Tech exercises its option. Prior to
exercising its option under Section 9.2(i) or (ii), Gum Tech shall issue to BDT
at least ninety (90) days written notice of its intention to exercise its
option. In order to determine the fair market value of BDT's Interest, each
Member shall appoint a qualified appraiser and such appraisers shall jointly
appoint a third appraiser. Each appraiser shall determine the fair market value
of BDT's Interest. In order to determine the fair market value of BDT's Interest
in the Company, the value assigned by each appraiser shall be added together and
the sum shall be divided by three to arrive at an average value. This
determination of the value of BDT's Interest shall be conclusive and binding on
the parties. Notwithstanding this Section 9.2, if after two years from the
Effective Date of this Agreement, sales of the Company's Products have not
exceeded $50,000,000 and Gum Tech desires to purchase BDT's Interest in the
Company, then both Members shall agree to the fair market value of the Company.
Each Member shall be liable for 100% of the costs incurred for the appraisal
conducted by the qualified appraiser appointed by that Member and 50% of the
costs incurred by the third qualified appraiser. The value of the shares of Gum
Tech stock to be issued to BDT in consideration for acquiring BDT's Interest in
the Company shall be determined by the average of the closing prices of Gum
Tech's stock for the ten (10) day period ending on the fifth calendar day prior
to the date of the notice given pursuant to Section 9.2(i) or (ii), whichever is
applicable. In no event shall BDT have an option to acquire Gum Tech's Interest
in the Company under this Section 9.2.
9.3 RIGHTS OF ASSIGNEE. The purchaser or other transferee of a
Member's Interest in the Company shall have only the right to receive the
distributions and allocations of taxable income or loss to which the Member
would have been entitled under this Agreement with respect to the transferred
Interest and shall not have or enjoy any right to participate in the management
of the Company, or to exercise any voting rights hereunder or to receive any
financial information or reports relating to the Company or any other rights of
a Member under the Act or this Agreement, unless and until the purchaser or
transferee is admitted as a Member pursuant to Section 8.1 hereof.
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ARTICLE X: DISSOLUTION AND TERMINATION
10.1 DISSOLUTION. The Company shall be dissolved upon the first to
occur of any of the following events:
(a) The unanimous written agreement of all Managers at any
time;
(b) The entry of a decree of judicial dissolution under Section
29-785 of the Act;
(c) An administrative dissolution under section 29-786 of the
Act;
(d) The expiration of the term of the Company set forth in
Section 1.7 herein or such later date set forth in any then current amendment to
the Company's Articles of Organization;
(e) the sale or disposition of all or substantially all the
assets of the Company not in the ordinary course of business to any Person who
is not a Member; and
(f) Any Withdrawal Event with respect to any Member, unless
within 90 days following such Withdrawal Event, all of the remaining Members and
all the Managers consent in writing to the continuation of the business of the
Company.
Other than as provided in this Section 10.1, the Company shall not dissolve in
the event of a Withdrawal Event.
10.2 NOTICE OF WINDING UP. Promptly following the dissolution of the
Company, unless the Company's business is to be continued pursuant to Section
10.1(f) hereof, the Managers (or such other Person designated by the Members)
shall cause a Notice of Winding Up to be filed with the Arizona Corporation
Commission in accordance with the Act.
10.3 LIQUIDATION, WINDING UP AND DISTRIBUTION OF ASSETS. Unless the
business of the Company is to be continued pursuant to Section 10.1(f) hereof,
upon the unanimous consent of all the Managers, the Managers (or such other
Person designated by the Members) shall proceed to liquidate the Company's
assets and properties, discharge the Company's obligations, and wind up the
Company's business and affairs as promptly as is consistent with obtaining the
fair value thereof. The proceeds of liquidation of the Company's assets, to the
extent sufficient therefor, shall be applied and distributed as follows:
(a) First, to the payment and discharge of all of the Company's
debts and liabilities except those owing to Members or to the establishment of
any reasonable reserves for contingent or unliquidated debts and liabilities;
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(b) Second, to the payment of any accrued interest owing on any
debts and liabilities owing to Members in proportion to the amount due and owing
to each Member;
(c) Third, to the payment of outstanding principal amount owing
on any debts and liabilities owing to Members in proportion to the amount due
and owing to each Member;
(d) Fourth, any remaining proceeds up to $3,500,000 to Gum Tech
less any cumulative distributions received by Gum Tech under Section 6.1; and
(e) Fifth, any remaining proceeds shall be distributed 60% to
Gum Tech and 40% to BDT, subject to the restrictions in this Section 10.3(e). In
the event Gum Tech fails to make its Initial Capital Contribution of $3,500,000
in cash to the Company as set forth in Section 2.1, any remaining proceeds under
this Section 10.3(e) shall be distributed 50% to Gum Tech and 50% to BDT.
10.4 DEFICIT CAPITAL ACCOUNTS. No Member shall have any obligation to
contribute or advance any funds or other property to the Company by reason of
any negative or deficit balance in such Member's Capital Account during or upon
completion of winding up or at any other time.
10.5 ARTICLES OF TERMINATION. When all of the remaining property and
assets have been applied and distributed in accordance with Section 10.3 hereof,
the Managers (or such other Person designated by the Members) shall cause
Articles of Termination to be executed and filed with the Arizona Corporation
Commission in accordance with the Act.
10.6 RETURN OF CONTRIBUTION NON-RECOURSE TO OTHER MEMBERS. Except as
provided by law, upon dissolution, each Member shall look solely to the assets
of the Company for the return of his, her or its Capital Contributions. If the
Company property remaining after the payment or discharge of the debts and
liabilities of the Company is insufficient to return the cash or other property
contribution of one or more Members or assignees, such Member(s) shall have no
recourse against any other Member.
10.7 IN KIND DISTRIBUTIONS. A Member shall have no right to demand and
receive any distribution from the Company in any form other than cash. However,
a Member may be compelled to accept a distribution of an asset in kind if the
Company is unable to dispose of all of its assets for cash.
10.8 INCLUSION OF AN ASSIGNEE. For purposes of this Article X, the
term "Member" shall include an assignee.
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ARTICLE XI: ARBITRATION
11.1 BINDING ARBITRATION. The Members agree that all controversies and
claims of any nature arising directly or indirectly out of this Agreement must
be arbitrated under the Commercial Arbitration Rules of the American Arbitration
Association. For all controversies and claims brought by Gum Tech arising
directly or indirectly out of this Agreement, the arbitration will occur in the
City of Los Angeles, Los Angeles County, California pursuant to the Federal
Arbitration Act, 9 U.S.C. Section 1, ET. SEQ. For all controversies and claims
brought by BDT arising directly or indirectly out of this Agreement, the
arbitration will occur in the City of Phoenix, Maricopa County, Arizona pursuant
to the Federal Arbitration Act, 9 U.S.C. Section 1 ET. SEQ. As provided in
Section 12.2, the substantive law of the State of Arizona shall govern the
resolution of disputes and the enforcement of rights pursuant to this Agreement.
11.2 ARBITRATION PANEL. A single arbitrator shall have the power to
render a maximum award of $50,000. When any party files a claim in excess of
this amount, the arbitration decision shall be made by the majority vote of
three arbitrators. No arbitrator shall have the power to restrain any act of any
party. No arbitrator may grant any relief that would not be available pursuant
to Arizona law.
11.3 SERVICE OF PROCESS Service of process may be made by any means
authorized by applicable law and arbitration rules.
11.4 FORM OF AWARD. Any award by the arbitrator(s) shall be supported
by written findings of fact, conclusions of law and a calculation of how
damages, if any, were calculated. Any award not so supported shall be null and
void.
11.5 ATTORNEYS' FEES AND COSTS. The prevailing party in any
arbitration or court action arising hereunder shall be awarded its reasonable
attorneys' fees, expenses including expert witness fees, and costs, such amounts
to be determined by the arbitrator(s).
11.6 ENTRY AND REVIEW OF AWARD. Judgment may be entered on any award
made by the arbitrator(s) by the United States District Court, District of
Arizona, or, in the event that court lacks jurisdiction to do so by any other
court of competent jurisdiction. Upon review by the applicable court, the award
may be vacated, remanded, modified or corrected where (i) the award is contrary
to the terms of this Agreement, (ii) the award is otherwise contrary to Arizona
law, (iii) the award is contrary to the authority granted to the arbitrators
under this Article XI, or (iv) on such terms as are provided for in the Federal
Arbitration Act.
ARTICLE XII: MISCELLANEOUS PROVISIONS
12.1 NOTICES. Except as otherwise provided herein, any notice, demand,
or communication required or permitted to be given to a Member by any provision
of this Agreement shall be deemed to have been sufficiently given or served for
all purposes if (i) delivered personally to the Member or to an executive
officer of the Member to whom the same is directed or (ii) sent by registered or
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certified mail, postage and charges prepaid, addressed to the Member's address
which is set forth in this Agreement. Except as otherwise provided herein, any
such notice shall be deemed to be given on the date which is two days from the
date the same was deposited in a regularly maintained receptacle for the deposit
of United States mail, addressed and sent as aforesaid.
12.2 APPLICATION OF ARIZONA LAW. This Agreement shall be construed and
enforced in accordance with the laws of the State of Arizona.
12.3 WAIVER OF ACTION FOR PARTITION. Each Member irrevocably waives
during the term of the Company any right that it may have to maintain any action
for partition with respect to the property of the Company.
12.4 AMENDMENTS. This Agreement may not be amended except with the
unanimous written consent of all Managers.
12.5 EXECUTION OF ADDITIONAL INSTRUMENTS. Each Member hereby agrees to
execute such other and further statements of interest and holdings,
designations, powers of attorney, and other instruments necessary to effectuate
the terms of this Agreement or to comply with any laws, rules, or regulations.
12.6 HEADINGS. The headings in this Agreement are inserted for
convenience only and are in no way intended to describe, interpret, define, or
limit the scope, extent, or intent of this Agreement or any provision hereof.
12.7 SEVERABILITY. If any provision of this Agreement or the
application thereof to any Person or circumstance shall be invalid, illegal, or
unenforceable to any extent, the remainder of this Agreement and the application
thereof shall not be affected and shall be enforceable to the fullest extent
permitted by law.
12.8 CREDITORS AND OTHER THIRD PARTIES. None of the provisions of this
Agreement shall be for the benefit of or enforceable by any creditors of the
Company or by other third parties.
12.9 COUNTERPARTS. This Agreement may be executed in counterparts.
12.10 ENTIRE AGREEMENT. This Agreement contains all the agreements
between the parties hereto and supersedes any and all prior agreements,
arrangements, or understandings between the parties relating to the subject
matter hereof. No oral understandings, oral statements, oral promises or oral
inducements exist. No representations, warranties, covenants or conditions,
express or implied, whether by statute or otherwise, other than as set forth
herein, have been made by the parties hereto.
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Executed as of the date first above written.
GUM TECH INTERNATIONAL INC., a Utah
corporation
By:_______________________________________
Its: President
BIO DELIVERY TECHNOLOGIES, INC., a
California corporation
By:_______________________________________
Its: CEO
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EXHIBIT A
SCHEDULE OF MANAGERS
MANAGERS DESIGNATED BY GUM TECH
1) Walter Brown Russell, III
2) William J. Hemelt
MANAGERS DESIGNATED BY BDT
1) R. Steven Davidson
2) Charles B. Hensley
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EXHIBIT B
SCHEDULE OF MEMBERS
Member Address Initial Percentage Interest
- --------------------------------------------------------------------------------
Gum Tech 246 E. Watkins Street 60%
Phoenix, Arizona 85004
- --------------------------------------------------------------------------------
BDT 6430 Variel Avenue 40%
Suite 102B
Woodland Hills, CA, 91367
- --------------------------------------------------------------------------------
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EXHIBIT C
DESCRIPTION OF THE INTELLECTUAL PROPERTY
PATENT APPLICATIONS
U.S. Patent Application No. 09/145,042, filed September 1, 1998, by Robert S.
Davidson, Gary S. Kehoe, and Lawrence S. Kaye, for Method and Composition for
Delivering Zinc to the Nasal Membrane
TRADEMARKS AND SERVICE MARKS
GELTECH
ZICAM
ZINULLOSE
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EXHIBIT D
REIMBURSABLE EXPENSES
Gum Tech shall be reimbursed $370,848 and BDT shall be reimbursed $183,037, for
Reimbursable Expenses incurred prior to March 31, 1999. In addition, each member
will be reimbursed for expenses incurred subsequent to March 31, 1999 and prior
to the date of execution of this Agreement. Any amounts to be reimbursed will be
subject to audit and approval by a Majority of the Managers, which must include
the approval of at least one Manager designated by Gum Tech and at least one
Manager designated by BDT.
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EXHIBIT E
INDEPENDENT PUBLIC ACCOUNTANT TO AUDIT FINANCIAL STATEMENTS
FOR FISCAL YEAR
The independent public accountant agreed upon by the parties to audit the
financial statements for each fiscal year shall be Angell & Deering, LLP.
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EXHIBIT F
INITIAL OFFICERS OF THE COMPANY
As of the date of this Agreement, the initial Officers of the Company are as
follows:
POSITION NAME
- -------- ----
Chief Executive Officer R. Steven Davidson
President Hank Landau
Chief Operating Officer Larry Kaye
Executive Vice President and
Chief of Research and Scientific
Affairs Charles B. Hensley
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APPENDIX A
A.1 ACCOUNTING DEFINITIONS. The following terms, which are
used predominantly in this Appendix A, shall have the meanings set forth below
for all purposes under this Agreement:
"ADJUSTED CAPITAL ACCOUNT BALANCE" means, with
respect to any Member, the balance of such Member's Capital Account as of the
end of the relevant Fiscal Year, after giving effect to the following
adjustments:
(a) Credit to such Capital Account any
amounts which such Member is obligated to restore pursuant to
this Agreement or as determined pursuant to Regulations
Section 1.704-1(b)(2)(ii)(C), or is deemed to be obligated to
restore pursuant to the penultimate sentences of Regulations
Sections 1.704-2(g)(1) and 1.704-2(i)(5); and
(b) Debit to such Capital Account the items
described in clauses (4), (5) and (6) of Section
1.704-1(b)(2)(ii)(D) of the Regulations.
The foregoing definition of Adjusted Capital Account Balance is intended to
comply with the provisions of Section 1.704-1(b)(2)(ii)(D) of the Regulations
and shall be interpreted consistently therewith.
"BOOK VALUE" means, with respect to any asset, the asset's
adjusted basis for Federal income tax purposes, except as follows:
(a) The initial Book Value for any asset
(other than money) contributed by a Member to the Company
shall be the gross fair market value of such asset, as agreed
upon by the Manager at the time of such contribution;
(b) The Book Value of all Company assets
shall be adjusted to equal their respective gross fair market
values, as reasonably determined by the Manager as of the
following times: (i) the acquisition of an additional Interest
in the Company by any new or existing Member in exchange for
more than a de minimis Capital Contribution; (ii) the
distribution by the Company to a Member of more than a de
minimis amount of cash or property as consideration for an
Interest in the Company, if (in any such event) such
adjustment is necessary or appropriate, in the reasonable
judgment of the Manager, to reflect the relative economic
interests of the Members in the Company; or (iii) the
liquidation of the Company for Federal income tax purposes
pursuant to Regulations section 1.704-1(b)(2)(ii)(G);
PROVIDED, however, that, if a Member, or former Member whose
Interest in the Company is being purchased or liquidated does
not accept
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the proposed adjustment to the Book Value of any asset or
assets, then such adjustment shall be determined by the
following procedure: the disagreeing Members shall each select
a qualified appraiser. Unless the same person is selected, the
two appraisers shall then jointly nominate a third, neutral
qualified appraiser, who shall determine the appropriate
adjustment and whose determination shall be final and
conclusive on the parties;
(c) The Book Value of any Company asset
distributed to any Member shall be adjusted to equal its gross
fair market value on the date of distribution;
(d) The Book Values of the Company's assets
shall be increased (or decreased) to reflect any adjustments
to the adjusted basis of such assets pursuant to Code Section
734(b) or Code Section 743(b), but only to the extent that
such adjustments are taken into account in determining Capital
Accounts pursuant to Regulation Section 1.704-1(b)(2)(iv)(M)
and Section A.2(g) hereof; provided, however, that Book Values
shall not be adjusted pursuant to this subsection (d) to the
extent that an adjustment pursuant to subsection (b) of this
definition is necessary or appropriate in connection with a
transaction that would otherwise result in an adjustment
pursuant to this subsection (d); and
(e) If the Book Value of an asset has been
determined or adjusted pursuant to subsection (a), (b) or (d)
above, such Book Value shall thereafter be adjusted by the
Depreciation taken into account from time to time with respect
to such asset for purposes of computing Profits and Losses.
"CAPITAL ACCOUNT" means, with respect to any Member or other
owner of an Interest in the Company, the Capital Account maintained for such
Person in accordance with the following provisions:
(a) To each such Person's Capital Account
there shall be credited such Person's Capital Contributions,
such Person's distributive share of Profits and any items in
the nature of income or gain that are specially allocated
pursuant to Sections A.2 and A.3 hereof, and the amount of any
Company liabilities assumed by such Person (excluding assumed
liabilities that have been taken into account in computing the
Net Asset Value of any Company property distributed to such
Person);
(b) To each such Person's Capital Account
there shall be debited the amount of cash and the Net Asset
Value of any Company property distributed to such Person
pursuant to any provision of this Agreement, such Person's
distributive share of Losses, and any items in the nature of
expenses or losses that are specially allocated pursuant to
Sections A.2 and A.3 hereof, and the
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amount of any liabilities of such Person assumed by the
Company (excluding assumed liabilities that were taken into
account in computing the Net Asset Value of any property
contributed by such Person to the Company);
(c) In the event any Interest in the Company
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;
(d) Section 752(c) of the Code shall be
applied in determining the amount of any liabilities taken
into account for purposes of this definition of "Capital
Account"; and
(e) The foregoing provisions and the other
provisions of this Agreement relating to the maintenance of
Capital Accounts are intended to comply with Sections
1.704-1(b) and 1.704-2 of the Regulations and shall be
interpreted and applied in a manner consistent with such
Regulations. The Manager may modify the manner of computing
the Capital Accounts or any debits or credits thereto
(including debits or credits relating to liabilities that are
secured by contributed or distributed property or that are
assumed by the Company or any Member) in order to comply with
such Regulations, provided that any such modification is not
likely to have a material effect on the amounts distributable
to any Member pursuant to Section 10.3 hereof upon the
dissolution of the Company. Without limiting the generality of
the preceding sentence, the Manager shall make any adjustments
that are necessary or appropriate to maintain equality between
the aggregate sum of the Capital Accounts and the amount of
capital reflected on the balance sheet of the Company, as
determined for book purposes in accordance with Section
1.704-1(b)(2)(iv)(G) of the Regulations. The Manager shall
also make any appropriate modifications if unanticipated
events (for example, the availability of investment tax
credits) might otherwise cause this Agreement not to comply
with Regulations Section 1.704-1(b).
"COMPANY MINIMUM GAIN" has the same meaning as the term
"partnership minimum gain" under Regulations Section 1.704-2(d) of the
Regulations.
"DEPRECIATION" means, for each Fiscal Year or other period, an
amount equal to the depreciation, amortization or other cost recovery deduction
allowable with respect to an asset for such year or other period, except that if
the Book Value of an asset differs from its adjusted basis for Federal income
tax purposes at the beginning of such year or other period, Depreciation shall
be an amount that bears the same ratio to such beginning Book Value as the
Federal income tax depreciation, amortization or other cost recovery deduction
for such year or other period bears to such beginning adjusted tax basis;
provided, however, that if such depreciation, amortization or other cost
recovery deductions with respect to any such asset for Federal income tax
purposes is zero for any Fiscal Year, Depreciation shall be determined with
reference to the
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asset's Book Value at the beginning of such year using any reasonable method
selected by the Manager.
"MEMBER NONRECOURSE DEBT" has the same meaning as the term
"partner nonrecourse debt" under Section 1.704-2(b)(4) of the Regulations.
"MEMBER NONRECOURSE DEBT MINIMUM GAIN" has the same meaning as
the term "partner nonrecourse debt minimum gain" under Section 1.704-2(i)(2) of
the Regulations and shall be determined in accordance with Section 1.704-2(i)(3)
of the Regulations.
"MEMBER NONRECOURSE DEDUCTIONS" has the same meaning as the
term "partner nonrecourse deductions" under Regulations Section 1.704-2(i)(1).
The amount of Member Nonrecourse Deductions with respect to a Member Nonrecourse
Debt for each Fiscal Year of the Company equals the excess (if any) of the net
increase (if any) in the amount of Member Nonrecourse Debt Minimum Gain
attributable to such Member Nonrecourse Debt during such Fiscal Year over the
aggregate amount of any distributions during such Fiscal Year to the Member that
bears the economic risk of loss for such Member Nonrecourse Debt to the extent
that such distributions are from the proceeds of such Member Nonrecourse Debt
which are allocable to an increase in Member Nonrecourse Debt Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance with
Section 1.704-2(i)(2) of the Regulations.
"NET ASSET VALUE" means, with respect to any asset (other than
money) contributed by a Member to the Company's capital or distributed by the
Company to any Member, the amount by which the gross fair market value of such
asset, as determined by the Members at the time of such contribution or
distribution, exceeds the total monetary obligations then secured by such asset
or otherwise assumed by the transferee at the time of such contribution or
distribution. In the case of contributed services, if any, the Net Asset Value
shall be equal to the value thereof as determined by the Members at the time of
the contribution.
"NONRECOURSE DEBT" or "NONRECOURSE LIABILITY" has the same
meaning as the term "nonrecourse liability" under Section 1.704-2(b)(3) of the
Regulations.
"NONRECOURSE DEDUCTIONS" has the meaning set forth in Section
1.704-2(b)(1) of the Regulations. The amount of Nonrecourse Deductions for a
Company Fiscal Year equals the excess (if any) of the net increase (if any) in
the amount of Company Minimum Gain during that Fiscal Year over the aggregate
amount of any distributions during that Fiscal Year of proceeds of a Nonrecourse
Debt that are allocable to an increase in Company Minimum Gain, determined
according to the provisions of Section 1.704-2(c) of the Regulations.
"PROFITS" or "LOSSES" means, for each Fiscal Year or other
period, the taxable income or taxable loss of the Company as determined under
Code Section 703(a) (including in
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such taxable income or taxable loss all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a)(1) of the Code) with
the following adjustments:
(a) All items of gain or loss resulting from any
disposition of the Company's property shall be determined upon
the basis of the Book Value of such property rather than the
adjusted tax basis thereof;
(b) Any income of the Company that is exempt from
Federal income tax shall be added to such taxable income or
loss;
(c) Any expenditures of the Company that are
described in Code Section 705(a)(2)(B), or treated as such
pursuant to Regulations Section 1.704-1(b)(2)(iv)(I), and that
are not otherwise taken into account in the computation of
taxable income or loss of the Company, shall be deducted in
the determination of Profits or Losses;
(d) If the Book Value of any Company asset is
adjusted pursuant to subsection (b) or (c) of the definition
of "Book Value" set forth in this Appendix A, the amount of
such adjustment shall be taken into account as gain or loss
from the disposition of such asset for purposes of computing
Profits or Losses unless such gain or loss is specially
allocated pursuant to Section A.2 hereof;
(e) In lieu of the depreciation, amortization, and
other cost recovery deductions taken into account in
determining such taxable income or loss, there shall be
deducted Depreciation, computed in accordance with the
definition of such term in this Appendix A; and
(f) Notwithstanding any of the foregoing provisions,
any items that are specially allocated pursuant to Section A.2
or A.3 hereof shall not be taken into account in computing
Profits or Losses.
A.2 SPECIAL ALLOCATIONS. The allocation of Profits and Losses
for each Fiscal Year shall be subject to the following special allocations in
the order set forth below
(a) MEMBER MINIMUM GAIN CHARGEBACK. If there is a
net decrease in Company Minimum Gain for any Fiscal Year, each
Member shall be specially allocated items of income and gain
for such year (and, if necessary, for subsequent years) in an
amount equal to such Member's share of the net decrease in
Company Minimum Gain during such year, determined in
accordance with Regulations Section 1.704-2(g)(2). Allocations
pursuant to the preceding sentence shall be made among the
Members in proportion to the respective amounts required to be
allocated to each of them pursuant to such Regulation. The
items to be so allocated shall be determined in accordance
with Regulations Section
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1.704-2(f)(6). Any special allocation of items of Company
income and gain pursuant to this Section A.2(a) shall be made
before any other allocation of items under this Appendix A.
This Section A.2(a) is intended to comply with the "minimum
gain chargeback" requirement in Regulations Section 1.704-2(f)
and shall be interpreted consistently therewith.
(b) MEMBER NONRECOURSE DEBT MINIMUM GAIN CHARGEBACK.
If there is a net decrease during a Fiscal Year in the Member
Nonrecourse Debt Minimum Gain attributable to a Member
Nonrecourse Debt, then each Member with a share of the Member
Nonrecourse Debt Minimum Gain attributable to such debt,
determined in accordance with Regulations Section
1.704-2(i)(5), shall be specially allocated items of income
and gain for such year (and, if necessary, subsequent years)
an amount equal to such Member's share of the net decrease in
the Member Nonrecourse Debt Minimum Gain attributable to such
Member Nonrecourse Debt, determined in accordance with
Regulations Section 1.704-2(i)(4). Allocations pursuant to the
preceding sentence shall be made among the Members in
proportion to the respective amounts to be allocated to each
of them pursuant to such Regulation. Any special allocation of
items of income and gain pursuant to this Section A.2(b) for a
Fiscal Year shall be made before any other allocation of
Partnership items under this Appendix A, except only for
special allocations required under Section A.2(a) hereof. The
items to be so allocated shall be determined in accordance
with Regulations Section 1.704-2(i)(4). This Section A.2(b) is
intended to comply with the provisions of Regulations Section
1.704-2(i)(4) and shall be interpreted consistently therewith.
(c) QUALIFIED INCOME OFFSET. If any Member receives
any adjustments, allocations, or distributions described in
clauses (4), (5) or (6) of Regulations Section
1.704-1(b)(2)(ii)(D), items of income and gain shall be
specially allocated to each such Member in an amount and
manner sufficient to eliminate as quickly as possible, to the
extent required by such Regulation, any deficit in such
Member's Adjusted Capital Account Balance, such balance to be
determined after all other allocations provided for under this
Appendix A have been tentatively made as if this Section
A.2(c) were not in this Agreement.
(d) GROSS INCOME ALLOCATION. In the event any Member
has a deficit Capital Account at the end of any Fiscal Year
which is in excess of the sum of (i) the amount (if any) such
Member is obligated to restore pursuant to any provision of
this Agreement, and (ii) the amount such Member is deemed to
be obligated to restore pursuant to the penultimate sentences
of Sections 1.704-2(g)(1) and 1.704- 2(i)(5) of the
Regulations, each such Member shall be specially allocated
items of income and gain in the amount of such excess as
quickly as possible, provided that an allocation pursuant to
this Section A.2(d) shall be made only if and to the extent
that such Member would have a deficit Capital Account in
excess of such
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sum after all other allocations provided for in this Appendix
A have been made as if Section A.2(c) hereof and this Section
A.2(d) were not in the Agreement.
(e) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions
for any Fiscal Year or other period shall be specially
allocated to the Members in proportion to their Percentage
Interests.
(f) MEMBER NONRECOURSE DEDUCTIONS. Member
Nonrecourse Deductions for any Fiscal Year or other period
shall be specially allocated, in accordance with Regulations
Section 1.704-2(i)(1), to the Member or Members who bear the
economic risk of loss for the Member Nonrecourse Debt to which
such deductions are attributable.
(g) CODE SECTION 754 ADJUSTMENTS. To the extent an
adjustment to the adjusted tax basis of any Company asset
under Code Section 734(b) or 743(b) is required to be taken
into account in determining Capital Accounts pursuant to
Regulations Section 1.704-1(b)(2)(iv)(M), the amount of such
adjustment to the Capital Accounts shall be treated as an item
of gain (if the adjustment increases the basis of the asset)
or loss (if the adjustment decreases such basis), and such
gain or loss shall be specially allocated to the Members in a
manner consistent with the manner in which their Capital
Accounts are required to be adjusted pursuant to such section
of the Regulations.
A.3 CURATIVE ALLOCATIONS. The allocations set forth in
subsections (a) through (g) of Section A.2 hereof ("Regulatory Allocations") are
intended to comply with certain requirements of Regulations Sections 1.704-1(b)
and 1.704-2. Notwithstanding any other provisions of this Appendix A (other than
the Regulatory Allocations and the next two following sentences), the Regulatory
Allocations shall be taken into account in allocating other Profits, Losses and
items of income, gain, loss and deduction among the Members so that, to the
extent possible, the net amount of such allocations of other Profits, Losses and
other items and the Regulatory Allocations to each Member shall be equal to the
net amount that would have been allocated to each such Member if the Regulatory
Allocations had not occurred. For purposes of applying the preceding sentence,
Regulatory Allocations of Nonrecourse Deductions and Member Nonrecourse
Deductions shall be offset by subsequent allocations of items of income and gain
pursuant to this Section A.3 only if and to the extent that: (a) the Manager
reasonably determines that such Regulatory Allocations are not likely to be
offset by subsequent allocations under Section A.2(a) or Section A.2(b) hereof,
and (b) there has been a net decrease in Company Minimum Gain (in the case of
allocations to offset prior Nonrecourse Deductions) or a net decrease in Member
Nonrecourse Debt Minimum Gain attributable to a Member Nonrecourse Debt (in the
case of allocations to offset prior Member Nonrecourse Deductions). The Manager
shall apply the provisions of this Section A.3, and shall divide the allocations
hereunder among the Members, in such manner as will minimize the economic
distortions upon the distributions to the Members that might otherwise result
from the Regulatory Allocations.
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A.4 GENERAL ALLOCATION RULES.
(a) Generally, all Profits and Losses allocated to
the Members shall be allocated among them in proportion to
their Percentage Interests, except as otherwise specifically
provided under the terms of this Agreement. In the event
Members are admitted to the Company pursuant to this Agreement
on different dates during any Fiscal Year, the Profits (or
Losses) allocated to the Members for each such Fiscal Year
shall be allocated among the Members in proportion to the
Percentage Interests that each Member holds from time to time
during such Fiscal Year in accordance with Code Section 706,
using any convention permitted by law and selected by the
Managing Member.
(b) For purposes of determining the Profits, Losses
or any other items allocable to any period, Profits, Losses
and any such other items shall be determined on a daily,
monthly or other basis, as determined by the Manager using any
method permissible under Code Section 706 and the Regulations
thereunder.
(c) For purposes of determining the Members'
proportionate shares of the "excess nonrecourse liabilities"
of the Company within the meaning of Regulations Section
1.752-3(a)(3), their respective interests in Member Profits
shall be in the same proportions as their Percentage
Interests.
36
