<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 1998.
[ ] 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: 0-22187
ADVANTAGE LEARNING SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WISCONSIN 39-1559474
(STATE OR OTHER (IRS EMPLOYER
JURISDICTION OF INCORPORATION) IDENTIFICATION NO.)
PO BOX 8036
2911 PEACH STREET
WISCONSIN RAPIDS, WISCONSIN
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
54495-8036
(ZIP CODE)
(715) 424-3636
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AT
CLASS MAY 8, 1998
----- --------------
Common Stock, $0.01 par value 16,902,383
<PAGE> 2
ADVANTAGE LEARNING SYSTEMS, INC.
INDEX TO FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
PART I - FINANCIAL INFORMATION
Page
Number
------
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 1998
(Unaudited) and December 31, 1997 ...................... 1
Unaudited Consolidated Statements of Income for the Three
Months Ended March 31, 1998 and 1997 ................... 2
Unaudited Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1997 ................... 3
Notes to Unaudited Consolidated Financial Statements............. 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 5
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................... 7
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ...................... 8
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............................... 8
- Index -
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ADVANTAGE LEARNING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1998
(Unaudited) December 31, 1997
-------------- -----------------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,675 $ 22,320
Short term investments 21,776 6,865
Accounts receivable, less allowance of
$581 in 1998 and $638 in 1997 4,300 3,317
Inventories 296 345
Prepaid expenses 587 746
Deferred tax asset 1,872 1,831
---------- ----------
Total current assets 38,506 35,424
---------- ----------
Property, plant and equipment, net 12,013 11,315
Building held for sale 722 727
Deferred tax asset 1,653 1,661
Intangibles, net 1,520 1,599
Capitalized software, net 100 157
---------- ----------
Total assets $ 54,514 $ 50,883
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,398 $ 982
Deferred revenue 2,980 2,854
Payroll and employee benefits 893 657
Retainage & amounts due under construction contract - 17
Other current liabilities 2,665 1,684
Distribution payable to shareholders 555 555
---------- ----------
Total current liabilities 8,491 6,749
---------- ----------
Deferred revenue 1,223 1,299
---------- ----------
Total liabilities 9,714 8,048
Minority interest 66 -
Shareholders' equity:
Common stock, $.01 par;
Shares authorized: 50,000,000;
Issued and outstanding: 16,902,383 169 169
Additional paid in capital 40,757 40,757
Retained earnings 3,808 1,909
---------- ----------
Total shareholders' equity 44,734 42,835
---------- ----------
Total liabilities and shareholders' equity $ 54,514 $ 50,883
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
- 1 -
<PAGE> 4
ADVANTAGE LEARNING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
1998 1997
-------- --------
(In thousands, except per share amounts)
<S> <C> <C>
Net sales:
Products $ 8,636 $ 6,444
Services 1,987 1,369
-------- --------
Total net sales 10,623 7,813
-------- --------
Cost of sales:
Products 901 781
Services 865 718
-------- --------
Total cost of sales 1,766 1,499
-------- --------
Gross profit 8,857 6,314
Operating expenses:
Product development 1,027 679
Selling and marketing 3,351 2,161
General and administrative 1,737 1,164
-------- --------
Total operating expenses 6,115 4,004
-------- --------
Operating income 2,742 2,310
Other income (expense):
Interest income 434 25
Interest expense - (174)
Other, net 70 (18)
-------- --------
Income before taxes 3,246 2,143
Income taxes 1,347 1,602
-------- --------
Net income $ 1,899 $ 541
======== ========
Basic and diluted earnings per share $ 0.11 $ 0.04
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
ADVANTAGE LEARNING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Reconciliation of net income to net cash provided by operating activities:
Net income $ 1,899 $ 541
Noncash (income) expenses included in net income -
Depreciation and amortization 403 337
Deferred income taxes (33) 1,602
Change in assets and liabilities -
Accounts receivable (984) (684)
Inventory 50 (75)
Prepaid expenses 159 (568)
Accounts payable and other current liabilities 1,633 822
Retainage and amounts due under construction contract (17) (697)
Deferred revenue 50 81
---------- ----------
Net cash provided by operating activities 3,160 1,359
---------- ----------
Cash flows used in investing activities:
Purchase of property, plant and equipment (960) (343)
Short-term investments (14,911) -
Capitalized software development costs - (4)
---------- ----------
Net cash used in investing activities (15,871) (347)
---------- ----------
Cash flows from financing activities:
Equity contribution from minority partner 66 -
Proceeds from long-term debt and notes payable to shareholders - 853
---------- ----------
Net cash provided by financing activities 66 853
---------- ----------
Net (decrease) increase in cash (12,645) 1,865
Cash and cash equivalents, beginning of period 22,320 1,756
---------- ----------
Cash and cash equivalents, end of period $ 9,675 $ 3,621
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE> 6
ADVANTAGE LEARNING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. CONSOLIDATION
The consolidated financial statements include the financial results of Advantage
Learning Systems, Inc. ("ALS"), and its consolidated subsidiaries, the Institute
for Academic Excellence, Inc. ("Institute"), IPS Publishing, Inc. ("IPS"), and
Athena Holdings LLC ("AHL"), collectively the "Companies". All significant
intercompany transactions have been eliminated in the consolidated financial
statements.
Effective March 10, 1998, AHL, a limited liability company, was formed to
purchase land and construct an office building for the Company's Madison,
Wisconsin operations. For financial reporting purposes, the assets and
liabilities of AHL are consolidated in the financial statements of the Company,
and the outside investor's limited partnership interest has been recorded as
minority interest.
2. BASIS OF PRESENTATION
The consolidated financial statements reflect all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results of the interim periods, and are
presented on an unaudited basis. These financial statements should be read in
conjunction with the Company's financial information contained in the Company's
Annual Report on Form 10-K which is on file with the U.S. Securities and
Exchange Commission.
The results of operations for the three month periods ended March 31, 1998 and
1997 are not necessarily indicative of the results to be expected for the full
year.
3. EARNINGS PER COMMON SHARE
Basic earnings per common share has been computed based on the weighted average
number of common shares outstanding. Diluted earnings per common share has been
computed based on the weighted average number of common shares outstanding,
increased by the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued.
The weighted average shares outstanding during the three months ended March 31,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 1998 March 31, 1997
------------------ ------------------
<S> <C> <C>
Basic Weighted Average Shares 16,902,383 13,651,133
Impact of Stock Options 57,484 -
Diluted Weighted Average Shares 16,959,867 13,651,133
</TABLE>
4. RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants issued Statement of Position No. 97-2 ("SOP
97-2") "Software revenue recognition". This SOP was issued to provide guidance
on applying generally accepted accounting principles to software transactions
and to narrow the range of revenue recognition practices that were in use before
its issuance. SOP 97-2 is generally effective for transactions entered into in
fiscal years beginning after December 15, 1997. The adoption of SOP 97-2 had no
material impact on the Company's results of operations for the three months
ended March 31, 1998.
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<PAGE> 7
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
The following table sets forth certain consolidated income statement
data in dollars and as a percentage of net sales, except that individual
components of costs of sales and gross profit are shown as a percentage of their
corresponding component of net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1998 1997 CHANGE
------------------ ------------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net Sales:
Products $ 8,636 81.3% $ 6,444 82.5% $ 2,192 34.0%
Services 1,987 18.7% 1,369 17.5% 618 45.1%
-------- ------ -------- ------ --------
Total net sales 10,623 100.0% 7,813 100.0% 2,810 36.0%
-------- ====== -------- ====== --------
Cost of sales:
Products 901 10.4% 781 12.1% 120 15.4%
Services 865 43.5% 718 52.4% 147 20.5%
-------- -------- --------
Total cost of sales 1,766 16.6% 1,499 19.2% 267 17.8%
-------- -------- --------
Gross profit:
Products 7,735 89.6% 5,663 87.9% 2,072 36.6%
Services 1,122 56.5% 651 47.6% 471 72.4%
-------- -------- --------
Total gross profit 8,857 83.4% 6,314 80.8% 2,543 40.3%
-------- -------- --------
Operating expenses:
Product development 1,027 9.7% 679 8.7% 348 51.3%
Selling & marketing 3,351 31.5% 2,161 27.7% 1,190 55.1%
General & administrative 1,737 16.4% 1,164 14.9% 573 49.2%
-------- -------- --------
Total operating expenses 6,115 57.6% 4,004 51.2% 2,111 52.7%
-------- -------- --------
Operating income 2,742 25.8% 2,310 29.6% 432 18.7%
Other income (expense):
Interest income 434 4.1% 25 0.3% 409 1636.0%
Interest expense - 0.0% (174) -2.2% 174 -100.0%
Other, net 70 0.7% (18) -0.2% 88 -488.9%
-------- -------- --------
Total other income (expense) 504 4.7% (167) -2.1% 671 -401.8%
-------- -------- --------
Income before taxes 3,246 30.6% 2,143 27.4% 1,103 51.5%
Income taxes 1,347 12.7% 1,602 20.5% (255) -15.9%
-------- -------- --------
Net income $ 1,899 17.9% $ 541 6.9% $ 1,358 251.0%
======== ======== ========
</TABLE>
Net Sales. The Company's net sales increased by $2.8 million, or 36.0%,
to $10.6 million in the first quarter of 1998 from $7.8 million in the first
quarter of 1997. Product sales increased by $2.2 million, or 34.0%, to $8.6
million in
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<PAGE> 8
the first quarter of 1998 from $6.4 million in the first quarter of 1997. The
increase in product sales is primarily attributable to (i) the sale of the
Accelerated Reader and S.T.A.R. to approximately 1,500 new customer schools
since year-end 1997 and (ii) increased sales of Accelerated Reader title disks
to a larger base of Accelerated Reader schools, including the introduction of
approximately 1,200 new book titles on Accelerated Reader title disks since
December 31, 1997. Sales of Accelerated Reader software and supplemental
Accelerated Reader title disks remained constant at approximately 55% of net
sales in the first quarter of 1998 and 1997.
Service revenue, which consists of revenue from sales of: (i) training
seminars and programs and (ii) software support agreements, increased by
$618,000, or 45.1%, to $2.0 million in the first quarter of 1998 from $1.4
million in the first quarter of 1997. This increase is primarily attributable to
an increased number of Reading Renaissance training sessions, and, to a lesser
extent, additional revenue from software support agreements principally
associated with increased new product sales.
Cost of Sales. The cost of sales of products increased by $120,000, or
15.4%, to $901,000 in the first quarter of 1998 from $781,000 in the first
quarter of 1997. As a percentage of product sales, the cost of sales of products
decreased to 10.4% in the first quarter of 1998 compared to 12.1% in the first
quarter of 1997, primarily due to operating leverage associated with increased
product sales. The cost of sales of services increased by $147,000, or 20.5%, to
$865,000 in the first quarter of 1998 from $718,000 in the first quarter of
1997. As a percentage of sales of services, the cost of sales of services
declined to 43.5% in the first quarter of 1998 compared to 52.4% in the first
quarter of 1997 primarily as a result of decreased costs of delivering training
sessions. The Company anticipates gross profit margin on services will remain
relatively close to first quarter 1998 levels. The Company's overall gross
profit margin improved 2.6% to 83.4% in the first quarter of 1998 from 80.8% in
the first quarter of 1997, due primarily to improved gross profit margins on
services. Management expects that the overall gross profit margin will remain
relatively constant in 1998.
Product Development. Product development expenses increased by
$348,000, or 51.3%, to $1.0 million in the first quarter of 1998 from $679,000
in the first quarter of 1997. These expenses increased primarily due to
increased development staff and consulting costs associated with new products.
As a percentage of net sales, product development costs increased to 9.7% in the
first quarter of 1998 from 8.7% in the first quarter of 1997. The Company
anticipates that the total dollar amount of product development costs will
continue to increase as the Company extends its product offerings into other
areas of the K-12 curriculum.
Selling and Marketing. Selling and marketing expenses increased by $1.2
million, or 55.1%, to $3.4 million in the first quarter of 1998 from $2.2
million in the first quarter of 1997. These expenses increased due to
participation in more trade shows, the publication of additional catalogs,
mailings to an increased customer and prospect base and increased advertising in
publications. As a percentage of net sales, selling and marketing expenses
increased to 31.5% in the first quarter of 1998 from 27.7% in the first quarter
of 1997. Management anticipates incurring increased selling and marketing
expenses during the second half of 1998 due primarily to the expected
introduction of new products, and, to a lesser extent, the expansion of
international selling and marketing activities.
General and Administrative. General and administrative expenses
increased by $573,000, or 49.2%, to $1.7 million in the first quarter of 1998
from $1.2 million in the first quarter of 1997. The higher expenses for the
first quarter of 1998 are largely due to increased costs associated with: (i)
the conversion to a publicly held company in late 1997, and (ii) increased costs
associated with the hiring of additional personnel, including wages and related
benefits. As a percentage of net sales, general and administrative costs
increased to 16.4% in the first quarter of 1998 compared to 14.9% in the first
quarter of 1997.
Operating Income. Operating income increased by $432,000, or 18.7%, to
$2.7 million in the first quarter of 1998 from $2.3 million in the first quarter
of 1997. As a percentage of net sales, operating income decreased to 25.8% in
the first quarter of 1998 compared to 29.6% in the first quarter of 1997.
Interest Income. Interest income increased $409,000 to $434,000 in the
first quarter of 1998 from $25,000 in the first quarter of 1997. This increase
is due to an increase in interest earning short-term investments which were
purchased in late 1997 and early 1998 with proceeds from the Company's initial
public offering in September, 1997.
Interest Expense. Interest expense decreased $174,000 in the first
quarter of 1998 compared to the same period in 1997. In October 1997, proceeds
from the Company's initial public offering were used to pay all outstanding
indebtedness.
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<PAGE> 9
Income Tax Expense. Income tax expense of $1.3 million was recorded in
the first quarter of 1998 at an effective income tax rate, as a percent of
pre-tax income, of 41.5%. A deferred tax asset and corresponding benefit of $1.6
million recorded in 1996 in connection with the operations of IPS, which was a
C corporation at the time, was reversed in January 1997 when IPS elected S
corporation status.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company's cash and cash equivalents decreased to $9.7
million from the December 31, 1997 total of $22.3 million. The decrease of $12.6
million in cash and cash equivalents in the first quarter of 1998 is primarily
due to the net effect of (i) the purchase of $14.9 million in short-term
commercial paper offset by (ii) an increase of $3.2 million in net cash provided
by operating activities.
In December 1997, the Company obtained a $7.5 million unsecured revolving line
of credit with a bank which matures on December 31, 1998. The line of credit
bears interest at either a floating rate based on the prime rate established by
the bank less 1.0%, or a fixed rate for a period of up to 90 days based on LIBOR
plus 1.25%. The rate is at the option of the Company and is determined at the
time of borrowing. As of March 31, 1998, the line of credit had not been used.
In March 1998, Athena Holdings LLC ("AHL") was formed by the Company and an
unaffiliated party to develop an office facility in the Madison, Wisconsin area.
The Company received a 70% interest in AHL in return for its capital
contribution of $700,000. This facility would be used for the Company's Madison
operations and the other party would also utilize part of the facility. The
estimated total cost of the project is approximately $6.6 million. The amount
and source of financing for such development has not been finalized at this
time. The Company has the option, but not the obligation, to provide the
financing for the project.
Within the next 12 months, the Company expects to commence pilot operations in
one or more international markets. It is anticipated that the investment
required during this period will be approximately $1.5 million to $2.0 million.
The Company believes cash flow from operations and its current cash position
will be sufficient to meet its working capital requirements for the foreseeable
future.
In accordance with the Private Securities Litigation Reform Act of 1995, the
Company can obtain a "safe-harbor" from forward-looking statements by
identifying those statements and by accompanying those statements with
cautionary statements which identify factors that could cause actual results to
differ materially from those in the forward-looking statements. Accordingly, the
foregoing "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains certain forward-looking statements relating to
growth plans, projected sales, revenues, earnings and costs, and product
development schedules and plans. The Company's actual results may differ
materially from those contained in the forward-looking statements herein.
Factors which may cause such a difference to occur include those factors
identified in Item 1, Business, Forward-Looking Statements, contained in the
Company's Form 10-K for the year ended December 31, 1997, which factors are
incorporated herein by reference to such Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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<PAGE> 10
Part II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) The net proceeds to the Company from its initial public offering, after
deducting underwriting discounts of $3,606,400 and other expenses of
approximately $941,000, were approximately $46,972,000. From September 24, 1997
(the effective date of the Company's Form S-1 Registration Statement) through
March 31, 1998, the Company used the net proceeds from the offering as follows:
(i) Approximately $1.6 million was used to pay compensation expenses
related to the termination of the Company's phantom stock plan.
(ii) Approximately $7.2 million was used to pay the entire principal and
accrued interest on the mortgage note and an unsecured note, both related
to the construction of the Company's new headquarters facility in
Wisconsin Rapids, Wisconsin.
(iii) Approximately $5.1 million was used to pay the entire principal and
accrued interest on notes from the Company's principal shareholders
related to the 1996 acquisition of IPS Publishing, Inc.
(iv) Approximately $10 million was used to pay distributions of S
corporation retained profits to S corporation shareholders.
(v) Approximately $700,000 was used to invest in Athena Holdings LLC, a
limited liability company formed for the purpose of constructing a
building for the Institute for Academic Excellence, Inc.'s operations.
The remaining proceeds have been invested in cash-equivalents and short-term
investments. The Company has broad discretion with respect to the use of the
remaining proceeds.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit No. Description
---------- -----------
10.1 Operating Agreement dated March 13, 1998 for
Athena Holdings LLC (exhibits to such
Operating Agreement have been omitted)
27.1 Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter covered by this
report.
- 8 -
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANTAGE LEARNING SYSTEMS, INC.
(Registrant)
May 14, 1998 /s/ Michael H. Baum
------------ ------------------------------
Date Michael H. Baum
Chief Executive Officer
(Principal Executive Officer)
May 14, 1998 /s/ Timothy Sherlock
------------ ------------------------------
Date Timothy Sherlock
Secretary, Vice President, and Chief
Financial Officer (Principal Financial
and Accounting Officer)
<PAGE> 12
Index to Exhibits
Exhibit No. Description
- ---------- -----------
10.1 Operating Agreement dated March 13, 1998 for
Athena Holdings LLC (exhibits to such
Operating Agreement have been omitted)
27.1 Financial Data Schedule
<PAGE> 1
OPERATING AGREEMENT
OF
ATHENA HOLDINGS LLC
THIS OPERATING AGREEMENT is made and entered into as of March 13, 1998,
by and between Advantage Learning Systems, Inc., a Wisconsin corporation
("Advantage") and DezCon, LLC, a Wisconsin limited liability company ("DezCon"),
collectively the Members of Athena Holdings LLC, a Wisconsin limited liability
company, for the purposes of providing the rights, obligations, and restrictions
as set forth herein with the force and effect of an operating agreement as
provided for in the Wisconsin Limited Liability Company Law ("WLLCL") and
Michael J. Dwyer solely for the purpose of making the acknowledgment at the end
of this Operating Agreement.
W I T N E S S E T H:
WHEREAS, the Members have formed a limited liability company pursuant
to the WLLCL (the "Company") for the purposes set forth below; and
WHEREAS, the Articles of Organization for the Company were filed with
the Department of Financial Institutions for the State of Wisconsin on March 10,
1998.
NOW, THEREFORE, in consideration of the mutual promises made herein,
the parties hereby agree to manage and operate the Company pursuant to this
Operating Agreement as follows:
ARTICLE 1
GENERAL PROVISIONS
SECTION 1.1. GENERAL PURPOSE. The Company's general purpose and business is to
acquire, hold, develop, improve, manage, finance, lease and/or sell the real
property located within the Old Sauk Trails Park in Madison, Wisconsin more
particularly described on EXHIBIT A attached hereto (the "Property"), and to
pursue other business and investment opportunities as the members may jointly
determine may be beneficial for the Company and which are not prohibited by
the WLLCL, and the Company shall have all powers necessary or appropriate to
that business.
<PAGE> 2
SECTION 1.2. DEFINITIONS. For purposes of this Operating Agreement,
the following terms shall have the meanings ascribed to them, and any
derivatives of these terms shall have correlative meanings:
(a) "Adjusted Capital Account Deficit" means, with respect to any
Member, the deficit balance, if any, in the Member's Capital Account as
of the end of the relevant Fiscal Period, after giving effect to the
following adjustments:
(i) the Capital Account shall be credited any amounts that the
Member is deemed obligated to restore pursuant to the
penultimate sentences of section 1.704-2(g)(1) and (i)(5) of
the Treasury Regulations; and
(ii) the Capital Account shall be debited the items described in
section 1.704-1(b)(2)(ii)(d)(4), (5), and (6) of the Treasury
Regulations.
(iii) This definition is intended to comply with the provisions of
section 1.704-1(b)(2)(ii)(d) of the Treasury Regulations and
shall be interpreted consistently therewith.
(b) [intentionally omitted]
(c) "Affiliates" means, when used with reference to a specified
person, (i) any person that directly or indirectly, controls, is
controlled by or is under common control with the specified person,
(ii) any person who is an officer of, partner in or trustee of, or who
serves in a similar capacity with respect to, the specified person,
(iii) any person who directly or indirectly, is the beneficial owner of
10% or more of any ownership interest or securities of the specified
person, or (iv) any corporation, partnership, limited liability company
or other entity of which the specified person serves as an officer,
director, managing partner, managing member or in a similar capacity.
(d) "Articles" means the Company's Articles of Organization as
filed with the Wisconsin Department of Financial Institutions, a copy
of which is attached as EXHIBIT B.
(e) "Capital Account" means the account established and
maintained for each Member pursuant to Article 3.
(f) "Capital Contribution" means the gross amount of cash,
property, services rendered, or promissory notes or other written
obligations to provide cash or property or to perform services, in each
case at its Value, contributed to the Company by any Member with
respect to his or its Membership Interest.
2
<PAGE> 3
(g) "Cash Available for Distribution" means Cash Flow less
Reserves.
(h) "Cash Flow" means cash funds provided from operations,
including proceeds from leases or the release of Reserves, without
deducting for depreciation, amortization, or similar noncash
allowances, but after deducting cash funds used to pay for all
operating expenses, Debt payments, improvements, replacements, or other
cash outlays actually incurred.
(i) "Cash From Sales or Refinancings" means all cash funds, if
any, from the sale of any portion of the Company's assets or from the
refinancing of the Property after repayment of the existing Debt, less
any portion thereof used to establish Reserves and pay expenses of the
Company associated with the refinancing.
(j) "Code" means the Internal Revenue Code of 1986, as amended (or
any corresponding provisions of succeeding law).
(k) "Company" means Athena Holdings LLC.
(l) "Debt" means (i) any indebtedness for borrowed money or the
deferred purchase price of property as evidenced by a note, bond,
or other instrument, (ii) obligations as lessee under capital leases,
(iii) obligations secured by any mortgage, pledge, security interest,
encumbrance, lien, or charge of any kind existing on any asset owned or
held by the Company whether or not the Company has assumed or become
liable for the obligations, and (iv) obligations under direct or
indirect guarantees of indebtedness (including obligations, contingent
or otherwise, to assure a creditor against loss in respect of
indebtedness), or obligations of the kinds referred to in (i)-(iii)
above, provided that the Debt shall not include obligations in respect
of any accounts payable that are incurred in the ordinary course of the
Company's business and are not delinquent or are being contested in
good faith by appropriate proceedings. In determining the amount of
Debt in any given circumstance, section 752(c) and any related
provisions of the Code and Treasury Regulations shall be taken into
account if appropriate.
(m) "Depreciation" means, for each Fiscal Period of the Company,
an amount equal to the depreciation, amortization, or other cost
recovery deduction allowable with respect to an asset for the Fiscal
Period under the Code, except that if the Value of an asset differs
from its adjusted basis for federal income tax purposes at the
beginning of the Fiscal Period, Depreciation shall be an amount that
bears the same ratio to the beginning Value as the federal income tax
depreciation, amortization, or other cost recovery deduction for the
Fiscal Period bears to the beginning adjusted tax basis; provided,
however, that if the adjusted basis for federal income tax purposes of
an asset at the beginning of the Fiscal Period is zero, Depreciation
shall be determined with reference to
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the beginning Value using any reasonable method selected by both
of the Members consistent with the purpose and intent of this
definition.
(n) "Design/Build Contract" means the contract to be entered by
and between the Company and Planning Associates, in form reasonably
acceptable to both Members, which will set forth the design and
construction services to be performed by Planning Associates for the
Project, the fee to be paid Planning Associates for such services, and
other matters related to the design and construction of the Project.
(o) "Development Budget" means the budget for acquisition of the
Property and development of the Project as set forth on EXHIBIT D
attached hereto, as the same may be revised from time to time in
accordance with Section 7.7.
(p) "Dissolution Event" means (i) the sale or other disposition of
all or substantially all of the Project; (ii) the election by Advantage
or DezCon to abandon development of the Project and to dissolve the
Company in the event the Company is unable to satisfy or waive the
contingencies contained in the offer to purchase for the Property
entered into by DezCon and the current owner of the Property, and
Advantage does not elect to proceed with the project pursuant to
Section 11.7; or (iii) the election by unanimous consent of the Members
to dissolve the Company other than in connection with the abandonment
of development of the Project under subsection (ii), above.
(q) "Distribution" means the aggregate amount of any payment
pursuant to Article 5 to Members with respect to Membership Interests
of cash, property, services rendered, or promissory notes or other
obligations to provide cash or property or to perform services, in each
case at its Value.
(r) "Fiscal Period" means any 12-month period ending on December
31 or any portion of that period for which the Company is required to
allocate Profits, Losses, and other items of income, gain, loss, or
deduction for federal income tax purposes.
(s) "GMP" means the guaranteed maximum price set forth in the
Design/Build Contract.
(t) "Held" or "Hold" means, when applied to Membership Interests,
owned and controlled, and specifically includes Membership Interests
deemed to be Held pursuant to Section 9.2 and/or Section 9.5(c), and
each Member shall be conclusively presumed to Hold the Membership
Interest set forth herein, as amended from time to time, until
Transferred in accordance with Article 9.
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(u) "Involuntary Transfer" means any Transfer of a Membership
Interest by operation of law or in any transaction, proceeding, or
action by or in which a Member would, but for the provisions of Section
9.5, be involuntarily deprived or divested of any right, title, or
interest in or to any Membership Interest, including, without
limitation, (i) a Transfer on death or bankruptcy, (ii) any foreclosure
of a security interest in the Membership Interest (including a
Membership Interest that has been pledged to a financial institution
solely as security for a Company Debt), (iii) any seizure under levy of
attachment or execution, or (iv) any Transfer to a state or to a public
office or agency pursuant to any statute pertaining to escheat or
abandoned property or forfeiture.
(v) "Involuntary Transferee" means any creditor, receiver, trust
or trustee, estate, beneficiary, or other person to whom Membership
Interests are Transferred pursuant to Section 9.5.
(w) "Leases" mean the lease to the Institute for Academic
Excellence, Inc. ("Institute") for space within the Project in the form
as that attached hereto as EXHIBIT E, the lease to Planning Associates,
Inc. ("Planning Associates") for space within the Project in the form
as that attached hereto as EXHIBIT F, and any other lease hereafter
entered into by the Company for the lease of space within the Project .
(x) "Managing Member" means the Member chosen to manage the
day-to-day operations of the Company pursuant to Section 7.1 and has
the powers and shall perform the duties set forth in this Operating
Agreement. Any reference in this Operating Agreement to Managing Member
refers to such person or entity solely in the role of Managing Member
and not in their role as a Member.
(y) "Member" means each party signing this Operating Agreement as
a Member and any person or entity that becomes a Member after acquiring
a Membership Interest pursuant to Article 8.
(z) "Member Nonrecourse Debt" has the same meaning as "partner
nonrecourse debt" as set forth in section 1.704-2(b)(4) of the Treasury
Regulations.
(aa) "Member Nonrecourse Debt Minimum Gain" means an amount, with
respect to each Member Nonrecourse Debt, equal to the Minimum Gain that
would result if the Member Nonrecourse Debt were treated as a
Nonrecourse Liability, determined in accordance with section
1.704-2(i)(3) of the Treasury Regulations.
(bb) "Member Nonrecourse Deductions" has the same meaning as
"partner nonrecourse deductions" as set forth in section 1.704-2(i)(1)
and (2) of the Treasury Regulations.
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<PAGE> 6
(cc) "Membership Interest" means the interests of a Member in the
Profits, Losses and capital of the Company, and the commitments for
which a Member is responsible under the WLLCL and as provided in this
Operating Agreement. No individual right or obligation represented by a
Membership Interest may be separately transferred or relinquished,
whether voluntarily or by operation of law.
(dd) "Minimum Gain" has the same meaning as "partnership minimum
gain" as set forth in sections 1.704-2(b)(2) and (d) of the Treasury
Regulations.
(ee) "Nonrecourse Deductions" has the meaning set forth in section
1.704-2(b)(1) of the Treasury Regulations. The amount of Nonrecourse
Deductions for a Fiscal Period of the Company equals the net increase,
if any, in the amount of Minimum Gain during that Fiscal Period,
determined according to the provisions of section 1.704-2(c) of the
Treasury Regulations.
(ff) "Nonrecourse Liability" has the meaning set forth in section
1.704-2(b)(3) of the Treasury Regulations.
(gg) "Notice of Involuntary Transfer" means the written notice to
be sent by a Transferor and an Involuntary Transferee to the Company
pursuant to Section 9.5 describing the event giving rise to the
Involuntary Transfer; the date upon which the Transfer occurred; the
reason or reasons for the Transfer; the name, address and capacity of
the Involuntary Transferee; and the Membership Interest involved.
(hh) "Notice of Transfer" means the written notice to be sent by a
Transferor to the Company and the other Members pursuant to Section 9.3
before any proposed Transfer stating the Membership Interest proposed
to be transferred; the name and address of the prospective Transferee;
the date on which the Transfer is to occur (which date shall not be
later than one hundred eighty (180) days nor earlier than sixty (60)
days after the date of the Notice of Transfer); and the sale price, the
terms of payment, and the other material terms and conditions of the
proposed Transfer.
(ii) "Offer" means the offer to sell the Membership Interest
identified in a Notice of Involuntary Transfer that is represented by
the Notice of Involuntary Transfer pursuant to Section 9.5.
(jj) "Operating Agreement" means this Operating Agreement and all
exhibits attached hereto.
(kk) "Operating Budget" means the budget for the day-to-day
operations of the Partnership as approved from time to time by the
Members under Section 7.8.
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<PAGE> 7
(ll) "Percentage Interests" means the percentage interests of each
Member in the management and control of the Company as set forth on
EXHIBIT C attached hereto, subject to adjustment under Section 3.3.
(mm) "Permitted Assignee" means with respect to a Member, (i) the
shareholders, officers, directors, partners or members of a Member,
(ii) the spouse or the issue of any person identified in subsection
(i), above, (iii) another Member, (iv) a trust created for the benefit
of any of the foregoing, or, in the case of a trust, the beneficiaries
of the trust, or (v) to an entity controlled by, controlling, or under
common control with a Member or any entity identified in subsection
(i), above.
(nn) [intentionally omitted]
(oo) "Prime Rate" means the highest base rate on corporate loans
posted by at least 75% of the thirty (30) largest banks in the United
States as published from time to time by The Wall Street Journal.
(pp) "Profits" and "Losses" mean, for each Fiscal Period, amounts
equal to the Company's taxable income and loss for the Fiscal Period,
determined in accordance with section 703(a) of the Code (for this
purpose, all items of income, gain, loss, or deduction required to be
stated separately pursuant to section 703(a)(1) of the Code shall be
included in taxable income or loss), with the following adjustments:
(i) Any income of the Company that is exempt from federal
income tax and not otherwise taken into account in
computing Profits or Losses pursuant to this definition
shall be added to the taxable income or loss.
(ii) Any expenditures of the Company described in section
705(a)(2)(B) of the Code or treated as section
705(a)(2)(B) expenditures as described in section
1.704-1(b)(2)(iv)(i) of the Treasury Regulations, and
not otherwise taken into account in computing Profits or
Losses pursuant to this definition, shall be subtracted
from the taxable income or loss.
(iii) In the event the Value of any asset of the Company is
adjusted pursuant to the definition of Value below, the
amount of the adjustment shall be taken into account as
gain or loss from the disposition of the asset for
purposes of computing Profits and Losses.
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<PAGE> 8
(iv) Gain or loss resulting from the Company's disposition of
any property, with respect to which gain or loss is
recognized for federal income tax purposes, shall be
computed by reference to the Value of the property
disposed of, notwithstanding that the property's
adjusted tax basis differs from its Value.
(v) In lieu of the depreciation, amortization, and other
cost recovery deductions taken into account in computing
such taxable income or loss, there shall be taken into
account Depreciation for the fiscal year or other
period.
(vi) To the extent that an adjustment to the adjusted tax
basis of any Company asset pursuant to section 734(b) or
743(b) of the Code must be taken into account pursuant
to section 1.704-1(b)(2)(iv)(m) of the Treasury
Regulations in determining Capital Accounts as a result
of a Distribution other than in complete liquidation of
a Member's Membership Interest, the amount of the
adjustment shall be treated as an item of gain (if the
adjustment increases the asset's basis) or loss (if the
adjustment decreases the asset's basis) from the
disposition of the asset and shall be taken into account
for purposes of computing Profits or Losses.
(vii) Notwithstanding any other provisions of this definition,
any items that are specially allocated pursuant to
Sections 6.2 and 6.3 shall not be taken into account in
computing Profits or Losses.
(viii) The amounts of the items of income, gain, loss, and
deduction available to be specially allocated pursuant
to Sections 6.2 and 6.3 shall be determined by applying
rules analogous to those set forth in this definition as
appropriate.
(qq) "Project" means the Property and the development thereon of
an approximately 73,638 square foot, three-story professional office
building, surface parking and related site work.
(rr) "Project Financing" means the financing described in Section
3.2.
(ss) "Property" means approximately 4.62 acres of land located
within the First Addition to Old Sauk Trails in the City of Madison,
Wisconsin, more particularly described on EXHIBIT A attached hereto.
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<PAGE> 9
(tt) "Property Management Contract" means the property management
contract to be entered into by the Company with Planning Associates, a
copy of which is attached hereto as EXHIBIT H.
(uu) "Reserves" means, with respect to any Fiscal Period, any
funds set aside or amounts allocated during or with respect to that
period, in amounts reasonably established by both Members, for repairs,
replacements, contingencies, working capital, or other outlays, known
or unknown, contingent or otherwise.
(vv) "Transfer" means sell, give, assign, bequeath, pledge or
otherwise encumber, divest, dispose of, or transfer ownership or
control of all, any part of, or any interest in, whether voluntarily or
by operation of law, either inter vivos or upon death, but does not
include, with respect to a Membership Interest, a pledge of the
Membership Interest to a financial institution solely as security for a
Company Debt.
(ww) "Transferee" means any person acquiring a Membership Interest
pursuant to the terms of Article 9.
(xx) "Transferor" means a Member who proposes to Transfer any of
his or its Membership Interest pursuant to the terms of Article 9.
(yy) "Treasury Regulations" means the regulations adopted from
time to time by the Department of the Treasury under the Code, and any
references to "partners" and "partnership" in those regulations shall
refer, as appropriate, to Members and the Company, respectively.
(zz) "Value" means, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(i) The initial Value of any asset contributed by a Member
to the Company shall be the gross fair market value of
the asset, as determined by both of the Members.
(ii) The Values of all Company assets shall be adjusted to
equal their respective gross fair market values, as
reasonably determined by both of the Members, as of the
following times: (A) the acquisition of additional
Membership Interests by any new or existing Member in
exchange for more than a de minimis Capital
Contribution; (B) the Company's Distribution to a Member
of more than a de minimis amount of the Company's
property as consideration for his or her Membership
Interest if the Members reasonably
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<PAGE> 10
determine that the adjustment is necessary or
appropriate to reflect the Members' relative economic
interests in the Company; and (C) the liquidation of the
Company within the meaning of section
1.704-1(b)(2)(ii)(g) of the Treasury Regulations.
(iii) The Value of any asset of the Company distributed to any
Member shall be the gross fair market value of the asset
on the date of Distribution reasonably determined by
both of the Members.
(iv) The Value of the Company assets shall be increased (or
decreased) to reflect any adjustments to the assets'
adjusted basis pursuant to section 734(b) or 743(b) of
the Code, but only to the extent that the adjustments
are taken into account in determining Capital Accounts
pursuant to Section 6.2(g) as required by
section 1.704-1(b)(2)(iv)(m) of the Treasury
Regulations; provided, however, that Values shall not be
adjusted pursuant to this Clause (iv) to the extent that
both of the Members reasonably determine that an
adjustment pursuant to Clause (ii) above is necessary or
appropriate in connection with a transaction that would
otherwise result in an adjustment pursuant to this
Clause (iv).
If the Value of an asset has been determined or adjusted pursuant to Clause
(i), (ii), or (iv) above, the Value shall thereafter be adjusted by the
Depreciation taken into account with respect to the asset for purposes of
computing Profits and Losses.
ARTICLE 2
GENERAL PROVISIONS
SECTION 2.1. NAME. The name of the Company is "Athena Holdings LLC".
SECTION 2.2. PRINCIPAL OFFICE, REGISTERED OFFICE AND REGISTERED AGENT.
(a) Initial Office and Agent. The principal business office of the
Company and the Company's Registered Office initially shall be located at
455 Science Drive, Madison, Wisconsin and shall be changed to the address
for the Project once Institute has taken possession of its space under its
lease for a portion of the Project. The Company's Registered Agent shall be
Stuart Udell.
(b) Filing on Change. Upon the appointment of a new Registered Agent or
the change of the Registered Office, the Managing Member shall file or cause
the filing of the
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document required by section 183.0105 of the WLLCL as appropriate to the
circumstances.
ARTICLE 3
CAPITAL CONTRIBUTIONS
SECTION 3.1 CAPITAL CONTRIBUTIONS. Each Member has made an initial Capital
Contribution of the amount set forth in EXHIBIT C.
SECTION 3.2. PROJECT FINANCING. The Members shall seek development and
"mini-perm" financing for the Project on the most favorable terms reasonably
available. Members shall deliver to each other all information and proposals
from lenders relating to the financing available to the Company. Prior to
securing any financing, Advantage shall have the right, but not the obligation,
to elect to provide financing to the Company on the same terms and conditions as
those contained in the most favorable proposal submitted to the Company for
nonrecourse financing.
SECTION 3.3. OPERATING DEFICIT. If the operating cash requirements of the
Company exceed available cash from Company operations, the Managing Member shall
first seek third party financing for the shortfall ("Operating Deficit"), on
commercially reasonable terms and at competitive rates. If available at
commercially reasonable terms and at competitive rates, the Company shall take
out a loan to finance the Operating Deficit. If the Managing Member is unable to
obtain a loan on commercially reasonable terms and at competitive rates, which
rates shall not exceed an annual rate of 3% plus the Prime Rate, the Managing
Member shall notify each Member of the need to contribute each Member's prorata
share of the Operating Deficit, based on each Member's Percentage Interest in
the Company. Each Member's share of the Operating Deficit as hereinabove
calculated shall be referred to as the "Member Operating Deficit Share". If any
Member does not contribute to the Company all or any part of its Member
Operating Deficit Share (the "Default Amount"), the nondefaulting Member shall
have the option to contribute the Default Amount to the Company and each
Member's Percentage Interest shall be adjusted accordingly; provided, however,
that for purposes of computing such adjustment, DezCon's initial capital
contribution shall be deemed to be $300,000.00, and the initial total capital
contribution of the Members shall be deemed to be $1,000,000.00. By way of
example, if the Operating Deficit is $50,000.00, Advantage's Member Operating
Deficit Share is $35,000.00 (70% times $50,000.00) and DezCon's Member Operating
Deficit Share is $15,000.00 (30% times $50,000.00). If DezCon only contributes
to the Company $2,000.00 of its Member Operating Deficit Share and this is the
first time that the Company has required additional capital contributions from
the Members pursuant to this Section 3.3, the Default Amount is $13,000.00
($15,000.00 minus $2,000.00). Assuming that Advantage contributes to the capital
of the Company both its Member Operating Deficit Share and the Default Amount,
Advantage's and DezCon's Percentage Interests in the Company shall be adjusted
as follows:
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DezCon's Percentage Initial Capital Contribution
Interest = Value + Section .3.3 Deficit
Contributions 1,000,000.00 + Aggregate
Section .3.4 Deficit Contributions
= $300,000.00 + $2,000
-----------------------
$1,000,000.00 + $50,000
= 28.76%
Advantage's Percentage $700,000.00 + $48,000.00
------------------------
Interest = $1,000,000.00 + $50,000
= 71.24%
The provisions of this Section 3.3 are for the benefit of Members only and
not third party creditors of the Company.
SECTION 3.4. ADJUSTED CAPITAL CONTRIBUTIONS. The Capital Contributions
attributable to the Membership Interest held by a Member shall be adjusted as
follows:
(a) Increase. The Capital Contributions shall be increased by the
amount of any of the Company's Debt that, in connection with Distributions,
is assumed by the Member or is secured by any property of the Company
distributed to the Member.
(b) Reduction. The Capital Contributions shall be reduced by the amount
of any Debt of the Member that is assumed by the Company or secured by any
property contributed by the Member to the Company.
(c) Transfers. If any Member Transfers all or any portion of his or her
Membership Interest in accordance with the terms of this Operating
Agreement, the Transferee shall succeed to the Transferor's Capital
Contribution, as adjusted under this Section 3.4, to the extent that it
relates to the Transferred Membership Interest.
SECTION 3.5. RETURN OF CAPITAL. No Member is entitled to withdraw or resign
from the Company, to receive a return of any part of its Capital Contribution,
to receive any distribution or to receive a repayment of any balance in its
Capital Account, except as expressly provided in this Operating Agreement. No
Member has the right to demand that distributions be in kind. No Member will be
paid interest on any Capital Contribution or on such Member's Capital Account.
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SECTION 3.6. BREACH OF LEASE. If the Institute or Planning Associates fails
to make a monetary payment when due or payable under their respective Leases,
after having had the opportunity to remedy or cure such failure as permitted
under their respective Leases, any amounts due Advantage, in the event of a
default by the Institute, or any amounts due DezCon, in the event of a default
by Planning Associates under this Agreement may be offset against any amounts
due the Company from the defaulting party under the applicable Lease.
ARTICLE 4
CAPITAL ACCOUNTS
SECTION 4.1 CAPITAL ACCOUNTS. There shall be established and maintained with
respect to the Membership Interest Held by each Member a Capital Account in
accordance with the following:
(a) Credits. To each Member's Capital Account there shall be credited
(i) the Member's Capital Contributions (including additional contributions
under Section 3.3, if made), (ii) the Member's allocable share of Profits
pursuant to Section 6.1 and any items in the nature of income or gain that
are specially allocated pursuant to Section 6.2 and Section 6.3.
(b) Debits. To each Member's Capital Account there shall be debited (i)
the amount of cash and the Value of any property distributed to the Member,
(ii) the Member's allocable share of Losses pursuant to Section 6.1 and any
items in the nature of deductions or losses specially allocated pursuant to
Section 6.2 and Section 6.3.
(c) Transfers. If any Member Transfers all or any portion of his or its
Membership Interest in accordance with the terms of this Operating
Agreement, the Transferee shall succeed to the Transferor's Capital
Contribution and Capital Account to the extent related to the Membership
Interest transferred.
SECTION 4.2. INTERPRETATION. The provisions of Section 4.1 and the other
provisions of this Operating Agreement relating to the maintenance of Capital
Accounts are intended to comply with section 1.704-1(b) of the Treasury
Regulations and shall be interpreted and applied in a manner consistent with
that Treasury Regulation. If the Members determine that it is prudent to modify
the manner in which the Capital Accounts, or any debits or credits to those
Capital Accounts are computed in order to comply with the Treasury Regulations,
the Members may make the modification, provided that it is not likely to have a
material effect on the amounts distributable to any Member pursuant to Article
11 upon the dissolution of the Company. The Members also shall (a) make any
adjustments that are necessary or appropriate to maintain equality between the
Capital Accounts and the amount of capital reflected on the Company's
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balance sheet, as computed for book purposes, in accordance with section
1.704-1(b)(2)(iv)(g) of the Treasury Regulations, and (b) make any appropriate
modifications in the event that unanticipated events might otherwise cause this
Operating Agreement not to comply with section 1.704-1(b) of the Treasury
Regulations.
ARTICLE 5
DISTRIBUTIONS
SECTION 5.1 CASH AVAILABLE FOR DISTRIBUTION. Except as otherwise provided in
Section 5.3, the Managing Member shall distribute, within forty-five (45) days
after the end of each calendar year, Cash Available for Distribution pro rata to
DezCon and Advantage, in accordance with their Percentage Interests.
SECTION 5.2. CASH FROM SALES OR REFINANCINGS. Except as otherwise provided
in Section 5.3, at such times as reasonably determined by the Members but in any
event within forty-five (45) days after the end of each calendar year, Cash From
Sales or Refinancings shall be distributed prorata to Advantage and DezCon, in
accordance with their Percentage Interests.
SECTION 5.3. LIQUIDATING DISTRIBUTION. If the Company is liquidated pursuant
to Article 11, the assets to be distributed pursuant to Section 11.3(d) shall be
distributed to the Members in accordance with their Capital Account balances
after making the adjustments for allocations under Article 3 and Article 6.
ARTICLE 6
ALLOCATION OF PROFITS AND LOSSES
SECTION 6.1. PROFITS AND LOSSES.
(a) Profits. Except as provided below in this Article 6, Profits, for
each Fiscal Period shall be allocated among the Members as follows:
(i) First, to offset any prior Loss allocations under Section
6.1(b)(ii) and then Section 6.1(b)(i) to the extent not
off-set by prior allocations of Profits under this Section
6.1(a)(i); and
(ii) The balance, if any, prorata to DezCon and Advantage in
accordance with their Percentage Interests.
(b) Losses. Except as provided below in this Article 6, Losses shall be
allocated among the Members as follows:
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<PAGE> 15
(i) First, to the extent of the Members' positive Capital Account
balances, in accordance with a ratio for each Member in which
the numerator is the Member's positive Capital Account
balance and the denominator is the aggregate of all Members'
positive Capital Account balances; and
(ii) The balance, prorata to DezCon and Advantage in accordance
with their Percentage Interests.
(c) Gain from Sales or Refinancings. Gain from the sale or other
disposition of all or substantially all of the Company's Assets or from the
refinancing of the Property (to the extent there is sufficient gain), shall
be allocated as follows:
(i) First, to offset any prior Loss Allocations under Section
6.1(b)(i) to the extent not offset by prior allocations of
Profits under Section 6.1(a)(i) or gains under this Section
6.1(c)(i);
(ii) Second, to DezCon in an amount equal to $234,000; and
(iii) The balance, if any, shall be prorata to DezCon and
Advantage in accordance with their Percentage Interests.
SECTION 6.2. SPECIAL ALLOCATIONS. The following special allocations shall
be made in the following order:
(a) Minimum Gain Charge-back. Except as otherwise provided in section
1.704-2(f) of the Treasury Regulations, notwithstanding any other provision
of this Article 6, if there is a net decrease in Minimum Gain during any
Fiscal Period, each Member shall be specially allocated items of income and
gain for the Fiscal Period (and, if necessary, subsequent Fiscal Periods) in
an amount equal to the Member's share of the net decrease in Minimum Gain,
determined in accordance with section 1.704-2(g) of the Treasury
Regulations. The items to be so allocated shall be determined in accordance
with sections 1.704-2(i)(4) and (j)(2) of the Treasury Regulations. This
Section 6.2(a) is intended to comply with the minimum gain charge-back
requirement in section 1.704-2(f) of the Treasury Regulations and shall be
interpreted consistently therewith.
(b) Member Minimum Gain Charge-back. Except as otherwise provided in
section 1.704-2(i)(4) of the Treasury Regulations, notwithstanding any other
provision of this Article 6, if there is a net decrease in Member
Nonrecourse Debt Minimum Gain attributable to a Member Nonrecourse Debt
during any Fiscal Period, each Member who has a share of the Member
Nonrecourse Debt Minimum Gain attributable to the Member
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Nonrecourse Debt, determined in accordance with section 1.704-2(i)(5) of the
Treasury Regulations, shall be specially allocated items of income and gain
for the Fiscal Period (and, if necessary, subsequent Fiscal Periods) in an
amount equal to the Member's share of the net decrease in Member Nonrecourse
Debt Minimum Gain attributable to the Member Nonrecourse Debt, determined in
accordance with section 1.704-2(i)(4) of the Treasury Regulations. The items
to be so allocated shall be determined in accordance with sections
1.704-2(i)(4) and (j)(2) of the Treasury Regulations. This Section 6.2(b) is
intended to comply with the minimum gain charge-back requirement in section
1.704-2(i)(4) of the Treasury Regulations and shall be interpreted
consistently therewith.
(c) Qualified Income Offset. If any Member unexpectedly receives any
adjustments, allocations, or Distributions described in section
1.704-1(b)(2)(ii)(d)(4), (5), or (6) of the Treasury Regulations, items of
income and gain shall be specially allocated to each such Member in an
amount and manner sufficient to eliminate, to the extent required by the
Treasury Regulations, the Adjusted Capital Account Deficit of the Member as
quickly as possible, provided that an allocation pursuant to this Section
6.2(c) shall be made if and only to the extent that the Member would have an
Adjusted Capital Account Deficit after all other allocations provided for in
this Article 6 have been tentatively made as if this Section 6.2(c) were not
in this Operating Agreement.
(d) Gross Income Allocation. If any Member has an Adjusted Capital
Account Deficit (determined without regard to the second adjustment listed
in the definition of the term in Section 1.2) at the end of any Fiscal
Period, each such Member shall be specially allocated items of income and
gain in an amount and manner sufficient to eliminate, to the extent required
by the Treasury Regulations, the Adjusted Capital Account Deficit as quickly
as possible; provided that an allocation pursuant to this Section 6.2(d)
shall be made if and only to the extent that the Member would have an
Adjusted Capital Account Deficit in excess of this amount after all other
allocations provided for in this Article 6 have been tentatively made as if
this Section 6.2(d) and Section 6.2(c) were not in this Operating Agreement.
(e) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal
Period shall be allocated among the Members in accordance with Section
6.1(a).
(f) Member Nonrecourse Deductions. Any Member Nonrecourse Deductions
for any Fiscal Period shall be specially allocated to the Member who bears
the economic risk of loss with respect to the Member Nonrecourse Debt to
which the Member Nonrecourse Deductions are attributable in accordance with
section 1.704-2(i)(1) of the Treasury Regulations.
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(g) Section 754 Adjustment. To the extent that an adjustment to the
adjusted tax basis of any Company asset pursuant to section 734(b) or
section 743(b) of the Code is required to be taken into account, pursuant to
section 1.704-1(b)(2)(iv)(m)(2) or (4) of the Treasury Regulations, in
determining Capital Accounts as the result of a Distribution to a Member in
complete liquidation of his or her Membership Interest, the amount of the
adjustment to the Capital Accounts shall be treated as an item of gain (if
the adjustment increases the asset's basis) or loss (if the adjustment
decreases the asset's basis), and this gain or loss shall be specially
allocated (i) to the Members in accordance with Section 6.1 if section
1.704-1(b)(2)(iv)(m)(2) of the Treasury Regulations applies, or (ii) to the
Members to whom the Distribution was made if section 1.704-1(b)(2)(iv)(m)(4)
of the Treasury Regulations applies.
(h) Imputed Interest. To the extent that the Company has taxable
interest income or expense with respect to any obligation relating to a
Member pursuant to section 483, sections 1271-1288, or section 7872 of the
Code:
(i) the interest income or expense shall be specially allocated
to the Members to whom the obligation relates; and
(ii) the amount of the interest income or expense shall be
excluded from the Capital Contributions credited to the
Member's Capital Account in connection with payments of
principal with respect to the obligation.
(i) Allocations Relating to Taxable Issuance of Membership Interests.
Any income, gain, loss, or deduction realized as a direct or indirect result
of the issuance of Membership Interests shall be allocated among the Members
so that, to the extent possible, the net amount of the items, together with
all other allocations to each Member under this Operating Agreement, shall
be equal to the net amount that would have been allocated to each such
Member if the items had not been realized.
SECTION 6.3. CURATIVE ALLOCATIONS. The allocations set forth in Sections
6.2(a)-6.2(g) above (the "regulatory allocations") are intended to comply with
certain requirements of the Treasury Regulations. It is the Members' intent
that, to the extent possible, all regulatory allocations shall be offset either
with other regulatory allocations or with special allocations of other items of
income, gain, loss, or deduction pursuant to this Section 6.3. Therefore,
notwithstanding any other provision of this Article 6 (other than the regulatory
allocations), the Members shall make such offsetting special allocations of
income, gain, loss, or deduction in whatever manner they reasonably determine
appropriate so that, after the offsetting allocations are made, each Member's
Capital Account balance is, to the extent possible, equal to the Capital
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Account balance the Member would have had if the regulatory allocations were not
part of this Operating Agreement and all such items were allocated pursuant to
Sections 6.1, 6.2(h), 6.2(i) and Section 6.4. In exercising their discretion
under this Section 6.3, the Members shall take into account future regulatory
allocations under Sections 6.2(a) and 6.2(b) that, although not yet made, are
likely to offset other regulatory allocations previously made under Sections
6.2(e) and 6.2(f).
SECTION 6.4. TAX ALLOCATIONS.
(a) Capital Contributions. In accordance with section 704(c) of the
Code and the Treasury Regulations under that section, income, gain, loss,
and deduction with respect to any Capital Contribution shall, solely for tax
purposes, be allocated among the Members so as to take account of any
variation between the property's adjusted basis to the Company for federal
income tax purposes and its initial Value.
(b) Adjustment of Value. If the Value of any Company asset is adjusted,
subsequent allocations of income, gain, loss, and deduction with respect to
the asset shall take account of any variation between the asset's adjusted
basis for federal income tax purposes and its Value as so adjusted in the
same manner as under section 704(c) of the Code and the Treasury Regulations
under that section.
(c) Elections. Any elections or other decisions relating to the
allocations shall be made by the Members in any manner that reasonably
reflects the purpose and intent of this Operating Agreement. Allocations
pursuant to this Section 6.4 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 Capital Account or share of Profits, Losses, other items, or
Distributions pursuant to any provision of this Operating Agreement.
ARTICLE 7
RIGHTS AND DUTIES OF MANAGING MEMBER
SECTION 7.1. MANAGEMENT The day-to-day business and affairs of the Company
shall be managed by its Managing Member. Except for situations in which the
approval of the Members is expressly required by this Operating Agreement, the
Managing Member shall have full and complete authority, power and discretion to
manage and control the day-to-day business, affairs and properties of the
Company, to make all decisions regarding those matters and to perform any and
all other acts or activities customary or incident to the day-to-day management
of the Company's business. Advantage shall be the initial Managing Member of the
Company. Decisions outside of the day-to-day business of the Company shall be
reserved to the Members.
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SECTION 7.2. AUTHORITY AND POWERS OF MANAGING MEMBER.
(a) Authority. Without limiting the generality of Section 7.1, the
Managing Member for, in the name of, on behalf of, and at the expense of the
Company, is authorized to do on the Company's behalf all things that, in its
sole judgment, are necessary, proper, or desirable to carry out the normal
day-to-day Company business in its ordinary course, including, but not
limited to, the right to:
(i) assume by assignment from DezCon the right to acquire the
Property for a purchase price of $605,000.00;
(ii) enter into the Property Management Contract in substantially
the form as that attached hereto as EXHIBIT G;
(iii) pay out of Company funds all fees and expenses incurred in
the organization of the Company and reflected in the
Development Budget approved by the Members and attached
hereto as EXHIBIT D, as well as all fees and expenses
necessary to carry on the business and accomplish the
purposes of the Company as contemplated in the Operating
Budget for the Company established from time to time under
Section 7.8;
(iv) notwithstanding anything to the contrary in this Operating
Agreement, enter into and execute the Leases;
(v) enter into and execute all documents, instruments, and
agreements reasonably deemed by the Managing Member to be
necessary, appropriate, or needed for the performance of its
duties and the exercise of its powers under this Operating
Agreement;
(vi) subject to the limitations set forth in Section 7.3(b)(xiii),
contract on behalf of the Company for the employment and
services of employees and independent contractors, attorneys,
accountants, architects, and other professionals, consistent
with the Operating Budget approved from time to time under
Section 7.8, and delegate to such persons the duty to manage
or supervise any of the assets or operations of the Company
on such compensation terms as deemed appropriate by the
Managing Member, provided that any fees paid shall be
competitive with fees customarily charged for similar
services in the Dane County area;
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(vii) enter into the Design/Build Contract; and
(viii) make such elections under Section 754 of the Code or any
other appropriate provision of the Code as the Managing
Member may in its good faith discretion deem advisable and
consistent with the provisions of this Agreement.
(b) Certificate of Authority. Any person dealing with the Company or
the Managing Member may rely on a certificate signed by the Managing Member
with respect to:
(i) the identity of the Members and Managing Member;
(ii) the existence or nonexistence of any fact or facts that
constitute a condition precedent to acts by the Managing
Member or any other matter germane to the Company's affairs;
(iii) the persons who are authorized to execute and deliver any
instrument or document on the Company's behalf; and
(iv) any other matter whatsoever involving the Company, Managing
Member or any Member.
SECTION 7.3. RESTRICTIONS ON AUTHORITY OF MANAGING MEMBER.
(a) Absolute Restrictions. The Managing Member shall not have the
authority to:
(i) act in contravention of applicable law or this Operating
Agreement or in such a manner as to make it impossible to
carry on the Company's ordinary business;
(ii) possess Company property, or assign rights in specific
Company property, for other than a Company purpose; or
(iii) perform any act that would subject the Members to liability
in any jurisdiction except as expressly provided in this
Operating Agreement.
(b) Restrictions Without Consent. Without the unanimous written consent
of all Members, the Managing Member shall not have the authority to make
decisions outside of the scope of the day to day business of the Company,
including but not limited to the following:
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(i) sell or otherwise dispose of all or any portion of the
Project;
(ii) issue additional Membership Interests or admit additional
Members;
(iii) compromise, prosecute, defend or settle any claim against or
inuring to the benefit of the Company;
(iv) make any changes or amendments to the Company's Articles of
Organization;
(v) enter into any construction contract for the Project (other
than the Design/Build Contract), or agree to any amendment,
modification, extension, or change order to or under the
Design/Build Contract;
(vi) enter into any lease other than the Leases, or enter into any
modification, amendment, extension or early termination of
any of the Leases;
(vii) establish capital reserves in excess of the amount approved
in the Operating Budget;
(viii) borrow any sum on behalf of the Project;
(ix) expend any Project funds in any fiscal period other than (a)
amounts in the annual Operating Budget for the Project
approved by the Members or (b) the original costs of
completing the development of the Project set forth in the
Project Budget;
(x) refinance the Project or any indebtedness of the Company;
(xi) cause the Company to make loans;
(xii) grant any easements encumbering the Project or execute any
deeds conveying any Partnership property; or
(xiii) enter into any contract with any member of Managing Member
or any Affiliate of Managing Member.
Any request for the consent of the Members in regard to the above referenced
actions shall be made by the Managing Member in writing and shall be
approved or denied by all
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Members within ten (10) business days of receipt, or such request shall be
deemed approved.
SECTION 7.4. DUTIES AND OBLIGATIONS OF MANAGING MEMBER.
(a) Operations. The Managing Member shall take all action that may be
necessary or appropriate (i) for the continuation of the Company's valid
existence as a limited liability company under the WLLCL, and (ii) for the
acquisition, development, maintenance, financing, operation, leasing and
sale of the Property owned by the Company in accordance with the provisions
of this Operating Agreement and applicable laws and regulations.
(b) Tax Returns. No later than the fifteenth (15th) day of the third
(3rd) month following the last day of each Fiscal Period of the Company, the
Managing Member shall cause to be prepared the state and federal income tax
returns for the Company (and shall submit the same to the appropriate
governmental agency), and such other information as may be necessary to
enable Members to prepare state and federal income tax returns. Each person
or entity that was a Member during the Fiscal Period covered by the
statement shall be entitled to a copy thereof.
(c) Accounting. Not later than the tenth (10th) business day after the
end of each month, Managing Member shall provide to the Members an
accounting of all income and expenses for the preceding month. In preparing
the accounting, the Managing Member shall maintain the financial records of
the Company on an accrual basis in accordance with GAAP and Advantage's
auditors' instructions. At any time, Advantage may perform all or any of the
tasks set forth in this Section 7.4 (b) or (c), upon ten (10) days prior
written notice to Managing Member, in which case Managing Member shall no
longer perform the tasks set forth in Advantage's notice.
(d) Financial Statements. No later than the fifteenth (15th) day of the
third (3rd) month following the last day of each Fiscal Period of the
Company, Advantage shall cause to be prepared financial statements of the
Company as of the close of the preceding Fiscal Period (in form audited,
compiled or otherwise), as the Managing Member shall deem appropriate. The
Managing Member shall cooperate with Advantage's auditor in this regard, and
a copy of the financial statements shall be provided to all Members. The
cost of preparing the financial statements shall be paid by the Company.
SECTION 7.5. LIMITATION ON LIABILITY OF MANAGING MEMBER; INDEMNIFICATION.
The Managing Member shall not be liable, responsible, or accountable in damages
or otherwise to the Members for any act or omission pursuant to the authority
granted the Managing Member by this Operating Agreement if the Managing Member
acted (a) in good faith and in a manner he
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reasonably believed to be within the scope of the authority granted to him by
this Operating Agreement, and (b) in the best interests, or not opposed to the
best interests, of the Company, provided that the Managing Member shall not be
relieved of liability for any claim, issue, or matter as to which the Managing
Member shall have been finally determined to have violated section 183.0402 of
the WLLCL. Subject to this limitation, in the case of any such determination of
liability, the Company shall indemnify and allow expenses to the Managing Member
to the fullest extent permitted or required by section 183.0403 of the WLLCL.
SECTION 7.6. NO COMPENSATION. The Managing Member shall not receive any
salary, fee, or draw for services rendered to or on behalf of the Company, but
the Managing Member shall be reimbursed for any out-of-pocket expenses incurred
by the Managing Member on behalf of the Company consistent with the Operating
Budget approved by the Members under Section 7.8.
SECTION 7.7. DEVELOPMENT BUDGET. Prior to the commencement of construction
of the Project, each Member shall approve in writing the Development Budget
prepared by DezCon or its Affiliate. Each Member shall raise any objections it
may have to the Development Budget within thirty (30) days after the date of
this Agreement, or that Member shall be deemed to have approved the Development
Budget. If any Member raises any objection to the Development Budget, the
Members shall negotiate in good faith to resolve any dispute and adopt and
approve of the Development Budget. The Development Budget, once approved by the
Members, shall not be modified without the consent of all of the Members.
SECTION 7.8. OPERATING BUDGET. Prior to the commencement date of the
original term of the Leases (whichever is earlier) and thereafter prior to
December 1 of each calendar year, Managing Member will direct Planning
Associates under the Property Management Contract to prepare and submit to all
Members an operating budget ("Operating Budget") for the current calendar year
with respect to the first Operating Budget submitted prior to the commencement
date of the term of the Leases and for the following calendar year with respect
to each subsequent Operating Budget required to be prepared hereunder. Each
Member shall raise any objections it may have to the Operating Budget submitted
by Planning Associates (or any successor property manager) within thirty (30)
days after receipt of the proposed Operating Budget, or that Member shall be
deemed to have approved the Operating Budget as so submitted by Planning
Associates (or any successor property manager). If any Member raises any
objection to the Operating Budget, the Members shall negotiate in good faith to
resolve any dispute and adopt an approved Operating Budget. If after thirty (30)
days of negotiations the Members are unable to reach agreement on an Operating
Budget, an impasse shall be deemed to have occurred for purposes of Article 9.
An Operating Budget, once approved by the Members, shall not be modified without
the consent of all the Members.
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ARTICLE 8
ACTIONS BY MEMBERS
SECTION 8.1 ACTION. Any action requiring the consent of the Members may be
taken either by the vote of the Members at a meeting of the Members or by the
unanimous written consent of the Members without a meeting. No person other than
a Member may challenge an act taken by the Managing Member on behalf of the
Company based on the failure to obtain the requisite consent, and any act taken
by the Company with respect to a third party having no actual knowledge of such
a failure shall be binding against the Company.
SECTION 8.2. OTHER BUSINESS ACTIVITIES. The Members and their respective
Affiliates may engage independently or with others in other business ventures of
every nature and description, including, without limitation, the rendering of
advice or services of any kind to other persons and the making or management of
other investments. Nothing in this Operating Agreement shall be deemed to
prohibit the Members or their respective Affiliates from dealing or otherwise
engaging in business with persons transacting business with the Company or from
providing services relating to the purchase, sale, management, development, or
operation of real property and receiving compensation for those services.
Neither the Company nor any Member shall have any right by virtue of this
Operating Agreement, or the relationship created by this Operating Agreement or
by the Articles, in or to such other ventures or activities, or to the income or
proceeds derived from such other ventures or activities, and the pursuit of such
ventures shall not be deemed wrongful or improper. Notwithstanding any other
provision of this Section 8.2, for a period ending June 30, 2000 or for a period
ending on the date on which there is no vacant leaseable space in the Project,
whichever is first to occur ("Initial Management Period"), and for as long as
Planning Associates or an Affiliate of Planning Associates or DezCon is property
manager of the Project, neither DezCon nor Planning Associates nor any Affiliate
of DezCon or Planning Associates shall manage directly or indirectly, any
multi-tenant office building within a three mile radius of the Project.
After the Initial Management Period, provided that Planning Associates or an
Affiliate of Planning Associates or DezCon is the property manager of the
Project, if leaseable space becomes available in the Project, DezCon and
Planning Associates and their Affiliates will use their best efforts to lease
such space, notwithstanding their association with any other multi-tenant office
building within said three-mile radius.
SECTION 8.3. AUDIT RIGHTS. Any Member shall have the right to audit the
books and records of the Company maintained by the Managing Member. The cost of
any such audit shall be borne by the Member requesting the audit unless such
audit discloses a material discrepancy, in which case the Managing Member shall
individually reimburse the requesting Member for the cost of such audit;
provided, further, that the Managing Member's obligation to reimburse the
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requesting Member hereunder shall not exceed the product of (i) the aggregate
amount of discrepancies discovered by the audit, multiplied by (ii) the
Percentage Interest of the requesting Member.
ARTICLE 9
TRANSFER OF MEMBERSHIP INTERESTS
SECTION 9.1 GENERAL RESTRICTIONS ON TRANSFERS. Except in accordance with the
terms of this Operating Agreement, no Member may Transfer all or any portion of
his or its Membership Interest without the prior written consent of all of the
Members, which consent may be withheld by a Member in his or its sole and
unrestricted discretion. Any Transfer, attempted Transfer, or purported Transfer
in violation of this Operating Agreement's terms and conditions shall be null
and void. For purposes of this Agreement, the transfer of voting control of
DezCon to other than Thomas Pientka and/or James Pientka shall constitute a
Transfer of DezCon's Membership Interest.
SECTION 9.2. PERMITTED ASSIGNEES. A Member may assign all or any portion of
his or its Membership Interest as a Member in the Company to a Permitted
Assignee. Unless agreed to by the unanimous consent of the Members, a Permitted
Assignee shall not become a substituted Member hereunder and shall not be
entitled to participate in or interfere with any decisions affecting the Company
or its business affairs; and its Membership Interest shall continue to be deemed
to be held by the Transferor with respect to all management decisions and voting
by Members until such Permitted Assignee is admitted as a substitute Member.
Such Permitted Assignee, however, shall be entitled to the Transferor's interest
in the distributions, profits and losses of the Company to the extent of the
Membership Interest assigned and shall be responsible for making future Member
contributions in accordance with the provisions of Section 3.3. Notwithstanding
assignment to a Permitted Assignee the Transferor shall remain liable for any
and all obligations of the Transferor hereunder applicable to the Membership
Interest being transferred.
No assignment of Membership Interest to a Permitted Assignee will be valid
or effective until the Permitted Assignee takes all actions and executes all
instruments, if any, required by legal counsel to the Company in order for such
assignment to comply with the applicable federal or state laws and regulations
relating to the assignment of Membership Interests or with this Operating
Agreement.
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SECTION 9.3. RIGHT OF FIRST REFUSAL.
(a) Notice of Transfer. Except in the case of a Transfer to a Permitted
Assignee pursuant to Section 9.2, or an Involuntary Transfer pursuant to
Section 9.5, a Transferor who intends to Transfer all or any portion of his
Membership Interest to someone other than a Permitted Transferee or
Involuntary Transferee must send a Notice of Transfer to the Company, and
the applicable provisions of this Section 9.3 must be complied with, before
a Transfer will be effective and the Transferee will be considered a Member.
The Managing Member shall deliver a copy of each Notice of Transfer to each
other Member promptly upon receipt of the notice.
(b) Option to Purchase. A Transferor may not Transfer all or any
portion of the Transferor's Membership Interest pursuant to Section 9.3(c),
without first offering to sell the Membership Interest to the other Member.
The other Member shall have thirty (30) days from the date of receipt of the
Notice of Transfer to exercise the option to purchase contained in this
Section 9.3(b) by providing written notice of such exercise to the
Transferor. If exercised, the Transferor shall be obligated to sell, and the
other Member shall be obligated to purchase all of the Transferor's
Membership Interest being offered upon the same terms, conditions and price
as offered by the Transferee and described in the Notice of Transfer. If the
offer of sale is not accepted by the other Member with respect to the entire
Membership Interest offered for sale, then the Transferor may Transfer the
Transferor's entire Membership Interest being offered pursuant to Section
9.3(c).
(c) Transfer to Third Party. If the Transferor's entire Membership
Interest is not purchased as provided in Section 9.3(b), the Transferor may
Transfer all (but not less than all) of the Transferor's Membership Interest
pursuant to this Section 9.3(c), at which time the Transferee shall become a
Member.
(i) The Transferor may Transfer all (but not less than all) of
the Membership Interest identified in the Notice of Transfer
to the third party designated in the Notice of Transfer at
the same price and on the same terms of payment specified in
the Notice of Transfer, provided that the Transfer is made
within one hundred twenty (120) days after the date of the
Notice of Transfer.
(ii) The Transferee must, as part of the closing of the Transfer,
sign a counterpart to this Operating Agreement, agreeing for
the benefit of the other Members to be bound by this
Operating Agreement
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to the same extent as if the Transferee had been an original
party to this Operating Agreement as a Member.
(iii) The Transferee must, as part of the closing of the Transfer,
take all actions and execute all instruments required by the
Company in order for the Transfer to comply with any
applicable federal or state laws and regulations relating to
the Transfer of a Membership Interest or with this Operating
Agreement.
If the Membership Interest proposed to be transferred pursuant to the
Notice of Transfer is not transferred within the applicable periods and
in accordance with the foregoing provisions of this Section 9.3(c), the
Membership Interest shall again be subject to the restrictions of this
Article 9.
SECTION 9.4. RESTRICTION ON TRANSFER. Any Transfer, attempted Transfer, or
purported Transfer in violation of the terms and conditions of this Operating
Agreement shall be null and void.
SECTION 9.5. INVOLUNTARY TRANSFER. A Transferor may Transfer all or any
portion of his or its Membership Interest in an Involuntary Transfer to a person
other than the Company, provided that the applicable provisions of this Section
9.5 are complied with before the Involuntary Transfer becomes effective, at
which time the Involuntary Transferee will have only the rights provided in
Section 9.5(c).
(a) Notice to Company. The Transferor and the Involuntary Transferee
shall each immediately deliver a Notice of Involuntary Transfer to the
Company. The Notice of Involuntary Transfer shall constitute an Offer to
sell to the Company the Membership Interest identified in the Notice of
Involuntary Transfer for an amount equal to the fair market value of the
Transferor's Membership Interest, calculated as of the last day of the
calendar month immediately preceding the date of the Involuntary Transfer in
the manner provided under Section 9.8 (and calculated without regard to any
minority discount). The sale amount shall be payable pursuant to the terms
of payment set forth in Section 9.8.
(b) Option to Purchase. Within the ninety (90) day period commencing on
the date of the receipt of the Notice of Involuntary Transfer, the Company
shall either reject the Offer or accept the Offer by written notice to the
Involuntary Transferee during the ninety (90) day period.
(c) Failure to Exercise. If the Company does not accept the Offer
within the applicable time period pursuant to Section 9.5(b), the
Involuntary Transfer shall become
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effective. An Involuntary Transferee shall not be entitled to participate in
or interfere with any decisions affecting the Company or its business
affairs; and its Membership Interest shall continue to be deemed to be held
by the Transferor with respect to all management decisions and voting by
Members until such Involuntary Transferee is admitted as a substitute
Member. Such Involuntary Transferee, however, shall be entitled to the
assigning Member's interest in the distributions, profits and losses of the
Company to the extent of the Membership Interest assigned and shall be
responsible for making future Member contributions in accordance with the
provisions of Section 3.3. Notwithstanding assignment to an Involuntary
Transferee, the Transferor shall remain liable for any and all obligations
of the Transferor hereunder applicable to the Member Interest being
transferred.
SECTION 9.6. RESTRICTION ON WITHDRAWAL. No Member may withdraw from the
Company without the prior written consent of all of the Members, which consent
may be withheld by a Member in his or her sole and unrestricted discretion. Any
withdrawal without said consent shall be null and void. In the event a Member
withdraws with the prior written consent of all of the Members, the Company
shall redeem all of the Membership Interest Held by the Member and any Permitted
Transferee or Involuntary Transferee to whom the Member has Transferred a
Membership Interest. The redemption price for the Membership Interest shall be
an amount equal to the fair market value of the Membership Interest of the
withdrawing Member, calculated as of the last day of the calendar month
immediately preceding the redemption date in the manner provided under Section
9.9 (and calculated without regard to any minority discount), which amount shall
be payable pursuant to the terms of payment set forth in Section 9.8.
SECTION 9.7. TIME AND PLACE OF CLOSING. Except as otherwise agreed by the
Company, the closing of any Transfer pursuant to this Article 9 shall occur at
the Company's principal office on such day as the parties shall agree, but in
any event within ninety (90) days after the date of acceptance of the Offer
under Section 9.3(b) or Section 9.5(b), as applicable.
SECTION 9.8. TRANSFER AND PAYMENT OF PURCHASE PRICE. At the closing, the
Transferor shall deliver the Membership Interest that is subject to the Transfer
free and clear of any liens, security interests, encumbrances, charges, or other
restrictions (other than those created pursuant to this Operating Agreement),
together with all such instruments or documents of conveyance as shall be
reasonably required in connection with the Transfer. The purchase or redemption
price for the Membership Interest shall be paid in full at closing of the
Transfer.
SECTION 9.9. FAIR MARKET VALUE. Whenever this Agreement calls for the
determination of the fair market value of a Member's Membership Interest in the
Company, the Members shall first attempt to agree upon the fair market value. If
the Members are unable to agree upon the fair market value, either Member may,
by written notice to the other, designate a professional real
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estate appraiser having at least ten (10) years professional experience in the
appraisal of commercial office buildings in the Madison metropolitan area and
who shall be in all respects impartial and disinterested. If the other Member
objects to such appraiser, that Member shall propose an alternate appraiser
similarly qualified by written notice to the first Member within fifteen (15)
days after receipt of the first Member's notice, or the other Member shall be
deemed to have accepted the appraiser proposed by the first Member. The first
Member shall have fifteen (15) days after receipt of the other Member's proposal
of an alternate appraiser to object to such proposal, or the first Member shall
be deemed to have accepted the other Member's proposed appraiser. If the first
Member timely objects to the other Member's proposed appraiser, then the
appraiser selected by the first Member and the appraiser selected by the other
Member shall jointly name a third appraiser similarly qualified and that third
appraiser shall determine the fair market value of the Membership Interest.
Within thirty (30) day after final designation of the appraiser, that appraiser
shall render a written opinion on the fair market value of the Membership
Interest and shall deliver the same to each of the Members. Such determination
of fair market value shall be binding upon each of the Members.
SECTION 9.10. SPECIFIC PERFORMANCE. The parties declare that it may be
impossible to measure in money the damages that will accrue to any party by
reason of a failure to perform any of the obligations under this Article 9, and
the parties agree that this Article 9 shall be specifically enforced. Therefore,
if any Member or Transferee institutes any action or proceeding to enforce the
provisions of this Article 9, any person, including the Company, against whom
the action or proceeding is brought waives the claim or defense that the party
has or may have an adequate remedy at law. The person shall not urge in any such
action or proceeding the claim or defense that the remedy at law exists, and the
person shall consent to the remedy of specific performance of this Operating
Agreement.
SECTION 9.11. ABSOLUTE RESTRICTIONS ON TRANSFERS. Notwithstanding any other
provision of this Article 9, no Transfer of any Membership Interest may be made
if, in the opinion of the Company's legal counsel, the Transfer (a) will result
in the Company being considered to have been terminated within the meaning of
section 708 of the Code; or (b) will violate any applicable federal or state
securities laws. Before making any Transfer of any Membership Interest, the
Transferor must notify the Company in writing, and the Managing Member shall, if
they believe there is a material risk of violating this Section 9.11, obtain an
opinion from the Company's legal counsel confirming whether the proposed
Transfer will cause such a termination, change in tax status, or violation of
securities laws. The Transferor shall bear the responsibility for the legal
fees.
SECTION 9.12. PROHIBITED ELECTION. No Member shall elect to have the Company
taxed as a corporation or association without the prior unanimous written
consent of all Members.
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ARTICLE 10
OPTION TO PURCHASE
SECTION 10.1. IMPASSE. If, with respect to a matter for which unanimous
consent is required and the Members are unable to agree, either Member may
deliver a notice of the impasse to the other Member ("Impasse Notice"),
describing the matter on which the parties are unable to agree. If, after three
(3) months after the delivery of the Impasse Notice by either Member, the
Members have not agreed on the matter described in the Impasse Notice, then any
Member may declare a deadlock situation and the provisions of Section 10.2 shall
then apply. In this connection, where a decision requires the unanimous consent
of the Members, each Member agrees that it will not capriciously or unreasonably
withhold or delay consent to or approval of any such action.
SECTION 10.2 OFFER UPON IMPASSE. In the event of the occurrence of an
impasse (as defined in Section 10.1), either (i) Advantage may offer by written
notice (the "Impasse Call Option") to DezCon to buy DezCon's entire interest in
the Company (including any interest in the Company transferred by DezCon after
the date hereof) at the fair market value of the Membership Interests of the
DezCon, as determined in accordance with Section 9.9, or (ii) DezCon may require
Advantage to buy DezCon's entire interest in the Company(including any interest
in the Company transferred by DezCon after the date hereof) at the fair market
value of the Membership Interests of DezCon, as determined in accordance with
Section 9.9 ("Impasse Put Option"). Upon delivery of the Impasse Call Option or
the Impasse Put Option, Advantage shall be required to buy and DezCon shall be
required to sell its entire Membership Interests in the Company (including any
interest in the Company transferred by DezCon after the date hereof) in
accordance with the provisions of Section 10.4.
SECTION 10.3. OFFER UPON INSTITUTE LEASING THE PLANNING ASSOCIATES SPACE. If
at any time the Institute exercises its option to lease the Planning Associates
Space (as defined in the Lease entered into by the Company and the Institute,
set forth on EXHIBIT E attached hereto ("Institute Lease")) pursuant to section
1.8 of the Institute Lease, or is then leasing the Planning Associates Space,
then (i) Advantage shall have the option to purchase at fair market value the
entire Membership Interest of DezCon in the Company (including any interest in
the Company transferred by DezCon after the date hereof) at the fair market
value of the Membership Interests of DezCon as determined in accordance with
Section 9.9 ("Call Option"), and (ii)DezCon shall have the option to require
Advantage to purchase the entire Membership Interest of DezCon in the Company
(including any interest in the Company transferred by DezCon after the date
hereof) at the fair market value of the Membership Interests of DezCon as
determined in accordance with Section 9.9 ("Put Option"). The Call Option and
the Put Option shall be exercised by providing written notice to the other
Member and the Company. Upon delivery of the Call Option or the Put Option,
Advantage shall be required to buy and
30
<PAGE> 31
DezCon shall be required to sell DezCon's entire membership interest in the
Company (including any interest in the Company transferred by DezCon after the
date hereof) in accordance with the provisions of Section 10.4. Notwithstanding
the foregoing, if the Call Option is exercised and closing or conveyance of
DezCon's Membership Interests occurs during the sixth through the tenth year of
the original term of the Planning Associates lease, the purchase price paid by
Advantage shall be increased by the product of (a) the fair market value of
DezCon's Membership Interests multiplied by (b) the "Call Premium Percentage".
For purposes hereof, the "Call Premium Percentage" shall mean 50% in year 6, 40%
in year 7, 30% in year 8, 20% in year 9 and 10% in year 10.
SECTION 10.4. CLOSING. Upon delivery of the Call Option, the Impasse Call
Option, the Impasse Put Option or the Put Option, the closing thereof shall
occur within thirty (30) days after the determination of fair market value of
DezCon's Membership Interests. At closing, the purchase price shall be paid in
cash or its equivalent by Advantage and DezCon shall duly execute and deliver
all documents reasonably necessary to transfer all of its interest in the
Company, free and clear of all liens and encumbrances. Any party that acquires
any of DezCon's interest in the Company after the date hereof agrees to be bound
by this Article 10.
ARTICLE 11
DISSOLUTION, TERMINATION, AND LIQUIDATION
OF COMPANY
SECTION 11.1.EVENTS CAUSING DISSOLUTION. The Company shall be dissolved upon
the happening of any Dissolution Event, but shall not be dissolved upon an
"event of dissociation" as defined in Section 183.0802 of the WLLCL.
SECTION 11.2. TERMINATION. Dissolution of the Company shall be effective on
the date on which the Dissolution Event occurs, but the Company shall not
terminate until articles of dissolution have been duly filed under the WLLCL,
the Company's affairs have been wound up, and the Company's assets have been
distributed as provided in Section 11.3. Notwithstanding the Company's
dissolution, this Operating Agreement shall continue to govern the Company's
business and the Members' affairs until the Company is terminated and
liquidated.
SECTION 11.3. LIQUIDATION. On the effective date of the dissolution, the
Managing Member shall proceed with the winding up and liquidation of the Company
by the application and Distribution of assets as follows:
(a) Payment of Debts to Third Parties. The assets shall first be
applied to the payment of the Company's liabilities (other than any loans or
advances that may have
31
<PAGE> 32
been made to the Company by a Member) and the liquidation expenses. A
reasonable time shall be allowed for the orderly liquidation of the
Company's assets and the discharge of liabilities to creditors so as to
enable the Managing Member to minimize any losses resulting from the
liquidation.
(b) Reserves. Fund any Reserves established by the Members for all
contingent liabilities of the Company.
(c) Payment of Debts to Members. The remaining assets shall next be
applied to the repayment of any loans or advances (but not any Capital
Contribution) made by the Members to the Company, in proportion to the
relative amounts lent or advanced by them.
(d) Payment of Distributions to Members. The remaining assets shall be
distributed to the Members pursuant to Section 5.3.
SECTION 11.4. FILING AND NOTICE. The Managing Member shall promptly execute
and file on the Company's behalf articles of dissolution as provided in section
183.0906 of the WLLCL. The Managing Member shall also notify the Company's known
claimants as provided in section 183.0907 of the WLLCL and publish a notice of
the Company's dissolution as provided in section 183.0908 of the WLLCL.
SECTION 11.5. DISTRIBUTIONS IN KIND. If any Distribution of the Company's
assets is to be in kind, the Distribution shall be on the basis of the Value of
the assets, and any Member entitled to an interest in the assets shall receive
the interest as a tenant-in-common with all other Members so entitled.
SECTION 11.6. LIMITATION ON LIABILITY. Each Holder of a Membership Interest
shall look solely to the Company's assets for all Distributions from the Company
and the return of his or its Capital Contribution to the Company and shall have
no recourse (upon dissolution or otherwise) against any other Members or any of
their Affiliates.
SECTION 11.7. ABANDONMENT OF PROJECT. Notwithstanding anything contained in
this Operating Agreement to the contrary, if a Dissolution Event described in
Section 1.2(p)(ii) occurs, in lieu of dissolving the Company, Advantage may
elect, by giving written notice to DezCon within ten (10) business days after
the date of such Dissolution Event, to acquire all of DezCon's interest in the
Company for a purchase price equal to the amount of DezCon's Capital
Contribution actually paid to the Company. In addition, Advantage shall
reimburse DezCon for all actual out-of-pocket expenses, including design and
engineering expenses incurred by DezCon in connection with the pursuit of
development of the Project not previously paid by or reimbursed to DezCon from
the Company. If Advantage so elects to purchase DezCon's interest in the
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<PAGE> 33
Company, the Company shall retain the architectural/design and engineering work
product as completed to date, including all CAD files.
ARTICLE 12
BOOKS AND RECORDS
SECTION 12.1. BOOKS AND RECORDS. The Company's books and records shall be
maintained at the Company's principal office and shall be available for
examination by any Member or any Member's duly authorized representative(s) at
any reasonable time.
SECTION 12.2. COMPANY FUNDS. The Company's funds may be deposited in such
banking institutions as the Managing Member determine, and withdrawals shall be
made only in the regular course of the Company's business on such signature or
signatures as the Managing Member determines. All deposits and other funds not
needed in the operation of the business may be invested in certificates of
deposit, short-term money market instruments, government securities, money
market funds, or similar investments as the Managing Member reasonably
determines.
SECTION 12.3. AVAILABILITY OF INFORMATION. The Company shall keep at its
principal office and place of business, and each Member shall have the right to
inspect and copy, all of the following:
(a) a current list of the full name and last-known business address of
each Member or former Member, the date on which each Member or former Member
became a Member and the period of his or her Membership, and the date on
which any former Member ceased to be a Member;
(b) a copy of the Articles and all amendments to the Articles;
(c) copies of the Company's federal, state, and local income tax
returns and financial statements, if any, for its four (4) most recent
years;
(d) copies of this Operating Agreement and any written amendments to
this Operating Agreement; and
(e) any records kept pursuant to this Operating Agreement. Each Member
shall have the right to obtain from the Company from time to time on
reasonable demand, at the Member's cost and expense, copies of any such
information, except to an attorney of the Company or of such person, a
financial institution in connection with a financial transaction of the
Company or of such person, or as required by law.
33
<PAGE> 34
ARTICLE 13
REPORTS
On or before the fifteenth (15th) day of the third (3rd) calendar month after
the end of each Fiscal Period, the Managing Member shall send to each person who
was a Member at any time during the Fiscal Period then ended (a) a balance sheet
as of the end of the Period, (b) statements of income, Members' equity, changes
in financial position, and a cash flow statement for the period, and (c) such
tax information as is necessary or appropriate for the Members' preparation of
their individual federal and state income tax returns. In addition, the Managing
Member shall provide to each Member semi-annual income and expense reports and
management reports highlighting any issues that the Managing Member believes in
its good faith opinion should be considered by the Members, along with copies of
any other financial report Managing Member may prepare for the Project.
ARTICLE 14
MISCELLANEOUS
SECTION 14.1. AMENDMENTS TO OPERATING AGREEMENT. No amendment or
modification of this Operating Agreement shall be valid unless in writing and
signed by all of the Members.
SECTION 14.2. BINDING PROVISIONS. The agreements contained in this Operating
Agreement shall be binding on and inure to the benefit of the heirs, executors,
administrators, personal representatives, successors, and assigns of the
respective parties to this Operating Agreement. This Operating Agreement shall
not inure to the benefit of any other person and no third-party beneficiary
claims may be based on this Operating Agreement.
SECTION 14.3. APPLICABLE LAW. This Operating Agreement shall be governed by
and construed in accordance with the laws of the state of Wisconsin without
regard to its choice of law provisions.
SECTION 14.4. SEPARABILITY OF PROVISIONS. Each provision of this Operating
Agreement shall be considered separable, and if for any reason any provision or
provisions are determined to be invalid and contrary to any existing or future
law, the invalidity shall not impair the operation of those portions of this
Operating Agreement that are valid.
SECTION 14.5. HEADINGS. Section headings are for descriptive purposes only
and shall not control or alter the meaning of this Operating Agreement as set
forth in the text.
SECTION 14.6. INTERPRETATION. When the context in which words are used in
this Operating Agreement indicates that such is the intent, words in the
singular shall include the
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<PAGE> 35
plural, and vice versa, and pronouns in the masculine shall include the feminine
and neuter, and vice versa.
SECTION 14.7. CONFIDENTIALITY. This Operating Agreement, the Company's
business and affairs, the Company's books and records, and any information
relating to the foregoing are confidential and private. Each person Holding a
Membership Interest agrees to maintain the confidentiality of, and not to
disclose, any such information, except to an attorney, accountant, or other
professional advisor of the Company or of such person, a financial institution
in connection with a financial transaction of the Company or of such person, or
as required by law.
SECTION 14.8. NOTICE. Any notice required or permitted to be given pursuant
to this Operating Agreement shall be valid only if in writing and upon actual
receipt by its intended recipient. Any person required to give notice pursuant
to this Operating Agreement shall have the burden of proving the validity of the
notice.
SECTION 14.9. COUNTERPARTS. This Operating Agreement may be executed in
counterparts, all of which shall constitute the same agreement.
IN WITNESS WHEREOF, the undersigned have executed this Operating Agreement
as of the date first written above.
Advantage Learning Systems, Inc.
By:/s/ Michael H. Baum, CEO
--------------------------------
DezCon, LLC
By:/s/ Thomas Pientka
--------------------------------
Thomas Pientka, Member
By:/s/ James Pientka
--------------------------------
James Pientka, Member
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<PAGE> 36
ACKNOWLEDGMENT
THE UNDERSIGNED hereby acknowledges that EXHIBIT B hereto contains a true
and correct copy of the Articles of Organization filed by me with the Wisconsin
Department of Financial Institutions to organize the Company.
/s/ Michael J. Dwyer
--------------------------------
Michael J. Dwyer, Organizer
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