UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 13D
(Rule 13d-101)
Under the Securities Exchange Act of 1934
(Amendment No. )
Discovery Zone, Inc.
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(Name of Issuer)
Common Stock, par value $.01 per share
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(Title of Class of Securities)
25468B305
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(CUSIP Number)
James H. Schwab, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
Tel. No.: (212) 373-3000
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(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
July 29, 1997
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(Date of Event which Requires Filing
of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report
the acquisition which is the subject of this Schedule 13D, and is filing this
schedule because of Rule 13d-1(b)(3) or (4), check the following box |_|.
The remainder of this cover page shall be filled out for a reporting person's
initial filing on this form with respect to the subject class of securities, and
for any subsequent amendment containing information which would alter
disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed
to be "filed" for the purpose of Section 18 of the Securities Exchange Act of
1934 ("Act") or otherwise subject to the liabilities of that section of the Act
but shall be subject to all other provisions of the Act (however, see the
Notes).
<PAGE>
CUSIP No. 25468B305 Page 2 of 10 Pages
- --------------------------------------------------------------------------------
1 Name of Reporting Person
S.S. or I.R.S. Identification No. of Above Person
Birch Holdings LLC
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2 Check the Appropriate Box If a Member of a Group
a. |_|
b. |_|
- --------------------------------------------------------------------------------
3 SEC Use Only
- --------------------------------------------------------------------------------
4 Source of Funds
OO
- --------------------------------------------------------------------------------
5 Check Box If Disclosure of Legal Proceedings Is Required Pursuant to Items
2(d) or 2(e) |_|
- --------------------------------------------------------------------------------
6 Citizenship or Place of Organization
New York
- --------------------------------------------------------------------------------
7 Sole Voting Power
Number of
Shares -0-
Beneficially --------------------------------------------------------
Owned By 8 Shared Voting Power
Each
Reporting -2,229,622-
Person --------------------------------------------------------
With 9 Sole Dispositive Power
-0-
--------------------------------------------------------
10 Shared Dispositive Power
-2,229,622-
--------------------------------------------------------
- --------------------------------------------------------------------------------
11 Aggregate Amount Beneficially Owned by Each Reporting Person
-2,229,622-
- --------------------------------------------------------------------------------
12 Check Box If the Aggregate Amount in Row (11) Excludes Certain Shares |_|
- --------------------------------------------------------------------------------
13 Percent of Class Represented By Amount in Row (11)
55.7%
- --------------------------------------------------------------------------------
14 Type of Reporting Person
OO
- --------------------------------------------------------------------------------
SEE INSTRUCTIONS BEFORE FILLING OUT!
<PAGE>
CUSIP No. 25468B305 Page 3 of 10 Pages
- --------------------------------------------------------------------------------
1 Name of Reporting Person
S.S. or I.R.S. Identification No. of Above Person
Birch Acquisition LLC
- --------------------------------------------------------------------------------
2 Check the Appropriate Box If a Member of a Group
a. |_|
b. |_|
- --------------------------------------------------------------------------------
3 SEC Use Only
- --------------------------------------------------------------------------------
4 Source of Funds
OO
- --------------------------------------------------------------------------------
5 Check Box If Disclosure of Legal Proceedings Is Required Pursuant to Items
2(d) or 2(e) |_|
- --------------------------------------------------------------------------------
6 Citizenship or Place of Organization
New York
- --------------------------------------------------------------------------------
7 Sole Voting Power
Number of
Shares -0-
Beneficially --------------------------------------------------------
Owned By 8 Shared Voting Power
Each
Reporting -2,229,622-
Person --------------------------------------------------------
With 9 Sole Dispositive Power
-0-
--------------------------------------------------------
10 Shared Dispositive Power
-2,229,622-
--------------------------------------------------------
- --------------------------------------------------------------------------------
11 Aggregate Amount Beneficially Owned by Each Reporting Person
-2,229,622-
- --------------------------------------------------------------------------------
12 Check Box If the Aggregate Amount in Row (11) Excludes Certain Shares |_|
- --------------------------------------------------------------------------------
13 Percent of Class Represented By Amount in Row (11)
55.7%
- --------------------------------------------------------------------------------
14 Type of Reporting Person
OO
- --------------------------------------------------------------------------------
SEE INSTRUCTIONS BEFORE FILLING OUT!
<PAGE>
CUSIP No. 25468B305 Page 4 of 10 Pages
- --------------------------------------------------------------------------------
1 Name of Reporting Person
S.S. or I.R.S. Identification No. of Above Person
Martin S. Davis
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2 Check the Appropriate Box If a Member of a Group
a. |_|
b. |_|
- --------------------------------------------------------------------------------
3 SEC Use Only
- --------------------------------------------------------------------------------
4 Source of Funds
OO
- --------------------------------------------------------------------------------
5 Check Box If Disclosure of Legal Proceedings Is Required Pursuant to Items
2(d) or 2(e) |_|
- --------------------------------------------------------------------------------
6 Citizenship or Place of Organization
United Stateds of America
- --------------------------------------------------------------------------------
7 Sole Voting Power
Number of
Shares -0-
Beneficially --------------------------------------------------------
Owned By 8 Shared Voting Power
Each
Reporting -2,229,622-
Person --------------------------------------------------------
With 9 Sole Dispositive Power
-0-
--------------------------------------------------------
10 Shared Dispositive Power
-2,229,622-
--------------------------------------------------------
- --------------------------------------------------------------------------------
11 Aggregate Amount Beneficially Owned by Each Reporting Person
-2,229,622-
- --------------------------------------------------------------------------------
12 Check Box If the Aggregate Amount in Row (11) Excludes Certain Shares |_|
- --------------------------------------------------------------------------------
13 Percent of Class Represented By Amount in Row (11)
55.7%
- --------------------------------------------------------------------------------
14 Type of Reporting Person
IN
- --------------------------------------------------------------------------------
SEE INSTRUCTIONS BEFORE FILLING OUT!
<PAGE>
CUSIP No. 25468B305
Item I. Security and Issuer.
This statement on Schedule 13D relates to the Common Stock (the
"Common Stock"), par value $.01 per share, of Discovery Zone, Inc., a Delaware
corporation (the "Company"), whose principal executive office is located at 565
Taxter Road, Fifth Floor, Elmsford, New York 10523. The 2,229,622 shares of
Common Stock to which this statement relates are referred to herein as the
"Shares."
Item II. Identity and Background.
This statement on Schedule 13D is filed (i) by Birch Holdings LLC, a
New York limited liability company ("Birch"), as the direct beneficial owner of
the Shares, (ii) by Birch Acquisition LLC, a New York limited liability company
("SM Acquisition"), as a member of Birch and indirect beneficial owner of the
Shares, and (iii) Martin S. Davis as a member of SM Acquisition and indirect
beneficial owner of the Shares (collectively, the "Reporting Persons"). By
signing this statement, each Reporting Person agrees that this statement is
filed on its behalf.
The address of Birch is c/o Wellspring Associates L.L.C., 620 Fifth
Avenue, New York, New York 10020. Birch conducts no business other than through
its ownership of 2,015,642 shares of Common Stock. The Management Committee
persons of Birch are Martin S. Davis, Greg S. Feldman, Kenneth Grossman and
Scott Bernstein.
SM Acquisition is a member of Birch, along with B1 Investments, LLC,
a Delaware limited liability company ("BF Acquisition"). SM Acquisition has an
address at c/o Wellspring Associates L.L.C., 620 Fifth Avenue, New York, New
York 10020, and conducts no business other than through its ownership of
membership interests in Birch.
Martin S. Davis is a member of SM Acquisition, along with Greg
Feldman, Douglas W. Rotatori and Jason Fortin. Martin S. Davis is Managing
Partner of Wellspring Associates L.L.C. and a citizen of the United States of
America, and has an address at c/o Wellspring Associates L.L.C., 620 Fifth
Avenue, New York, New York 10020.
A copy of the Joint Filing Agreement among the Reporting Persons is
annexed hereto as Exhibit A.
During the last five years, (i) the Reporting Persons and (ii) to
the knowledge of the Reporting Persons, all of the other individuals named in
this Item 2 have not been convicted in a criminal proceeding (excluding traffic
violations or similar misdemeanors), and has not been a party to a civil
proceeding of a judicial or adminis-
<PAGE>
CUSIP No. 25468B305
trative body of competent jurisdiction resulting in a judgment, decree or final
order enjoining future violations of, or prohibiting or mandating activities
subject to, federal or state securities laws or finding any violation with
respect to such laws.
Item III. Source and Amount of Funds or Other Consideration.
No cash was required to be paid by the Reporting Persons in
consideration of the issuance of the 2,015,639 shares of Common Stock by the
Company to Birch under and pursuant to a plan of reorganization (the "Plan")
filed by the Company under Chapter 11 of the United States Bankruptcy Court for
the District of Delaware on March 11, 1997 and became effective on July 29,
1997. Pursuant to the Plan, the Company agreed, among other things, to exchange
all claims arising under or related to the Credit Agreement, dated as of
December 22, 1994, as amended (the "Credit Agreement"), by and among the
Company, the lenders named therein and NationsBank, N.A., as co-agent, and Bank
of Montreal, as co-agent ("Credit Agreement Claims"), for shares of Common
Stock.
Pursuant to the Plan, holders of Credit Agreement Claims, on July
29, 1997, became entitled to receive a total of 3,186,699 shares of Common Stock
in exchange for releasing the Company from its obligations under the Credit
Agreement Claims. Birch is entitled to receive 2,015,639 shares of Common Stock
pursuant to this Plan in exchange for Birch's release of the Company from the
Credit Agreement Claims held by Birch which included $63,251,616.69 principal
amount under the Credit Agreement.
Item IV. Purpose of Transaction.
By the acquisition of the Shares, the Reporting Persons acquired
majority control of the Company. The Reporting Persons have formulated a
reorganization strategy for the Company in order to revitalize the Company's
business. The Reporting Persons recruited new senior management, including Scott
W. Bernstein as President and Chief Executive Officer, Robert G. Rooney as Chief
Financial and Administrative Officer, and Sharon L. Rothstein as Senior Vice
President of Marketing and Entertainment. Scott W. Bernstein, Martin S. Davis,
Greg S. Feldman, Douglas W. Rotatori and L.G. Schafran have been elected to the
Company's Board of Directors by the Reporting Persons.
The Reporting Persons may consider making additional purchases of
equity securities of the Company in open-market or private transactions, the
extent of which purchases would depend upon prevailing market and other
conditions. Alternatively, the Reporting Persons may sell all or a portion of
their shares of Common Stock in open-market or private transactions, depending
upon prevailing market conditions and other factors.
<PAGE>
CUSIP No. 25468B305
Except as indicated above, the Reporting Persons have no plans or
proposals which relate to or would result in any of the events, actions or
conditions specified in paragraphs (a) through (j) of Item 4 of this Form.
Item V. Interest in Securities of the Issuer.
(a) Birch has direct beneficial ownership with respect to 2,015,639
shares of Common Stock owned by it. In addition, Birch may be deemed to have
beneficial ownership of 213,983 shares of Common Stock owned by Veritov Trade,
Inc., an affiliate of BF Acquisition ("Veritov"), because of Birch's rights and
obligations with respect to such shares as described in Item 6 below. Birch
disclaims such beneficial ownership. SM Acquisition, as the controlling member
of Birch, and Martin S. Davis, as the managing member of SM Acquisition, each
has indirect beneficial ownership of 2,015,639 shares of Common Stock owned by
Birch and may be deemed to have beneficial ownership of 213,983 shares of Common
Stock owned by Veritov. SM Acquisition and Martin S. Davis disclaim beneficial
ownership of the 213,983 shares owned by Veritov. 2,015,639 shares constitute
approximately 50.4% and 213,983 shares constitute approximately 5.5% of the
Common Stock.
(b) Pursuant to arrangements described in Item 6 below, Birch, SM
Acquisition and Martin S. Davis, each has shared voting and dispositive power
with respect to 2,229,622 shares of Common Stock.
(c) Other than as reported in Item 3 above, there were no
transactions by the Reporting Persons during the past sixty (60) days.
(d) Not applicable.
(e) Not applicable.
Item VI. Contracts, Arrangements, Understandings or Relationships with
Respect to Securities of the Issuer.
SM Acquisition is a member of, and has control of, Birch under the
Amended and Restated Operating Agreement of Birch Holding LLC, dated as of July
17, 1996 (the "Operating Agreement"), among SM Acquisition, BF Acquisition and
the individual named therein as the withdrawing member. Pursuant to the terms of
the Operating Agreement, that certain letter agreement, dated July 17, 1996,
among SM Acquisition, BF Acquisition and Veritov, and that certain letter
agreement, dated January 8, 1998, among SM Acquisition, BF Acquisition, Balfour
Investors Incorporated and Veritov (collectively, the "Agreements"), SM
Acquisition, Birch and
<PAGE>
CUSIP No. 25468B305
Veritov have agreed to vote or cause to be voted all shares of Common Stock held
by them in favor of a person nominated by BF Acquisition to the Company's Board
of Directors. In the event that SM Acquisition elects to transfer shares of
Common Stock held directly or indirectly by them, SM Acquisition has the option
to cause the transfer of the shares of Common Stock owned by BF Acquisition and
Veritov along with SM Acquisition's transfer. In the event that BF Acquisition
or Veritov elects to transfer shares of Common Stock held directly or indirectly
by them, SM Acquisition has the right to first offer to acquire such shares of
Common Stock. Veritov owns 213,983 shares of Common Stock.
Except as set forth above, there exist no contracts, arrangements,
understandings or relationships legal or otherwise among the persons named in
Item 2 and between such persons and any persons with respect to any securities
of the Company, including, but not limiting to transfer or voting of any
securities, finders' fees, joint ventures, loan or option agreements, put or
calls, guarantees of profits, division of profits or loss, or the giving or
withholding of proxies.
Item VII. Material to Be Filed as Exhibits.
Exhibit A Joint Filing Agreement
Exhibit B Third Amended Joint Plan of Reorganization of the Company
(incorporated by reference from the Company's Current Report
on Form 8-K, filed on July 9, 1997).
Exhibit C* Amended and Restated Operating Agreement of Birch Holdings
LLC, dated as of July 17, 1996.
Exhibit D* Letter Agreement, dated July 17, 1996, by and among Birch
Acquisition, LLC, B1 Investments LLC and Veritov Trade, Inc.
Exhibit E Letter Agreement, dated January 8, 1998, by and among Birch
Acquisition, LLC, B1 Investments LLC, Balfour Investors
Incorporated and Veritov Trade, Inc.
* Certain portions of these Agreements have been omitted from this filing
pursuant to a confidential treatment request filed on February 17, 1998..
<PAGE>
CUSIP No. 25468B305
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief,
the undersigned certifies that the information set forth in this statement is
true, complete and correct.
Dated: February 17, 1998
BIRCH HOLDINGS LLC
By: /s/ Martin S. Davis
-----------------------------------------
Name: Martin S. Davis
Title: Management Committee Member
BIRCH ACQUISITION LLC
By: /s/ Martin S. Davis
-----------------------------------------
Name: Martin S. Davis
Title: Managing Member
/s/ Martin S. Davis
-----------------------------------------
MARTIN S. DAVIS
EXHIBIT A
JOINT FILING AGREEMENT
In accordance with Rule 13d-1(f) under the Securities Exchange Act
of 1934, as amended, the persons named below each hereby agrees that the
Schedule 13D filed herewith and any amendments thereto relating to the
acquisition of shares of the Common Stock of the Company is filed jointly on
behalf of each such person.
Dated: February 17, 1998
BIRCH HOLDINGS LLC
By: /s/ Martin S. Davis
-----------------------------------------
Name: Martin S. Davis
Title: Management Committee Member
BIRCH ACQUISITION LLC
By: /s/ Martin S. Davis
-----------------------------------------
Name: Martin S. Davis
Title: Managing Member
/s/ Martin S. Davis
-----------------------------------------
MARTIN S. DAVIS
Exhibit C
AMENDED AND RESTATED
OPERATING AGREEMENT
OF
BIRCH HOLDINGS LLC
------------------------------------
Dated as of July 17, 1996
------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I FORMATION; PURPOSES; DEFINITIONS................................2
1.1 Formation.......................................................2
1.2 Company Name....................................................2
1.3 Term............................................................2
1.4 Purposes........................................................3
1.5 Powers of the Company...........................................3
1.6 Principal Place of Business.....................................4
1.7 Qualification in Other Jurisdictions............................5
1.8 Definitions.....................................................5
1.9 Usage Generally................................................19
ARTICLE II CAPITAL CONTRIBUTIONS; CAPITAL
ACCOUNTS; ALLOCATIONS; DISTRIBUTIONS...........................20
2.1 Initial Capital Contribution...................................20
2.2 Additional Contributions.......................................21
2.3 Capital Accounts...............................................23
2.4 Allocations....................................................24
2.5 Allocations for Tax Purposes...................................30
2.6 Distributions..................................................30
2.7 No Return......................................................32
2.8 Withholding....................................................32
ARTICLE III ACCOUNTING; FINANCIAL AND TAX MATTERS..........................33
3.1 Books and Records; Reports.....................................33
3.2 Fiscal Year....................................................34
3.3 Bank and Investment Accounts...................................34
3.4 Tax Matters Person.............................................35
3.5 Tax Elections and Accounting Decisions.........................35
ARTICLE IV MEMBERS........................................................35
4.1 Meeting of Members.............................................35
4.2 Quorum; Adjournment............................................37
4.3 Voting Rights..................................................38
4.4 Proxies........................................................38
4.5 No Liabilities.................................................38
<PAGE>
2
ARTICLE V MANAGEMENT OF THE COMPANY......................................39
5.1 Management of the Company......................................39
5.2 Designation and Removal of Management Committee Persons........39
5.3 Meetings of the Management Committee...........................43
5.4 Quorum and Voting..............................................44
5.5 Procedural Matters of the Management Committee.................45
5.6 Designation of Officers, Term, etc.............................46
5.7 DZ Option Plan.................................................48
5.8 Certain Post-Conversion Matters................................49
5.9 Management of DZ Bankruptcy....................................53
ARTICLE VI EXCULPATION; INDEMNIFICATION; LIABILITY;
OUTSIDE BUSINESS...............................................55
6.1 Exculpation....................................................55
6.2 Indemnification................................................56
6.3 Outside Businesses.............................................58
ARTICLE VII DISSOLUTION; LIQUIDATION AND WINDING-UP........................59
7.1 Events of Dissolution..........................................59
7.2 Liquidation and Winding-Up.....................................60
7.3 Calculation of Gain or Loss....................................62
7.4 Claims of the Members..........................................62
7.5 Survival of Rights, Duties and Obligations.....................63
ARTICLE VIII TRANSFER; ADMISSION OF MEMBERS
RIGHT OF FIRST OFFER ......................................63
8.1 General Restrictions...........................................63
8.2 Permitted Transfers............................................65
8.3 Procedures for Transfers.......................................66
8.4 Admission of Additional Members by the Company.................68
8.5 Additional or Substituted Members..............................68
8.6 Rights of First Offer and First Refusal Pre-Senior Debt
Conversion Date................................................70
8.7 Right of First Offer Post-Senior Debt Conversion Date..........76
8.8 Take-Along Right of SM Acquisition.............................80
8.9 Tag-Along Rights...............................................80
8.10 Election to Adjust Tax Basis...................................81
8.11 Certain Transfers..............................................82
8.12 Notice of Certain Transfers....................................82
<PAGE>
3
ARTICLE IX GENERAL PROVISIONS.............................................82
9.1 Notices........................................................82
9.2 Power of Attorney..............................................83
9.3 Entire Agreement; Non-Waiver...................................84
9.4 Amendments.....................................................85
9.5 Further Assurances.............................................85
9.6 Applicable Law.................................................85
9.7 Severability...................................................85
9.8 Counterparts...................................................85
9.9 Table of Contents and Headings.................................86
9.10 No Third Party Rights..........................................86
9.11 Changes of Law.................................................86
Schedules
2.1 Members; Initial Capital Contributions; Interests
5.2 Initial Management Committee Persons
Exhibits
Exhibit A BF Warrant Agreement
<PAGE>
1
AMENDED AND RESTATED OPERATING AGREEMENT
OF
BIRCH HOLDINGS LLC
This Amended and Restated Operating Agreement (the "Agreement") of
BIRCH HOLDINGS LLC, a New York limited liability company (the "Company"), dated
as of July 17, 1996, is adopted and entered into by and among BIRCH ACQUISITION
LLC, a New York limited liability company f/k/a Santa Maria Acquisition LLC ("SM
Acquisition"), and B1 Investments LLC, a Delaware limited liability company ("BF
Acquisition"), as Members (as hereinafter defined), and MARTIN S. DAVIS, an
individual (the "Withdrawing Member"). Capitalized terms used herein without
definition shall have the respective meanings set forth in Section 1.8 hereof.
The Company was formed as of April 30, 1996, pursuant to the
provisions of the Act upon the filing of the Articles of Organization with the
Secretary of State of the State of New York (the "Articles of Organization") and
the execution of an Operating Agreement, dated as of April 30, 1996, between SM
Acquisition and the Withdrawing Member, as amended by Amendment thereto, dated
as of May 6, 1996 (as so amended, the "Original Agreement").
The Withdrawing Member wishes to withdraw from the Company as a
Member. The Company wishes to admit BF Acquisition as a Member, and the Members
wish to amend and restate the Original Agreement as set forth below.
<PAGE>
2
Accordingly, the parties agree as follows:
1. The Withdrawing Member hereby withdraws as a Member of the
Company, and each Member hereby consents to such withdrawal of the Withdrawing
Member and elects to continue the Company following such withdrawal.
2. BF Acquisition is hereby admitted to the Company as a Member.
3. The Members agree that the Original Agreement is hereby amended
and restated to read in its entirety as follows:
ARTICLE I.
FORMATION; PURPOSES; DEFINITIONS
1.1 Formation. The Company was formed as of April 30, 1996, pursuant
to the provisions of the Act upon the filing of the Articles of Organization
with the Secretary of State of the State of New York and the execution of the
Original Agreement. The Members hereby agree that the Company shall be governed
by the terms and conditions of this Agreement.
1.2 Company Name. The name of the Company is "Birch Holdings LLC".
The Management Committee may change the Company's name at any time in accordance
with this Agreement and the provisions of the Act.
1.3 Term. The term of the Company commenced upon the filing of the
Articles of Organization with the Secretary of State of the State of New York on
April 30, 1996, and shall continue in perpetuity, unless dissolved earlier
pursuant to the provisions of Article VII herein.
<PAGE>
3
1.4 Purposes. The Company shall be organized for the purpose of
engaging in any lawful act or activity for which a limited liability company may
be formed under the Act, including, without limitation, purchasing the claims of
certain banks and others against DZ (as hereinafter defined).
1.5 Powers of the Company. The Company shall have the power and
authority to take any and all actions necessary, appropriate, proper, advisable,
convenient or incidental to or in furtherance of the purposes set forth in
Section 1.4, including, but not limited to, the power:
(i) to conduct its business, carry on its operations and have
and exercise the powers granted to a limited liability company by the Act
in any state, territory, district or possession of the United States, or
in any foreign country, as may be necessary, convenient or incidental to
the accomplishment of the purposes of the Company;
(ii) to enter into, perform and carry out contracts of any
kind, including, but not limited to, contracts with any Member or any
Affiliate thereof, as may be necessary, convenient or incidental to the
accomplishment of the purposes of the Company;
(iii) to appoint officers, employees and agents of the
Company, and define their duties and fix their compensation;
(iv) to sue and be sued, complain and defend, and participate
in administrative or other proceedings, in its name;
<PAGE>
4
(v) to indemnify any Person in accordance with the Act and to
obtain any and all types of insurance;
(vi) to cease its activities and cancel its Articles of
Organization;
(vii) to negotiate, enter into, renegotiate, extend, renew,
terminate, modify, amend, waive, execute, acknowledge or take any other
action with respect to any lease, contract or other agreement in respect
of any assets of the Company;
(viii) to borrow money and issue evidences of indebtedness,
and to secure the same by a mortgage, pledge or other lien on the assets
of the Company;
(ix) to pay, collect, compromise, litigate, arbitrate or
otherwise adjust or settle any and all other claims or demands of or
against the Company; and
(x) to make, execute, acknowledge and file any and all
documents or instruments as may be necessary, convenient or incidental to
the accomplishment of the purposes of the Company.
1.6 Principal Place of Business. The principal place of business of
the Company shall be at c/o Wellspring Associates L.L.C., 620 Fifth Avenue,
Suite 216, New York, New York 10020, or at such other or additional place or
places of business as the Management Committee shall reasonably determine from
time to time.
1.7 Qualification in Other Jurisdictions. The Company may be
qualified, or registered under assumed or fictitious name statutes or similar
laws in any
<PAGE>
5
jurisdiction in which the Company transacts or proposes to transact business and
where such qualification or registration is required or desirable. The officers
of the Company may execute, deliver and file any certificates and other
documents and take any and all actions as may be necessary or desirable to
obtain such qualification or registration.
1.8 Definitions. As used in this Agreement, the following terms
shall have the meanings set forth below:
"Act" shall mean the Limited Liability Company Law of the State of
New York, as amended from time to time.
"Adjusted Capital Account" shall have the meaning set forth in
Section 2.4(f)(i) hereof.
"Affiliate" shall mean, with respect to any Person, any other Person
that directly, or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with such Person. For the purposes of
this definition, "control," when used with respect to any specified Person,
shall mean the power to direct or cause the direction of the management and
policies of such Person, directly or indirectly, whether through ownership of
voting securities or other ownership interests, by contract or otherwise; and
the term "controlled" shall have the correlative meaning.
"Agreement" shall have the meaning set forth in the preamble hereto.
"Applicable Tax Rate" shall mean (i) in the case of each of SM
Acquisition and BF Acquisition, the highest effective marginal combined federal,
New York State and New York City income tax rate applicable to individuals for
the taxable year in question and (ii) in the case of any other Member, the
highest effective
<PAGE>
6
marginal combined federal and applicable state and local income tax rate for the
taxable year in question.
"Bankruptcy" of a Member shall mean (i) the filing by such Member of
a voluntary petition seeking liquidation, reorganization, arrangement or
readjustment, in any form, of its debts under Title 11 of the United States Code
(or corresponding provisions of future laws) or any other bankruptcy or
insolvency law, or such Member's filing an answer consenting to or acquiescing
in any such petition, (ii) the making by such Member of any assignment for the
benefit of its creditors or the admission of such Member in writing of its
inability to pay its debts as they mature (iii) such Member seeking, consenting
to or acquiescing in the appointment of a trustee, receiver or liquidator of or
for all or any substantial part of such Member's assets, (iv) the expiration of
180 days after the filing of any involuntary petition under Title 11 of the
United States Code (or corresponding provisions of future laws), or an
involuntary petition seeking liquidation, reorganization, arrangements,
composition, dissolution or readjustment of its debts or similar relief under
any bankruptcy or insolvency law, provided that the same shall not have been
vacated, set aside or stayed within such 180-day period, (v) the expiration of
150 days after an application, without consent of such Member, for the
appointment of a trustee, receiver or liquidator of or for such Member, or for
all or any substantial part of such Member's assets, provided that the same
shall not have been vacated or stayed within such 150-day period, or within 90
days after the expiration of any such stay, the appointment is not vacated.
<PAGE>
7
"Bankruptcy Case" shall mean the cases being jointly administered by
the United States Bankruptcy Court for the District of Delaware pursuant to
voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code filed on March 25, 1996 by DZ and its nineteen domestic subsidiaries in the
United States Bankruptcy Court for the District of Delaware.
"BF Acquisition" shall have the meaning set forth in the preamble
hereto.
"BF Management Committee Person" shall have the meaning set forth in
Section 5.2(a) hereof.
"BF Minimum Ownership Condition" shall mean, as of any date of
determination, that BF Acquisition and its Affiliates (other than the Company)
shall beneficially own, directly or indirectly, in the aggregate, (x) ***% or
more of the fully diluted DZ Equity (assuming the full exercise of any
unexercised portion of any BF Warrants), as such percentage may be adjusted
pursuant to Section 5.8(a), or (y) $****** or more of invested capital in the DZ
Equity or in Interests of the Company.
"BF Non-Transferable Rights" shall mean the rights granted to BF
Acquisition in the following provisions of this Agreement:
(a) the second sentence of the definition of "Gross Asset Value" set
forth in Section 1.8;
(b) the definition of "Independent Appraiser" set forth in Section 1.8;
(c) the second sentence of Section 2.2;
(d) Sections 2.4(a)(ii), 2.4(b)(ii);
(e) the first sentence of Section 4.1(b);
(f) the fourth sentence of Section 5.2(a);
(g) the proviso to Section 5.2(c);
(h) Sections 5.8(a), 5.8(b), 5.8(c), 5.8(d), 5.8(e), 5.8(f);
<PAGE>
8
(i) Section 5.9(a);
(j) the parenthetical clause set forth in the penultimate sentence of
Section 7.2(b);
(k) the proviso to Section 8.1(a)(i);
(l) Section 8.6(e);
(m) Section 8.6(f);
(n) Section 8.6(h);
(o) Section 8.9;
(p) Section 8.11; and
(q) Section 8.12.
"BF Ownership Percentage" shall mean, as of any date of
determination, the quotient of (i) the number of shares of DZ Equity (assuming
the full exercise of any unexercised portion of any BF Warrants) held directly
by BF Acquisition or its Affiliates (other than the Company) and the number of
shares of DZ Equity attributable to BF Acquisition's Interest and (ii) the sum
of (x) the number of shares of DZ Equity held by the Company, (y) the number of
shares of DZ Equity (assuming the full exercise of any warrants issued by DZ
held by SM Acquisition) held directly by SM Acquisition or its Affiliates (other
than the Company) and (z) the number of shares of DZ Equity (assuming the full
exercise of any unexercised portion of any BF Warrants) held directly by BF
Acquisition or its Affiliates (other than the Company).
"BF Warrants" shall mean the General Warrants and the Birch Warrants
(as such terms are defined in the BF Warrant Agreement) owned directly or
indirectly by BF Acquisition or its Affiliates (other than the Company).
"BF Warrant Agreement" shall mean that certain Letter Agreement,
dated as of July 17, 1996, among SM Acquisition, BF Acquisition, Veritov Trade,
Inc.
<PAGE>
9
and the Company, an executed copy of which is attached hereto as Exhibit A, as
amended, modified or supplemented from time to time.
"Business Day" shall mean any day other than a Saturday, Sunday or a
day on which banks in New York City are authorized or required by law or
executive order to be closed.
"Buyout Notice" shall have the meaning set forth in Section 8.8
hereof.
"Capital Account" shall have the meaning set forth in Section 2.3(a)
hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Company" shall have the meaning set forth in the preamble hereto.
"Depreciation" shall mean, with respect to any fiscal year, an
amount equal to the depreciation, amortization or other cost recovery deduction
allowable with respect to an asset for Federal income tax purposes, except that
if the Gross Asset Value of the asset differs from its adjusted tax basis,
Depreciation shall be determined in accordance with the methods used for Federal
income tax purposes and shall equal the amount that bears the same ratio to the
Gross Asset Value of such asset as the depreciation, amortization or other cost
recovery deduction computed for Federal income tax purposes with respect to such
asset bears to the adjusted Federal income tax basis of such asset; provided,
however, that if any such asset that is depreciable or amortizable has an
adjusted federal income tax basis of zero, the rate of Depreciation shall be as
determined by the Tax Matters Person.
<PAGE>
10
"Distributable Cash" shall mean, at any time, all cash on hand that
the Management Committee reasonably deems not necessary for use in the operation
of the Company in accordance with the terms of this Agreement and that the
Management Committee reasonably determines is available for distribution after
payment or providing for the payment of all salaries, bonuses, expenses and
other obligations of the Company then due, and after the creation of such
working capital and cash reserves as the Management Committee reasonably
determines to be necessary for the proper management of the Company's business
interests.
"DZ" shall mean Discovery Zone, Inc., a Delaware corporation, and
any successor thereto, including a successor under a Chapter 11 Plan of
Reorganization confirmed pursuant to an order of the United States Bankruptcy
Court.
"DZ Equity" shall have the meaning set forth in Section 5.7 hereof.
"DZ Per Share Price" shall have the meaning set forth in Section 5.7
hereof.
"DZ Senior Debt" shall mean amounts borrowed by DZ pursuant to a
Credit Agreement, dated as of December 22, 1994, among Discovery Zone, Inc.,
each of the lenders party thereto, NationsBank of North Carolina, N.A., as
agent, and Harris Trust and Savings Bank, as co-agent, as amended, modified or
supplemented from time to time in accordance with the terms thereof.
"Equity Securities" shall have the meaning ascribed to such term in
Rule 405 promulgated under the Securities Act as in effect on the date hereof.
"Exchange Act" shall mean the Securities Act of 1934, as amended.
<PAGE>
11
"Family Members" shall have the meaning set forth in Section 8.2
hereof.
"First Offer Notice" shall have the meaning set forth in Section
8.6(a) hereof.
"Governmental Authority" shall mean any nation or government, any
state or other political subdivision thereof, and any entity, agency or official
properly exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government.
"Gross Asset Value" shall mean, with respect to any asset, the
asset's adjusted basis for Federal income tax purposes, except that (i) the
Gross Asset Value of any asset contributed to the Company shall be its gross
fair market value (as determined by the Management Committee in good faith or as
determined by an Independent Appraiser in accordance with the following
sentence) at the time such asset is contributed or deemed contributed for
purposes of computing Capital Accounts, (ii) upon a contribution of money or
other property to the Company by a new or existing Member as consideration for
an interest in the Company and upon a distribution of money or other property to
a retiring or continuing Member as consideration for an interest in the Company,
the Gross Asset Value of all of the assets of the Company shall be adjusted to
equal their respective gross fair market values (as determined by the Management
Committee in good faith or as determined by an Independent Appraiser in
accordance with the following sentence), (iii) the Gross Asset Value of any
asset distributed in kind to any Member shall be the gross fair market
<PAGE>
12
value of such asset (as determined by the Management Committee in good faith or
as determined by an Independent Appraiser in accordance with the following
sentence) on the date of such distribution, and (iv) the Gross Asset Value of
any asset determined pursuant to clauses (i) or (ii) above shall thereafter be
adjusted from time to time by the Depreciation taken into account with respect
to such asset for purposes of determining Net Income or Net Loss. In the event
that the BF Management Committee Person (or, if at the time of determination
there shall be more than one BF Management Committee Person, a majority of the
BF Management Committee Persons) shall object to the Management Committee's
determination of the Gross Asset Value of any asset pursuant to clause (i), (ii)
or (iii) of the immediately preceding sentence by delivering written notice to
the other Management Committee Persons within five (5) Business Days following
the receipt by such BF Management Committee Person(s) of written notice of the
Management Committee's determination, the determination of the Gross Asset Value
of any asset pursuant to clause (i), (ii) or (iii) of the immediately preceding
sentence shall instead be determined by an Independent Appraiser; provided,
however, that the BF Management Committee Person (or a majority of the BF
Management Committee Persons, as the case may be) shall have the right to so
object only if, at the time of such objection, BF Acquisition is a Member of the
Company and the BF Minimum Ownership Condition is satisfied. If the BF
Management Committee Person (or a majority of the BF Management Committee
Persons, as the case may be) shall not so object, the determination by the
Management Committee of such Gross Asset Value(s) shall be binding and
conclusive. The fees and expenses of any Independent
<PAGE>
13
Appraiser determining any Gross Asset Value shall be borne by the Company and
the Independent Appraiser's determination thereof shall be binding and
conclusive.
"Holder" shall have the meaning set forth in Section 5.8(a) hereof.
"Indemnitee" shall have the meaning set forth in Section 6.2(a).
"Independent Appraiser" shall mean any nationally recognized
investment banking firm or accounting firm (other than any investment banking
firm or accounting firm having a significant ongoing relationship with the
Company, any Member or any Affiliate of any Member at the time of the appraisal)
selected by the Management Committee with the approval of BF Acquisition, which
approval shall not be unreasonably withheld; provided, however, that BF
Acquisition's approval shall be required only if, at the time of selection of
the Independent Appraiser, BF Acquisition is a Member of the Company and the BF
Minimum Ownership Condition is satisfied.
"Interest" shall have the meaning set forth in Section 2.1.
"Majority in Interest" shall mean Members owning a majority of the
profits interests and a majority of the capital interests in the Company. For
purposes of the foregoing, profits interests shall be determined based on a
reasonable estimate of profits through the projected termination of the Company,
and capital interests shall be determined by reference to the Capital Account
balances of the Members determined as of the date of the event in question
pursuant to which a vote of the Members is required.
"Management Committee" shall have the meaning set forth in Section
5.1 hereof.
<PAGE>
14
"Management Committee Persons" shall have the meaning set forth in
Section 5.2 hereof.
"Market Value" shall mean, as of any date, in the case of any
Marketable Security, the average of the last reported sale prices for the 20
consecutive trading days ended immediately preceding the date in question of a
unit of such security on the principal national securities exchange registered
under the Exchange Act on which such security is listed or admitted to trading
or, if such security is not listed on any such exchange, the average of the
closing sale prices of a unit of such security during the 20 consecutive trading
days ended immediately preceding the date in question on the NASDAQ National
Market System ("NMS") or, if not quoted on NMS, the average of the highest
reported bid and lowest reported asked quotation on the NASDAQ during the 20
consecutive trading days immediately preceding the date in question.
"Marketable Securities" shall mean any Equity Securities of a Person
that are (i) listed on a national securities exchange or quoted on NASDAQ, (ii)
freely tradeable under the Securities Act by the recipient thereof and (iii) not
subject to restrictions on transfer as a result of any applicable contractual
provisions; provided, however, that such securities do not constitute in excess
of 5% of any class of outstanding securities of such Person immediately prior to
the date of transfer thereof pursuant hereto, unless the recipients of the
Marketable Securities shall otherwise agree.
<PAGE>
15
"Members" shall mean SM Acquisition and BF Acquisition, and any
other Person or Persons who may from time to time become Members of the Company
in accordance with the terms of this Agreement.
"NASDAQ" shall mean the National Association of Securities Dealers
Automated Quotation System.
"Net Income or Net Loss," as the case may be, for any period shall
mean the taxable income or loss of the Company as determined for federal income
tax pur poses, with the following adjustments:
(i) Such taxable income or loss shall be increased by the
amount, if any, of tax-exempt income received or accrued by the Company;
(ii) Such taxable income or loss shall be reduced by the
amount, if any, of all expenditures of the Company described in Section
705(a)(2)(B) of the Code, including expenditures treated as described therein
under ss. 1.704(b)(2)(iv)(i) of the Treasury Regulations;
(iii) If the Gross Asset Value of any asset is adjusted
pursuant to clause (ii) or (iii) of the definition of Gross Asset Value, the
amount of such adjust ment shall be taken into account, immediately prior to the
event giving rise to such adjustment, as gain or loss from the disposition of
such asset for purposes of computing Net Income or Net Loss;
(iv) Gain or loss resulting from any disposition of any asset
with respect to which gain or loss is recognized for Federal income tax purposes
shall be computed by reference to the Gross Asset Value of the asset disposed
of,
<PAGE>
16
notwithstanding that such Gross Asset Value differs from the adjusted tax basis
of such asset; and
(v) In lieu of the depreciation, amortization, or other cost
recovery deductions taken into account in computing such taxable income or loss,
there shall be taken into account Depreciation for such fiscal year.
Notwithstanding the foregoing, Net Income and Net Loss shall be
determined without regard to any amounts credited or charged to the Capital
Accounts of the Members under Sections 2.4(e), 2.4(f) and 2.4(g) hereof.
"Offered Interest" shall have the meaning set forth in Section
8.6(a) hereof.
"Offering Member" shall have the meaning set forth in Section 8.6(a)
hereof.
"Original Agreement" shall have the meaning set forth in the
preamble hereto.
"Permitted Transferee" shall mean any Person referred to in clauses
(i) and (ii) of Section 8.2.
"Person" shall mean an individual, corporation, company, voluntary
association, partnership, joint venture, limited liability company, limited
liability partnership, trust, estate, unincorporated organization, governmental
authority or other entity.
"Post-Conversion First Offer Notice" shall have the meaning set
forth in Section 8.7(a) hereof.
<PAGE>
17
"Post-Conversion First Offer Price" shall have the meaning set forth
in Section 8.7(a) hereof.
"Post-Conversion Offered Interest" shall have the meaning set forth
in Section 8.7(a) hereof.
"Post-Conversion Offering Member" shall have the meaning set forth
in Section 8.7(a) hereof.
"Post-Debt Conversion Value" shall have the meaning set forth in
Section 2.2 hereof.
"Pre-Debt Conversion Value" shall have the meaning set forth in
Section 2.2 hereof.
"Preemptive Rights" shall have the meaning set forth in Section
5.8(b) hereof.
"Preemptive Rights Notice" shall have the meaning set forth in
Section 5.8(a) hereof.
"Preemptive Rights Percentage" shall have the meaning set forth in
Section 5.8(c) hereof.
"Regulations" shall mean the regulations promulgated under the Code.
"Satisfied Percentage" shall have the meaning set forth in Section
2.4(a) hereof.
"Sales Percentage" shall have the meaning set forth in Section
5.8(f) hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended.
<PAGE>
18
"Senior Debt Conversion Date" shall mean the date on which the
outstanding DZ Senior Debt (including, without limitation, the DZ Senior Debt
held by the Company) is converted into or exchanged for DZ Equity in connection
with the consummation of the reorganization of DZ under a Chapter 11 Plan of
Reorganization confirmed pursuant to an order of the United States Bankruptcy
Court.
"SM Acquisition" shall have the meaning set forth in the preamble
hereto.
"SM First Refusal Notice" shall have the meaning set forth in
Section 8.6(e) hereof.
"SM First Refusal Price" shall have the meaning set forth in Section
8.6(e) hereof.
"SM First Refusal Interest" shall have the meaning set forth in
Section 8.6(e) hereof.
"SM Management Committee Person" shall have the meaning set forth in
Section 5.2(c) hereof.
"Tag Along Notice" shall have the meaning set forth in Section 8.9
hereof.
`
"Tax Matters Person" shall have the same meaning as the term "tax
matters partner" as such term is defined in Section 6231(a)(7) of the Code or
any successor provision of the Code.
<PAGE>
19
"Transfer" shall mean to sell, give, assign, hypothecate, pledge,
encumber, grant a security interest in or otherwise dispose of (whether by
operation of law or otherwise). "Transferor" and "Transferee" have correlative
meanings.
"Transferable Interest" shall have the meaning set forth in Section
8.1(a) hereof.
"Unaffiliated Buyer" shall have the meaning set forth in Section 8.8
hereof.
"Unaffiliated Offer" shall have the meaning set forth in Section
8.6(e) hereof.
"Unexercised Preemptive Rights" shall have the meaning set forth in
Section 5.8(d) hereof.
"Withdrawing Member" shall have the meaning set forth in the
preamble hereto.
1.9 Usage Generally. The definitions in Section 1.8 shall apply
equally to both the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. All references herein to Articles, Sections and
Schedules shall be deemed to be references to Articles and Sections of, and
Schedules to, this Agreement unless the context shall otherwise require. All
Schedules attached hereto shall be deemed incorporated herein as if set forth in
full herein and, unless otherwise defined therein, all terms used in any Exhibit
or Schedule shall have the meaning ascribed to such term in this Agreement. The
words "include", "includes" and "including" shall be
<PAGE>
20
deemed to be followed by the phrase "without limitation". The words "hereof",
"herein" and "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement. Unless otherwise expressly provided herein, any agreement,
instrument or statute defined or referred to herein or in any agreement or
instrument that is referred to herein means such agreement, instrument or
statute as from time to time amended, modified or supplemented, including (in
the case of agreements or instruments) by waiver or consent and (in the case of
statutes) by succession of comparable successor statutes and references to all
attachments thereto and instruments incorporated therein.
ARTICLE II
CAPITAL CONTRIBUTIONS; CAPITAL
ACCOUNTS; ALLOCATIONS; DISTRIBUTIONS
2.1 Initial Capital Contribution. Upon execution of this Agreement,
each of the Members shall contribute to the capital of the Company cash, DZ
Senior Debt or other assets in the amount set forth on Schedule 2.1 opposite
such Member's name. The respective contributions of each of the Members set
forth on Schedule 2.1 shall be the "Initial Capital Contribution" of each of the
respective Members. The respective interests of each of the Members (each, an
"Interest") shall be as set forth on Schedule 2.1. Schedule 2.1 shall be amended
from time to time to reflect Initial Capital Contributions and Interests of new
Members that may be admitted from time to time, additional capital contributions
of Members that may be made from time to time and Transfers of Members'
Interests. Upon each contribution of capital from SM
<PAGE>
21
Acquisition, such Member shall allow credit toward the purchase of DZ Senior
Debt by BF Acquisition in an amount equal to ******** percent (*****%) of such
capital contribution; provided, that the sum of all such credits applied toward
the purchase of Senior Debt by BF Acquisition shall not exceed $******** in the
aggregate.
2.2 Additional Contributions. Following additional capital
contributions to the equity of the Company made by any Member (including any new
Member), the Interests of each Member shall be recalculated by the Management
Committee to reflect such contributions so that each Interest is equal to a
percentage derived from the fraction, the numerator of which shall be the sum of
(x) (a) prior to the Senior Debt Conversion Date, the product of (i) the
aggregate capital contributions made by all Members immediately prior to the
making of such additional contributions (the "Pre-Debt Conversion Value") and
(ii) the Interest of such Member at such time, and (b) from and after the Senior
Debt Conversion Date, the product of (i) the fair market value of the Company
immediately prior to the making of such additional contributions (the "Post-Debt
Conversion Value"), as determined by the Management Committee in good faith or
as determined by an Independent Appraiser in accordance with the following
sentence, and (ii) the Interest of such Member at such time and (y) the
additional capital contribution made by such Member at such time and the
denominator of which shall be the sum of (A) the Pre-Debt Conversion Value or
the Post-Debt Conversion Value, as the case may be, plus (B) the amount of
additional capital contributions made at such time by all of the Members
(including new Members). In the event that the BF Management Committee Person
(or, if at the time
<PAGE>
22
of determination there shall be more than one BF Management Committee Person, a
majority of the BF Management Committee Persons) shall object to the Management
Committee's determination of the Post-Debt Conversion Value by delivering
written notice to the other Management Committee Persons within five (5)
Business Days following the receipt by such BF Management Committee Person(s) of
written notice of the Management Committee's determination, the Post-Debt
Conversion Value shall instead be determined by an Independent Appraiser;
provided, however, that the BF Management Committee Person (or a majority of the
BF Management Committee Persons, as the case may be) shall have the right to so
object only if, at the time of such objection, BF Acquisition is a Member of the
Company and the BF Minimum Ownership Condition (calculated without giving effect
to the additional capital contribution(s) giving rise to the recalculation of
any Interest pursuant to this Section 2.2) is satisfied. If the BF Management
Committee Person (or a majority of the BF Management Committee Persons, as the
case may be) shall not so object, the determination by the Management Committee
of the Post-Debt Conversion Value shall be binding and conclusive. The fees and
expenses of any Independent Appraiser determining the Post-Debt Conversion Value
shall be borne by the Company and the determination by such Independent
Appraiser of the Post-Debt Conversion Value shall be binding and conclusive.
<PAGE>
23
2.3 Capital Accounts.
(a) A capital account shall be maintained for each Member on
the books of the Company (a "Capital Account") in accordance with the terms of
this Section 2.3.
(b) A Member's Capital Account shall be credited with:
(i) such Member's Initial Capital Contribution made
pursuant to Section 2.1 as set forth on Schedule 2.1, and any additional
contributions that may be made by such Member to the capital of the
Company from time to time in accordance with Section 2.1 hereof; and
(ii) such Member's share of Net Income and items of
income or gain allocated to such Member under any provision of Section 2.4
hereof.
(c) A Member's Capital Account shall be charged with:
(i) the amount of all distributions made to such Member
under Section 2.6 or 7.2; and
(ii) such Member's share of Net Losses and items of loss
or deduction allocated to such Member under any provision of Section 2.4
hereof.
(d) Capital Accounts shall be maintained in accordance with
the Treasury Regulations implementing Section 704(b) of the Code.
<PAGE>
24
2.4 Allocations.
(a) From and after the date hereof, all Net Income of the
Company for any fiscal year shall be divided among the Members as follows and in
the following order of priority:
(i) First, to the Members in proportion to their
respective Interests until each has received aggregate allocations of Net
Income pursuant to this Section 2.4(a)(i) for the current and all prior
years sufficient to offset any Net Loss allocated to such Member pursuant
to Section 2.4(b)(iii) for all prior periods;
(ii) Second, to BF Acquisition, an amount equal to 10%
of the aggregate amount of Net Income to be allocated for such fiscal year
among the Members pursuant to this Section 2.4(a)(ii) and Section
2.4(a)(iii); and
(iii) Thereafter, to the Members in proportion to their
respective Interests;
provided, however, that upon the occurrence of the BF Acquisition Satisfaction
Event (as defined in the BF Warrant Agreement), the allocations provided for in
Section 2.4(a)(ii) shall be treated as having been fully satisfied and BF
Acquisition will cease to be entitled to any further allocations pursuant to
Section 2.4(a)(ii); and provided, further; if the SM General Warrant Percentage
(as such term is defined in the BF Warrant Agreement) is less than ***** percent
(****%) and for so long as the BF Acquisition Satisfaction Event shall not have
occurred, then the allocations provided for
<PAGE>
25
in Section 2.4(a)(ii) shall be treated as having been satisfied to the extent of
the percentage (the "Satisfied Percentage") that the SM General Warrants (as
such term is defined in the BF Warrant Agreement) and the Birch Warrants (as
such term is defined in the BF Warrant Agreement) received by BF Acquisition and
its Affiliates (but excluding any BF Affiliate General Warrants (as such term is
defined in the BF Warrant Agreement)) represent of SM Acquisition's aggregate
indirect and direct ownership interest in the Fully Diluted DZ Equity as of the
date of the latest distribution of such warrants (calculated in accordance with
the terms of paragraph 2 of the BF Warrant Agreement) and for purposes of any
further allocations to BF Acquisition pursuant to Section 2.4(a)(ii), the
percentage used shall be the excess of ***** percent (****%) over the Satisfied
Percentage.
(b) From and after the date hereof, all Net Loss of the
Company for any fiscal year shall be divided among the Members as follows and in
the following order of priority:
(i) First, to the Members in proportion to their
respective Interests until aggregate Net Losses have been allocated
pursuant to this Section 2.4(b)(i) for the current and all prior years in
an amount equal to the excess, if any, of (A) Net Income previously
allocated to such Members pursuant to Section 2.4(a)(iii) for all prior
years over (B) all amounts distributed (or expected to be distributed) to
such Members pursuant to Section 2.6(a)(iii) for the current and all prior
years;
<PAGE>
26
(ii) Second, to BF Acquisition until aggregate Net
Losses have been allocated pursuant to this Section 2.4(b)(ii) for the
current and all prior years in an amount equal to the excess, if any, of
(A) all Net Income previously allocated to such Member pursuant to Section
2.4(a)(ii) for all prior years over (B) all amounts distributed (or
expected to be distributed) to such Member pursuant to Section 2.6(a)(ii)
for the current and all prior years; and
(iii) Thereafter, to the Members in proportion to their
respective Interests;
provided, however, that upon the occurrence of the BF Acquisition Satisfaction
Event (as defined in the BF Warrant Agreement), BF Acquisition will cease to be
entitled to the allocations provided for in Section 2.4(b)(ii).
(c) Except as may otherwise be provided herein, whenever a
proportionate part of Net Income or Net Loss of the Company is credited or
charged to a Member's Capital Account for any fiscal year, every item of income,
gain, loss, or deduction entering into the computation thereof shall be
considered either credited or charged, as the case may be, and every item of
credit or tax preference related thereto and applicable to such fiscal year
shall be allocated to, such Capital Account in the same proportion.
(d) Upon any change in the relative Interests of the Members,
whether by reason of the admission or withdrawal of a Member, the Transfer by
any Member of all or any part of its Interest, or otherwise, the Members' shares
of all
<PAGE>
27
Company items shall be determined, except as otherwise required by law, by an
interim closing of the Company's books.
(e) All nonrecourse deductions (as defined in Treasury
Regulations Section 1.704-2(b)(1)) shall be charged to the Capital Accounts of
the Members as Net Loss pursuant to Section 2.4(b).
(f) Notwithstanding anything in this Agreement to the
contrary:
(i) No Member shall be allocated any item of loss or
deduction to the extent said allocation will cause or increase any deficit
in said Member's Adjusted Capital Account. For purposes of this Agreement,
"Adjusted Capital Account" means, with respect to any Member, such
Member's Capital Account increased for the amount such Member is deemed
obligated to restore pursuant to (i) the penultimate sentences of Treasury
Regulation Sections 1.704-2(g)(1) and 1.704-2(i)(5) and (ii) Treasury
Regulation Section 1.704-1(b)(2)(ii)(c), as of the end of the Company's
tax year to which such allocation relates, and reduced for the items
described in Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4), (5) and
(6). If any Member with a deficit in his or its Adjusted Capital Account
unexpectedly receives any adjustment, allocation or distribution described
in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), then
Company items of income and gain shall be specifically allocated to such
Member in an amount and manner sufficient to eliminate the deficit in said
Member's Adjusted Capital
<PAGE>
28
Account created by such adjustment, allocation or distribution as quickly
as possible. The Members intend that the provisions set forth in this
clause (i) will constitute a "Qualified Income Offset" as described in
Treasury Regulation Sec tion 1.704-1(b)(2)(ii)(d).
(ii) The following provisions shall be applicable
beginning in the first taxable year in which the Company has nonrecourse
deductions as defined in Treasury Regulations Section 1.704-2(b)(1):
(A) For purposes of this Section 2.4(f), "Minimum
Gain" means the total gain which the Company would realize if it sold, in
a taxable disposition, each of its assets that were subject to nonrecourse
liabilities in full satisfaction of the liabilities. In computing such
gain, only the portion of the assets' tax bases allocated to nonrecourse
liabilities of the Company shall be taken into account.
(B) If in any taxable year of the Company there is
a net decrease in Minimum Gain, then each Member with a share of Minimum
Gain (as determined in accordance with Regulations Section 1.703-2(g)(1))
as of the beginning of such year shall be allocated items of income and
gain for such year (and, if necessary, for succeeding years), equal to
that Member's share of the net decrease in Minimum Gain (determined in
accordance with Regulations Section 1.704-2(g)(2)). In allocating the
income and gain pursuant to the previous sentence, gains recognized from
the disposition of Company assets subject to nonrecourse liabilities of
the Company
<PAGE>
29
shall be allocated first to the extent of the decrease in Minimum Gain
attributable to the disposition of said asset. Thereafter, any income and
gain to be allocated shall consist of a pro rata amount of other Company
income and gain for that year. The Members intend that this clause (ii)
will constitute a "Minimum Gain Chargeback" as set forth in Treasury
Regulation Section 1.704-2(f).
(iii) In the event that any Member bears the economic
risk of loss (within the meaning of Regulations Section 1.752-2) with
respect to any nonrecourse loan of the Company, then (a) the losses,
deductions or Section 705(a)(2)(B) expenditures that are attributable to
such nonrecourse loan for any fiscal year or other period shall be
allocated to the Members who bear the burden of such economic risk of loss
in accordance with Regulations Section 1.704-2(i), and (b) if in any
taxable year there is a net decrease in Partner Nonrecourse Debt Minimum
Gain (as determined in accordance with Regulations Section 1.704-2(i)(4))
attributable to such nonrecourse loan, each Member with a share of Partner
Nonrecourse Debt Minimum Gain attributable to such nonrecourse loan (as
determined in accordance with Regulations Section 1.704-2(i)(5)) as of the
beginning of the year shall be allocated items of income and gain for the
year (and, if necessary, for succeeding years), equal to that Member's
share of the net decrease in the Partner Nonrecourse Debt Minimum Gain (as
determined in accordance with Regulations Section 1.704-2(i)(4)).
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30
(g) The provisions of Sections 2.4(e) and (f) (collectively,
the "Regulatory Provisions") are intended to comply with certain requirements of
the Regulations. It is the intent of the Members that, to the extent possible,
all allocations pursuant to the Regulatory Provisions shall be offset either
with other allocations pursuant to the Regulatory Provisions or, if necessary,
with curative allocations of other items of income, gain, loss or deduction
pursuant to this Section 2.4(g). Therefore, notwithstanding any other provision
of this Agreement, other than the Regulatory Provisions, allocations pursuant to
the Regulatory Provisions shall be taken into account in allocating other items
of income, gain, expense or loss among the Members so that, to the extent
possible, the net amount of such allocations of other items and the allocations
pursuant to the Regulatory Provisions to each Member are equal to the net amount
that would have been allocated to such Member if the Regulatory Provisions were
not part of this Agreement. In applying this Section 2.4(g), there shall be
taken into account (i) future allocations under Section 2.4(f)(ii) that,
although not yet made, are likely to offset other allocations previously made
under Section 2.4(e), and (ii) future allocations under Section 2.4(f)(iii)(b)
that, although not yet made, are likely to offset other allocations previously
made under Section 2.4(f)(iii)(a).
2.5 Allocations for Tax Purposes.
(a) For each taxable year of the Company, the income,
recognized gains and losses, credits and deductions of the Company shall be
allocated, for Federal, state and local income tax purposes, among the Members
in the same
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31
manner as similar items are allocated among the Members for such taxable year of
the Company as provided in Section 2.4, except as otherwise provided herein or
required by law.
(b) Income, gain, loss or deductions of the Company shall,
solely for income tax purposes, be allocated among the Members in accordance
with Section 704(c) of the Code and the Treasury Regulations promulgated
thereunder, so as to take account of any difference between the adjusted basis
of the assets of the Company and their respective Gross Asset Values in
accordance with the traditional method with curative allocations set forth in
ss. 1.704-3(c) of the Treasury Regulations.
2.6 Distributions.
(a) Except as otherwise provided in this Agreement, as soon as
reasonably practicable after the end of each fiscal year, as reasonably
determined by the Management Committee, the Company will distribute to the
Members its Distributable Cash as provided pursuant to this Section 2.6(a). The
Distributable Cash shall be divided among the Members as follows and in the
following order of priority:
(i) First, to the Members, in proportion to their
respective Interests, until SM Acquisition has received aggregate
distributions pursuant to this Section 2.6(a)(i) equal to its aggregate
capital contributions;
(ii) Second, to BF Acquisition, until it has received
aggregate distributions pursuant to this Section 2.6(a)(ii) for the
current and all prior years equal to the excess, if any, of (A) all Net
Income allocated to such Member pursuant to Section 2.4(a)(ii) for the
current and all prior years over
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32
(B) all Net Loss allocated to such Member pursuant to Section 2.4(b)(ii)
for the current and all prior years; and
(iii) Thereafter, to the Members in proportion to their
respective Interests;
provided, however, that upon the occurrence of the BF Acquisition Satisfaction
Event, the distributions provided for in Section 2.6(a)(ii) shall be treated as
having been fully satisfied, and BF Acquisition will cease to be entitled to any
further distributions pursuant to Section 2.6(a)(ii); and provided, further, if
the SM General Warrant Percentage is less than ****% and for so long as the BF
Acquisition Satisfaction Event shall not have occurred, then the distributions
provided for in Section 2.6(a)(ii) shall be treated as having been satisfied to
the extent of the amount treated as having been allocated with respect thereto
pursuant to the second proviso of Section 2.4(a).
(b) Notwithstanding the provisions of Section 2.6(a), if, in
any fiscal year, the amount of Distributable Cash distributed to any Member is
less than the product of (x) the Net Income credited to the Capital Account of
such Member for such year, times (y) the Applicable Tax Rate of such Member for
such year, then Distributable Cash in the amount of such difference that would
otherwise be distributed thereafter in accordance with Section 2.6(a) shall
instead be distributed to such Member (or, in the event there is more than one
such Member, pro rata to such Members in proportion to their respective
differences). Any distribution made in accordance with this paragraph (b) shall
be considered an advance against future distributions of
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33
Distributable Cash to such Member. Such future distributions shall be reduced so
as to recoup such advance as quickly as possible.
(c) Prior to any distribution made to a Member pursuant to
this Section 2.6, the Company shall give such Member five days' notice thereof,
specifying the amount of the distributions to be made to such Member. Any
distribution by the Company pursuant to the terms of this Section 2.6 to the
Person shown on the Company's records as a Member or to its legal
representatives, or to the assignee of the right to receive such distributions
as provided herein, shall acquit the Company of all liability to any other
Person who may be interested in such distribution by reason of any other
assignment or Transfer of such Member's Interest for any reason (including an
assignment or Transfer thereof by reason of death, incompetence, Bankruptcy or
liquidation of such Member).
2.7 No Return. No Member shall be entitled to the withdrawal or
return of such Member's capital contributions, except to the extent, if any,
that distributions made pursuant to this Agreement or upon termination or
dissolution of the Company may be considered as such by law, and then only to
the extent provided for in this Agreement.
2.8 Withholding. Any payments required to be made by the Company to
any Member hereunder shall be net of any and all amounts required to be deducted
and withheld from such payments under applicable law. Each Member hereby
consents to the deduction and withholding of any such amounts, agrees to
cooperate fully with the Company in determining the amount of any required
withhold-
<PAGE>
34
ings, and agrees promptly to return to the Company upon request any
amounts that the Company erroneously fails to deduct and withhold from any
payment hereunder.
ARTICLE III
ACCOUNTING; FINANCIAL AND TAX MATTERS
3.1 Books and Records; Reports.
(a) The Company shall maintain, at its principal place of
business, books of account for the Company that shall show a true and accurate
record of all costs and expenses incurred, all charges made, all credits made
and received and all income derived in connection with the operation of the
Company's business in accordance with the principles applicable and accounting
method used for Federal income tax purposes.
(b) The financial officers of the Company shall maintain a
system of accounting established and administered in accordance with the
principles applicable and accounting method used for Federal income tax purposes
and otherwise in accordance with generally accepted accounting principles, and
shall set aside on the books of the Company or otherwise record all such proper
reserves as shall be required by generally accepted accounting principles.
(c) Within 45 days after the end of each of the first three
quarters of each fiscal year of the Company, the financial officers of the
Company shall prepare and distribute to each Member quarterly financial
statements of the Company, including a balance sheet, capital account balances
and profit and loss statement.
<PAGE>
35
(d) Within 105 days after the close of each fiscal year of the
Company, the financial officers of the Company shall prepare and distribute to
each Member the following financial statements, accompanied by the audit report
thereon of the independent accountants for the Company: (i) a balance sheet of
the Company as at the end of such fiscal year; (ii) a statement of profit and
loss for such fiscal year; (iii) a statement of the Members' Capital Accounts
and changes therein for such fiscal year; and (iv) a statement of cash flows of
the Company for such fiscal year.
3.2 Fiscal Year. The fiscal year of the Company shall end on
December 31 of each year; provided, however, that upon termination of the
Company, the fiscal year of the Company shall be the period from the January 1
immediately preceding such termination to the date of such termination.
3.3 Bank and Investment Accounts. All funds of the Company shall be
deposited in its name, or in such name as may be designated by the Management
Committee or, if delegated by the Management Committee, the officers of the
Company, in such checking, savings or other accounts, or held in the Company's
name in the form of such other investments as shall be designated by the
Management Committee or, if delegated by the Management Committee, the officers
of the Company. All withdrawals of such deposits or liquidations of such
investments by the Company shall be made exclusively upon the signature or
signatures of such officer or officers of the Company as the Management
Committee may designate.
3.4 Tax Matters Person. The Tax Matters Person of the Company shall
be SM Acquisition, or any other Member selected by the Management Committee
<PAGE>
36
to succeed it or any of its successors, who shall be subject to the control of
the Management Committee. Each Member, by its execution of this Agreement,
consents to such designation of the Tax Matters Person, and agrees to execute,
certify, acknowledge, deliver, swear to, file and record at the appropriate
public offices such documents as may be necessary or appropriate to evidence
such consent. The Tax Matters Person shall keep each Member reasonably informed
of the commencement and status of any tax audit of the Company. The Tax Matters
Person shall not, without the consent of all the Members, file a petition with
respect to the Company in any court other than the United States Tax Court.
3.5 Tax Elections and Accounting Decisions. All determinations as to
tax elections shall be made by the Tax Matters Person. All determinations as to
accounting principles shall be made by the Management Committee or the officers
of the Company.
ARTICLE IV
MEMBERS
4.1 Meeting of Members.
(a) A meeting of Members shall be held annually for the
transaction of business at such time and on such business day as may be
reasonably determined by the Management Committee and designated in the notice
of meeting.
(b) A special meeting of Members may be called at any time by
the Management Committee, the Chief Executive Officer, BF Acquisition, the
<PAGE>
37
President or the Secretary of the Company; provided, that BF Acquisition shall
have such right only if, at the time BF Acquisition elects to exercise such
right, BF Acquisition is a Member of the Company and the BF Minimum Ownership
Condition is satisfied. At any special meeting of Members, only such business
may be transacted as is related to the purpose or purposes of such meeting set
forth in the notice thereof given pursuant to Section 4.1(c) hereof or in any
waiver of notice thereof given pursuant to Section 4.1(d) hereof.
(c) Except as otherwise provided in Section 4.1(d) hereof,
written notice of meeting of Members shall be given stating the place, date and
time of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called. A copy of the notice of any meeting
shall be given, personally or by mail, not less than ten nor more than sixty
days before the date of the meeting, to each Member entitled to notice of or to
vote at such meeting.
(d) Whenever the giving of any notice is required by the Act
or this Agreement, a waiver thereof, in writing, signed by the Member or Members
entitled to said notice, whether before or after the event as to which such
notice is required, shall be deemed equivalent to notice. Attendance by a Member
at a meeting shall constitute a waiver of notice of such meeting except when the
Member attends a meeting for the express purpose of objecting, at the beginning
of the meeting, to the transaction of any business on the ground that the
meeting has not been lawfully called or convened.
<PAGE>
38
(e) Members may participate in a meeting of the Members by
means of telephonic conference or similar communications equipment by means of
which all persons participating in the meeting can hear one another, and such
participation shall constitute presence in person at such meeting.
(f) Any action required or permitted to be taken at any
meeting of Members may be taken without a meeting, without prior notice and
without a vote, if all of the Members consent in writing to such action. Such
consent shall be filed with the minutes of the proceedings of the Members and
shall have the same effect as an unanimous vote of the Members.
4.2 Quorum; Adjournment. Except as otherwise provided by the Act,
the presence in person or by proxy of a Majority in Interest entitled to vote at
a meeting of Members shall constitute a quorum for the transaction of any
business at such meeting; provided, however, that, when a specified item of
business is required to be voted on by a class, if any, or series voting as a
class, if any, the presence in person or by proxy of holders of a Majority in
Interest of such class or series shall constitute a quorum (as to such class or
series) for the transaction of such item of business. Once a quorum is present,
it is not broken by the subsequent withdrawal of any Members from the meeting.
The holders of a Majority in Interest entitled to vote at any meeting of
Members, present in person or represented by proxy, may adjourn any meeting
(including an adjourned meeting) to another time and place.
<PAGE>
39
4.3 Voting Rights.
(a) Except as otherwise provided by the Act, the Members shall
be entitled to vote on each matter on which Members are entitled to vote.
(b) Each Member shall vote in proportion to such Member's
Interest.
(c) At any meeting of Members, except as otherwise provided by
the Act or by this Agreement, all matters shall be decided by the vote of the
holders of a Majority in Interest entitled to vote and present in person or
represented by proxy at a meeting of the Members.
4.4 Proxies. Each Member entitled to vote at a meeting of Members or
to express consent or dissent to action in writing without a meeting may
authorize another Person or Persons to act for such Member by proxy. A Member
may revoke any proxy that is not irrevocable by attending the meeting and voting
in person or by filing an instrument in writing revoking the proxy or by
delivering a proxy bearing a later date to the Secretary of the Company.
4.5 No Liabilities. The Members shall have no liability under this
Agreement or otherwise with respect to any debt, liability or obligation of the
Company because of their status as Members, except to the extent provided in the
Act.
<PAGE>
40
ARTICLE V
MANAGEMENT OF THE COMPANY
5.1 Management of the Company. Except as otherwise expressly
provided for herein, the business and affairs of the Company shall be managed by
and under the direction of a committee of managers established pursuant to, and
with the powers and authority set forth in, this Article V (the "Management
Committee"). A manager need not be a Member or an Affiliate of a Member. The
Management Committee shall have the sole and exclusive responsibility and
authority for the management, conduct and operation of the Company's business in
all respects and in all matters, except to the extent that the Management
Committee delegates any such responsibility or authority to any officer,
employee or agent of the Company. The Management Committee may delegate such
general or specific authority to officers, employees or agents of the Company as
the Management Committee considers desirable from time to time, and such
officers, employees or agents of the Company may, subject to any restraints or
limitations imposed by the Management Committee, exercise the authority granted
to them. There shall be no committees of Members or committees (or
sub-committees) of the Management Committee as to which the Management Committee
may delegate any responsibility or authority.
5.2 Designation and Removal of Management Committee Persons.
(a) The Management Committee initially shall be comprised of
four (4) individuals (the "Management Committee Persons"), each of whom shall
serve until their death, disability or resignation or until removed in
accordance with the
<PAGE>
41
terms of this Agreement. The initial Management Committee Persons are set forth
on Schedule 5.2 hereto. The size of the Management Committee may be changed from
time to time by action of the Management Committee. For so long as (x) BF
Acquisition is a Member of the Company and (y) the BF Minimum Ownership
Condition is satisfied, BF Acquisition shall be entitled to designate to the
Management Committee an aggregate number (rounded to the nearest whole number
with .5 and above rounded to the next whole number) of persons equal to the
greater of (i) one and (ii) the product of (A) the BF Ownership Percentage at
the time of determination and (B) the aggregate number of persons comprising the
Management Committee at the time of determination. The person(s) designated by
BF Acquisition to the Management Committee pursuant to this Section 5.2(a) shall
hereinafter be referred to as "BF Management Committee Persons".
(b) BF Acquisition (and no other Person) shall be entitled at
any time and for any reason to designate any BF Management Committee Person for
removal; provided, however, that SM Acquisition shall have the right to remove
such number of BF Management Committee Persons as is necessary to cause the
number of BF Management Committee Persons on the Management Committee to be
equal to the number of BF Management Committee Persons which BF Acquisition is
then entitled to designate to the Management Committee pursuant to the fourth
sentence of Section 5.2(a). If at any time, a vacancy (or vacancies, as the case
may be) is created on the Management Committee by reason of the death, removal
or resignation of any BF Management Committee Person(s), then BF Acquisition may
fill such vacancy (or
<PAGE>
42
vacancies, as the case may be) by delivering written notice to the Company of
the name of the person (or persons, as the case may be) to be designated as the
replacement BF Management Committee Person(s); provided, that BF Acquisition
shall have such right to fill such vacancy (or vacancies, as the case may be) if
(x) at the time BF Acquisition shall so designate any replacement BF Management
Committee Person(s), BF Acquisition is a Member of the Company and the BF
Minimum Ownership Condition is satisfied and (y) after giving effect to the
designation of any replacement BF Acquisition Committee Person(s), the number of
BF Management Committee Persons on the Management Committee is no greater than
the number of BF Management Committee Persons as BF Acquisition is then entitled
to designate to the Management Committee pursuant to the fourth sentence of
Section 5.2(a).
(c) SM Acquisition (and no other Person) shall be entitled at
any time and for any reason to designate any Management Committee Person other
than a BF Management Committee Person (such persons being referred to herein as
"SM Management Committee Person(s)") for removal. If at any time, a vacancy (or
vacancies, as the case may be) is created on the Management Committee by reason
of the death, removal or resignation of any SM Management Committee Person or as
a result of an increase in the size of the Management Committee, then SM
Acquisition may fill such vacancy (or vacancies, as the case may be) by
delivering written notice to the Company of the name of the person (or persons,
as the case may be) to be newly designated as the SM Management Committee
Person(s); provided, however, that, if, at the time any such vacancy (or
vacancies, as the case may be) is created on the
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43
Management Committee (x) BF Acquisition is a Member of the Company and the BF
Minimum Ownership Condition is satisfied and (y) the composition of the
Management Committee is such that the number of BF Management Committee Persons
is less than the number of BF Management Committee Persons which BF Acquisition
is then entitled to designate to the Management Committee pursuant to the fourth
sentence of Section 5.2(a), then BF Acquisition shall be entitled to fill such
vacancy (or vacancies, as the case may be) in a manner such that, after giving
effect to any newly designated BF Management Committee Person, the number of BF
Management Committee Persons on the Management Committee is no greater than the
number of BF Management Committee Persons as BF Acquisition is then entitled to
designate to the Management Committee pursuant to the fourth sentence of Section
5.2(a). If BF Acquisition is so entitled to fill any such vacancies pursuant to
the immediately preceding sentence it shall do so by delivering written notice
to the Company of the name of the person (or persons, as the case may be) to be
newly designated as the BF Management Committee Person(s).
(d) SM Acquisition and BF Acquisition shall cause the SM
Management Committee Persons and the BF Management Committee Persons,
respectively, to comply with the terms of this Agreement. If any SM Management
Committee Person or BF Management Committee Person is unwilling or unable to
serve or is removed from office pursuant to Section 5.2(b) or (c), SM
Acquisition or BF Acquisition, respectively, prior to the transaction of any
other business of the Management Committee, shall promptly designate a successor
SM Management
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44
Committee Person or BF Management Committee Person, respectively, in accordance
with the terms of this Agreement.
(e) Each Management Committee Person, in consideration of his
or her service as such, shall be entitled to receive from the Company (i) such
amount per annum or such fees for attendance at Management Committee meetings,
or both, as the Management Committee may from time to time reasonably determine;
provided, however, that any such amounts or fees shall be customary for a
company of this type, and (ii) reimbursement for the reasonable out-of-pocket
expenses, if any, incurred by such Management Committee Person in connection
with the performance of his or her duties.
5.3 Meetings of the Management Committee. The Management Committee
shall hold regular meetings at such time and place as shall be reasonably
determined by the Management Committee. Special meetings of the Management
Committee may be called at any time by the Chairman, the Chief Executive
Officer, the President or by a majority of the members of the Management
Committee. Except as otherwise reasonably determined by the Management
Committee, all special and regular meetings of the Management Committee shall be
held at the principal office of the Company. No notice shall be required with
respect to any regular meeting of the Management Committee. At each regular
meeting of the Management Committee, the acting Chairman of such meeting shall
announce the date, time and location of the next regular meeting of the
Management Committee. Unless waived by all of the Manage ment Committee Persons
in writing (before or after a meeting) or with respect to any
<PAGE>
45
Management Committee Person, by the attendance of such Management Committee
Person at such meeting, prior notice of any special meeting shall be given in
the manner specified in Section 9.1 to each Management Committee Person at least
three (3) Business Days before the date of such meeting. Notice of any meeting
need not be given to any Management Committee Person who shall submit, either
before or after the meeting, a signed waiver of notice. Attendance of a
Management Committee Person at a meeting shall constitute a waiver of notice of
such meeting, except when the Management Committee Person attends the meeting
for the express purpose of objecting at the beginning thereof to the transaction
of any business because the meeting is not lawfully called or convened. Notice
of any adjourned meeting, including the place, date and time of the new meeting,
shall be given to all Management Committee Persons not present at the time of
the adjournment, as well as to the other Management Committee Persons unless the
place, date and time of the new meeting is announced at the adjourned meeting.
5.4 Quorum and Voting. No action may be taken by the Man agement
Committee unless a quorum is present, and, unless otherwise specified in this
Agreement, the affirmative vote of a majority of the Management Committee
Persons present shall be required for any act or decision thereof. No Management
Committee Person shall be disqualified from acting on any matter because such
Management Committee Person is interested in the matter to be acted upon by the
Management Committee. A quorum for any meeting of the Management Committee shall
be comprised of a majority of the Management Committee Persons.
<PAGE>
46
5.5 Procedural Matters of the Management Committee.
(a) Each Management Committee Person shall have one vote on
all matters presented to the Management Committee for decision or approval,
other than with respect to any matter as to which there is a deadlock, in which
instance the acting Chairman of such meeting shall cast an additional deciding
vote.
(b) Any action required or permitted to be taken at any
meeting of the Management Committee may be taken without a meeting, without
prior notice and without a vote, if all of the Management Committee Persons
consent in writing to such action. Such consent shall be filed with the minutes
of the proceedings of the Management Committee and shall have the same effect as
an unanimous vote of the Management Committee.
(c) The Management Committee shall cause to be kept a book of
minutes of all of its actions by written consent and its meetings in which there
shall be recorded the time and place of such meeting, whether regular or special
(and if special, how called), the notice thereof given, the names of those
present and the proceedings thereof. Upon reasonable notice, any Member shall
have the right, at reasonable times during business hours, to inspect for any
proper purpose such book of minutes, and to make copies or extracts therefrom. A
proper purpose shall mean a purpose reasonably related to such Member's interest
as a Member of the Company.
(d) At each meeting of the Management Committee, the Chairman,
or in the absence of the Chairman, the Chief Executive Officer, or in the
absence of the Chief Executive Officer, a Management Committee Person chosen by
a
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47
majority of the Management Committee Persons present, shall act as Chairman of
the meeting. The Chairman shall appoint a secretary of the meeting who shall
produce the written minutes of the meeting. The order of business of the meeting
of the Management Committee shall be determined by the Chairman of the meeting.
The secretary of the meeting may be a person who is not a Management Committee
Person.
(e) Management Committee Persons may participate in a meeting
of the Management Committee by means of telephonic conference or similar
communications equipment by means of which all persons participating in the
meeting can hear one another, and such participation shall constitute presence
in person at such meeting.
5.6 Designation of Officers, Term, etc.
(a) The Management Committee may elect or appoint officers of
the Company, including a Chairman, a Chief Executive Officer, a President, a
Secretary and a Treasurer of the Company, and may elect or appoint one or more
Vice Presidents and such other officers of the Company as the Management
Committee may reasonably determine. The Management Committee may use descriptive
words or phrases to designate the standing, seniority or area of special
competence of the officers elected or appointed. Any two or more offices may be
held by the same person. All officers shall have such authority and perform such
duties in the management of the Company as the Management Committee or the Chief
Executive Officer may from time to time reasonably determine, and may act on
behalf of the Company in the manner and regarding such matters as is provided
for in this Article V or as may be authorized by
<PAGE>
48
the Management Committee or the Chief Executive Officer. The Management
Committee may from time to time establish, increase, reduce or otherwise modify
responsibilities of the officers of the Company or may create or eliminate
offices as the Company may consider appropriate.
(b) Each officer elected by the Management Committee shall
serve until his or her successor is duly elected as provided herein or, if
earlier, until his or her death, resignation or removal. A vacancy in any office
because of death, resignation, removal, or any other cause shall be filled for
the unexpired portion of the term in the manner prescribed in this Agreement for
the regular election to such office.
(c) Any officer may resign at any time by so notifying the
Management Committee and the Secretary in writing. Such resignation shall take
effect upon receipt of such notice or at such later time as is therein
specified, and unless otherwise specified, the acceptance of such resignation
shall not be necessary to make it effective. Any officer elected or appointed by
the Management Committee may be removed with or without cause. The election of
an individual as an officer shall not of itself create a right to continued
employment with the Company.
(d) Salaries and other compensation of the officers of the
Company shall be fixed from time to time by unanimous vote of the Management
Committee.
5.7 DZ Option Plan. The Management Committee shall authorize and
shall cause DZ to adopt, on the Senior Debt Conversion Date or as promptly as
practicable thereafter, one or more option plans or other employee benefit plans
to
<PAGE>
49
provide for the issuance to officers and employees of DZ (other than any Members
or Affiliates of Members) of common stock of DZ (the "DZ Equity") or other
securities of DZ convertible into or exchangeable for DZ Equity representing, in
the aggregate, up to 10% of the fully diluted DZ Equity outstanding immediately
following the Senior Debt Conversion Date at an exercise price per share no less
than the imputed price per share of the DZ Equity held by the Company
immediately following the Senior Debt Conversion Date based upon the value of
the capital contributions to the Company through such date (such imputed price
per share, the "DZ Per Share Price"). The Management Committee shall authorize
and shall cause DZ to issue, on the Senior Debt Conversion Date or as promptly
as practicable thereafter, to the Chief Executive Officer of DZ options to
acquire up to 5% of the fully diluted DZ Equity outstanding immediately
following the Senior Debt Conversion Date at an exercise price per share equal
to the DZ Per Share Price, it being understood that the DZ Equity issuable upon
the exercise of the options granted to the Chief Executive Officer of DZ
pursuant to this sentence shall comprise a portion of the 10% of the fully
diluted DZ Equity which shall be issuable upon the exercise of the options or
other securities granted to any officer or employee of DZ pursuant to the first
sentence of this Section 5.7.
5.8 Certain Post-Conversion Matters. Subject to applicable law, on
the Senior Debt Conversion Date (or as soon as practicable thereafter), the
Management Committee shall authorize and shall cause DZ to enter into an
agreement with SM Acquisition and BF Acquisition on terms substantially similar
to those set
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50
forth in Sections 5.8(a), 5.8(b), 5.8(c) and 5.8(d).
(a) If DZ proposes to issue or sell any DZ Equity to any
Unaffiliated Buyer other than DZ Equity which may be issued (i) to officers or
employees of DZ pursuant to the options, stock option plans or other employees
benefit plans contemplated by Section 5.7 hereof, (ii) as consideration in
connection with the merger or consolidation of DZ with or into another Person
pursuant to which DZ shall be the surviving entity, (iii) as consideration in
connection with the acquisition by DZ of all or substantially all of the assets,
capital stock or other ownership interests of another Person, (iv) in connection
with any reorganization of DZ or (v) pursuant to a public offering of DZ Equity,
with respect to which a registration statement shall have been filed under the
Securities Act, which, in each case, is approved by the Management Committee in
accordance with the terms of this Agreement, then the Company shall cause DZ to
give notice (a "Preemptive Rights Notice") of such proposed issuance or sale to
each of SM Acquisition, BF Acquisition and any other Person to whom DZ has
granted rights substantially similar to those set forth in Sections 5.8(a),
5.8(b) and 5.8(c) (each, a "Holder"), which notice shall be delivered at least
10 Business Days prior to such proposed issuance or sale and shall state the
price and other material terms and conditions upon which such proposed issuance
or sale is to be made to the Unaffiliated Buyer. In the event that (A) DZ issues
or sells DZ Equity in connection with a transaction of the type described in
clause (ii), (iii) or (iv) of this Section 5.8(a), (B) the BF Minimum Ownership
Condition was satisfied immediately
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51
prior to such issuance or sale and (C) immediately following such issuance or
sale, the BF Minimum Ownership Condition would not be satisfied solely as a
result of such issuance or sale, then the percentage set forth in clause (x) of
the definition of "BF Minimum Ownership Condition" shall be reduced to the
percentage of the fully diluted DZ Equity (assuming the full exercise of any
unexercised portion of any BF Warrants) beneficially owned, in the aggregate, by
BF Acquisition and its Affiliates (other than the Company) immediately following
such issuance or sale.
(b) For a period of ten (10) Business Days following the
delivery of a Preemptive Rights Notice, each Holder shall have the right to
purchase or subscribe for a percentage of the total number of shares of DZ
Equity to be issued or sold by DZ equal to such Holder's Preemptive Rights
Percentage (as hereinafter defined) on the same price and other terms and
conditions as are applicable to the Unaffiliated Buyer; provided, that, in the
case of BF Acquisition, such right shall only apply if the BF Minimum Ownership
Condition is satisfied immediately prior to such issuance or sale of DZ Equity
by DZ (such rights of each Holder being referred to herein as such Holder's
"Preemptive Rights").
(c) Preemptive Rights shall be exercisable by any Holder by
delivery of written notice to DZ prior to the expiration of the 10-Business Day
period referred to in Section 5.8(b), which notice may also indicate that such
Holder elects to exercise the Unexercised Preemptive Rights, if any, with
respect to the issuance or sale of DZ Equity by DZ to which such 10-Business Day
period relates. The failure of any Holder to respond within such 10-Business Day
period shall be deemed to be a waiver
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52
of such Holder's Preemptive Rights with respect to such issuance or sale of DZ
Equity by DZ. A Holder's "Preemptive Rights Percentage" shall mean such Holder's
pro rata ownership interest in the fully diluted DZ Equity at the time of any
issuance or sale of DZ Equity by DZ based upon such Holder's Interest (if such
Holder is a Member), the DZ Equity held directly by such Holder or any of its
Affiliates (other than the Company) and, if at the time of such issuance or sale
of DZ Equity by DZ such Holder is the beneficial owner of any security
convertible into or exercisable for DZ Equity, the DZ Equity issuable upon the
full conversion or exercise of any unconverted or unexercised portion of such
security.
(d) If the 10-Business Day period referred to in Section
5.8(b) expires and any Holder has not elected to exercise its Preemptive Rights
(such unexercised Preemptive Rights being referred to herein as the "Unexercised
Preemptive Rights") with respect to a proposed issuance or sale by DZ of DZ
Equity, then (i) BF Acquisition, if it elected to exercise the Unexercised
Preemptive Rights with respect to such issuance or sale of DZ Equity by DZ in
accordance with Section 5.8(c), shall be deemed to have exercised the
Unexercised Preemptive Rights of SM Acquisition, if any, and to have purchased
or subscribed for the shares of DZ Equity attributable thereto and (ii) each
Holder, if any, who elected to exercise the Unexercised Preemptive Rights with
respect to such issuance or sale of DZ Equity by DZ in accordance with Section
5.8(c) shall be deemed to have exercised the portion of such Unexercised
Preemptive Rights which is exercisable for a number of shares of DZ Equity equal
to the product of (x) the difference between such number of shares of DZ
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53
Equity (I) for which such Unexercised Preemptive Rights are exercisable and (II)
deemed purchased or subscribed for, if any, pursuant to clause (i) of this
Section 5.8(d) and (y) the quotient of (A) such Holder's Preemptive Rights
Percentage and (B) the sum of the Preemptive Rights Percentage of each Holder
who elected to exercise the Unexercised Preemptive Rights in accordance with
Section 5.8(c).
(e) After the Senior Debt Conversion Date, for so long as (i)
the Company, SM Acquisition and BF Acquisition and any of their respective Affil
iates collectively own more than *****% of the DZ Equity and (ii) the BF Minimum
Ownership Condition is satisfied, BF Acquisition shall be entitled to nominate
an aggregate number (rounded to the nearest whole number with .5 and above
rounded to the next whole number) of directors for election to the Board of
Directors of DZ equal to the greater of (x) one and (y) the product of (A) the
BF Ownership Percentage at the time of determination and (B) the aggregate
number of directors comprising the Board of Directors of DZ at the time of
determination, and each of the Company, SM Acquisition and BF Acquisition and
any of their respective Affiliates shall vote or cause to be voted all shares of
DZ Equity with respect to which such Person is entitled to vote in favor of such
nominee(s); and
(f) After the Senior Debt Conversion Date, for so long as the
BF Minimum Ownership Condition is satisfied, the Company will not authorize and
will not cause to be entered into by DZ any transaction or series of related
transactions with the Company or any of the Company's Affiliates unless such
transaction or series of related transactions is on terms that are no less
favorable to DZ than those that
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54
would have been obtainable by DZ at the time of such transaction or series of
related transactions in a comparable transaction (or series of comparable
related transactions) with an unrelated Person, and unless, if such transaction
or series of related transactions has a value that is, in the aggregate, equal
to or more than (i) $******, if the Sales Percentage (as hereinafter defined) is
equal to or more than $*****, (ii) the Sales Percentage, if the Sales Percentage
is less than $****** but more than $******, or (iii) $**** , if the Sales
Percentage is equal to or less than $******, BF Acquisition has given its prior
written consent. The term "Sales Percentage" shall mean ****% of DZ's
consolidated sales for its latest fiscal year.
5.9 Management of DZ Bankruptcy.
(a) Prior to the Senior Debt Conversion Date, BF Acquisition
and any of its Affiliates shall have the right, and are hereby authorized, after
prior consultation with SM Acquisition and subject to the provisions of Section
5.9(b), to take all actions on behalf of the Company in respect of the
Bankruptcy Case, including, without limitation, to serve on an official
committee of unsecured creditors, to negotiate with DZ and other creditors, to
appear and file pleadings and other papers with the Bankruptcy Court and to
execute and deliver (in the name of and on behalf of the Company) and file in
such Bankruptcy Case, any proof of claim, statement or demand which BF
Acquisition and its Affiliates may reasonably determine to be required or
appropriate in respect of the Company's DZ Senior Debt; provided, however, that
BF Acquisition shall not, and shall not permit any of its Affiliates to, without
the prior written consent of SM Acquisition, (i) consent to any compromise,
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55
reduction or any other treatment of the Company's claim in respect of the DZ
Senior Debt held by the Company pursuant to a plan of reorganization or
otherwise, (ii) accept or reject any plan of reorganization proposed in the
Bankruptcy Case, (iii) execute, file or submit any plan of reorganization in the
Bankruptcy Case or (iv) consent to the appointment of a trustee, the dismissal
or conversion of the Bankruptcy Case or relief from the automatic stay by the
holders of the DZ Senior Debt. Notwithstanding anything to the contrary
contained in this Agreement, BF Acquisition and its Affiliates shall not, by
executing, delivering or filing any such proof of claim, statement or demand,
become liable or responsible in any respect for the legality, adequacy or
sufficiency thereof, and shall have no liability for any other act taken
pursuant to their rights in this Section 5.9(a), except for such acts that
involve gross negligence or willful misconduct on the part of BF Acquisition or
its Affiliates.
(b) During the Bankruptcy Case, BF Acquisition shall, and
shall cause its representatives to, (i) confer on a regular and frequent basis
with SM Acquisition and its representatives with respect to the status and
proceedings of the Bankruptcy Case, (ii) as promptly as reasonably practicable,
furnish SM Acquisition and its representatives with copies of all documents,
data and other information concerning DZ, the DZ Senior Debt or the Bankruptcy
Case that BF Acquisition or its Affiliates may from time to time possess and
(iii) deliver to SM Acquisition drafts of all documents and other papers to be
filed with the Bankruptcy Court (in the name of or on behalf of the Company) in
respect of the Bankruptcy Case within a reasonable time
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56
prior to filing or submitting such documents and other papers so as to afford SM
Acquisition and its representatives an opportunity to review and comment
thereon.
ARTICLE VI
EXCULPATION; INDEMNIFICATION; LIABILITY; OUTSIDE BUSINESS
6.1 Exculpation.
(a) A Member shall not have personal liability to the Company
or its Members for damages for any breach of duty in such capacity; provided,
however, that nothing in this Section 6.1 shall eliminate or limit the liability
of any such Member if a judgment or other final adjudication adverse to such
Member establishes that such Member's acts or omissions were in bad faith or
involved intentional misconduct or a knowing violation of law or that such acts
were not performed in accordance with Section 409 of the Act.
(b) None of the Members shall have the power to bind any other
Member except as specifically provided in this Agreement. None of the Members or
the Company shall be responsible or liable for any indebtedness, liability or
obligation of any other Member incurred either before or after the execution of
this Agreement, except that the Company shall be responsible and liable for
indebtedness, liabilities or obligations incurred in connection with activities
within the proper business purposes of the Company and pursuant to direct
authorization of the Manage ment Committee or a duly authorized officer of the
Company.
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57
6.2 Indemnification.
(a) The Company shall (subject to subsection (b) of this
Section 6.2) indemnify any person (an "Indemnitee") who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding brought by or against the Company, whether civil, criminal,
administrative or investigative, including, without limitation, an action by or
in the right of the Company to procure a judgment in its favor, by reason of the
fact that such Indemnitee is or was a Member, a Management Committee Person, a
member of any other committee of the Company or an officer of the Company, or at
the relevant time, being or having been such a Member, a Management Committee
Person, a member of any other committee of the Company or an officer of the
Company, or that such Indemnitee is or was serving at the request of the Company
as a partner, director, officer or trustee of another Person, against all
expenses, including attorneys' fees and disbursements, judgments, fines and
amounts paid in settlement actually and reasonably incurred by such Indemnitee
in connection with such action, suit or proceeding. Notwithstanding the
foregoing, no indemnification shall be provided to or on behalf of any
Indemnitee if a judgment or other final adjudication adverse to such Indemnitee
establishes that (i) such Indemnitee's acts were committed in bad faith or were
the result of active and deliberate dishonesty and, in either case, were
material to the cause of action so adjudicated or (ii) such Indemnitee in fact
personally gained a financial profit or other advantage to which such Indemnitee
was not legally entitled.
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(b) Any indemnification under subsection (a) of this Section
6.2 (unless ordered by a court) shall be made by the Company only as authorized
in the specific case upon a determination that the indemnification of the
Indemnitee is proper under the circumstances because he or she has met the
applicable standard of conduct set forth in subsection (a) of this Section 6.2.
Such determination shall be reasonably made by the Management Committee or, if
the Management Committee so directs, by independent legal counsel in a written
opinion.
(c) The Company may (to the extent permitted by applicable
law), in the reasonable judgment of the Management Committee, pay expenses
incurred in defending any action, suit or proceeding described in subsection (a)
of this Section 6.2 in advance of the final disposition of such action, suit or
proceeding.
(d) The Company may (to the extent permitted by applicable
law), in the reasonable judgment of the Management Committee, purchase and
maintain insurance on behalf of any Indemnitee against any liability asserted
against him or her, whether or not the Company would have the power by law to
indemnify him or her against such liability.
(e) The indemnification provided by this Section 6.2 shall not
be deemed exclusive of any other rights to indemnification to which those
seeking indemnification may be entitled under any agreement, determination of
the Management Committee or otherwise. The rights to indemnification and
reimbursement or advancement of expenses provided by, or granted pursuant to,
this Section 6.2 shall continue as to an Indemnitee who has ceased to be a
Member, a
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59
Management Committee Person, a member of any other committee of the Company or
an officer of the Company (or other person indemnified hereunder) and shall
inure to the benefit of the executors, administrators, legatees and distributees
of such person.
(f) The provisions of this Section 6.2 shall be a contract
between the Company, on the one hand, and each Indemnitee who served in such
capacity at any time while this Section 6.2 is in effect, on the other hand,
pursuant to which the Company and each such Indemnitee intend to be legally
bound. No repeal or modification of this Section 6.2 shall affect any rights or
obligations with respect to any state of facts then or theretofore existing or
thereafter arising or any proceeding theretofore or thereafter brought or
threatened based in whole or in part upon such state of facts.
6.3 Outside Businesses. Any Member or Affiliate thereof may acquire,
invest in, or otherwise engage in, directly or indirectly, any other business
ventures of any nature or description, independently or with others, similar or
dissimilar to the business of the Company, and the Company and the Members shall
have no rights by virtue of this Agreement in and to such independent ventures
or the income or profits derived therefrom, and the pursuit of any such venture,
even if competitive with the business of the Company, shall not be deemed
wrongful or improper. No Member or Affiliate thereof shall be obligated to
present any particular investment opportunity to the Company even if such
opportunity is of a character that, if presented to the Company, could be taken
by the Company, and any Member or Affiliate thereof shall have the right to take
for its own account (individually or as a
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60
partner, member, shareholder, fiduciary or otherwise) or to recommend to others
any such particular investment opportunity. Nothing contained in this Section
6.3 shall be construed to absolve any Member or Affiliate thereof from any
fiduciary duty of such Person imposed by operation of law or otherwise as a
result of such Person being a director, officer or shareholder of DZ.
ARTICLE VII
DISSOLUTION; LIQUIDATION AND WINDING-UP
7.1 Events of Dissolution. The Company shall be dissolved and its
affairs wound up upon the earliest to occur of any of the following:
(a) the vote or written consent of Members holding at least
two-thirds of the Interests electing to dissolve the Company;
(b) the vote or written consent of at least two-thirds of the
Management Committee Persons;
(c) the death, retirement, resignation, expulsion, Bankruptcy
or dissolution of any Member or the occurrence of any other event that
terminates the continued membership of a Member in the Company; unless within 90
days after such event a Majority in Interest (excluding the Interest held by the
terminated Member) elect in writing to continue the Company;
(d) the entry of a decree of judicial dissolution of the
Company under Section 702 of the Act; and
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(e) 60 days after the assignment, sale, transfer or other
disposition of all or substantially all of the assets, properties and business
of the Company.
7.2 Liquidation and Winding-Up. If the Company is dissolved pursuant
to Section 7.1, the Company shall be liquidated and wound up in accordance with
the Act and the following provisions:
(a) The financial officers of the Company shall be directed to
prepare a balance sheet of the Company as of the date of dissolution in
accordance with generally accepted accounting principles, which balance sheet
shall be reported upon by the Company's independent public accountants.
(b) The assets, properties and business of the Company shall
be liquidated by the Management Committee as promptly as possible, provided that
such liquidation is carried out in an orderly and businesslike manner so as to
maximize value and not involve undue sacrifice, and in any event within one year
from the date of the dissolution event. Notwithstanding the foregoing, if the
Management Committee reasonably determines not to sell all or any portion of the
properties and assets of the Company, such properties and assets shall be
distributed in kind in the order of priority set forth in subsection (d);
provided, however, that the fair market value of such properties and assets (as
reasonably determined by the Management Committee in good faith, unless BF
Acquisition requests an appraisal and at the time of such request, BF
Acquisition is a Member of the Company and the BF Minimum Ownership Condition is
satisfied, in which case the fair market value of such properties and assets
shall be
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62
determined by an Independent Appraiser, which determination, in either case,
shall be binding and conclusive on the parties) shall be used in determining the
extent and amount of a distribution in kind of such properties and assets in
lieu of actual cash proceeds of any sale or other disposition thereof. The fees
and expenses of such Independent Appraiser shall be borne by the Company.
(c) Net Income or Net Loss of the Company for the year(s) of
liquidation shall be credited or charged to the Capital Accounts of the Members
in accordance with the allocation provisions set forth in Section 2.4.
(d) The proceeds of sale of all or substantially all of the
properties and assets of the Company and all other properties and assets of the
Company not sold, as provided in subsection (b) above, and valued at the fair
market value thereof as provided in such subsection (b), shall be applied and
distributed as follows, and in the following order or priority:
First, to creditors of the Company, including Members
who were creditors, to the extent permitted by law, in satisfaction of all
debts and liabilities of the Company and the expenses of liquidation not
otherwise adequately provided for (whether by payment or the making of
reasonable provisions for the payment thereof), including, without
limitation, the setting up of any reserves that are reasonably necessary
for any contingent, conditional or unmatured liabilities or obligations of
the Company arising out of, or in connec tion with, the Company; and
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63
Second, the remaining proceeds to the Members in
proportion to the positive balances of their Capital Accounts, determined
after the allocation of all Net Income and Net Loss and items of income,
gain, expense and loss.
(e) Articles of Dissolution of the Company, as required by
law, shall be filed.
7.3 Calculation of Gain or Loss. The amount by which the fair market
value of any property to be distributed in kind to the Members exceeds or is
less than the basis of such property shall, to the extent not otherwise
recognized to the Company, be taken into account in computing gain or loss of
the Company for purposes of crediting or charging the Capital Accounts of, and
distributing proceeds to, the Members under Section 7.2.
7.4 Claims of the Members. Members and former Members shall look
solely to the Company's assets for the return of their Capital Contributions,
and if the assets of the Company remaining after payment of or due provision for
all debts, liabilities and obligations of the Company are insufficient to return
such Capital Contributions, the Members and former Members shall have no
recourse against the Company or any other Member.
7.5 Survival of Rights, Duties and Obligations. Dissolution,
liquidation or winding up of the Company for any reason shall not release any
party from liability which at the time of such dissolution, liquidation or
winding up already
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had accrued to any other party or which thereafter may accrue in respect to any
act or omission prior to such dissolution, liquidation or winding up.
ARTICLE VIII
TRANSFER; ADMISSION OF MEMBERS;
RIGHT OF FIRST OFFER
8.1 General Restrictions.
(a) (i) Except as otherwise permitted in this Article VIII, no
Member shall Transfer, directly or indirectly, any Interest unless a Majority in
Interest (other than such Transferring Member) has approved such Transfer (which
approval may be withheld in the sole discretion of each such non-Transferring
Member); provided, however, that subject to the other provisions of this Article
VIII, each of SM Acquisition and BF Acquisition may Transfer without the
approval of any other Member, in a single transaction or series of related
transactions, all of its respective Interest, except for a portion of its
respective Interest equal to *****% of its respective Interest as of the date
hereof (the portion of such Member's Interest that is so transferable, a
"Transferable Interest"; provided, that at no time shall the aggregate
Transferrable Interests of all Members exceed *******% of the aggregate
Interests, (ii) for so long as BF Acquisition is a Member of the Company, it
shall cause each of Jay Goldsmith and Harry Freund (or their respective estates)
to remain the sole controlling (within the meaning of Rule 405 under the
Securities Act) Persons of BF Acquisition and any Permitted Transferee of BF
Acquisition to which BF Acquisition Transfers all or any portion of its Interest
pursuant to Section 8.2 and (iii) for so long
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65
as each of SM Acquisition and BF Acquisition are Members of the Company and the
BF Minimum Ownership Condition is satisfied, SM Acquisition shall cause each of
the members of Wellspring Associates L.L.C., a New York limited liability
company, as of the date hereof (or any of such member's respective estates) to
remain the sole controlling (within the meaning of Rule 405 under the Securities
Act) Persons of SM Acquisition and any Permitted Transferee of SM Acquisition to
which SM Acquisition Transfers all or any portion of its Interest pursuant to
Section 8.2. It is hereby acknowledged and agreed that (x) any such Transfer
shall constitute a Transfer by such Member in violation of this Agreement, shall
be void ab initio and shall not be recognized by the Company and (y) any such
change in controlling persons of BF Acquisition or SM Acquisition shall be
deemed a breach of this Agreement by BF Acquisition or SM Acquisition, as the
case may be; provided, however, that the obligations of BF Acquisition and SM
Acquisition set forth in clauses (ii) and (iii) above shall inure solely to the
benefit of SM Acquisition and BF Acquisition (and their Permitted Transferees),
respectively, and no other Member (or other Person) shall be entitled to
enforce, or seek or obtain any remedy with respect to, the obligations of BF
Acquisition and SM Acquisition set forth in clauses (ii) and (iii) above.
(b) The BF Non-Transferable Rights are personal to BF
Acquisition and, notwithstanding anything to the contrary contained in this
Agreement, are non-transferable by BF Acquisition to any Person (other than a
Permitted Transferee of BF Acquisition).
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(c) Without limiting the generality of Sections 8.1(a) and
8.1(b) above, other than pursuant to a Transfer in compliance with the
provisions of this Agreement, no Member shall (and each Member shall cause its
Affiliates not to) enter into any agreement, arrangement or understanding,
written or oral, pursuant to which it shall Transfer, or otherwise grant to or
provide any Person, directly or indirectly, its Interest or any of its rights or
interests under this Agreement.
8.2 Permitted Transfers. At any time and from time to time and
subject to Section 8.1(a)(i), any Member may Transfer all or any portion of such
Member's Interest (i) with respect to any Member who is an individual, to a
member of such Member's immediate family, which shall include his parents,
spouse, siblings, children and grandchildren ("Family Members"), or a trust,
corporation, partnership or limited liability company, all of the beneficial
interests in which are held by such Member or one or more Family Members of such
Member; provided, however, that during the period in which any such trust,
corporation, partnership or limited liability company holds any right, title or
interest in any Interest, no Person other than such Member and his Family
Members may be or become beneficiaries, shareholders, partners or members
thereof and (ii) with respect to a Member who is not an individual, to such
Member's Affiliates. Any Transfer made pursuant to this Section 8.2 shall not be
subject to any of the other provisions of this Article VIII (other than Section
8.3).
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8.3 Procedures for Transfers.
(a) Notwithstanding any other provisions of this Agreement, no
Transfer of a Member's Interest may be made pursuant to any Section of this
Agreement unless (i) an instrument of Transfer and assumption in form and
substance reasonably satisfactory to the Management Committee, executed by the
Transferor and the Transferee of the Interest, pursuant to which, among other
things, the Transferee of the Interest shall acknowledge that such transferred
Interest is subject to the restrictions imposed pursuant to this Agreement and
applicable Federal and state securities laws, together with such additional
instruments and documents as shall be reasonably requested by the Management
Committee shall be delivered to the Management Committee and (ii) counsel to the
Company shall have delivered to the Company an opinion (unless (x) such opinion
is waived by the Management Committee or (y) with respect to the opinions
contained in clauses (i) and (iii) below, such Transfer shall cause (A) each
Person who was a Member immediately prior to such Transfer to cease to be a
Member upon the occurrence of such Transfer or (B) the Company to have only one
(1) Member upon the occurrence of such Transfer) reasonably satisfactory in form
and substance to the Management Committee opining that:
(i) such Transfer, when added to the total of all other
Transfers of Interests in the Company within the preceding twelve (12)
months, would not result in any Federal income tax consequences which may
be materially adverse to the Company or the Members;
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(ii) such Transfer would not violate the Securities Act,
or any state securities or "blue sky" laws applicable to the Company or
the Interest to be Transferred;
(iii) such Transfer would not cause the Company to lose
its status as a partnership for Federal income tax purposes; and
(iv) such Transfer shall not impose liability or
reporting obligations on the Company or any Member thereof in any
jurisdiction, whether domestic or foreign, or result in the Company or any
Member thereof becoming subject to the jurisdiction of any court or
governmental entity anywhere, other than the states, courts and
governmental entities in which the Company is then subject to such
liability, reporting obligation or jurisdiction.
(b) Any Person that acquires an Interest pursuant to this
Article VIII shall (i) subject to clause (ii) below, succeed to all rights of
the transferor of the Interest with respect to such transferred Interest and
(ii) assume the pro rata portion of the Capital Account of the transferring
Member that related to the portion of the Interest being transferred to such
Person (and for purposes of the allocation and distribution provisions of
Sections 2.4 and 2.6 such Person shall be treated as if any allocations and
distributions previously made with respect to such transferred Interest had been
made to such Person and not to the Transferring Member). To the extent permitted
by law, a Transferring Member shall have no liability for amounts required to be
paid with respect to such Member's Interest after the Transferee of such
Interest is admitted as a substituted Member (other than with respect to amounts
owed, but not
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paid, by such Transferring Member as an additional capital contribution or
otherwise prior to such Transfer).
8.4 Admission of Additional Members by the Company. The Company may,
from time to time, upon the approval of the Management Committee, issue
Interests to any Person, which Interests may have such preferences, rights and
designations and such other terms and conditions as the Management Committee may
reasonably determine, and such Person shall, upon such issuance and fulfillment
of the conditions set forth in Section 8.5, be admitted to the Company as a
Member.
8.5 Additional or Substituted Members. As a condition to the
admission of any Person as an additional or substituted Member, the Person to be
admitted shall execute and acknowledge such instruments, in form and substance
reasonably satisfactory to the Management Committee, as the Management Committee
may deem reasonably necessary or desirable to effectuate such admission and to
confirm that such Person has agreed to be bound by all of the covenants, terms
and conditions of this Agreement, as the same shall have been amended. Such
Persons shall become Members on the last to occur of (a) their making
contributions to the capital of the Company, to the extent required by the
Management Committee; (b) their execution of the instruments described in the
first sentence of this Section 8.5; (c) the approval of any other Person whose
approval thereof may be necessary; (d) subject to Section 9.4, the making of all
necessary amendments, modifications and restatements of this Agreement as the
Management Committee may deem appropriate to reflect a change or modification of
the Company or of the respective rights of the Members
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hereunder (including such adjustment in Interests and in Capital Accounts as may
be required to admit a new Member and to reflect the issuance of an Interest to
a new Member); and (e) the filing of an Amendment to the Articles of
Organization with the Secretary of State of the State of New York if, in the
opinion of the Management Committee, such filing is required; and thereupon such
Persons shall be included in the definition of Members, and as parties to this
Agreement, for all purposes of this Agreement. Upon becoming a substituted
Member, such Person shall be substituted for, and shall enjoy the same rights
and be subject to the same obligations as, the Member from whom such Person
received its Interest; provided, however, that any Transferee (other than a
Permitted Transferee) of all or any portion of BF Acquisition's Interest shall
not be entitled to the benefit of any BF Non-Transferable Right. Any thing
herein to the contrary notwithstanding, the Company and the Management Committee
shall be entitled to treat the Transferor of an Interest as the absolute owner
thereof in all respects, and shall incur no liability for distributions made in
good faith to the Transferor, until such time as a Transfer meeting all of the
requirements of this Article VIII has been made and a written assignment that
conforms to the requirements of this Article VIII has been received by the
Company.
8.6 Rights of First Offer and First Refusal Pre-Senior Debt
Conversion Date.
(a) If, at any time prior to the Senior Debt Conversion Date,
any Member other than SM Acquisition (such Member, the "Offering Member")
desires to Transfer any or all of its Interest (other than to a Permitted
Transferee), the Offering
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Member shall first give written notice to the Company and SM Acquisition (the
"First Offer Notice"), which First Offer Notice shall identify the Interest
proposed to be Transferred (the "Offered Interest").
(b) For a period of ten (10) Business Days following the
delivery of the First Offer Notice pursuant to Section 8.6(a), SM Acquisition
shall have the right, but not the obligation, to elect to purchase all of the
Offered Interest at a purchase price equal to the product of (i) the purchase
price paid by the Company for the DZ Senior Debt or the value attributed to the
DZ Senior Debt upon its contribution to the Company, as the case may be, and
(ii) the Offered Interest (expressed as a percentage). The right of SM
Acquisition to elect to purchase the Offered Interest under this Section 8.6(b)
shall be exercisable by delivery of written notice, prior to the expiration of
the 10-Business Day period referred to in this Section 8.6(b), to the Offering
Member with a copy of such written notice to the Company. The failure of SM
Acquisition to respond within such 10-Business Day period shall be deemed to be
a waiver of its right to purchase the Offered Interest.
(c) If the 10-Business Day period referred to in Section
8.6(b) expires and SM Acquisition has not elected to purchase all of the Offered
Interest, the Offering Member shall have the right, subject to compliance with
Sections 8.1 and 8.3 hereof, to Transfer such Offered Interest to any buyer in a
bona fide transaction consummated within 60 Business Days following the
expiration of the 10-Business Day period referred to in Section 8.6(b), as such
60-Business Day period may be extended solely for the purpose of allowing the
parties to such proposed Transfer to comply with
<PAGE>
72
any applicable laws, rules or regulations of any Governmental Authority and only
for so long as such parties are using their commercially reasonable efforts to
consummate such Transfer; provided, that not less than five (5) Business Days
prior to the consummation of such Transfer, the Offering Member shall have
furnished the Company with a certificate signed by such Offering Member, which
certificate shall (i) identify the prospective buyer and include an
acknowledgment from the prospective buyer to the effect that it agrees to be
bound by the terms of this Agreement, (ii) state the aggregate purchase price
for the Offered Interest to be paid by the prospective buyer and (iii) describe
all other material terms and conditions of the proposed Transfer of the Offered
Interest. If such proposed Transfer of the Offered Interest to a buyer is not
consummated within such 60-Business Day period, as extended if applicable, and
prior to the Senior Debt Conversion Date for any reason, then the restrictions
provided for herein shall again become effective, and no Transfer of such
Offered Interest may be made thereafter by the Offering Member without again
offering the same to SM Acquisition in accordance with Section 8.6(a).
(d) If SM Acquisition shall exercise its option pursuant to
Section 8.6(b), the Transfer of the Offered Interest to SM Acquisition resulting
from the exercise of such option shall be subject to compliance with Section 8.3
hereof and shall take place at the offices of the Company no later than the
twentieth Business Day after the expiration of the 10-Business Day period
referred to in Section 8.6(b), or such later date as shall be required solely
for the purpose of allowing the parties to such proposed Transfer to comply with
any applicable laws, rules or regulations of any
<PAGE>
73
Governmental Authority for so long as such parties are using their commercially
reasonable efforts to consummate such Transfer. On such closing date, the
Offering Member Transferring the Offered Interest shall execute and deliver
instruments, in form and substance reasonably satisfactory to SM Acquisition,
assigning all of its right, title and interest in the Offered Interest to SM
Acquisition, against payment therefor, free and clear of all liens, claims or
other encumbrances, other than restrictions imposed pursuant to this Agreement
and applicable Federal and state securities laws.
(e) If, at any time prior to the Senior Debt Conversion Date,
SM Acquisition desires to Transfer any or all of its Interest (other than to a
Permitted Transferee), and has received a bona fide offer to purchase such
Interest from an Unaffiliated Buyer (the "Unaffiliated Offer") and desires to
accept such Unaffiliated Offer, then prior to accepting such Unaffiliated Offer,
SM Acquisition shall first give written notice to the Company and BF Acquisition
(the "SM First Refusal Notice") if, at the time SM Acquisition desires to accept
such Unaffiliated Offer, BF Acquisition is a Member of the Company and the BF
Minimum Ownership Condition is satisfied. Any SM First Refusal Notice delivered
hereunder shall (i) identify the Interest proposed to be Transferred (the "SM
First Refusal Interest"), (ii) provide all the material terms and conditions of
the Unaffiliated Offer and (iii) state the proposed aggregate purchase price for
the SM Offered Interest (the "SM First Refusal Price"), which price must be
payable in cash, Marketable Securities or any combination thereof in full upon
consummation of the Unaffiliated Offer.
<PAGE>
74
(f) For a period of ten (10) Business Days following the
delivery of the SM First Refusal Notice pursuant to Section 8.6(e), BF
Acquisition shall have the right, but not the obligation, to elect to purchase
all of the SM First Refusal Interest (x) for the SM First Refusal Price, payable
in cash or by delivery of Marketable Securities having a Market Value
(determined as of the Business Day immediately preceding the closing date for
such Transfer) equal to the excess of such SM First Refusal Price over the
amount of cash, if any, delivered by BF Acquisition on such closing date, and
(y) upon other material terms and conditions no less favorable to SM Acquisition
than as are set forth in the SM First Refusal Notice. The right of BF
Acquisition to elect to purchase the SM First Refusal Interest under this
Section 8.6(f) shall be exercisable by delivery of written notice, prior to the
expiration of the 10-Business Day period referred to in this Section 8.6(f), to
SM Acquisition with a copy of such written notice to the Company. The failure of
BF Acquisition to respond within such 10-Business Day period shall be deemed to
be a waiver of its right to purchase the SM First Refusal Interest.
(g) If the 10-Business Day period referred to in Section
8.6(f) expires and BF Acquisition has not elected to purchase all of the SM
First Refusal Interest, SM Acquisition shall have the right, subject to
compliance with Sections 8.1, 8.3 and 8.9 (to the extent any Member (other than
SM Acquisition) exercises its rights thereunder), to Transfer such SM First
Refusal Interest to the party set forth in the SM First Refusal Notice for no
less than the SM First Refusal Price set forth therein and upon material terms
and conditions no less favorable to SM Acquisition than as are
<PAGE>
75
set forth in such SM First Refusal Notice within 60 Business Days following the
expiration of the 10-Business Day period referred to in Section 8.6(f), as such
60-Business Day period may be extended solely for the purpose of allowing the
parties to such proposed Transfer to comply with any applicable laws, rules or
regulations of any Governmental Authority and only for so long as such parties
are using their commercially reasonable best efforts to consummate such
Transfer; provided, that not less than five (5) Business Days prior to the
consummation of such Transfer, SM Acquisition shall have furnished the Company
with a certificate signed by SM Acquisition, which certificate shall (i)
identify the prospective buyer and include an acknowledgment from the
prospective buyer to the effect that it agrees to be bound by the terms of this
Agreement, (ii) state the aggregate purchase price for the SM First Refusal
Interest to be paid by the prospective buyer and (iii) describe all other
material terms and conditions of the proposed Transfer of the SM First Refusal
Interest; provided, further, that such certificate shall not be required to be
delivered in the event that, as a result of such Transfer, the Transferee would
hold all of the Interests. If such proposed Transfer of the SM First Refusal
Interest to a buyer is not consummated within such 60-Business Day period, as
extended if applicable, for any reason, then the restrictions provided for
herein shall again become effective, and no Transfer of such SM First Refusal
Interest may be made prior to the Senior Debt Conversion Date by SM Acquisition
without again offering the same to BF Acquisition in accordance with Section
8.6(e). In addition to the rights granted to SM Acquisition under this Section
8.6(g), if (x) the SM First Refusal Interest consists of all of SM Acquisition's
<PAGE>
76
Interest and (y) BF Acquisition has not elected to purchase all of the SM First
Refusal Interest pursuant to Section 8.6(f), SM Acquisition shall be entitled to
exercise its rights under Section 8.8 with respect to such SM First Refusal
Interest.
(h) If BF Acquisition shall exercise its option pursuant to
Section 8.6(f), the Transfer of the SM First Refusal Interest to BF Acquisition
resulting from the exercise of such option shall be subject to compliance with
Section 8.3 and shall take place at the offices of the Company no later than the
twentieth Business Day after the expiration of the 10-Business Day period
referred to in Section 8.6(f), or such later date as shall be required solely
for the purpose of allowing the parties to such proposed Transfer to comply with
any applicable laws, rules or regulations of any Governmental Authority for so
long as such parties are using their commercially reasonable best efforts to
consummate such Transfer. On such closing date, SM Acquisition shall execute and
deliver instruments, in form and substance reasonably satisfactory to BF
Acquisition, assigning all of its right, title and interest in the SM First
Refusal Interest to BF Acquisition, against payment therefor, free and clear of
all liens, claims or other encumbrances, other than restrictions imposed
pursuant to this Agreement and applicable Federal and state securities laws.
8.7 Right of First Offer Post-Senior Debt Conversion Date.
(a) If, at any time after the Senior Debt Conversion Date, any
Member other than SM Acquisition (such Member, the "Post-Conversion Offering
Member") desires to Transfer any or all of its Interest (other than to a
Permitted Transferee), the Post-Conversion Offering Member shall first give
written notice to the
<PAGE>
77
Company and the other Members (the "Post-Conversion First Offer Notice"), which
Post-Conversion First Offer Notice shall (i) identify the Interest proposed to
be Transferred (the "Post-Conversion Offered Interest"), (ii) provide all the
material terms and conditions on which the Post-Conversion Offering Member
desires to consummate the Transfer and (iii) state the proposed aggregate
purchase price for the Post-Conversion Offered Interest (the "Post-Conversion
First Offer Price"), which price must be payable in cash, Marketable Securities
or any combination thereof in full upon consummation of the Transfer.
(b) For a period of ten (10) Business Days following the
delivery of the Post-Conversion First Offer Notice pursuant to Section 8.7(a),
SM Acquisition shall have the right, but not the obligation, to elect to
purchase all of the Post-Conversion Offered Interest (x) for the Post-Conversion
First Offer Price, payable in cash or by delivery of Marketable Securities
having a Market Value (determined as of the Business Day immediately preceding
the closing date for such Transfer) equal to the excess of such Post-Conversion
First Offer Price over the amount of cash, if any, delivered by SM Acquisition
on such closing date, and (y) upon other material terms and conditions no less
favorable to the Post-Conversion Offering Member as are set forth in the
Post-Conversion First Offer Notice. The right of SM Acquisition to elect to
purchase the Post-Conversion Offered Interest under this Section 8.7(b) shall be
exercisable by delivery of written notice, prior to the expiration of the
10-Business Day period referred to in this Section 8.7(b), to the
Post-Conversion Offering Member with a copy of such written notice to the
Company. The failure of SM Acquisition to
<PAGE>
78
respond within such 10-Business Day period shall be deemed to be a waiver of its
right to purchase the Post-Conversion Offered Interest. If SM Acquisition waives
its right to purchase the Post-Conversion Offered Interest, the Company shall
give notice to each other Member, if any, and each such other Member, if any,
shall have the right, but not the obligation, to elect to purchase all of the
Post-Conversion Offered Interest (x) for the Post-Conversion First Offer Price,
payable in cash or by delivery of Marketable Securities having a Market Value
(determined as of the Business Day immediately preceding the closing date for
such Transfer) equal to the excess of such Post-Conversion First Offer Price
over the amount of cash, if any, delivered by such Member on such closing date,
and (y) upon other material terms and conditions no less favorable to the
Post-Conversion Offering Member as are set forth in the Post-Conversion First
Offer Notice. Each such other Member shall give written notice to the Company
within five (5) Business Days after its receipt of notice from the Company
advising the Company whether it wishes to purchase such Post-Conversion Offered
Interest. If more than one such Member gives such written notice to the Company,
then each such Member shall be entitled to purchase its pro rata share of the
Post-Conversion Offered Interest for its pro rata portion of the Post-Conversion
First Offer Price, based on the relative Interests of all such Members that have
elected to purchase the Post-Conversion Offered Interest.
(c) If, after the 5-Business Day period referred to in Section
8.7(b), all of the Post-Conversion Offered Interest has not been elected to be
purchased by the Members, the Post-Conversion Offering Member shall have the
right,
<PAGE>
79
subject to compliance with Sections 8.1 and 8.3 hereof, to Transfer such
Post-Conversion Offered Interest to any buyer in a bona fide transaction
consummated within 60 Business Days following the expiration of the 5-Business
Day period referred to in Section 8.7(b), as such 60-Business Day period shall
be extended solely for the purpose of allowing the parties to such proposed
Transfer to comply with any applicable laws, rules or regulations of any
Governmental Authority and only for so long as such parties are using their
commercially reasonable best efforts to consummate such Transfer, for no less
than the Post-Conversion First Offer Price set forth in the Post-Conversion
First Offer Notice and upon other material terms and conditions no less
favorable to the Post-Conversion Offering Member than the material terms and
conditions set forth in the Post-Conversion First Offer Notice; provided, that
not less than five (5) Business Days prior to the consummation of such Transfer,
the Post-Conversion Offering Member shall have furnished the Company with a
certificate signed by such Post-Conversion Offering Member, which certificate
shall (i) identify the prospective buyer and include an acknowledgment from the
prospective buyer to the effect that it agrees to be bound by the terms of this
Agreement, (ii) state the aggregate purchase price for the Post-Conversion
Offered Interest to be paid by the prospective buyer and (iii) describe all
other material terms and conditions of the proposed Transfer of the
Post-Conversion Offered Interest. If such proposed Transfer of the Post-
Conversion Offered Interest to a buyer is not consummated within such
60-Business Day period, as extended if applicable, for any reason, then the
restrictions provided for herein shall again become effective, and no Transfer
of such Post-Conversion Offered
<PAGE>
80
Interest may be made thereafter by the Post-Conversion Offering Member without
again offering the same to SM Acquisition (and the other Members, if any) in
accordance with Section 8.7(a).
(d) If the option pursuant to Section 8.7(b) is exercised by
SM Acquisition or any other Member, the Transfer of the Post-Conversion Offered
Interest resulting from the exercise of such option shall be subject to
compliance with Section 8.3 and shall take place at the offices of the Company
no later than the twentieth Business Day or such later date as may be required
solely for the purpose of allowing the parties to such proposed Transfer to
comply with any applicable laws, rules or regulations of any Governmental
Authority for so long as such parties are using their commercially reasonable
best efforts to consummate such Transfer, after the expiration of the 5-Business
Day period referred to in Section 8.7(b). On such closing date, the
Post-Conversion Offering Member Transferring the Post-Conversion Offered
Interest shall execute and deliver instruments, in form and substance reasonably
satisfactory to such purchasing Member or Members, as the case may be, assigning
all of its right, title and interest in the Post-Conversion Offered Interest to
such purchasing Member or Members, as the case may be, against payment therefor,
free and clear of all liens, claims or other encumbrances, other than
restrictions imposed pursuant to this Agreement and applicable Federal and state
securities laws.
8.8 Take-Along Right of SM Acquisition. Subject to BF Acquisition's
rights under Sections 8.6(e), 8.6(f) and 8.6(h), if SM Acquisition proposes to
Transfer all of its Interest at any time to a third party buyer (the
<PAGE>
81
"Unaffiliated Buyer"), then SM Acquisition may, at its option, deliver a notice
(the "Buyout Notice") to the Company and the other Members (a) stating that it
proposes to consummate such Transfer and that it exercises its rights under this
Section 8.8, and (b) setting forth the name and address of the Unaffiliated
Buyer and the proposed purchase price. The Members (other than SM Acquisition)
agree that, upon receipt of the Buyout Notice, they shall be obligated to sell
all of their Interests to the Unaffiliated Buyer at a price (based on such
Member's pro rata ownership of Interests at the time of determination) equal to
and subject to the same terms and conditions as the price and terms and
conditions received by SM Acquisition for its Interest. Notwithstanding anything
to the contrary contained in this Agreement, SM Acquisition shall be entitled to
exercise its rights under this Section 8.8 without compliance with any of the
provisions contained in Section 8.1 or 8.3.
8.9 Tag-Along Rights. If at any time SM Acquisition desires to
Transfer to an Unaffiliated Buyer more than 20% of the outstanding Interests, SM
Acquisition shall give written notice (the "Tag-Along Notice") to BF Acquisition
at least 10 Business Days prior to the Transfer. BF Acquisition may, upon giving
written notice to SM Acquisition and the Company within 5 Business Days after
its receipt of the Tag-Along Notice, participate in such Transfer by including
in such Transfer an amount of its Interest equal to the product of (x) the
Interest to be Transferred by SM Acquisition to the Unaffiliated Buyer, and (y)
the percentage ownership of the Company represented by BF Acquisition's
Interest. The Transfer by BF Acquisition pursuant to this Section 8.9 shall be
made on the same terms and conditions as those
<PAGE>
82
applicable to the Transfer by SM Acquisition and BF Acquisition shall comply
with the provisions of Sections 8.1 and 8.3 with respect to such Transfer. The
failure of BF Acquisition to respond within such 5-Business Day period shall be
deemed to be a waiver of its right to participate in such Transfer pursuant to
this Section 8.9.
8.10 Election to Adjust Tax Basis. The Tax Matters Person may, but
(unless the affected Member agrees to pay the associated costs) need not, cause
the Company to make an election or, with the consent of the Commissioner of
Internal Revenue, to revoke any election made under Section 754 of the Code to
adjust the basis of Company property under Sections 734 and 743 of the Code, and
each Member agrees to furnish the Company with all information necessary to give
effect to any such election. The Tax Matters Person may elect to make any other
election permitted under any provision of the Code if, in the opinion of the Tax
Matters Person, such election would be advantageous to the Members as a group or
to any Member without being disadvantageous to any other Member.
8.11 Certain Transfers. If, at any time prior to the Senior Debt
Conversion Date, SM Acquisition Transfers all of its Interest and exercises its
rights under Section 8.8, notwithstanding anything to the contrary contained in
this Agreement, BF Acquisition shall be entitled to receive from SM Acquisition
an amount equal to the amount BF Acquisition would have received under Article
VII if the Company had been liquidated.
8.12 Notice of Certain Transfers. If, at any time after the Senior
Debt Conversion Date, SM Acquisition intends to Transfer more than ******% of
its
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83
Interest, SM Acquisition shall give at least ten (10) Business Days written
notice to BF Acquisition setting forth such intention, unless SM Acquisition
shall have theretofore delivered a notice pursuant to Section 8.7, 8.8 or 8.9,
as the case may be.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. Whenever provision is made in this Agreement for the
giving of any notice, such notice shall be in writing and shall be deemed to
have been duly given if mailed by first class United States mail, postage
prepaid, delivered personally, telegraphed, telexed, sent by facsimile
transmission or sent by overnight courier, if to the Members, to the addresses
therefor set forth on Schedule 2.1, and if to the Company, to:
Birch Holdings LLC
c/o Wellspring Associates L.L.C.
620 Fifth Avenue, Suite 216
New York, New York 10020
Attention: Greg S. Feldman
Telecopier: (212) 332-7575
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: James M. Dubin, Esq.
Telecopier: (212) 757-3990
<PAGE>
84
and to:
B1 Investments LLC
c/o Balfour Investors Incorporated
620 Fifth Avenue
New York, NY 10020
Attention: Ken Grossman
Telecopier: (212) 265-8049
or to such other address, in any such case, as any party hereto shall have last
designated by notice to the other parties hereto. Notice shall be deemed to have
been given on the day that it is so delivered personally, telegraphed, telexed
or sent by facsimile transmission and the appropriate answerback received or, if
sent by overnight courier, shall be deemed to have been given one day after
delivery to the courier company, or if mailed, three days following the date on
which such notice was so mailed.
9.2 Power of Attorney. Each Management Committee Person, at the
request of the Management Committee, shall execute such amendment of the
Articles of Organization, restated Articles of Organization or other documents
or certificates as the Management Committee deems necessary or appropriate to
comply with the laws of any jurisdiction in which the Company does business.
Each Member and each Management Committee Person hereby appoints James M. Dubin
as its true and lawful representative and attorney-in-fact, in its name, place
and stead to make, execute, sign and file all instruments, documents and
certificates that, from time to time, may be required by the laws of the United
States of America, the State of New York or any other State in which the Company
shall determine to do business, or any
<PAGE>
85
political subdivision or agency thereof, and that are consistent with the terms
hereof. James M. Dubin, as representative and attorney-in-fact, however, shall
not have any right, power of authority to amend or modify this Agreement when
acting in such capacity, which amendment or modification shall only be effected
in accordance with the provisions of Section 9.4.
9.3 Entire Agreement; Non-Waiver. This Agreement and the BF Warrant
Agreement constitute the entire agreement of the parties with respect to the
Company and supersedes all prior agreements, written or oral, with respect
thereto. No delay on the part of any party in exercising any right hereunder
shall operate as a waiver thereof, nor shall any waiver, express or implied, by
any party of any right hereunder or of any failure to perform or breach hereof
by any other party constitute or be deemed a waiver of any other right hereunder
or of any other failure to perform or breach hereof by the same or any other
Member, whether of a similar or dissimilar nature thereof.
9.4 Amendments. This Agreement may be amended from time to time upon
the approval of at least a Majority in Interest.
9.5 Further Assurances. Each of the Members hereby agrees to execute
and deliver all such other and additional instruments and documents and to do
such other acts and things, at the request of the Management Committee, as may
be reasonably necessary or appropriate to carry out the intent and purposes of
this Agreement.
<PAGE>
86
9.6 Applicable Law. This Agreement, the relations, rights and duties
of the Members among themselves, and all matters pertaining to the Members and
the Company, shall be governed by and construed under and in accordance with the
laws of the State of New York applicable to agreements entered into and to be
performed wholly within such State (without regard to principles of conflicts of
laws).
9.7 Severability. In the event that any provision of this Agreement
shall be declared to be invalid, illegal or unenforceable, such provision shall
survive to the extent it is not so declared, and the validity, legality and
enforceability of the other provisions hereof shall not in any way be affected
or impaired thereby, unless such action would substantially impair the benefits
to either party of the remaining provisions of this Agreement.
9.8 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
9.9 Table of Contents and Headings. The table of contents and
headings in this Agreement are solely for convenience of reference and shall not
affect the interpretation or construction of any of the provisions hereof.
9.10 No Third Party Rights. Except for the rights of parties
expressly created hereby, this Agreement is intended solely for the benefit of
the parties hereto and is not intended to confer any benefit upon, or create any
rights in favor of, any Person other than the parties hereto.
<PAGE>
87
9.11 Changes of Law. In the event that the adoption of or any change
in law, rule, regulation, or directive (or in the interpretation or application
thereof) at any time after the date hereof does or shall have the effect of
eliminating or reducing the restrictions on the transferability of interests in
an entity (with attributes similar to those of the Company) in order for such
entity to maintain its status as a partnership for Federal income tax purposes
and the Tax Matters Person shall determine that the Company shall be entitled to
rely on such law, rule, regulation or directive (or interpretation or
application thereof), the Members hereby agree to amend this Agreement to
reflect such elimination or reduction of the restriction on transferability of
the Interests set forth in Section 8.1(a)(i) in an equitable manner as
determined by the Tax Matters Person, in its reasonable discretion.
<PAGE>
88
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
or caused this Agreement to be executed by their respective duly authorized
officers, on the date first above written.
MEMBERS
BIRCH ACQUISITION LLC
By: /s/ Martin S. Davis
-------------------------------------
Name: Martin S. Davis
Title: Managing Member
B1 INVESTMENTS LLC
By: /s/ Jay Goldsmith
-------------------------------------
Name: Jay Goldsmith
Title: Member
WITHDRAWING MEMBER
/s/ Martin S. Davis
-------------------------------------
Martin S. Davis
<PAGE>
Schedule 2.1 to the
Amended and Restated
Operating Agreement
of Birch Holdings LLC
Members;
Initial Capital Contributions; Interests
Name and Address Initial Capital
of Member Contributions Interest
---------------- --------------- --------
Birch Acquisition LLC $********* *****%
620 Fifth Avenue
Suite 216
New York, NY 10020
B1 Investments LLC $********* *****%
c/o Balfour Investors Incorporated
620 Fifth Avenue
New York, NY 10020
<PAGE>
Schedule 5.2 to the
Amended and Restated
Operating Agreement
of Birch Holdings LLC
Management Committee Persons
- ----------------------------
Martin S. Davis
Greg S. Feldman
Designee of BF Acquisition
Scott Bernstein
Exhibit D
BIRCH ACQUISITION LLC
c/o Wellspring Associates L.L.C.
620 Fifth Avenue, Suite 216
New York, NY 10020
July 17, 1996
B1 Investments LLC
Veritov Trade, Inc.
c/o Balfour Investors Incorporated
620 Fifth Avenue
New York, NY 10020
Reference is made to the Amended and Restated Operating Agreement of
Birch Holdings LLC, a New York limited liability company (the "Company"), dated
as of July 17, 1996 (the "Agreement"), among Birch Acquisition LLC, a New York
limited liability company f/k/a Santa Maria Acquisition LLC ("SM Acquisition"),
and B1 Investments LLC, a Delaware limited liability company ("BF Acquisition"),
each as Members of the Company, and an individual named therein, as the
Withdrawing Member of the Company. All capitalized terms used herein but not
otherwise defined shall have the meanings ascribed to them in the Agreement.
The parties hereto hereby agree as follows:
1. The Company shall use commercially reasonable efforts to cause DZ
to issue, under a plan of reorganization confirmed under chapter 11 of the
Bankruptcy Code, upon (or as promptly as practicable thereafter) the Senior Debt
Conversion Date units consisting of shares of common stock of DZ (such common
stock, the "DZ Common Stock") and warrants to purchase common stock of DZ (such
warrants, the "General Warrants") to all holders of DZ Senior Debt immediately
prior to the Senior Debt Conversion Date (collectively, the "Senior
Debtholders"), provided that the Company shall use commercially reasonable
efforts to cause such General Warrants, in the aggregate, to be exercisable for
******% of the outstanding DZ Common Stock.
2. SM Acquisition agrees to cause the Company to distribute in kind,
to BF Acquisition, as promptly as practicable after the Company's receipt of its
General Warrants, such number of the Company's General Warrants representing
**** per cent (******%) of SM Acquisition's aggregate indirect and direct
ownership interest in the Fully Diluted DZ Equity as of the date of such
distribution (calculated (x) after giving effect to the issuance of all General
Warrants to all Senior Debtholders and assuming full conversion thereof and (y)
without regard to the allocations set forth in Sections 2.4(a)(ii) and
2.4(b)(ii) of the Agreement). The General Warrants so distributed to BF
Acquisition
<PAGE>
2
shall hereinafter be referred to as the "SM General Warrants" and the percentage
that the SM General Warrants represent of SM Acquisition's aggregate indirect
and direct ownership interest in the Fully Diluted DZ Equity as of the date of
such distribution (calculated in accordance with the provisions set forth above)
shall hereinafter be referred to as the "SM General Warrant Percentage."
3. (i) Upon the occurrence of the BF Acquisition Satisfaction Event
(as defined herein), allocations of Net Income and Net Loss shall no longer be
made to BF Acquisition under Sections 2.4(a)(ii) and 2.4(b)(ii), respectively,
of the Agreement, and from and after the date of consummation of such
distribution(s), such Sections of the Agreement shall no longer have any force
or effect. The respective Capital Account balances of SM Acquisition and BF
Acquisition shall be adjusted by the Tax Matters Person in accordance with the
procedures for determining Gross Asset Value set forth in clause (iii) of the
definition of Gross Asset Value in Section 1.8 of the Agreement so that,
following such distribution(s), (i) any allocations theretofore made to BF
Acquisition pursuant to Section 2.4(a)(ii) or 2.4(b)(ii) of the Agreement shall
be reversed and of no force or effect for any purpose of the Agreement and (ii)
such balances are proportionate to the respective Interests of SM Acquisition
and BF Acquisition.
(ii) Notwithstanding anything contained in paragraph 3(i) to
the contrary, if the SM General Warrant Percentage is less than **** percent
(****%) and for so long as the BF Acquisition Satisfaction Event shall not have
occurred, then the Allocations of Net Income shall be made to BF Acquisition
under Section 2.4(a)(ii) of the Agreement, to reflect the difference between (A)
**** percent (****%) and (B) the percentage that the SM General Warrants and the
Birch Warrants (as defined herein) received by BF Acquisition and its Affiliates
(but excluding any BF Affiliate General Warrants (as defined below)) represent
of SM Acquisition's aggregate indirect and direct ownership interest in the
Fully Diluted DZ Equity as of the date of the latest distribution of such
warrants (calculated in accordance with the terms of paragraph 2 above).
4. If the General Warrants received by BF Acquisition pursuant to
paragraph 2 above, together with any General Warrants held by any Affiliate of
BF Acquisition (but excluding any BF Affiliate General Warrants) in the
aggregate, are exercisable for less than *****% of the Fully Diluted DZ Equity,
the Company shall use commercially reasonable efforts to cause DZ to issue,
under a plan of reorganization confirmed under chapter 11 of the Bankruptcy
Code, upon (or as promptly as practicable thereafter) the Senior Debt Conversion
Date additional warrants or options convertible into or exchangeable for DZ
Equity to the Company, to SM Acquisition or to any of SM Acquisition's
Affiliates (and not to any other holder of any DZ Equity) in consideration for
management services rendered or to be rendered by such Person (such warrants or
options, the "Birch Warrants"), and such Birch Warrants shall be distributed or
transferred as follows and in the following order of priority:
<PAGE>
3
(i) first, a percentage of each Birch Warrant to SM
Acquisition equal to SM Acquisition's aggregate indirect and direct
ownership interest in the Fully Diluted DZ Equity immediately prior to the
issuance of the initial Birch Warrant and the balance of each Birch
Warrant to BF Acquisition, until BF Acquisition, together with its
Affiliates (but excluding any BF Affiliate General Warrants), have
received a number of Birch Warrants exercisable into a number of shares of
DZ Common Stock equal to the difference between ****% of the Fully Diluted
DZ Equity and the number of shares of DZ Common Stock for which the
General Warrants received by BF Acquisition pursuant to paragraph 2 above,
together with any General Warrants held by any Affiliate of BF Acquisition
(but excluding any BF Affiliate General Warrants), are exercisable; and
(ii) thereafter, to SM Acquisition and BF Acquisition pro rata
in accordance with their respective Interests.
To the extent that the Birch Warrants are issued to the Company and then
allocated and distributed in kind to SM Acquisition and BF Acquisition, such
allocation and distribution shall be appropriately reflected in their respective
Capital Accounts in accordance with the procedures for determining Gross Asset
Value set forth in clause (iii) of the definition of Gross Asset Value in
Section 1.8 of the Agreement.
5. (i) SM Acquisition and Veritov Trade, Inc. ("Veritov") agree that
(a) the provisions of Article 8 of the Agreement shall apply (to the extent
applicable) to Veritov with respect to its ownership of DZ Senior Debt and (b)
each shall enter into a definitive investors' agreement to reflect clause (a)
above as promptly as practicable following the date hereof.
(ii) Each of SM Acquisition, BF Acquisition, the Company and
Veritov agree that on the Senior Debt Conversion Date (or as soon as practicable
thereafter) such parties shall enter into a stockholders' agreement with DZ to
provide for (a) terms substantially similar to those set forth in Article 8 of
the Agreement with respect to such parties' ownership of DZ Common Stock and/or
warrants to purchase DZ Common Stock and (b) such other terms as the parties
thereto may agree.
6. For purposes of this letter agreement, "BF Acquisition
Satisfaction Event" shall mean the receipt by BF Acquisition of such number of
SM General Warrants and/or Birch Warrants which, in the aggregate, represent
**** percent (****%) of SM Acquisition's aggregate indirect and direct ownership
interest in the Fully Diluted DZ Equity as of the date of the latest
distribution of such warrants (calculated in accordance with the terms of
paragraph 2 above), "BF Affiliate General Warrants" shall mean General Warrants
issued by DZ under a plan of reorganization confirmed under Chapter 11 of the
Bankruptcy Code to any Affiliate of BF Acquisition in its capacity as a Senior
Debtholder, and "Fully Diluted DZ Equity" shall mean, as of any date of
<PAGE>
4
determination, the then fully diluted DZ Equity without giving any effect to any
warrants, options or other securities of DZ convertible into or exchangeable for
DZ Equity issued to any officer or employee of DZ under or pursuant to any
option, stock option plan or other employee benefit plan contemplated by Section
5.7 of the Agreement.
7. SM Acquisition hereby agrees to use commercially reasonable
efforts to cause DZ to issue, in accordance with the terms hereof, General
Warrants which are substantially similar to the form of warrant attached hereto
as Exhibit A.
8. This letter agreement constitutes the entire agreement of the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements, written or oral, with respect thereto. No delay on the part of
a party in exercising any right hereunder shall operate as a waiver thereof, nor
shall any waiver, express or implied, by a party of any right hereunder or of
any failure to perform or breach hereof by the other party constitute or be
deemed a waiver of any other right hereunder or of any other failure to perform
or breach hereof by such other party, whether of a similar or dissimilar nature
thereof.
9. This letter agreement may be amended from time to time by a
written instrument executed by each party hereto.
10. Each of the parties hereto agrees to use commercially reasonable
efforts to take, or cause to be taken, all actions, and to do, or cause to be
done, all things reasonably necessary, proper or advisable to consummate and
make effective as promptly as practicable the agreements set forth herein,
including, without limitation, amending the Agreement.
11. This letter agreement and the relations, rights and duties of
the parties hereto shall be governed by and construed under and in accordance
with the laws of the State of New York applicable to agreements entered into and
to be performed entirely within such State (without regard to principles of
conflicts of laws).
<PAGE>
5
12. This letter agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
BIRCH ACQUISITION LLC
By: /s/ Martin S. Davis
-------------------------------------
Name: Martin S. Davis
Title: Managing Member
ACKNOWLEDGED AND AGREED TO AS OF THE 17th DAY OF July, 1996:
B1 INVESTMENTS LLC
By: /s/ Jay Goldsmith
---------------------------
Name: Jay Goldsmith
Title: Member
VERITOV TRADE, INC.
By: /s/ H. I. Freund
---------------------------
Name: H.I. Freund
Title: President
BIRCH HOLDINGS LLC
By: /s/ Martin S. Davis
---------------------------
Name:
Title:
EXHIBIT E
January 8, 1998
VIA FACSIMILE
212-265-8049
B1 Investments LLC
Balfour Investors Incorporated
Veritov Trade, Inc.
c/o Balfour Investors Incorporated
620 Fifth Avenue
New York, NY 10020
Attention: Mr. Ken Grossman
Re: Discovery Zone, Inc. Class 6 Common Stock and Warrants
Gentlemen:
Reference is made to (i) that certain Amended and Restated Operating
Agreement of Birch Holdings LLC ("Birch"), dated as of July 17, 1996, among
Birch Acquisition LLC ("SM Acquisition"), B1 Investments LLC ("BF Acquisition")
and the individual named therein as the withdrawing member (the "Agreement"),
and (ii) that certain letter agreement (the "Letter Agreement"), also dated July
17, 1996, between SM Acquisition, BF Acquisition and Veritov, Trade Inc.
("Veritov"). Capitalized terms used but not otherwise defined herein shall have
the respective meanings ascribed thereto in the Agreement of the Letter
Agreement, as the case may be.
The purpose of this letter is to confirm our understanding with
respect to the following matters:
1. Upon issuance of the shares DZ Common Stock and General
Warrants in accordance with the letter of instruction (the
"Letter of Instruction") dated December 23, 1997 to Mr. Robert
Rooney of DZ (a copy of which is attached hereto as Exhibit
A), such issuances by DZ shall be in full satisfaction of the
obligations of the Company, SM Acquisition and their
respective Affiliates to distribute or transfer to BF
Acquisition and its Affiliates (including each of you) any
warrants to purchase DZ Common Stock. In addition, such
issuances shall be deemed to constitute a
<PAGE>
2
BF Acquisition Satisfaction Event, with the effects set forth
in paragraph 3(i) of the Letter Agreement.
2. The provisions of Article 8 of the Agreement shall apply,
mutatis mutandis, to the 213,983 and 37,757 shares of DZ
Common Stock held by Balfour in Veritov and Birch,
respectively, to be issued pursuant to the Letter of
Instruction, and each of you agrees to be bound by such
provisions to the same extent as BF Acquisition.
If the foregoing correctly sets forth our agreement with respect to
the subject matter hereof, please sign the attached copy of this letter, which
shall serve as our agreement, and return the same to me.
Very truly yours,
BIRCH ACQUISITION LLC
By: /s/ Greg S. Feldman
-------------------------------------
Name: Greg S. Feldman
Title: Managing Partner
Acknowledged and Agreed:
B1 INVESTMENTS LLC
By: /s/ Jay Goldsmith
------------------------------
Name: Jay Goldsmith
Title: Member
BALFOUR INVESTORS INC.
By: /s/ Harry I. Freund
------------------------------
Name: Harry I. Freund
Title: Chairman of the Board
<PAGE>
3
VERITOV TRADE, INC.
By: /s/ Harry I. Freund
------------------------------
Name: Harry I. Freund
Title: President
