Limited Liability Company Operating Agreement

Exhibit 10.1


LIMITED LIABILITY COMPANY OPERATING AGREEMENT OF
UNZIPPED APPAREL LLC


TABLE OF CONTENTS


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ARTICLE 1: DEFINED TERMS..................................................... 1
Section 1.1 Definitions............................................ 1


ARTICLE 2: OPERATION; NAME; ADDRESS; QUALIFICATIONS TO DO
BUSINESS............................................................ 5
Section 2.1 Operation.............................................. 5
Section 2.2 Name................................................... 6
Section 2.3 Principal Place of Business............................ 6
Section 2.4 Term................................................... 6
Section 2.5 Qualification in Other Jurisdictions................... 6
Section 2.6 Partnership Status..................................... 6
Section 2.7 Service of Process..................................... 7


ARTICLE 3: PURPOSE AND POWERS OF THE LLC..................................... 7
Section 3.1 Purpose................................................ 7
Section 3.2 Powers of the LLC...................................... 7


ARTICLE 4: CAPITAL CONTRIBUTIONS, INTERESTS, AND CAPITAL
ACCOUNTS............................................................7-8
Section 4.1 Initial Capital Contributions to the LLC............... 8
Section 4.2 Use of Proceeds........................................ 8
Section 4.3 Interests.............................................. 8
Section 4.4 Status of Capital Contributions........................ 9
Section 4.5 Financing and Additional Capital....................... 9
Section 4.6 Capital Accounts....................................... 10
Section 4.7 Return of Capital Contributions ....................... 11
Section 4.8 Guarantees of Member Interests......................... 12


ARTICLE 5: REPRESENTATIONS AND WARRANTIES.................................... 12
Section 5.1 Representations and Warranties of Caruso............... 12
Section 5.2 Representations and Warranties of Sweet................ 14


ARTICLE 6: ALLOCATIONS AND DISTRIBUTIONS..................................... 16
Section 6.1 Allocations of Profits, Losses and Cash
Flow................................................... 16
Section 6.2 Time of Allocation..................................... 16
Section 6.3 Distributions of Cash Flow............................. 16
Section 6.4 Limitations on Distributions........................... 16
Section 6.5 Amounts Withheld....................................... 17
Section 6.6 Tax Allocations: Section 704(c) of the
Code................................................... 17


ARTICLE 7: MANAGEMENT........................................................ 18
Section 7.1 Designation of Management Committee.................... 18
Section 7.2 Authority of the Management Committee.................. 18
Section 7.3 Time Commitment of Managers............................ 20
Section 7.4 Resignation in Certain Events.......................... 21
Section 7.5 Initial Managers and Officers of the LLC............... 21


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ARTICLE 8: MEMBERS' VOTING REQUIREMENTS AND RIGHTS.......................... 21


ARTICLE 9: DISPOSITION OR TRANSFER OF INTERESTS............................. 21


ARTICLE 10: LEGAL AND ACCOUNTING FEES....................................... 22


ARTICLE 11: AFTER-ACQUIRED INTERESTS AND ISSUANCE OF
ADDITIONAL INTERESTS............................................... 22
Section 11.1 After-Acquired Interests............................ 22
Section 11.2 Issuance of Additional Interests.................... 22


ARTICLE 12: PURCHASE AND SALE OF SWEET INTEREST............................. 23
Section 12.1 Mandatory Purchase and Sale of Sweet
Interest............................................. 23
Section 12.2 Purchase Price of Sweet Interest..................... 23
Section 12.3 Closing and Payment.................................. 23
Section 12.4 Transition Period.................................... 24


ARTICLE 13: CERTAIN COVENANTS............................................... 24
Section 13.1 Confidentiality...................................... 24
Section 13.2 Delivery of Confidential Information................. 25
Section 13.3 No Hiring............................................ 26
Section 13.4 Other Remedies....................................... 26


ARTICLE 14: SPECIFIC PERFORMANCE............................................ 27


ARTICLE 15: BOOKS AND RECORDS; FISCAL YEAR; ACCOUNTING;
BANKING; REPORTS................................................... 28
Section 15.1 Books, Records and Financial Statements.............. 28
Section 15.2 Fiscal Year.......................................... 28
Section 15.3 Accounting; Accounting Method........................ 28
Section 15.4 Management Reports................................... 28
Section 15.5 Financial Statements and Tax Information............. 28
Section 15.6 Banking.............................................. 29


ARTICLE 16: TAX MATTERS..................................................... 29


ARTICLE 17: LIABILITY, EXCULPATION AND INDEMNIFICATION...................... 29
Section 17.1 Liability of Members................................. 29
Section 17.2 Liability of Managers................................ 30
Section 17.3 Exculpation.......................................... 30
Section 17.4 Fiduciary Duty....................................... 31
Section 17.5 Indemnification by the LLC........................... 31
Section 17.6 Indemnification Procedure............................ 32
Section 17.7 Expenses............................................. 32


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ARTICLE 18: DISSOLUTION, LIQUIDATION AND TERMINATION......................... 32
Section 18.1 No Dissolution on Admission of Substitute
Members............................................... 32
Section 18.2 Events Causing Dissolution............................ 32
Section 18.3 Notice of Dissolution................................. 33
Section 18.4 Liquidation........................................... 33
Section 18.5 Claims of the Members................................. 34
Section 18.6 Partition............................................. 34


ARTICLE 19: POWER OF ATTORNEY................................................ 34


ARTICLE 20: GOVERNING LAW; ARBITRATION....................................... 35
Section 20.1 Governing Law......................................... 35
Section 20.2 Arbitration............................................ 35


ARTICLE 21: MISCELLANEOUS.................................................... 35
Section 21.1 Notices............................................... 35
Section 21.2 Failure to Pursue Remedies............................ 36
Section 21.3 Cumulative Remedies................................... 36
Section 21.4 Binding Effect........................................ 36
Section 21.5 Interpretation........................................ 36
Section 21.6 Headings.............................................. 36
Section 21.7 Severability.......................................... 36
Section 21.8 Counterparts.......................................... 37
Section 21.9 Integration........................................... 37


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LIMITED LIABILITY COMPANY OPERATING AGREEMENT OF
UNZIPPED APPAREL LLC


This Limited Liability Company Operating Agreement of Unzipped Apparel LLC (the "Agreement") is made as of October 7 , 1998, by and among Michael Caruso & Co., Inc., a California corporation ("Caruso"), Sweet Sportswear, LLC, a California limited liability company ("Sweet"), and Unzipped Apparel LLC (the "LLC"). Sweet and Caruso are collectively referred to as the "Members" and severally as a "Member."


WHEREAS, the Members have formed a limited liability company pursuant to the Delaware Limited Liability Company Act; and


WHEREAS, the parties hereto desire to establish their respective rights and obligations as Members of such limited liability company.


NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Members and the LLC hereby agree as follows:


ARTICLE 1.


DEFINED TERMS


Section 1.1 Definitions. Unless the context otherwise requires, the terms defined in this Article 1, for the purposes of this Agreement, have the meanings herein specified.


"ADS" means Apparel Distribution Services, LLC, a California limited liability company.


"Accountant" means the certified public accountant or firm of certified public accountants for the LLC as selected from time to time by the Management Committee, initially designated to be Ernst & Young LLP.


"Act" means the Delaware Limited Liability Company Act.


"Agreement" means this Limited Liability Company Operating Agreement, as amended, modified, supplemented or restated from time to time.


"Apparel" means all apparel categories exploiting the various "Candie's" and "Bongo" trademarks, with the exception of (i) shoes, (ii) swimwear, (iii) intimate apparel, (iv) accessories, and (v) "Bongo" apparel under existing licenses with Jenna Lane, Inc. and M.Fine and Sons Manufacturing Company.


"Azteca" means Azteca Production International, Inc., a California corporation.


"Bankruptcy" means the occurrence of any of the events specified below with respect to a Member: (i) an assignment for the benefit of creditors; (ii) the application for or consent to the appointment of a receiver, trustee, liquidator or custodian or the like of its property; (iii) the commencement of a voluntary case under federal bankruptcy laws, any state insolvency law or similar laws of any country; (iv) the adjudication as a bankrupt or insolvent; (v) the filing of an answer admitting the material allegations of a petition filed against it in any bankruptcy, reorganization or insolvency proceeding, or the taking of any action for the purpose of effecting any of the foregoing or its insolvency; or (vi) the petition of bankruptcy filed against it which is not dismissed within 90 days of filing.


"Base Year" means the fiscal year commencing February 1, 2002 and ending January 31, 2003.


"Call Notice" has the meaning set forth in Section 4.5 hereof.


"Call Period" has the meaning set forth in Section 4.5 hereof.


"Candie's" means Candie's, Inc, a Delaware corporation and the sole stockholder of Caruso.


"Capital Account" means, with respect to any Member, the account maintained for such Member in accordance with the provisions of Section 4.6 hereof.


"Capital Call" has the meaning set forth in Section 4.5 hereof.


"Capital Contribution" means, with respect to any Member, the aggregate amount of money and the fair market value of any property, tangible or intangible (other than money), contributed to the LLC pursuant to Article 4 hereof with respect to the Interest of such Member.


"Cash Flow" means, for any period, such portion of the cash on hand or in bank accounts of the LLC, as the Management Committee determines is available for distribution to the Members, after reasonable provision has been made by such


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Management Committee for the current liabilities, obligations, and operating expenses of the LLC, and reasonable reserves have been established by the Management Committee for obligations, liabilities, improvements, operating expenses and contingencies of the LLC.


"Cause" means (i) a Member's conviction for committing a felony under federal law or the law of the state in which such action occurred; (ii) the Bankruptcy of a Member; (iii) acts of theft, embezzlement or fraud committed by a Member in the course of fulfilling the Member's duties hereunder; or (iv) material breach by a Member of its obligations which is specified in reasonable detail in a written notice from the LLC to the Member and which the Member has not either remedied within 30 days after the receipt of such notice or, in the event the breach is not reasonably remediable within such 30 day period, commenced to remedy within 30 days after the receipt of such notice and continued to pursue such remedy diligently in good faith.


"Certificate" means the Certificate of Formation and any and all amendments thereto and restatements thereof filed on behalf of the LLC with the office of the Secretary of State of the State of Delaware.


"Code" means the Internal Revenue Code of 1986, as amended from time to time, the Treasury Regulations promulgated thereunder, or any corresponding provisions of any succeeding federal statute.


"Covered Person" means any Member, Manager, any partners, employees, representatives or agents of any Member, Manager, and any employee, partner, representative or agent of the LLC.


"EBITDA" shall have the meaning set forth in Section 12.2 hereof.


"Failing Member" has the meaning set forth in Section 4.5 hereof.


"Interest" means an interest in the LLC representing a Member's percentage share in the Profits, Losses, and distributions of Cash Flow of the LLC (as the same may be amended from time to time).


"LLC" means Unzipped Apparel LLC, the limited liability company to be operated under and pursuant to the Act and this Agreement.


"LLC Property" means property of the LLC, including without limitation, all real, personal, tangible or intangible property or any interests in such property.


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"Manager" means any one of the five (5) individuals serving on the Management Committee, initially as designated in Section 7.5 hereof or, as selected from time to time by the Members.


"Management Committee" means the governing body of the LLC engaged in the general supervision and operation of the business and affairs of the LLC, consisting of five (5) Managers, as follows: two Managers as designated by Caruso, two Managers as designated by Sweet, and a fifth Manager as selected by the four Managers having been designated by Caruso and Sweet.


"Member" means Sweet or Caruso and includes any Person admitted as a Member pursuant to the provisions of this Agreement, and "Members" means two (2) or more of such Persons when acting in their capacities as members of the LLC.


"Member Loan" has the meaning set forth in Section 4.5 hereof.


"Net Sales" means the gross sales of the LLC, minus returns, chargebacks and allowances as more particularly set forth in the financial statements prepared by the LLC in accordance with this Agreement.


"Person" means any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company, or other legal entity or organization.


"Prime Rate" means the rate of interest then most recently announced by the Nationsbanc Commercial Corp. (or any successor thereto) as its prime or similar rate.


"Profits" and "Losses" mean the profits and losses of the LLC as determined by the certified public accountants then engaged by the LLC, in accordance with the accounting method followed by the LLC for federal income tax purposes, including without limitation, each item of LLC income, gain, loss, deduction, tax preference and credit, all as such terms or words are used in the Code.


"Purchase Price" has the meaning set forth in Section 12.2 hereof.


"Term" shall have the meaning set forth in Section 2.4 hereof.


"Transition Period" shall have the meaning set forth in Section 12.4 hereof.


"Treasury Regulations" means the income tax regulations, including temporary regulations, promulgated under


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the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).


ARTICLE 2.


OPERATION; NAME; ADDRESS; QUALIFICATIONS TO DO BUSINESS


Section 2.1 Operation.


2.1.1. The Members and the Management Committee shall operate the LLC
as a limited liability company under the provisions of the Act and the
rights, duties and liabilities of the Members shall be as provided under
the Act, except as otherwise provided herein.


2.1.2. The name and mailing address of each Member shall be listed on
Schedule 2.1 attached hereto. Each Member shall be required to update
Schedule 2.1, as it pertains to such Member, from time to time, as
necessary to reflect accurately the information therein. Any amendment or
revision to Schedule 2.1 made in accordance with this Agreement to reflect
an address change shall not be deemed an amendment to this Agreement.


2.1.3. Upon the execution of this Agreement, those persons listed in
the first paragraph of this Agreement as Members shall be admitted to the
LLC as Members.


Section 2.2 Name. The name of the LLC heretofore formed is "Unzipped Apparel LLC".


Section 2.3 Principal Place of Business. The principal places of business of the LLC shall be at 2975 Westchester Avenue, Purchase, New York 10577 and 5804 Slauson Avenue, Commerce California 90040, or at such other place as the Management Committee shall from time to time determine.


Section 2.4 Term. The term of the LLC commenced as of September 17, 1998 (the date on which the Certificate was filed with the Secretary of State of the State of Delaware), and shall continue until December 31, 2020, unless terminated sooner pursuant to the provisions hereof ("Term").


Section 2.5 Qualification in Other Jurisdictions. The Members shall cause the LLC to be qualified or registered under assumed or fictitious name statutes or similar laws in California and New York, and in any other jurisdiction in which such qualification or registration is necessary or required to conduct the LLC's business. Any Manager or other authorized representative of the Management Committee shall execute, deliver


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and file any certificates (and any amendments and/or restatements thereof) necessary for the LLC to qualify to do business in a jurisdiction in which the LLC may wish to conduct business.


Section 2.6 Partnership Status. Anything in this Agreement to the contrary notwithstanding, it is expressly intended that the entity formed hereby be treated as a partnership solely for Federal, state and local income tax purposes, as determined by the applicable provisions of the Code, the rules and regulations promulgated thereunder, and other laws pertaining thereto, and that in every respect all of the terms and provisions hereof shall at all times be so construed and interpreted as to give effect to this intent. In the event that the Internal Revenue Service of the United States (the "IRS") or any governmental authority having jurisdiction shall in any way or at any time determine that any provision of this Agreement adversely affects the qualification of this entity to be treated as a partnership for tax purposes, the Members shall use their best efforts to amend or supplement the terms and provisions of this Agreement to the extent necessary to comply with the rules, regulations and requirements of the IRS or any other governmental authority having jurisdiction, in order that the entity formed hereby be treated as a partnership for federal, state and local income tax purposes, be taxable as such, and the Members hereof be taxable as partners of a partnership; which modification or amendment shall be retroactively applied to the date of this Agreement. For no other purpose is the LLC to be treated as a partnership.


Section 2.7 Service of Process.


2.7.1. The Secretary of State of the State of Delaware is hereby designated as the LLC's agent for service of process.


2.7.2. Corporation Service Company, 1013 Centre Road, Wilmington, Delaware 19805, or such other entity or person as designated by the Management Committee, is hereby designated as registered agent for service of process in Delaware upon whom the Secretary of State of the State of Delaware may deliver any service of process received by it.


ARTICLE 3.


PURPOSE AND POWERS OF THE LLC


Section 3.1 Purpose. The purposes for which the LLC was formed are to manufacture, distribute and market the Apparel and to engage in any other lawful act or activity.


Section 3.2 Powers of the LLC. The LLC shall have the power and authority to take any and all actions necessary, appropriate, proper, advisable, incidental or convenient to or


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for the furtherance of the purposes set forth in Section 3.1 hereof.


ARTICLE 4.


CAPITAL CONTRIBUTIONS, INTERESTS,
AND CAPITAL ACCOUNTS


Section 4.1 Initial Capital Contributions to the LLC.


4.1.1. Each of Caruso and Sweet shall make a Capital Contribution to the LLC of $500,000, in cash or immediately available funds, in exchange for which each shall receive a 50% equity interest in the LLC. The LLC shall reimburse Caruso, Candie's, Sweet, Aztec and/or ADS for any disbursements made by them in connection with the formation of the LLC or this Agreement prior to the commencement of the Term, upon presentation of appropriate documentation.


4.1.2. Simultaneously with the execution of this Agreement, each of Caruso and Sweet, as the case may be, shall make, or cause to be made on its behalf, the following additional contributions to the capital of the LLC:


(a) Caruso shall grant, and/or cause Candie's to grant, to the LLC
royalty-free licenses, in substantially the forms of Exhibits A and B
attached hereto and made a part hereof (collectively, the "License
Agreements") to use and exploit the various "Candie's" and "Bongo"
trademarks listed therein with respect to the Apparel.


(b) The LLC shall enter into: (A) an exclusive agreement with Azteca,
in substantially the form of Exhibit C attached hereto and made a part
hereof, for the production by Azteca of the Apparel (the "Supply
Agreement") and (B) an exclusive agreement with ADS, in substantially the
form of Exhibit D attached hereto and made a part hereof (the "Distribution
Agreement")


Section 4.2 Use of Proceeds. The proceeds of the Capital Contributions shall be used for working capital and otherwise for the operation of the LLC's business.


Section 4.3 Interests. Except for the interests of Caruso granted pursuant to the License Agreement, which interests shall be returned to Caruso (without cost or credit) in the event of a dissolution of the LLC, no Member shall have an interest in specific LLC Property. Except as set forth in this Agreement, no additional Interest or other ownership interest of any kind or nature in the LLC (including any interest convertible into an


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Interest) may be issued or transferred without the consent of the Management Committee.


Section 4.4 Status of Capital Contributions.


4.4.1. Except as otherwise provided in this Agreement, a Member's
Capital Contributions may be returned, in whole or in part, at any time,
only with the approval of the Management Committee.


4.4.2. Notwithstanding the foregoing, no return of a Member's Capital
Contribution shall be made hereunder if such distribution would violate
applicable law.


4.4.3. No Member shall receive any interest, salary or drawing with
respect to its Capital Contribution or its Capital Account or for services
rendered to or on behalf of the LLC or otherwise in its capacity as a
Member or otherwise, except as otherwise specifically provided in this
Agreement.


4.4.4. Except as otherwise provided by applicable law and subject to
Section 4.5 hereof, the Members shall be liable only to make those Capital
Contributions as set forth in Section 4.1 hereof. After such Capital
Contributions have been fully made pursuant to Sections 4.1 and 4.5 (only
to the extent determined necessary to secure financing) hereof, no Member
shall be required to make any additional capital contributions at any time
to the LLC.


Section 4.5 Financing and Additional Capital.


4.5.1. During the Term, each of Caruso and Sweet shall contribute up to an additional $500,000 in cash to the LLC (the "Additional Contribution"), at such time as the Management Committee deems necessary and advisable, in connection with securing an asset based line of credit for the LLC with a financial institution mutually satisfactory to the Members.


4.5.2. In the event that the Management Committee determines that the Additional Contribution is required for a reason other than as a result of an event described in Section 4.5.1 hereof, it shall give notice (the "Call Notice") to each Member stating the aggregate amount of the additional capital required and each Member's share of the Additional Contribution based on its respective Interest (the "Capital Call"). Each Member shall within fifteen (15) days from the date of the Call Notice (the "Call Period") contribute to the LLC, in cash, its ratable share of the Capital Call.


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4.5.3. If a Member fails to contribute an amount equal to its ratable share of the Capital Call within the Call Period (the "Failing Member"), and if any other Member (the "Non-Failing Member") has made its entire required contribution, then each of the Non-Failing Members may, but need not, (a) withdraw from the LLC its most recent ratable contribution made pursuant to this Section 4.5, in which case the LLC shall promptly repay the amount of such withdrawn contribution to the Non-Faili ...