Operating Agreement of Armus, LLC

LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF
Armus, LLC,
a Delaware Limited Liability Company


THIS OPERATING AGREEMENT (this "Agreement") has been entered into as of June 14, 2000, to be effective as of the Effective Date (as defined in SECTION 1.4 hereof), by and between Church & Dwight Co., Inc., a Delaware corporation ("CHD"), and USA Detergents, Inc., a Delaware corporation ("USAD"), (together, the "Initial Members," and together with any persons who may hereafter be admitted as such in accordance with the terms of this Agreement, the "Members") for the purpose of providing for the organization and operation of Armus, LLC (the "Company"), a limited liability company formed pursuant to the Delaware Limited Liability Company Act, Title 6, Sections 18-101 et seq of the Delaware Code (the "Act").


WHEREAS, the Initial Members desire to organize the Company for the purpose of establishing a joint venture to combine the laundry detergent businesses of CHD and USAD;


WHEREAS, for tax purposes it is intended that the Company shall be classified as a "partnership," and not an "association" taxable as a "corporation," as those terms are defined in Section 7701 of the Internal Revenue Code of 1986, as amended (the "Code"), and the applicable Treasury regulations promulgated thereunder (the "Regulations"); and


WHEREAS, the Initial Members desire, by entering into this Agreement, to provide for the structure and operation of the Company.


NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and obligations set forth herein, the Initial Members hereby agree that the Company shall be structured and operated as follows:


ARTICLE I.


FORMATION


1.1. NAME. The name of the Company is "Armus, LLC," and all business of the Company shall be conducted under that name or any fictitious name or names selected by the Board (as defined in SECTION 5.1 hereof) from time to time, provided that any such name reflects the Company's status as a limited liability company and is otherwise permitted by applicable law.


1.2. PLACE OF BUSINESS. The Company's initial principal place of business shall be 9 East Loockerman Street, Dover, Delaware 19901 or such other place or places as the Board may from time to time determine. The registered agent for the service of process and the registered office shall be that person and location reflected in the Company's Certificate of Formation as filed in the office of the Delaware Secretary of State on or as soon as practicable after the date hereof.


1.3. BUSINESS AND AUTHORITY. The Company is formed for the specific and limited purpose of operating the laundry detergent joint venture between CHD and USAD, which includes, among other matters, the manufacture, distribution and sale of liquid and powder laundry detergent and liquid fabric softener products (the "Business"). The Company shall have the authority to do all things necessary or convenient to accomplish its purpose and operate the Business as described in this SECTION 1.3. The Company exists only for the purpose specified in this SECTION 1.3, and may not conduct any other business without the Consent (as defined in SECTION 2.4 hereof) of the Members. In particular, except as specifically contemplated by this Agreement, the Business shall not extend to any activity that will compete with any of the Other CHD Products or any of the Other USAD Products (each as defined in SECTION 6.2 below). The authority granted to the Board hereunder to bind the Company shall be limited to actions necessary or convenient to the Business.


1.4 EFFECTIVE DATE AND TERM. The "Effective Date" shall be the date, not later than January 1, 2001, specified by CHD in a notice delivered to USAD at any time after the date hereof (the date of such notice is referred to herein as the "Trigger Date"); PROVIDED, however, that the Effective Date shall not occur prior to, and shall be contingent upon, the expiration of the waiting period, if any, required under the Hart-Scott-Rodino Antitrust Improvements Act (the "HSR Act"); PROVIDED FURTHER, that USAD's obligations hereunder, including without limitation the payment of any Capital Contributions (as hereinafter defined) and Change of Control (as hereinafter defined) fees, shall be subject to the prior written consent of FINOVA Capital Corporation, as agent and lender (the "Agent"), and the other lenders (each a "Lender" and, collectively, the "Lenders") parties to that certain Amended and Restated Loan and Security Agreement, dated February 25, 1999, between such Lenders and USAD and its subsidiaries (the "USAD Loan Agreement"), under the USAD Loan Agreement. If within forty five (45) days after the date hereof (the "Finova Consent Period") USAD has not obtained the consent of the Agent and the Lenders to the transactions contemplated hereby (including without limitation Section 9.4(e) hereof) or replaced the loan facilities contemplated by the USAD Loan Agreement (including the revolving credit facility, all term notes and loans and all other credit facilities thereunder) with facilities reasonably acceptable to CHD, then, notwithstanding the fact that CHD has given notice of the Effective Date as contemplated by this Section 1.4, CHD shall have the right, exercisable by written notice to USAD no later than forty five (45) days after the expiration of the Finova Consent Period, to either (i) provide replacement loan facilities reasonably acceptable to USAD or (ii) terminate this Agreement effective upon delivery by CHD of such written notice to USAD. The term of the Company shall then continue until the Company's dissolution in accordance with the provisions of ARTICLE X of this Agreement. If the Effective Date has not occurred by January 1, 2001, this Agreement shall be null and void.


1.5 AGREEMENT; EFFECT OF INCONSISTENCIES WITH THE ACT. It is the express intention of the Members that this Agreement and the contracts and documents referred to herein shall be the sole source of agreement of the parties with respect to the matters dealt with herein and, except to the extent a provision of this Agreement expressly incorporates federal income tax rules by reference to sections of the Code or Regulations or is expressly prohibited or ineffective under the Act, this Agreement shall govern, even when inconsistent with, or different than, the provisions of the Act or any other law or rule. To the extent that any provision of this Agreement is prohibited or ineffective under the Act, this Agreement shall be deemed to be amended to the smallest degree possible in order to make this Agreement effective under the Act in accordance with the intent of the parties. In the event the Act is subsequently amended or interpreted in such a way to make any provision of this Agreement that was formerly invalid valid, such provision shall be considered to be valid from the effective date of such interpretation or amendment. The Members hereby agree that each Member shall be entitled to rely on the provisions of this Agreement, and no Member shall be liable to the Company or to any Member for any action or refusal to act taken in good faith reliance on the terms of this Agreement and which is in substantial compliance with the terms hereof. The Members hereby agree that the duties and obligations imposed on the Members as such shall be those set forth in this Agreement, which is intended to govern the relationship among and between the Company and the Members, notwithstanding any provision of the Act or common law to the contrary.


1.6 CONDITIONS/HSR FILING.


(a) USAD's obligation to enter into this Agreement is expressly conditioned on CHD, concurrently with the execution of this Agreement, entering into (i) that certain Stock Purchase Agreement (the "Stock Purchase Agreement"), dated as of the date hereof, by and among CHD, USAD and Frederick R. Adler ("Adler"), providing for the purchase by CHD of shares of USAD common stock from USAD and Adler and (ii) that certain Put & Call Agreement (the "Put & Call Agreement"), dated as of the date hereof, by and among CHD, USAD and Adler, providing for the right of CHD to call from Adler, and the right of Adler to put to CHD, certain shares of USAD common stock.


(b) CHD's obligation to enter into this Agreement is expressly conditioned on USAD, concurrently with the execution of this Agreement, entering into (i) the Stock Purchase Agreement, (ii) the Put & Call Agreement, (iii) that certain Registration Rights Agreement, dated as of the date hereof, between USAD and CHD, providing for the registration of shares of USAD common stock held by CHD and (iv) that certain Voting Agreement, dated as of the date hereof, by and among CHD, USAD and the USAD stockholders party thereto.


(c) Each party shall use its best efforts to determine as soon as practicable after the date hereof whether a filing is necessary pursuant to the HSR Act in connection with the formation and capitalization of the Company and the acquisition by CHD of USAD common stock. In the event the parties determine that a filing or filings are necessary, each party shall use its best efforts to complete the requisite filings as soon as practicable. In the event that each party is required to file as an "acquiring person," each party shall bear its own filing fees. In the event only one party is required to file as an "acquiring person," the parties shall split the filing fee.


ARTICLE II.


MEMBERS AND OWNERSHIP INTERESTS


2.1 MEMBERS. There shall be one class of Members of the Company, and all Members shall have the same relative rights, powers, and duties except as otherwise provided herein.


2.2 NAMES AND ADDRESSES AND OWNERSHIP INTERESTS OF THE INITIAL MEMBERS. The respective names, addresses and required initial capital contributions ("Capital Contributions") of the Initial Members of the Company are set forth beside each such Member's name on SCHEDULE 2.2 hereto.


2.3 REPRESENTATIONS AND WARRANTIES. Each Member hereby represents and warrants to the Company and to the other Members that, except as set forth on SCHEDULE 2.3(A) hereto (as to USAD) or Schedule 2.3(b) hereto (as to CHD):


(a) Such Member understands and acknowledges that such Member's interest in the Company ("Ownership Interest") has not been registered under the Securities Act of 1933 or any state securities laws;


(b) Such Member understands and acknowledges that Ownership Interests may not be sold unless they are registered under the Securities Act of 1933 and applicable state securities laws, or pursuant to an exemption from such registration requirements;


(c) The limitations on transfer contained in this SECTION 2.3 and in ARTICLE IX of this Agreement create an economic risk that such Member is capable of bearing;


(d) Such Member is acquiring its Ownership Interest for investment and not with a view to the resale or distribution thereof;


(e) All property contributed to the Company as part of such Member's Capital Contribution has been or will be contributed free and clear of all liens, pledges, claims, security interests, encumbrances and similar interests of any kind whatsoever;


(f) Such Member has the authority to enter into and consummate this Agreement and the transactions contemplated hereby, subject to Section 1.6(c) all required third party consents and approvals have been obtained, and this Agreement and all related transactions will not violate or cause a breach or default under the terms of any instrument, agreement, law, rule or regulation to which such Member is subject or by which it is bound. Such Member shall not be deemed to have made any representation or warranty as to any stockholder approvals that may be necessary at the date of exercise of the purchase and sale options set forth in Section 9.4 hereof; and


(g) Such Member has had the opportunity to have its own legal counsel review (i) this Agreement and (ii) all other agreements contemplated hereby, and based upon any such review, has independently made the decision to invest in the Company and accept the economic risks associated with such investment.


2.4 CONSENT OF MEMBERS. The term "Consent" of the Members, as used in this Agreement, shall mean the unanimous approval, authorization or ratification of all of the outstanding Ownership Interests of all Members duly given pursuant to the provisions of SECTIONS 7.5 THROUGH 7.15, inclusive, which approval may be withheld for any reason in the sole and absolute discretion of any Member, with or without cause.


ARTICLE III.


CAPITAL CONTRIBUTIONS AND LOANS


3.1 INITIAL CAPITAL CONTRIBUTIONS. Promptly upon the Effective Date, each Member shall deliver to the Company payment of such Member's initial Capital Contribution, which contributions shall include:


(a) An exclusive license, in form and substance to be negotiated in good
faith between the parties (the "CHD License"), of CHD's technology and
intellectual property with respect to liquid and powder laundry detergent
products, including without limitation liquid fabric softeners,
manufactured and sold by CHD as listed on SCHEDULE 3.1(A) hereto, but
excluding CHD's "Delicare" line of products, Arm & Hammer washing soda and
fabric softener sheets (the "CHD Detergent Products");


(b) An exclusive license, in form and substance to be negotiated in good
faith between the parties (the "USAD License"), of USAD's technology and
intellectual property with respect to liquid and powder laundry detergent
products, including without limitation liquid fabric softeners,
manufactured and sold by USAD as listed on SCHEDULE 3.1(B) hereto (the
"USAD Detergent Products");


(c) All finished goods inventories of CHD Detergent Products and USAD
Detergent Products which are reasonably saleable within the next sixty (60)
days; and


(d) Cash in amounts determined unanimously by the Board thirty (30) days
before the Effective Date as necessary to fund working capital needs of the
Company during the ninety (90) days following the Effective Date. Each
Member's initial cash Capital Contribution shall be determined so as to
ensure that the total aggregate amount of the Members' initial Capital
Contributions be split 60% CHD and 40% USAD. If, due to an imbalance in
finished goods inventories contributed to the Company, USAD is unable to
make its full initial cash Capital Contribution required by this SECTION
3.1(D), then the shortfall shall be provided by CHD and such shortfall
shall be treated as a loan by CHD to the Company (bearing interest at a
market rate) which shall be repaid to CHD as soon as the Company has
sufficient cash flow to do so.


The contributions made pursuant to paragraphs (a) and (b), above, will be assigned a value of zero for the purpose of each Member's Capital Contribution and Capital Account (as defined in SECTION 4.1).


3.2 INTEREST ON CAPITAL CONTRIBUTIONS. No Member shall be entitled to receive any interest on such Member's Capital Contribution.


3.3 ADDITIONAL CAPITAL CONTRIBUTIONS. No Member shall be required or obligated to restore a deficit Capital Account balance upon the liquidation of the Company or such Member's Ownership Interest in the Company. No Member shall be allowed or required to make any additional contribution to the capital of the Company in excess of $3,000,000 in the aggregate during any six month period, without the unanimous authorization of the Board. Additional capital contributions from each Member of $3,000,000 or less in the aggregate during any six month period may be required by a majority of the Board. All additional capital contributions shall be made by the Members in the same proportion as their average percentage allocations of Net Profit and Net Loss pursuant to SECTION 4.4 hereof for the immediately preceding fiscal year of the Company.


3.4 WITHDRAWAL OF CAPITAL. Except in connection with proceedings to dissolve the Company in accordance with the procedures set forth in ARTICLE X of this Agreement, no Member may withdraw any portion of such Member's Capital Contribution, or any portion of such Member's Capital Account, from the Company without the prior unanimous authorization of the Board.


3.5 LOANS BY MEMBERS. Other than as provided in SECTION 3.1(D) hereof, a Member may make a loan or advance money or property to or on behalf of the Company, only upon such terms as the Board has unanimously authorized. Any permitted loan or advance shall not increase the lending Member's Capital Account, entitle the lending Member to any greater share of Company distributions made in respect of a Member's Capital Account or subject such lending Member to any greater proportion of Company losses. The amount of such loans or advances shall be a debt owed by the Company to the lending Member, and any interest paid to the lending Member shall be charged as any other expense against income of the Company.


ARTICLE IV.


CAPITAL ACCOUNTS, DISTRIBUTIONS, AND TAX MATTERS


4.1 ESTABLISHMENT OF CAPITAL ACCOUNTS. A separate capital account ("Capital Account") shall be established and maintained for each Member in accordance with the principles set forth in Sections 704(b) and 704(c) of the Code and the Regulations. The Capital Account of each Member shall initially be equal to the sum of: (i) the full amount of cash contributed by such Member to the Company and (ii) except as specifically provided by Section 3.1, the fair market value, as determined by the Board in good faith, of other property contributed by such Member to the Company (net of liabilities secured by such property that the Company is considered to assume or take subject to under Section 752 of the Code). The provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulation Section 1.704-1(b) relating to the maintenance of capital accounts, and shall be interpreted and applied in a manner consistent with such Regulation. In the event the Board deems it advisable to modify the manner in which the Capital Accounts, or any debits or credits thereto, are computed in order to comply with such Regulation, the Board may make such modification, provided that it is not likely to have a material effect on the amounts which would otherwise be distributable to any Member upon the dissolution of the Company.


4.2 INCREASES AND DECREASES IN CAPITAL ACCOUNTS. Each Member's Capital Account shall be increased by any additional Capital Contributions made by such Member to the Company (in the case of contributed property, such increase shall equal the fair market value, as determined by the Board in good faith, of such property net of liabilities secured by such property that the Company is considered to assume or take subject to under Section 752 of the Code) and a Member's allocated share of Net Profit (as defined in SECTION 4.3 hereof), and decreased by any money and the fair market value, as determined by the Board in good faith, of any property distributed to such Member by the Company (net of liabilities secured by the distributed property that the Member is considered to assume or take subject to under Section 752 of the Code) and such Member's allocated share of Net Loss (as defined in SECTION 4.3 hereof).


4.3 NET PROFIT AND NET LOSS. For the purposes of this Agreement, the term "Net Profit" or "Net Loss" shall mean an amount equal to the Company's net income or loss for the relevant fiscal year or shorter period, determined in accordance with generally accepted accounting principles and procedures consistently applied.


4.4 ALLOCATIONS OF NET PROFIT AND NET LOSS. The Net Profit or Net Loss of the Company for each fiscal year or shorter period following the Effective Date shall be allocated as follows:


(a) Except as otherwise expressly provided in this SECTION 4.4, Net Profit up to $30,000,000 (or a proportionately reduced amount of Net Profit for a period shorter than a full fiscal year) shall be allocated 65% to CHD and 35% to USAD and any Net Profit in excess of $30,000,000 (or a proportionately reduced amount of Net Profit for a period shorter than a full fiscal year) shall be allocated 55% to CHD and 45% to USAD;


(b) Notwithstanding SECTION 4.4(A) hereof, in the event CHD's operating profit for its 2000 fiscal year from the sale of CHD Detergent Products (as computed in accordance with EXHIBIT A hereto) is less than $*** (the amount of such deficiency being hereinafter referred to as the "CHD Deficiency"), then CHD's allocable share of Net Profit up to $30,000,000 (or a proportionately reduced amount of Net Profit for a period shorter than a full fiscal year, taking into account spending patterns and other appropriate adjustments as determined in good faith by the unanimous approval of the Board) shall be reduced, but not below 60%, in the same ratio as the CHD Deficiency bears to $***, and USAD's allocable share of such Net Profit shall be correspondingly increased. For example, if the CHD Deficiency is $***, the adjustment would be $***%. CHD's allocable share would be reduced by ***% to ***% and USAD's allocable share would be increased by ***% to ***%. In no event would CHD's allocable share be reduced below 60%;


(c) Notwithstanding SECTION 4.4(A) hereof, in the event USAD's operating profit for its 2000 fiscal year from the sale of USAD Detergent Products (as computed in accordance with EXHIBIT B hereto) is less than $*** (the amount of such deficiency being hereinafter referred to as the "USAD Deficiency"), then USAD's allocable share of Net Profit up to $30,000,000 (or a proportionately reduced amount of Net Profit for a period shorter than a full fiscal year, taking into account spending patterns and other appropriate adjustments as determined in good faith by the unanimous approval of the Board) shall be reduced, but not below 30%, in the same ratio as the USAD Deficiency bears to $***, and CHD's allocable share of such Net Profit shall be correspondingly increased. For example, if the USAD Deficiency is $***, the adjustment would be $***%. USAD's allocable share would be reduced by ***% to ***% and CHD's allocable share would be increased by ***% to ***%. In no event would USAD's allocable share be reduced below 30%;


(d) Net Loss shall be allocated first to each Member based on, and to the extent of, previous allocations of Net Profit to such Member and then based on the then current percentages of Net Profit to be allocated to such Member pursuant to this SECTION 4.4. Notwithstanding the foregoing, except as otherwise provided in this SECTION 4.4(D), no Member shall be allocated Net Loss in any fiscal year or shorter period to the extent such allocation would create or increase a deficit in the Capital Account of such Member (the "Loss Limitation"). Any Net Loss otherwise allocable to a Member but for the Loss Limitation ("Contingent Loss") shall be allocated among the other Members, pro rata based on their respective positive Capital Account balances, subject to the Loss Limitation. Remaining Net Loss, if any, in excess of the Net Loss allocated under the immediately preceding sentence shall be allocated among the Members pro rata based on their respective Capital Account balances. To the extent that Members are allocated Contingent Loss, subsequent Net Profit first shall be allocated to the Members in reverse order of, and in an amount equal to, the Contingent Loss previously allocated to them pursuant to this SECTION 4.4(D) prior to any allocation of Net Profit in accordance with this SECTION 4.4; and


(e) In the event of a Transfer (as defined in SECTION 9.1 hereof) of all or any portion of an Ownership Interest in accordance with the provisions of this Agreement at any time other than the end of a fiscal year, the shares of items of Net Profit or Net Loss and special allocations of items of income or loss allocable to such Ownership Interest (or the Transferred portion thereof) shall be allocated between the transferor and the transferee in a manner that is consistent with the applicable provisions of the Code.


4.5 TAX ALLOCATIONS.


(a) Each item of income, gain, loss, deduction or credit for federal, state and local income tax purposes shall be allocated among the Members in the same proportion as the allocation of Net Profit, Net Loss and other items to the Members pursuant to SECTION 4.4 hereof, except as otherwise provided herein. The allocations made pursuant to this SECTION 4.5 shall be solely for tax purposes and shall not affect any Member's Capital Account or share of non-tax allocations or distributions under this Agreement.


(b) In the event the book value of any property contributed to the Company by a Member differs from its tax basis, allocations of taxable income, gain, loss and deduction with respect to such property shall be made in a manner which complies with Section 704(c) of the Code and the Regulations. The Company may, in the sole discretion of the Board, make, or not make, "curative" or "remedial" allocations (within the meaning of the Regulations under Section 704(c) of the Code) of Net Profit or Net Loss with respect to such property.


4.6 SPECIAL ALLOCATIONS. The following special allocations shall be made in the following order:


(a) MINIMUM GAIN CHARGEBACK. In the event that there is a net decrease during a fiscal year or shorter period in either Company Minimum Gain (within the meaning of the definition of partner minimum gain in Regulation Section 1.704-2(b)(2)) or Member Nonrecourse Debt Minimum Gain (within the meaning of the definition of partner nonrecourse debt minimum gain in Regulation Section 1.704-2(i)(3)), then, notwithstanding any other provision of this Article IV, each Member shall receive such special allocation of items of Company income and gain as are required in order to conform to Regulation Section 1.704-2.


(b) QUALIFIED INCOME OFFSET. Subject to SECTION 4.6(A), but notwithstanding any other provision of this Article IV, items of income and gain shall be specially allocated to the Members and in a manner that complies with the "qualified income offset" requirement of Regulation Section 1.704-1(b)(2)(ii)(d)(3).


(c) GROSS INCOME ALLOCATION. In the event that a Member has a deficit Capital Account at the end of any fiscal year or shorter period which is in excess of the amount such Member is deemed to be obligated to restore pursuant to the penultimate sentences of Regulation Sections 1.704-2(g)(1) and 1.704-2(i)(5), respectively, such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that any allocation under this SECTION 4.6(C) shall be made only if and to the extent that a Member would have a deficit Capital Account in excess of such sum after all allocations provided for in this Article IV have been tentati ...