SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
--------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-27736
POINT WEST CAPITAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 94-3165263
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1700 Montgomery Street, Suite 250
---------------------------------
San Francisco, California 94111
------------------------- -------
(Address of principal executive offices) (Zip Code)
(415) 394-9467
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
At October 31, 1997, there were 3,253,324 shares of the registrant's Common
Stock outstanding.
<PAGE>
21
POINT WEST CAPITAL CORPORATION
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INDEX
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Page #
Part I ------
- ------
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 1
Consolidated Statements of Operations for the
Three Months and Nine Months Ended
September 30, 1997 and 1996 2
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1996 3
Condensed Notes to Consolidated Financial Statements 4-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-19
Part II
- -------
Item 1. Legal Proceedings 20
Item 2. Change in Securities and Use of Proceeds 20
Item 6. Exhibits and Reports on Form 8-K 20-21
Signatures 21
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(i)
<PAGE>
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and December 31, 1996
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
-------------------- --------------------
<S> <C> <C>
Cash and cash equivalents $ 14,126,590 $ 6,586,447
Restricted cash (note 6) 4,120,847 4,625,663
Investment securities (note 2)
Held-to-maturity 2,477,500 --
Available-for-sale 1,614,530 --
Matured policies receivable (note 6) 146,000 1,181,513
Assets held for sale (note 3) 170,921 11,520,103
Purchased life insurance policies (note 4) 37,415,435 41,246,239
Investment in convertible preferred shares (note 5) 1,658,478 3,000,000
Deferred financing costs, net of accumulated amortization of
$559,228 and $381,690, respectively (note 4 and 6) 584,964 681,910
Other assets 139,890 102,598
-------------------- --------------------
Total assets $ 62,455,155 $ 68,944,473
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses $ 194,277 $ 190,894
Accounts payable 470,225 320,577
Accrued compensation payable 134,000 186,390
Payable for policies purchased -- 427,553
Reserve for equity interest in wholly owned financing
subsidiary (note 4) 3,363,936 6,452,589
Long term notes payable (note 6) 38,804,107 41,218,205
Deferred income taxes (note 7) 264,097 6,000
-------------------- --------------------
Total 43,230,642 48,802,208
liabilities
-------------------- --------------------
Minority interest (note 1) 112 --
-------------------- --------------------
Stockholders' equity:
Common stock, $0.01 par value; 15,000,000 authorized shares,
4,291,824 and 4,291,824 shares, respectively, issued
3,253,324 and 4,146,824 shares, respectively, outstanding 42,918 42,918
Additional paid-in-capital 29,496,720 29,496,720
Net unrealized investment gains (note 2 and 8) 356,421 --
-
Retained deficit (7,797,626) (9,007,373)
Treasury stock, 1,038,500 and 145,000 shares,
respectively (note 8) (2,874,032) (390,000)
-------------------- --------------------
Total stockholders' equity 19,224,401 20,142,265
-------------------- --------------------
Total liabilities and stockholders' equity $ 62,455,155 $ 68,944,473
==================== ====================
<FN>
See accompanying condensed notes to consolidated financial statements.
</FN>
</TABLE>
1
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Income:
Earned discounts on life insurance policies (note 9) $ -- $ -- $ -- $ 3,697,032
Earned discounts on prior maturities (note 9) -- 802,471 -- 802,471
Earned discounts on matured policies (note 9) 91,473 355,519 377,450 355,519
Interest income 338,191 181,670 883,401 638,583
Net gain (loss) on sale of convertible
preferred shares (note 5) (20,000) -- 679,665 --
Net gain (loss) on assets sold (note 3) 98,128 (299,718) 1,460,986 (299,718)
Other 18,168 115,078 88,043 281,728
-------------- -------------- -------------- ---------
Total income 525,960 1,155,020 3,489,545 5,475,615
Expenses:
Interest expense 896,771 1,065,486 2,721,030 3,040,424
Compensation and benefits 289,244 318,976 843,352 943,629
Other general and administrative expenses 12,123 231,244 1,037,236 898,037
Amortization 60,392 211,786 177,538 391,352
Depreciation -- -- -- 19,967
Provision for loss on assets held for sale (note 3) 328,236 3,314,498 328,236 3,314,498
Loss on investment in wholly owned financing
subsidiary (note 4) -- 6,940,189 -- 6,940,189
-------------- -------------- -------------- -------------
Total expenses 1,586,766 12,082,179 5,107,392 15,548,096
-------------- -------------- -------------- -------------
Loss before income taxes and net loss in
wholly owned financing subsidiary charged
to reserve for equity interest (1,060,806) (10,927,159) (1,617,847) (10,072,481)
Income tax expense (note 7) -- 893,223 -- 525,711
Net loss in wholly owned financing subsidiary charged
to reserve for equity interest (note 4) 942,943 -- 2,827,594 --
-------------- -------------- -------------- -------------
Net income (loss) $ (117,863) $ (10,033,936) $ 1,209,747 $ (9,546,770)
============== ============== ============== =============
Net income (loss) per share (note 8) (0.04) (2.34) 0.33 (2.49)
Weighted average number of shares of common stock
and common stock equivalents outstanding (note 8) 3,324,449 4,291,824 3,671,700 3,838,548
<FN>
See accompanying condensed notes to consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
POINT WEST CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended
September 30, 1997 and 1996
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
-------------------- --------------------
<S> <C> <C>
Cash flows for operating activities:
Net income (loss) $ 1,209,747 $ (9,546,770)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 177,538 411,319
Write-off of furniture and equipment -- 12,303
Net gain on assets sold (1,460,986) --
Net gain on sale of convertible preferred shares (679,665) --
Provisions for loss on sale of assets 328,236 3,614,217
Valuation provision for purchased life insurance policies -- 6,940,189
Earned discounts on policies (377,450) (4,855,023)
Purchase of life insurance policies (966,275) (23,914,937)
Collections on matured life insurance policies 5,317,170 13,478,494
Increase in unearned income -- (715,883)
Increase in other assets (37,292) (53,205)
Decrease in deferred taxes -- (525,711)
Increase (decrease) in accrued expenses 3,383 (121,556)
Increase (decrease) in accounts payable 149,648 (134,627)
Decrease in IPO financing costs payable -- (306,900)
Decrease in payable to related party -- (1,482,170)
Decrease in accrued compensation payable (52,390) (684,948)
Decrease in reserve for equity interest in wholly
owned financing subsidiary (2,827,594) --
Increase in minority interest 100 --
-------------------- --------------------
Net cash provided by (used in) operating activities 784,170 (17,885,208)
-------------------- --------------------
Cash flows from investing activities:
Proceeds from sale of assets held for sale 12,686,192 4,266,249
Purchase of furniture and equipment -- (6,776)
Decrease (increase) in restricted cash 504,816 (193,799)
Increase in investment securities (3,477,500) (2,090,871)
Proceeds from sale of convertible preferred shares 2,021,187 --
-------------------- --------------------
Net cash provided by investing activities 11,734,695 1,974,803
-------------------- --------------------
Cash flows from financing activities:
Proceeds from long term notes payable -- 6,375,000
Principal payments on long term notes payable (2,414,098) (3,083,919)
Proceeds from other long term debt -- 5,540,132
Principal payments on other long term debt -- (6,984,402)
Distribution to limited partners -- (783,313)
Purchase of limited partners' interest in investment partnership -- (5,081,184)
Principal payment on loan from stockholder -- (1,162,170)
Proceeds from issuances of common stock -- 25,273,968
Purchase of treasury stock (2,484,032) --
Increase in financing costs (80,592) (88,000)
Reimbursement of IPO financing costs -- 750,000
-------------------- --------------------
Net cash provided by (used in) financing activities (4,978,722) 20,756,112
-------------------- --------------------
Net increase in cash and cash equivalents 7,540,143 4,845,707
Cash and cash equivalents, beginning of period 6,586,447 1,056,611
-------------------- --------------------
Cash and cash equivalents, end of period $ 14,126,590 $ 5,902,318
==================== ====================
Supplemental disclosures:
Supplemental disclosure of non-cash activities:
Unrealized gain (loss) on securities available for sale, net of taxes $ 356,421 $ --
==================== ====================
Supplemental disclosure of cash flow information:
State taxes paid $ 35,823 $ 6,066
==================== ====================
Cash paid for interest $ 2,717,647 $ 3,161,981
<FN>
==================== ====================
See accompanying condensed notes to consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
POINT WEST CAPITAL CORPORATION
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1. General Description
- -- --------------------
The unaudited consolidated financial statements of Point West Capital
Corporation (formerly known as Dignity Partners, Inc.) and its consolidated
entities ("Point West" or the "Company") as of September 30, 1997 and for the
three and nine month periods ended September 30, 1997 and 1996 have been
prepared in accordance with generally accepted accounting principles for interim
financial information, in accordance with Rule 10-01 of Regulation S-X.
Accordingly, such statements do not include all of the information and notes
thereto that are included in the annual consolidated financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended September 30, 1997 are not indicative of the results that may be
expected for the year ending December 31, 1997. The balance sheet as of December
31, 1996 has been derived from the audited consolidated financial statements of
the Company. The statements included herein should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the
"Form 10-K").
Point West is a specialty financial services company. The Company's
financial statements consolidate the assets, liabilities and operations of
Dignity Partners Funding Corp. I ("DPFC"), Fourteen Hill Management, LLC
("Fourteen Hill Management"), Fourteen Hill Capital, L.P. ("Fourteen Hill
Capital") and Allegiance Capital, LLC ("Allegiance").
Until February 1997 the Company provided viatical settlements for
terminally ill persons. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Cessation of Viatical Settlement
Business; Sale of Assets." Subsequently, the Company has sought to become a
broad-based specialty financial services company. To that end, the Company has
expanded its financial services business through the formation and investment in
other entities, including Fourteen Hill Management, Fourteen Hill Capital and
Allegiance. The Company is currently evaluating other strategic business
opportunities. Fourteen Hill Capital and Allegiance, whose planned business
activities are described below, are indicative of the types of business
opportunities the Company intends to pursue.
The Company continues to service the policies held by its wholly-owned
special purpose subsidiary, DPFC. See Notes 4 and 6.
On June 3, 1997 the Company formed a limited partnership called
Fourteen Hill Capital and a wholly-owned limited liability company called
Fourteen Hill Management. Fourteen Hill Capital commenced operations in August
1997 by consummating two financings with unaffiliated entities in the aggregate
principal amount of $1.25 million. Fourteen Hill Management is the general
partner of Fourteen Hill Capital and owns 99.978% of the partnership interests.
Point West is one of two limited partners of Fourteen Hill Capital and owns
0.02% of the partnership interests. Fourteen Hill Management has invested $5
million in initial capital in Fourteen Hill Capital. Fourteen Hill Capital
received a license from the Small Business Administration (the "SBA") to become
a small business investment company effective September 26, 1997. Minority
interest on the balance sheet represents the interest in the assets of Fourteen
Hill Capital of the one unaffiliated limited partner. At present, Fourteen Hill
Capital does not have any outstanding debt from the SBA.
4
<PAGE>
On September 5, 1997 the Company formed a limited liability company
called Allegiance to provide senior secured loans to funeral home and cemetery
owners. Allegiance commenced operations on October 13, 1997 by issuing a
commitment letter to make a senior secured loan to an unaffiliated entity for
$2.1 million. Point West has a 51% equity interest and 95% voting control in
Allegiance and will serve as the managing member of Allegiance. The President
and Vice President of Marketing, each of whom Allegiance hired in September
1997, have the balance of such interests. Net profits of Allegiance for each
calendar year will be allocated first to Point West in an amount equal to a
return of 10% per annum, compounded monthly, on the amount of its capital
contribution, but not in excess of such net profits. Any shortfall will be
carried forward indefinitely to the next calendar year or years in which net
profits are sufficient to make such allocation. An additional 5% return for each
calendar year will be allocated first to Point West to the extent that in each
year sufficient profits are available with no carry forward provided. See Note
10 for further information regarding Allegiance.
Recent Accounting Developments
During the middle of 1997 the FASB issued Financial Accounting Standard
No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130 is effective with
the year-end 1998 financial statements; however, the total comprehensive income
is required in the financial statements for interim periods beginning in 1998.
FASB also issued Financial Accounting Standard No. 131, "Disclosure About
Segments of An Enterprise and Related Information." SFAS 131 is effective with
the year-end 1998 financial statements. Management believes that the adoption of
these standards will not have a material impact on the Company's financial
statements.
2. Investment Securities
- -- ---------------------
In compliance with the Statement of Financial Accounting Standards No.
115 (FAS No. 115), "Accounting for Certain Instruments in Debt and Equity
Securities," the Company classifies marketable debt and equities into
held-to-maturity and available-for-sale categories. Securities classified as
held-to-maturity are reported at amortized cost and available-for-sale
securities are reported at fair market value with unrealized gains and losses
included in stockholders' equity. Any realized gains and losses, declines in
value of securities judged to be other-than-temporary and accrued interest and
dividends on all securities will be reported in interest income and other income
as recognized.
The amortized costs and estimated fair value of investment securities
as of September 30, 1997 are as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross
Amortized Gain Unrealized
Cost Loss Fair Value
<S> <C> <C> <C> <C>
Held-to-maturity
Corporate bonds $2,227,500 $ 62,500 $ (625) $2,289,375
Other corporate debt $ 250,000 $ -- $ -- $ 250,000
----------- ------------ ------------- -----------
Total held-to-maturity $2,477,500 $ 62,500 $ (625) $2,539,375
Available-for-sale
Common stock $ 903,181 $ 355,153 $ -- $1,258,334
Warrants $ 96,819 $ 259,377 $ -- $ 356,196
------------ ----------- ------------- -----------
Total available-for-sale $ 1,000,000 $ 614,530 $ -- $1,614,530
</TABLE>
The Company classifies debt securities for which it has the positive
intent and ability to hold to maturity as held-to-maturity. All investments in
bond and debt securities classified as held-to-maturity
5
<PAGE>
at September 30, 1997 have maturity dates ranging from one to five years.
Warrants classified as available-for-sale also have expiration dates ranging
from one to five years.
Unrealized gains on available-for-sale securities (representing
differences between cost and market of $615,000 less deferred taxes of $258,000
and minority interest of $12) were credited to a separate component of
stockholders' equity called "Net Unrealized Investment Gains."
3. Assets Held for Sale and Related Sale Agreements
- -- ------------------------------------------------
As a result of the Company's decision in 1996 to sell all or
substantially all of its assets, it reclassified all assets owned as of such
date, other than the assets of DPFC, to a "held-for-sale" category. Accordingly,
such assets are recorded on the balance sheet as of September 30, 1997 and
December 31, 1996 at the lower of carrying value or fair value less estimated
cost to sell. In connection with the decision to sell assets, the Company
established a reserve for loss on sale of assets in September 1996 and
reevaluates such reserve each quarter. During the third quarter of 1997, the
Company recorded an additional reserve in the amount of $328,000 as a result of
difficulties encountered with insurance companies as described below in
transferring the ownership of policies remaining unsold. Assets held for sale
consist of:
<TABLE>
Assets Held for Sale
====================
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
Capitalized costs on life insurance policies $ 593,947 14,089,124
Earned discounts on life insurance policies 3,000 380,692
Reserve for loss on sale (426,026) (2,949,713)
------------------ --------------
Assets held for sale $ 170,921 11,520,103
================= ==============
</TABLE>
The calculation of reserve for loss on sale was calculated based on the
life expectancy of the insured under each policy in relation to prices obtained
by the Company in connection with other sales, management's estimate of the
current saleability of such policy, the type of policy (e.g., term or whole
life), the age of the insured and the premiums on such policy. Any gain or loss
due to the difference between actual proceeds (less any back end sourcing fees)
and the carrying value after giving effect to the reserve for loss on sale of
assets will be reported as a realized gain or loss on assets sold at the time
sale proceeds are received.
On September 27, 1996 the Company entered into an agreement with an
unaffiliated viatical settlement company to sell 197 policies with an aggregate
face value of $14.2 million for an aggregate consideration of approximately $8.7
million. Such policies, which were not sold in 1996, were carried on the balance
sheet at December 31, 1996 at approximately $6.9 million after giving effect to
the reserve for loss on sale of assets. The Company established a reserve in the
third quarter of 1996 of $1,792,087 in connection with policies covered by the
sale agreement. Through September 30, 1997, 187 policies with an aggregate face
value of $13.6 million had been sold, of which 46 policies with an aggregate
face value of $1.9 million were sold in the fourth quarter of 1996 (resulting in
a realized gain of $120,000), 136 policies with an aggregate face value of $11.4
million were sold in the first quarter of 1997 (resulting in a realized gain of
$426,000), 4 policies with an aggregate face value of $175,000 were sold in the
second quarter of 1997 (resulting in a realized loss of $5,000) and 1 policy
with an aggregate face value of $58,000 was sold in the third quarter of 1997
(resulting in no realized gain or loss). Seven policies covered by the sale
agreement were not sold because the insured died prior to the issuing insurance
company's acknowledgment of transfer of ownership of the policy and the Company
6
<PAGE>
collected the death benefit instead of selling those policies. As of September
30, 1997, the remaining three policies (with a face value of $187,000) were
pending acknowledgment of transfer of ownership.
On January 16, 1997 the Company entered into an agreement with an
unaffiliated viatical settlement company to sell 18 policies with an aggregate
face value of $1.0 million for approximately $710,000. Such policies were
carried on the balance sheet at December 31, 1996 at approximately $590,000
after giving effect to the reserve for loss on sale of assets. In the first
quarter of 1997, the Company completed the sale of 17 policies with an aggregate
face value of $990,000 and realized a gain of $121,000 associated with these
policies. As of September 30, 1997, the remaining policy with a face value of
$25,000 was pending acknowledgment of transfer of ownership.
On February 10, 1997 the Company entered into an agreement with an
unaffiliated viatical settlement company to sell 67 policies with an aggregate
face value of $4.5 million for approximately $3.0 million. Such policies were
carried on the balance sheet at December 31, 1996 at approximately $2.2 million
after giving effect to the reserve for loss on sale of assets. Through September
30, 1997, 62 policies with an aggregate face value of $4.1 million had been
sold, of which 35 policies with an aggregate face value of $1.7 million were
sold in the first quarter of 1997 (resulting in a realized gain of $295,000), 25
policies with an aggregate face value of $2.1 million were sold in the second
quarter of 1997 (resulting in a realized gain of $343,000) and 2 policies with
an aggregate face value of $270,000 were sold in the third quarter of 1997
(resulting in a realized gain of $33,000). As of September 30, 1997, the
remaining 5 policies with a face value of $414,000 were pending acknowledgment
of transfer of ownership.
On March 24, 1997 the Company entered into an agreement with an
unaffiliated viatical settlement company to sell 31 policies with a face value
of $2.9 million for approximately $1.7 million. Such policies were carried on
the balance sheet at March 31, 1997 at approximately $1.5 million after giving
effect to the reserve for loss on sale of assets. Through September 30, 1997, 23
policies with an aggregate face value of $2.3 million had been sold, of which 22
policies with an aggregate face value of $2.1 million were sold in the second
quarter of 1997 (resulting in a realized gain of $133,000) and 1 policy with an
aggregate face value of $213,000 was sold in the third quarter of 1997
(resulting in a realized loss of $5,950). Two policies covered by the sale
agreement were not sold because the insured died prior to the issuing insurance
company's acknowledgment of transfer of ownership of the policy and the Company
collected the death benefit instead of selling these policies. As of September
30, 1997, 4 policies with a face value of $247,000 were pending acknowledgment
of transfer of ownership.
The policies representing "assets held for sale" consist of the
policies under the aforementioned sales agreements for which the Company is
awaiting the acknowledgment of transfer of ownership by the applicable insurance
company and the payment therefor by the applicable purchaser. The Company is
experiencing delays or difficulties in transferring the ownership of certain
policies, and believes that it will not be successful in transferring the
ownership of such policies. In such event, due to contractual provisions in the
related sales agreements the sales will not be consummated. However, the Company
continues its efforts to sell such policies.
4. Purchased Life Insurance Policies
- -- ---------------------------------
Effective July 1996, purchased life insurance policies consisted only
of those policies held by DPFC. Any sale of policies held by DPFC, all of which
are pledged under the indenture pursuant to which the Securitized Notes (as
defined in Note 6) were issued, requires the consent of all of the holders of
the Securitized Notes ("Noteholders") and the Company. The Company has discussed
potential sales of DPFC policies with the Noteholders; however, the Company
cannot determine whether the
7
<PAGE>
Noteholders and the Company will decide to sell such policies or whether such a
sale is feasible. A reserve was recorded in the third quarter of 1996 to
reflect the estimated loss of the Company's equity interest in DPFC. As of
September 30, 1997 the reserve was $3.4 million. The reserve provides for
the write-off of deferred financing costs and the unrealized residual
value associated with DPFC.
5. Investment In Convertible Preferred Shares
- -- ------------------------------------------
On November 4, 1996, the Company purchased 21,517,100 convertible
preferred shares for $3.0 million (representing approximately 30% of the fully
converted common equity interest) in American Information Company, Inc.
("American Information"), a privately held company which, among other things,
provides information services to individuals owning or purchasing automobiles.
On March 18, 1997, the Company, following conversion of 8.2 million shares of
convertible preferred stock into 8.2 million shares of common stock of American
Information, sold such shares (approximately 38% of the Company's 30% equity
investment in American Information) to an unaffiliated third party for $1.83
million. The Company recognized a $700,000 pre-tax gain on this transaction in
the first quarter of 1997. The Company had an option that expired on October 26,
1997 to purchase for approximately $1.1 million 8.2 million additional shares of
common stock of American Information. Since the Company did not exercise this
option, a $20,000 pre-tax loss was recognized in the third quarter of 1997. At
September 30, 1997 the Company owned approximately 13.2% of the equity of
American Information. The Company accounts for its investment using the cost
method. If the equity method had been applied Point West would have recorded a
loss associated with the investment in the nine months ended September 30, 1997
of $722,000, which is equivalent to the Company's pro rata share on an as if
converted basis in American Information's loss for the nine months ended
September 30, 1997. At September 30, 1997 the Company held 12.0 million shares
of American Information with a cost of $0.14 per share. The Company sold 8.2
million shares to an unaffiliated third party for $0.22 per share in the March
18, 1997 sale mentioned above. On the same date, American Information sold
convertible preferred shares and warrants to such unaffiliated third party for
$7.5 million. If such shares were converted and such warrants exercised they
would represent approximately 25.8 million shares of common stock with a cost of
$0.29 per share. In light of such sale by American Information, notwithstanding
the extent of losses experienced by American Information, management of the
Company does not believe that the investment is permanently impaired at
September 30, 1997. However, management will continue to monitor the carrying
value.
6. Long Term Notes Payable
- -- -----------------------
The Senior Viatical Settlement Notes, Series 1995-A, Stated Maturity
March 10, 2005 (the "Securitized Notes") issued by DPFC initially provided for a
maximum lending commitment of $50 million. As a result of an early amortization
event in June 1996, the maximum lending commitment was reduced to the then
outstanding principal amount ($45.5 million) and principal payments on the
Securitized Notes began in July 1996. Principal and interest payments on the
Securitized Notes are payable solely from collections on pledged policies and
deposited funds. The Securitized Notes are reported on the balance sheet as long
term notes payable. The Securitized Notes bear a fixed interest rate of 9.17%
per annum.
The Securitized Notes represent the obligations solely of DPFC. The
Company's consolidated financial statements include the assets, liabilities and
operations of DPFC; however, the assets of DPFC are not available to pay
creditors of Point West Capital Corporation. The assets of DPFC are the
beneficial ownership interests in the life insurance policies and funds which
secure the Securitized Notes. To the extent that the book value of assets of
DPFC becomes less than the outstanding balance of the Securitized Notes,
generally accepted accounting principles nonetheless would require a loss to
8
<PAGE>
be recorded. Upon the retirement or maturity of the Securitized Notes, under
generally accepted accounting principles the Company would recognize a gain
equal to any such losses previously recognized. At September 30, 1997, the
carrying value of the assets of DPFC were $41.5 million (consisting of $37.4
million in purchased life insurance policies, $4.0 million in restricted cash on
deposit with a trustee for the benefit of the Noteholders and $146,000 in
matured policies receivable).
Point West is the servicer of the policies pledged under the indenture
pursuant to which the Securitized Notes were issued and incurs servicing
expenses (which are reimbursed, subject to certain priority payments) in
connection therewith.
7. Deferred Income Taxes
- -- ---------------------
Prior to September 30, 1996, the Company had provided for deferred
income taxes related to income accrued on purchased life insurance policies.
Because these policies have been sold, or are anticipated to be sold, at a loss,
the Company determined that the deferred tax liability associated with these
policies is not required. The Company has provided for miscellaneous state
income tax liabilities expected to be incurred. For the year ended December 31,
1996, the Company had a deferred tax asset resulting primarily from tax net
operating loss carryforwards. A valuation allowance was established to reduce
the amount of the gross deferred tax asset to that amount deemed more likely
than not to be utilized.
In the first nine months of 1997, the Company's provision for income
taxes for Point West Capital Corporation and DPFC were offset by a reduction in
the valuation allowance previously established. The valuation allowance has been
reduced to reflect that portion of the deferred tax asset which will more likely
than not be utilized based on anticipated earnings for the year ending December
31, 1997.
A deferred tax liability has been recorded as of September 30, 1997 in
connection with the unrealized investment gains in the third quarter of 1997.
Using a combined state and federal tax rate of 42%, a deferred tax liability of
$258,000 has been estimated on unrealized gains of $615,000. See Note 2.
8. Common Stock
- -- ------------
Changes in stockholders' equity during the first nine months of 1997
reflected the following:
Stockholders' equity, beginning of period $ 20,142,265
Net unrealized investment gains 356,421
Net income 1,209,747
Treasury stock (2,484,032)
-----------
Stockholders' equity, end of period $ 19,224,401
Net unrealized investment gains represent the net increase in the
Company's investment securities in common stock and warrants classified as
available-for-sale and represent differences between cost and estimated market
of $615,000 less deferred taxes of $258,000 and minority interest of $12.
In October 1996, the Board of Directors of the Company approved a share
repurchase program pursuant to which the Company was authorized to purchase from
time to time up to 1 million shares of Common Stock at prevailing market prices.
In June 1997, such authority was increased to 1.04 million
9
<PAGE>
shares of Common Stock. In June 1997, the Company completed the share repurchase
program, having repurchased an aggregate of 1.04 million shares at a weighted
average price of $2.77 per share.
The Company will implement the provisions of Statement of Financial
Accounting Standards No. 128, Earnings per Share ("Statement 128"), which will
be effective for interim and annual financial statements issued for periods
ending after December 15, 1997. Statement 128 simplifies the previous standards
for computing earnings per share ("EPS"), replacing the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
complex capital structures, which applies to the Company. For the three and nine
months ended September 30, 1997 and 1996, the effect of applying this statement
would not have been material.
9. Earned Discounts
- -- ----------------
Earned discounts on life insurance policies reflect the amount of
accretion recorded in the first half of 1996. With the decision to sell all or
substantially all of the Company's assets, unearned income recorded on the
balance sheet at June 30, 1996 relating to early maturities on or before June
30, 1996 has now been recorded as earned discounts on prior maturities. Any
income since the third quarter of 1996 has been recorded as earned discounts on
matured policies only and recorded upon receipt of proceeds of policies
(pursuant to the death of the insured).
10. Commitments
- -- -----------
Allegiance is a limited liability company formed on September 5, 1997
as a specialty finance company to operate a securitization-based loan program
targeted to funeral home and cemetery owners.Allegiance commenced operations on
October 13, 1997 by issuing a commitment letter to make a senior secured loan to
an unaffiliated entity for $2.1 million. Point West has a 51% equity interest
and 95% voting control in the new entity and will serve as the managing member
of Allegiance. The President and Vice President of Marketing, each of whom
Allegiance hired in September 1997, have the balance of such interests. The
Company invested $50,000 at the formation of Allegiance and agreed from time to
time thereafter, as needed, to contribute up to an additional $450,000 to be
used as working capital. The Company has also agreed to provide approximately
$1.5 million to support warehousing and equity components of the loans to be
funded in connection with an initial securitization. At the Company's
discretion, after the completion of an initial securitization, an additional
commitment up to approximately $1.5 million may be made to support warehousing
and equity components of a second securitization.
11. Litigation
- -- ----------
On December 19, 1996, a complaint was filed in the United States
District Court, Northern District of California (the "Court") (Docket No.
C96-4558) against Dignity Partners, Inc. and each of its directors by three
individuals purporting to act on behalf of themselves and an alleged class
consisting of all purchasers of the Company's common stock during the period
February 14, 1996 to July 16, 1996. The complaint alleged that the defendants
violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder and Section 11 of the Securities Act of 1933 and seeks, among other
things, compensatory damages, interest, fees and costs. The allegations were
based on alleged misrepresentations in and omissions from the Company's
registration statement and prospectus related to its initial public offering and
certain documents filed by the Company under the Exchange Act. On July 18, 1997,
the Court granted the defendants' motion to dismiss the complaint. However, the
Court gave the plaintiffs permission to file an amended complaint. The
plaintiffs filed an
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<PAGE>
amended complaint on September 8, 1997 and on October 8, 1997 the Company and
other defendants filed a motion to dismiss the complaint. A hearing on the
motion to dismiss is scheduled for December 5, 1997. The Company and each of
the defendants intend to continue to defend the action vigorously.
On February 13, 1997, a complaint was filed in the Superior Court of
California, City and County of San Francisco (Docket No. 984643) against Dignity
Partners, Inc., and each of its executive officers and New Echelon by an
individual purporting to act on behalf of himself and an alleged class
consisting of all purchasers of the Company's common stock during the period
February 14, 1996 to July 16, 1996. The complaint alleges that the defendants
violated section 25400 of the California Corporate Code and seeks to recover
damages. The allegations are based on alleged misstatements, concealment and/or
misrepresentations and omissions of allegedly material information in connection
with the Company's initial public offering and subsequent disclosures. The
Company and each of the defendants intend to defend the action vigorously.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
The following is a discussion and analysis of the consolidated
financial condition of the Company as of September 30, 1997 and of the results
of operations for the Company for the three and nine months ended September 30,
1997 and 1996, and of certain factors that may affect the Company's prospective
financial condition and results of operations. The following should be read in
conjunction with the unaudited consolidated financial statements and related
notes appearing elsewhere herein. For the reasons set forth below (including the
reclassification into "assets held for sale" of a substantial portion of the
Company's assets in 1996 and related accounting consequences), the Company's
results of operations and cash flows for the three and nine months ended
September 30, 1997 are not comparable to those for the three and nine months
ended September 30, 1996.
Overview
- --------
Point West is a specialty financial services company. The Company's
financial statements consolidate the assets, liabilities and operations of
Dignity Partners Funding Corp. I ("DPFC"), Fourteen Hill Management, LLC
("Fourteen Hill Management"), Fourteen Hill Capital, L.P. ("Fourteen Hill
Capital") and Allegiance Capital, LLC ("Allegiance"). See the Form 10-K and
Notes 1, 4, 6 and 10 of the Condensed Notes to Consolidated Financial Statements
(contained herein) for further information regarding these entities.
Until February 1997 the Company provided viatical settlements for
terminally ill persons. See "Cessation of Viatical Settlement Business; Sale of
Assets." Subsequently, the Company has sought to become a broad-based specialty
financial services company. To that end, the Company has expanded its financial
services business through the formation and investment in other entities,
including Fourteen Hill Management, Fourteen Hill Capital and Allegiance. The
Company is currently evaluating other strategic business opportunities. Fourteen
Hill Capital and Allegiance, whose planned business activities are described
below, are indicative of the types of business opportunities the Company intends
to pursue. See "Fourteen Hill Management," "Fourteen Hill Capital" and
"Allegiance." However, no assurance can be given that the Company will be
successful in becoming a broad-based specialty financial services company or
that such company will be successful.
Fourteen Hill Management
- ------------------------
Fourteen Hill Management, LLC is a wholly-owned limited liability
company of Point West formed on June 3, 1997 solely for the purpose of serving
as the general partner of one or more small business investment companies.
Fourteen Hill Management is the sole general partner of Fourteen Hill Capital
owning 99.978% of the partnership interests and has invested $5 million of
initial capital in this partnership. Fourteen Hill Management receives a
management fee for its services on behalf of Fourteen Hill Capital.
Fourteen Hill Capital
- ---------------------
Fourteen Hill Capital, L.P. is a limited partnership formed on June 3,
1997 solely for the purpose of operating as a small business investment company
("SBIC"). Fourteen Hill Capital commenced operations in August 1997 by
consummating two financings with unaffiliated entities in the
12
<PAGE>
aggregate principal amount of $1.25 million. Point West is one of the two
limited partners of Fourteen Hill Capital, with a 0.02% partnership interest.
Fourteen Hill Capital received its SBIC license from the Small Business
Administration effective September 26, 1997. Fourteen Hill Capital will provide
debt and/or equity capital to small companies (i.e., companies with a net worth
less than $18 million and average net income less than $6 million for the last
two years). See Note 1 of the Condensed Notes to Consolidated Financial
Statements (contained herein) for further information regarding Fourteen Hill
Capital.
Allegiance
- ----------
Allegiance Capital, LLC is a limited liability company formed on
September 5, 1997 as a specialty finance company to operate a
securitization-based loan program targeted to the nation's funeral home and
cemetery owners. Allegiance commenced operations on October 13, 1997 by issuing
a commitment letter to make a senior secured loan to an unaffiliated entity for
$2.1 million. Point West has a 51% equity interest and 95% voting control in
Allegiance and will serve as the managing member of Allegiance. The President
and Vice President of Marketing, each of whom Allegiance hired in September
1997, have the balance of such interests. Net profits of Allegiance for each
calendar year will be allocated first to Point West in an amount equal to a
return of 10% per annum, compounded monthly, on the amount of its capital
contribution, but not in excess of such net profits. Any shortfall will be
carried forward indefinitely to the next calendar year or years in which net
profits are sufficient to make such allocation. An additional 5% return for each
calendar year will be allocated first to Point West to the extent that in each
year sufficient profits are available with no carry forward provided. See Note
10 of the Condensed Notes to Consolidated Financial Statements (contained
herein) for further information regarding Allegiance.
Cessation of Viatical Settlement Business; Sale of Assets
- ---------------------------------------------------------
The principal business activity of the Company through February 1997 was
to provide viatical settlements for terminally ill persons. A viatical
settlement is the payment of cash in return for an ownership interest in, and
right to receive the death benefit (face value) from, a life insurance policy.
On July 16, 1996 the Company announced that, in light of the data
regarding new treatments involving combinations of various drugs presented at
the International AIDS Conference held in Vancouver, British Columbia in July
1996 (the "AIDS Conference"), the Company was temporarily ceasing processing new
applications for policies insuring individuals afflicted with AIDS and HIV while
it further analyzed the effects of such research results on its business and its
strategic options. See the Form 10-K for further information regarding the AIDS
Conference.
The Company decided in the third quarter of 1996 to sell all or
substantially all of its assets. As a result of such decision, the Company
reclassified all of its assets (other than the policies held by DPFC) to a
"held-for-sale" category during the third quarter of 1996. Accordingly, such
assets are accounted for at the lower of carrying value or fair value less cost
to sell.
The Company sought and received in December 1996 stockholder approval
to sell all or substantially all of its assets.
13
<PAGE>
Based on the Company's evaluation of the effects of the research
results reported at the AIDS Conference and subsequent reports and other
information, the Board of Directors in February 1997 approved the cessation of
the viatical settlement business and the sale by the Company of its non-AIDS
policies, consisting of approximately 31 policies with a face value of $2.9
million.
Through September 30, 1997 the Company had sold or entered into
agreements to sell 373 policies, representing $29.2 million in aggregate face
value, for an aggregate purchase price of $19.5 million. As a result of these
sales, the Company reported a pre-tax loss of $180,000 in 1996 and a pre-tax
gain of $1.5 million in the first nine months of 1997 (see "Results of
Operations -- Three and Nine Months Ended September 30, 1997 Compared to Three
and Nine Months Ended September 30, 1996 -- Net Gain (Loss) on Assets Sold").
The Company has experienced delays or difficulties in transferring the ownership
of certain policies. As of September 30, 1997 the Company retained ownership of
17 policies with an aggregate face value of $1.0 million that are the subject of
sales agreements. The Company continues to pursue other options for the sale of
these remaining policies, however, due to the limited market the Company has
reevaluated the fair value of these policies and has therefore recorded in the
third quarter of 1997 an additional reserve of $328,000 on the loss on sale of
these assets. The fair value is based on management's best estimate in light of
the limited market and in relation to current prices recorded by the Company in
connection with alternative bids. As of September 30, 1997 the carrying value of
the remaining policies was $171,000. See Note 3 of the Condensed Notes to
Consolidated Financial Statements.
Name Change Amendment
- ----------------------
Since the Company no longer engages in the viatical settlement
business, the Board of Directors determined that a change in the Company's name
was appropriate. The Company sought and received in June 1997 stockholder
approval to amend the Company's certificate of incorporation to change its name
from Dignity Partners, Inc. to Point West Capital Corporation. The name change
was effective August 1, 1997.
Method of Accounting
- --------------------
Through June 30, 1996, the Company recognized income ("earned
discount") on each purchased policy by accruing, over the period between the
acquisition date of the policy and the Company's estimated date of collection of
the policy's face value (the "Accrual Period"), the difference (the "unearned
discount") between (a) the face value of the policy less the amount of fees, if
any, payable to a referral source upon collection of the face value, and (b) the
carrying value of the policy. The carrying value for each policy was reflected
on the Company's consolidated balance sheet under "purchased life insurance
policies" and consisted of the purchase price, other capitalized costs and the
earned discount on the policy accrued to the balance sheet date. See the Form
10-K for further information regarding capitalized costs of policies,
determination of Accrual Periods and changes thereto over time.
As a result of the Company's decision to sell all or substantially all
of its assets, the Company established a reserve in 1996 for loss on sale of
assets. This reserve was reevaluated and increased in the third quarter of 1997.
The Company also established a reserve for loss of the Company's equity interest
in DPFC during 1996 because of the uncertainties created by the data presented
at the AIDS Conference and subsequent reports of the efficacy of new treatments
for AIDS/HIV. As of September 30, 1997, such reserves were $426,000 and $3.4
million, respectively. In addition, beginning in the
14
<PAGE>
third quarter of 1996, the Company began generally recognizing income on
policies only upon receipt of proceeds on policies (either pursuant to sale or
the death of the insured). Such income is equal to the difference between such
proceeds (less any back-end sourcing fees) and the carrying value of such
policies after giving effect to any reserve for loss on the sale of such
policies or any reserve for loss of the Company's equity interest in DPFC. See
the Form 10-K and Notes 4 and 6 of the Condensed Notes to Consolidated Financial
Statements for further information regarding the reserve for loss on sale of
assets.
In accordance with the Statement of Financial Accounting Standards No.
115 (FAS No. 115), "Accounting for Certain Instruments in Debt and Equity
Securities," the Company classifies marketable debt and equities into
held-to-maturity and available-for-sale categories. Securities classified as
held-to-maturity are reported at amortized cost and available-for-sale
securities are reported at estimated fair market value with unrealized gains and
losses included in Stockholders' Equity. Any realized gains and losses, declines
in value of securities judged to be other-than-temporary and accrued interest
and dividends on all securities will be reported in interest income and other
income as recognized. See Note 2 of the Condensed Notes to Consolidated
Financial Statements.
Certain Accounting Implications for DPFC
- ----------------------------------------
Under generally accepted accounting principles, to the extent that the
carrying value of the assets of DPFC are less than the carrying value of its
liabilities, the Company would be required to recognize a loss equal to the
amount of such difference, notwithstanding the non-recourse nature of the
Securitized Notes. At September 30, 1997, the carrying value of the assets of
DPFC were $41.5 million (consisting of purchased life insurance policies,
restricted cash and a portion of matured policies receivable) and its
liabilities were $38.8 million (consisting of long term notes payable, i.e. the
Securitized Notes).
Although the Securitized Notes had an expected life of 2.1 years when
the aggregate maximum principal amount of the Securitized Notes was increased
from $35 million to $50 million in September 1995, the Securitized Notes were
not retired through collections by October 1997. The Company reported in its
Form 10-Q for the quarterly period ended March 31, 1997, that in the event that
the collection experience for DPFC policies is substantially delayed, the assets
of DPFC may become less than its liabilities before late 2001. Because of recent
delays and variability in collections, the Company cannot predict at what point
in time the assets of DPFC may become less than its liabilities.
Additionally, if the collection experience for the DPFC policies is
substantially delayed, the value of the assets of DPFC may erode further for
some of the following reasons. First, a decision to discontinue paying premiums
on some policies may be made. Second, the face value of certain policies
(especially group term) may begin to decrease as the people whose lives are
insured thereunder reach specified age levels (often 65). Finally, policies for
which the insurance was continued under a disability provision may be
uneconomical to convert given the insured's age and life expectancy if such
insured person is no longer considered disabled. The Company cannot determine at
present how many, if any, policies held by DPFC would be so affected.
In light of the foregoing, the Company believes that it is possible
that the Company may in the future under generally accepted accounting
principles be required to recognize further losses to the extent that the
carrying value of the assets of DPFC is less than its liabilities. However, when
the Securitized Notes are finally discharged or mature, the Company under
generally accepted accounting principles would recognize a gain in an amount
equal to the aggregate amount of any such losses recognized. The
15
<PAGE>
Securitized Notes represent the obligations solely of DPFC. The Company did not
guarantee repayment of the Securitized Notes and is not required to fund any
principal or interest deficiencies thereunder.
Share Repurchase Program
- ------------------------
In October 1996, the Board of Directors of the Company approved a share
repurchase program pursuant to which the Company was authorized to purchase from
time to time up to 1 million shares of Common Stock at prevailing market prices.
In June 1997, such authority was increased to 1.04 million shares of Common
Stock. In June 1997, the Company completed the share repurchase program, having
repurchased an aggregate of 1.04 million shares at a weighted average price of
$2.77 per share.
Results of Operations
- ---------------------
Three and Nine Months Ended September 30, 1997 Compared to Three and Nine Months
- -------------------------------------------------------------------------------
Ended September 30, 1996
- -----------------------
Earned Discounts.The Company currently recognizes earned discounts only
upon receipt of proceeds on policies (pursuant to the death of the insured).
Consequently, the Company did not recognize any earned discounts on life
insurance policies during the first nine months of 1997, but instead recognized
$91,500 and $377,000 of earned discounts on matured policies for the three and
nine months ended September 30, 1997, respectively. Such income is equal to the
difference between the proceeds the Company received on the policies (less any
back end sourcing fees) and the carrying value of such policies after giving
effect to any reserve for loss on sale of such policies. See "Method of
Accounting."
In the first six months of 1996 the Company recognized earned discount
on each purchased policy by accruing, over the Accrual Period, the difference
between (a) the face value of the policy less the amount of fees, if any,
payable to a referral source upon collection of the face value, and (b) the
carrying value of the policy. Earned discounts on life insurance policies was
$3.7 million for the six months ended June 30, 1996. In the third quarter of
1996 the Company began recognizing earned discounts only upon receipt of
proceeds on policies (pursuant to the death of the insured). The Company
recognized $356,000 of earned discounts on matured policies in the three months
ended September 30, 1996. In addition, the Company recognized $802,000 of earned
discounts on prior maturities. Such earned discounts were carried on the balance
sheet at June 30, 1996 as unearned income which related to policies for which
the Company had collected the proceeds prior to the expected collection date.
The Company will not have any earned discounts on prior maturities in any other
period. See "Method of Accounting."
The Company purchased only four policies (outstanding commitments as of
December 31, 1996) with an aggregate face value of $155,000 during the first
nine months of 1997 compared to the purchase of 460 policies with an aggregate
face value of $31.9 million during the first nine months of 1996. See "Cessation
of Viatical Settlement Business; Sales of Assets."
Interest Income. Interest income increased 86.2% in the third quarter
of 1997 over the third quarter of 1996 and 38.3% in the first nine months of
1997 over the first nine months of 1996 as a result of the investment of the
proceeds from the sale of policies in short term securities and marketable
securities. Interest income generated in the first nine months of 1996 was
primarily the result of the investment of the Company's initial public offering
proceeds.
16
<PAGE>
Gain on Sale of Convertible Preferred Shares. In the first quarter of
1997 the Company recognized a $700,000 gain on the sale of a portion of its
investment in American Information. In March 1997 the Company converted 8.2
million shares of convertible preferred stock into 8.2 million shares of common
stock of American Information and sold such shares to an unaffiliated third
party for $1.8 million. The carrying value of such shares was $1.1 million. In
addition, the Company had an option that expired on October 26, 1997 to purchase
for approximately $1.1 million 8.2 million additional shares of common stock of
American Information. Since the Company did not exercise this option, a $20,000
pre-tax loss was recognized in the third quarter of 1997. See Note 5 of the
Condensed Notes to Consolidated Financial Statements.
Net Gain (Loss) on Assets Sold. The Company collected the sales
proceeds on 6 policies during the third quarter of 1997 and 245 policies during
the first nine months of 1997. See Note 3 of the Condensed Notes to Consolidated
Financial Statements. The total net gain recorded in the third quarter and first
nine months of 1997 in connection with these sales was $98,000 and $1.5 million,
respectively. The total net loss recorded in the third quarter and first nine
months of 1996 was $300,000 in both periods as a result of the sale on August 2,
1996 of 60 policies to an unaffiliated third party. The realized gain (loss) was
calculated based on the difference between the sale proceeds and the carrying
value after giving effect to the reserve for loss on sale of assets. See
"Cessation of Viatical Settlement Business; Sale of Assets."
Other Income. Components of other income include collections on
policies of dividends, interest, paid-up cash values, increases in face value of
matured policies, refunds of premiums on matured policies and realized capital
gains on investments securities. Other income decreased 84.2% in the third
quarter of 1997 over the third quarter of 1996 and 68.7% during the first nine
months of 1997 compared to the first nine months of 1996 due primarily to a
decrease in the number of matured policies. Other income was also relatively
high in 1996 due to an $80,000 aggregate increase in face value on two policies
which was recorded during the first nine months of 1996.
Interest Expense. Interest expense decreased 15.8% in the third quarter
of 1997 compared to the third quarter of 1996 and 10.5% in the first nine months
of 1997 compared to the first nine months of 1996 due mainly to the repayment of
indebtedness. There were no borrowings under the Company's revolving credit
facility in the first nine months of 1997 compared to average borrowings of $1.1
million in the first nine months of 1996. The revolving credit facility was
repaid and terminated in August 1996. Average borrowings under the Securitized
Notes were $39.3 million in the first nine months of 1997 compared to $43.0
million in the first nine months of 1996. The interest rate on the Securitized
Notes was 9.17% in all periods.
Compensation and Benefits. Compensation and benefits decreased 9.3% in
the third quarter of 1997 compared to the third quarter of 1996 and 10.6% in the
first nine months of 1997 compared to the first nine months of 1996. This
decrease was due mainly to the reduction in staff from 17 on September 30, 1996
to 12 on September 30, 1997 with the cessation of application processing of new
policies. Partially offsetting the staff reduction was the increase in
compensation and benefits for remaining employees (including executive officers)
in 1997.
Other General and Administrative Expenses. Other general and
administrative expenses decreased 94.8% in the third quarter of 1997 compared to
the third quarter of 1996. This decrease is the result of the reduction of
professional fees in the amount of $75,000 due to the expiration of a consulting
contract and the reduction of estimated legal expenses based on actual cost
incurred. Other general and administrative expenses increased 15.5% in the first
nine months of 1997 compared to the
17
<PAGE>
first nine months of 1996. The increase in the first nine months of 1997 is
primarily the result of a $361,000 legal reserve recorded in the first nine
months of 1997 in connection with federal and state alleged class action
lawsuits filed against the Company and its officers and directors.
Amortization. Because the Company prepaid its revolving credit facility
in August 1996, the Company incurred a charge in the third quarter of 1996 of
$130,000 as a result of the Company's writing off the unamortized financing
charges related to that facility. All periods include the amortization of
deferred financing costs for DPFC.
Provision for Loss on Assets Held for Sale. The Company recorded in the
third quarter of 1996 a provision for loss on sale of assets totaling $3.3
million based on management's estimate of proceeds from the sale of policies.
The provision equaled the difference between the carrying value of policies and
those estimates. The estimates were based on the life expectancies of the
insureds covered by the policies, the estimated sale period and the prices
obtained by the Company in connection with other sales of policies. For the
quarter ended September 30, 1997, the Company recorded an additional provision
in the amount of $328,000 in connection with the remaining policies not yet
sold, based on management's revised best estimate of proceeds from the sale of
such policies.
Loss on Investment in Wholly Owned Financing Subsidiary. A reserve was
recorded in the third quarter of 1996 in the amount of $6.9 million to reflect
the estimated loss of the Company's entire equity interest in DPFC. The Company
had an initial capital investment in DPFC of $2.9 million and, through
consolidation, an additional $3.3 million of increased equity attributable to
the earnings of DPFC. This reserve includes the write-off of deferred financing
costs in an amount equal to approximately $740,000. See "-- Certain Accounting
Implications for DPFC."
Income Tax Expense. In the first nine months of 1997 the Company did
not record an income tax expense on the income statement because the deferred
tax asset of $3,225,130 was available to offset any tax liability. The Company
adjusted its deferred tax asset, liability and related allowance to reflect the
tax effect on the earnings for the nine months ended September 30, 1997.
Net loss in Wholly Owned Financing Subsidiary Charged to Reserve for
Equity Interest. At December 31, 1996 the reserve to reflect the estimated loss
of the Company's entire equity interest in DPFC was $6.5 million. The DPFC net
loss of $943,000 and $2.8 million recorded in the three and nine months ended
September 30, 1997, respectively, was included in the Company's net loss before
income taxes and net loss in wholly owned financing subsidiary charged to
reserve for equity interest. This loss was charged against the reserve for
equity interest in wholly owned financing subsidiary.
Liquidity and Capital Resources
- -------------------------------
Other than debt that may be available to Fourteen Hill Capital through
the SBIC program, the Company does not currently have an external funding
source. The Securitized Notes do not provide funds with which to fund
operations. At September 30, 1997, cash and cash equivalents was $14.1 million
and investment securities was $4.1 million. The Company continues to analyze its
current and future needs for financing, which will be dependent on its strategic
direction. There can be no assurance that the Company will be successful in
obtaining external financing on satisfactory terms assuming it determines it
needs additional funds. However, the Company at present anticipates having
sufficient liquidity to meet its capital commitments and working capital and
operational needs through the first half of 1998, using current cash and cash
equivalents and investment securities and any additional cash generated by the
sale of policies. Such needs may change significantly depending on strategic
options
18
<PAGE>
selected. The Company has agreed to provide to Allegiance $500,000 of working
capital and approximately $1.5 million to support warehousing and equity
components of the loans to be funded in connection with an initial
securitization. In addition, at the Company's discretion, after the completion
of an initial securitization, an additional commitment up to approximately $1.5
million may be made to support warehousing and equity components of a second
securitization. Allegiance is in the process of securing an external warehousing
facility to support its loan activity prior to securitization. No assurance can
be given that Allegiance will be successful in obtaining external financing on
satisfactory terms. Allegiance issued a commitment letter to make a senior
secured loan for $2.1 million to an unaffiliated entity on October 13, 1997.
As of September 30, 1997, the outstanding principal amount of the
Securitized Notes was $38.8 million. Principal repayments on the Securitized
Notes began in July 1996. Principal and interest payments on the Securitized
Notes are payable solely from collections on policies pledged to secure the
payment thereof and do not require the Company to expend cash or obtain
financing to satisfy such principal and interest obligations. See Notes 4 and 6
of the Condensed Notes to Consolidated Financial Statements.
Forward Looking Statements
- --------------------------
This report includes forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. All statements made herein
which are not based on historical facts are forward looking and, accordingly,
involve risks and uncertainties that could cause actual results to differ
materially from those discussed. Such forward looking statements include those
under "Management's Discussion and Analysis Of Financial Condition and Results
of Operations" relating to (i) face and carrying values of policies expected to
continue to be owned by the Company, (ii) expectations regarding whether and the
time at which the carrying value of the assets of DPFC will be less than the
carrying value of its liabilities (see "Certain Accounting Implications for
DPFC"), and (iii) sufficiency of the Company's liquidity and capital resources
(see "Liquidity and Capital Resources"). Such statements are based on
management's belief, judgment and analysis as well as assumptions made by and
information available to management at the date hereof. In addition to any
assumptions and cautionary factors referred to specifically in this report in
connection with such forward looking statements, factors that could cause actual
results to differ materially from those contemplated by the forward looking
statements include (i) the ability of the Company to transfer ownership of
policies, (ii) the amount and timing of actual collections of DPFC policies
following the death of the insured, (iii) the results of the Company's
consideration of strategic options and any costs associated with a chosen
option, and (iv) availability and cost of capital.
19
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- --------------------------
On December 19, 1996, a complaint was filed in the United States
District Court, Northern District of California (the "Court") (Docket
No. C96-4558) against Dignity Partners, Inc. and each of its directors
by three individuals purporting to act on behalf of themselves and an
alleged class consisting of all purchasers of the Company's common
stock during the period February 14, 1996 to July 16, 1996. The
complaint alleged that the defendants violated Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 thereunder and Section
11 of the Securities Act of 1933 and seeks, among other things,
compensatory damages, interest, fees and costs. The allegations were
based on alleged misrepresentations in and omissions from the Company's
registration statement and prospectus related to its initial public
offering and certain documents filed by the Company under the Exchange
Act. On July 18, 1997, the Court granted the defendants' motion to
dismiss the complaint. However, the Court gave the plaintiffs
permission to file an amended complaint. The plaintiffs filed an
amended complaint on September 8, 1997 and on October 8, 1997 the
Company and the other defendants filed a motion to dismiss. A hearing
on the motion to dismiss is scheduled for December 5, 1997. The
Company and each of the defendants intend to continue to defend the
action vigorously.
On February 13, 1997, a complaint was filed in the Superior Court of
California, City and County of San Francisco (Docket No. 984643)
against Dignity Partners, Inc., and each of its executive officers and
New Echelon by an individual purporting to act on behalf of himself and
an alleged class consisting of all purchasers of the Company's common
stock during the period February 14, 1996 to July 16, 1996. The
complaint alleges that the defendants violated section 25400 of the
California Corporate Code and seeks to recover damages. The allegations
are based on alleged misstatements, concealment and/or
misrepresentations and omissions of allegedly material information in
connection with the Company's initial public offering and subsequent
disclosures. The Company and each of the defendants intend to defend
the action vigorously.
Item 2. Changes in Securities and Use of Proceeds
- --------------------------------------------------
Effective August 1, 1997, the Company's Second Amended and Restated
Certificate of Incorporation was amended to change the Company's name
to Point West Capital Corporation from Dignity Partners, Inc.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits.
Number Description
----- ------------
10.1 Limited Liability Company Agreement of Allegiance
Capital, LLC
10.2 Fourteen Hill Capital, L.P. Agreement of Limited
Partnership
10.3 Fourteen Hill Management, LLC Operating Agreement by
Point West Capital Corporation and Fourteen Hill
Management, LLC as of June 9, 1997
27 Financial Data Schedule
20
<PAGE>
(b) Reports on Form 8-K.
Date Item Reported Matter Reported
---- ------------- ---------------
8/7/97 5 The Company issued a press release
regarding its results of operations for
the second quarter of 1997.
SIGNATURES
==========
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
POINT WEST CAPITAL CORPORATION
DATED: November 13, 1997 /S/ ALAN B. PERPER
-------------------------------
ALAN B. PERPER
President
(Duly Authorized Officer)
DATED: November 13, 1997 /S/ JOHN WARD ROTTER
------------------------------
JOHN WARD ROTTER
Executive Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
21
LIMITED LIABILITY COMPANY AGREEMENT
-----------------------------------
OF
--
ALLEGIANCE CAPITAL, LLC
-----------------------
This LIMITED LIABILITY COMPANY AGREEMENT (this "Agreement"), dated as
---------
of September 5, 1997, is entered into among the parties listed on the signature
pages hereof.
RECITALS
--------
A. On or about September 5, 1997, the Certificate of Formation
for Allegiance Capital, LLC, a limited liability company under the laws of the
State of Delaware (the "Company"), will be filed with the Delaware Secretary of
-------
State; and
B. The parties hereto desire to adopt and approve a limited
liability company agreement for the Company;
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, and for other good and valuable consideration (the receipt and adequacy
of which are hereby acknowledged), the parties hereto, by this Agreement, set
forth the limited liability company agreement for the Company under the laws of
the State of Delaware.
ARTICLE I
=========
Certain Defined Terms; Certain Rules of Construction
====================================================
1.1 Certain Defined Terms. As used herein:
---------------------
"Act" means the Delaware Limited Liability Company Act, codified at
---
Delaware code Title 6, Sections 18.101 et seq.
-- ---
"Adjusted Capital Contribution" means, with respect to Point West as of
-----------------------------
any date of determination, the Capital Contributions of Point West made pursuant
to Section 3.1.1, increased by the amount of the Point West Primary Preferred
---------
Return accrued thereon (computed without regard to the limits on allocation set
forth in Section 6.1.2(a)) and by the amount of the Point West Secondary
Preferred Return accrued thereon (computed with regard to the limits on
allocation set forth in Section 6.1.2(b) and reduced by the cumulative amounts
-------
distributed to Point West pursuant to Section 6.5.1.
"Affiliate" means, as to any Person, any other Person directly or
---------
indirectly controlling, controlled by, or under common control with such Person.
The term "control," as used in the immediately preceding sentence, means the
-------
possession, whether direct or indirect, of the power to direct or cause the
direction of the management and policies of another Person.
"Agreement" has the meaning set forth in the introduction hereto.
---------
"Bankruptcy" means: (a) the filing of an application by a Member for,
----------
or such Person's consent to, the appointment of a trustee, receiver, or
custodian of such Person's assets; (b) the entry of an order for relief with
respect to a Member in proceedings under the federal bankruptcy code, as amended
or superseded from time to time; (c) the making by a Member of a general
assignment for the benefit of creditors; (d) the entry of an order, judgment, or
decree by any court of competent jurisdiction appointing a trustee, receiver, or
custodian of the assets of a Member unless the proceedings and the Person
appointed are dismissed within
<PAGE>
ninety (90) days; or (e) the failure by a Member generally to pay such Person's
debts as such debts become due within the meaning of the federal bankruptcy
code, as determined by the relevant bankruptcy court, or by the admission in
writing of such Person's inability to pay such Person's debts as they become
due.
"Capital Account" means, as to any Member, the capital account which
----------------
the Company establishes and maintains for such Member pursuant to Section 3.4.
"Capital Contribution" means as to any Member, the total amount of cash
--------------------
and the fair market value of property (including promissory notes or other
obligations to contribute cash or property) contributed to the Company by such
Member pursuant to Section 3.1 or 3.2.
"Certificate" means the Certificate of Formation for the Company.
-----------
"Code" means the Internal Revenue Code of 1986 and any applicable
----
Regulations thereunder.
"Company" has the meaning set forth in the recitals hereto.
-------
"Company Minimum Gain" has the meaning ascribed to the term
------------------------
"Partnership Minimum Gain" in Regulations Section 1.704-2(d).
"Dissolution Event" means, with respect to any Member, one or more of
------------------
the following: the death, insanity, withdrawal, resignation, Bankruptcy,
dissolution, or liquidation of any Member.
"Fiscal Year" means the Company's fiscal year, which is the calendar
----------
year.
"Indemnified Person" has the meaning set forth in Section 10.1.
------------------
"Isard" means Daniel M. Isard, an individual.
-----
"Isard Employment Agreement" means that certain Employment Agreement,
---------------------------
dated as of even date herewith, between Isard and the Company.
"Majority Voting Interest" means more than fifty percent (50%) of all
--------------------------
Voting Interests.
"Manager" has the meaning set forth in Section 5.1.2.
-------
"McDermitt" means Michael W. McDermitt, an individual.
---------
"McDermitt Employment Agreement" means that certain Employment
----------------------------------
Agreement, dated as of even date herewith, between McDermitt and the Company.
"Member" means each Person who: (a) is an initial signatory to this
-----
Agreement, has been admitted to the Company as a Member in accordance with the
Certificate and this Agreement, or is an assignee who has been substituted as a
Member in accordance with Article 7; and (b) is not the subject of a Dissolution
Event.
"Member Nonrecourse Debt" has the meaning ascribed to the term "Partner
-----------------------
Nonrecourse Debt" in Regulations Section 1.704-2(b)(4).
2
<PAGE>
"Member Nonrecourse Deductions" means items of Company loss, deduction,
-----------------------------
or Code Section 705(a)(2)(B) expenditures which are attributable to Member
Nonrecourse Debt.
"Membership Interest" means, as to any Member, the percentage interest
--------------------
set forth opposite the name of such Member under the column "Member's Percentage
Interest" on Schedule I attached hereto, as such percentage may be adjusted from
----------
time to time pursuant to the terms hereof.
"Net Profits" and "Net Losses" means the income, gain, loss,
------------ -----------
deductions, and credits of the Company in the aggregate or separately stated, as
appropriate, determined in accordance with the method of accounting used in the
preparation of the Company's partnership tax return filed for federal income tax
purposes.
"Nonrecourse Liability" has the meaning set forth in Regulations
---------------------
Section 1.752-l(a)(2).
"Person" means an individual, general partnership, limited partnership,
------
limited liability company, corporation, trust, estate, real estate investment
trust, association, organization, including a government or political
subdivision or an agency or instrumentality thereof, or any other entity.
"Point West" means Point West Capital Corporation.
----------
"Point West Carryforwards" has the meaning given in Section 6.1.2(a).
------------------------
"Point West Primary Preferred Return" means for any taxable year (or
-------------------------------------
portion thereof) during the term hereof, an amount equal to a return of ten
percent (10%) per annum, compounded monthly, on the amount of its Adjusted
Capital Contribution as of the close of each month.
"Point West Secondary Preferred Return" means for any taxable year (or
--------------------------------------
portion thereof) during the term hereof, an amount equal to a return of five
percent (5%) per annum, compounded monthly, on the amount of its Adjusted
Capital Contribution as of the close of each month.
"Regulations" means, unless the context clearly indicates otherwise,
-----------
the federal income tax code regulations currently in force as final or temporary
that have been issued by the U.S. Department of Treasury pursuant to its
authority under the Code.
"Securities Act" means the Securities Act of 1933.
--------------
"Voting Interest" means: (a) in the case of Isard, the lesser of (i)
----------------
2-1/2% and (ii) Isard's Membership Interest; (b) in the case of McDermitt, the
lesser of (i) 2-1/2% and (ii) McDermott's Membership Interest; and (c) in the
case of Point West, the greater of (i) 95% and (ii) Point West's Membership
Interest; provided that each Members' Voting Interest shall equal the same
--------
percentage as its Membership Interest from and after the earlier of: (A) the
consummation of an initial public offering for interests of the Company or (B) a
sale, in accordance with Article 7, by Point West of all or any part of its
interest in the Company to any party other than Isard or McDermitt.
1.2 Certain Rules of Construction. References to the plural include the
-----------------------------
singular and to the singular include the plural. References to any gender
include any other gender. The part includes the whole. The term "including" is
not limiting, and the term "or" has, except where otherwise indicated, the
inclusive meaning represented by the phrase "and/or." The words "hereof,"
"herein," "hereby," and "hereunder," and any other similar words, refer to this
Note as a whole and not to any particular provision of this Agreement. Section,
subsection, clause, exhibit, and schedule references are to this Agreement
unless otherwise indicated. Section, subsection, clause, exhibit, and schedule
headings are for convenience of reference only,
3
<PAGE>
shall not constitute a part of this Agreement for any other purpose, and shall
not affect the construction of this Agreement. Any reference to this Agreement
or any other agreement, document, or instrument (including the Certificate)
includes all permitted alterations, amendments, changes, extensions,
modifications, renewals, or supplements thereto or thereof, as applicable. Any
reference herein to the Code, the Regulations, the Act, the Corporations Code or
other statutes or laws will include all amendments, modifications, or
replacements of the specific sections and provisions concerned. Each exhibit and
schedule attached hereto is incorporated herein by this reference.
4
<PAGE>
ARTICLE 2
==========
Organization of the Company
===========================
2.1 Formation. Pursuant to the Act, the Members have formed a limited
---------
liability company under the laws of the State of Delaware by filing the
Certificate with the Delaware Secretary of State and entering into this
Agreement. The rights and liabilities of the Members shall be as provided in the
Act, except as specifically modified by this Agreement. If the rights or
obligations of any Member are different by reason of any provision of this
Agreement than they would be in the absence of such provision, then this
Agreement shall, to the extent permitted by the Act, control.
2.2 Name. The name of the Company shall be "Allegiance Capital, LLC."
----
2.3 Term. The term of this Agreement shall be co-terminus with the
----
period of duration of the Company provided in the Certificate, unless extended
or sooner terminated as hereinafter provided.
2.4 Office and Agent. The principal executive office of the Company
----------------
shall be located at 1700 Montgomery Street, Suite 250, San Francisco, CA 94111.
The Manager may, from time to time, upon 30-days advance written notice to each
Member, change the principal place of business of the Company or, without such
notice, establish additional places of business of the Company. The registered
agent shall be as stated in the Certificate or as otherwise determined by the
Manager, and the Manager, may, from time to time, change the registered agent
(or its office) through appropriate filings with the Delaware Secretary of
State.
2.5 Addresses of the Members and the Manager. The respective
-------------------------------------------
addresses for each Member and for the Manager are set forth on Schedule I
----------
attached hereto.
2.6 Purpose of Company. The purpose of the Company is to engage in any
------------------
lawful activity for which a limited liability company may be organized under the
Act. Notwithstanding the foregoing, without the prior written consent of all of
the Members, the Company shall not engage in any business other than (i)
conducting a lending business focused on the death care industry, including
originating, acquiring, holding, servicing and disposing of loans and other
forms of financing for funeral homes, cemeteries and other businesses in the
death care industry and (ii) other activities directly related to the foregoing
business as may be necessary, advisable, or appropriate to further the foregoing
business.
5
<PAGE>
ARTICLE 3
=========
Contributions to Capital
========================
3.1 Initial Capital Contributions. Members shall make initial
---------------------------------
contributions as follows and shall receive in exchange therefore the Membership
Interest set forth opposite such Member's name on Schedule I attached hereto :
----------
3.1.1 Initial Point West Contributions. Point West shall contribute:
--------------------------------
(a) $50,000 at the time of execution of this Agreement and from
time to time thereafter, as needed, up to an additional $450,000 to be used as
working capital for the Company,
(b) approximately $1,500,000, as needed from time to time to
support the warehousing and equity components of loans to be funded in
connection with an initial securitization, and
(c) at Point West's discretion, after completion of an initial
securitization by the Company, up to approximately $1,500,000 to be
used to support the warehousing and equity components of a second
securitization.
All such Capital Contributions shall be entitled to earn the Point West Primary
Preferred Return and the Point West Secondary Preferred Return pursuant to the
terms of this Agreement.
3.1.2 Initial Contributions by Isard and McDermitt. Isard and
--------------------------------------------
McDermitt shall contribute to the Company all their interest in any agreements,
rights, intellectual property, written presentations or other written or
electronic materials previously developed or collected by them in respect of the
business of the Company. It is agreed by the parties that such property will be
deemed to have no value for purposes of Capital Account computations hereunder.
3.2 Additional Contributions. If the Manager determines that additional
------------------------
funds are required or advisable for the operation of the business of the
Company, it may request additional Capital Contributions from the Members. Such
request shall be in writing and shall indicate the purpose, amount, timing and
terms of the additional Capital Contributions being requested and such other
information as the Members may reasonably request. All Members shall have the
opportunity but not the obligation to participate in the making of such Capital
Contributions on a pro rata basis in accordance with their Membership Interests.
No Capital Contributions in addition to those provided for in Section 3.1 shall
be accepted absent approval of the terms thereof by the Members holding 100% of
the Voting Interests. Each Member's Capital Account shall be credited for such
contribution in accordance with Section 3.4 and the Membership Interests, as
reflected on Schedule I shall be adjusted, if and as agreed upon by the Members,
----------
to reflect the new relative Membership Interests of the Members. If the Members
do not consent to the additional Capital Contributions proposed by the Manager,
the Manager may lend or contribute capital to the Company on such terms as it
deems appropriate; provided however, that the Members shall have a right of
first refusal to cause the Company to obtain funds from another source on better
terms, using procedures similar to those provided for in Section 7.6.
3.3 Liability for Promised Contributions.A Member is obligated for any
------------------------------------
promise to make a Capital Contribution, even if the Member is unable to perform
for any reason (including death or disability).
3.4 Capital Accounts.The Company shall establish an individual Capital
----------------
Account for each Member. If a Member transfers all or a part of such Member's
Membership Interest in accordance with this Agreement, then such Member's
Capital Account attributable to the transferred Membership Interest shall
6
<PAGE>
carry over to the new owner of such Membership Interest pursuant to Regulations
Section 1.704-1(b)(2)(iv). Each Member's Capital Account shall equal the value
of the Capital Contribution initially made by it pursuant to Section 3.1 and
shall be (a) increased by the amount of (i) Net Profits allocated to the Member
---------
and (ii) any subsequent Capital Contributions by the Member to the Company in
accordance with Section 3.2, and (b) decreased by the amount of (i) Net Losses
---------
allocated to the Member and (ii) all cash and property distributed to the
Member. Each Capital Account shall otherwise be kept in accordance with the
applicable Regulations promulgated under Section 704(b) of the Code. No Member
has any obligation to restore, or make contributions to the Company to restore,
a deficit balance in such Member's Capital Account.
3.5 No Interest; Return of Contributions. No Member shall be entitled
-------------------------------------
to receive any interest on such Member's Capital Contributions. Except as
otherwise provided in this Agreement, no Member shall have the right to receive
the return of any Capital Contribution or any withdrawal from the Company,
except upon a dissolution of the Company.
3.6 Organizational Costs. Upon receipt of reasonable documentation, the
--------------------
Company shall reimburse each Member for its reasonable out-of-pocket expenses
incurred on or after August 6, 1997 in connection with the organization of the
Company or advanced with respect to the Company on or before the date of
execution of this Agreement.
7
<PAGE>
ARTICLE 4
=========
Certain Rights and Liabilities of Members
=========================================
4.1 Limited Liability. Except as required under the Act or as expressly
-----------------
set forth in this Agreement, no Member shall be personally liable for any debt,
obligation, or liability of the Company, whether that liability or obligation
arises in contract, tort, or otherwise.
4.2 Admission of Additional Members. The Manager, with the approval of
-------------------------------
all of the Members, may admit additional members to the Company. Any additional
Members shall obtain Membership Interests and will participate in the
management, Net Profits, Net Losses, and distributions of the Company on such
terms as are provided herein and as may be approved by the Members.
Notwithstanding the foregoing, substitute members may only be admitted in
accordance with Article 7.
4.3 Withdrawals or Resignations. Except as otherwise specifically
---------------------------
provided herein, no Member may withdraw or resign from the Company.
4.4 Repurchase of a Membership Interest. Upon the transfer of a
--------------------------------------
Member's Membership Interest in violation of this Agreement or the occurrence of
a Dissolution Event as to a Member that does not result in the dissolution of
the Company, such Member's Voting Interest shall terminate and the Company shall
have the right to purchase the Membership Interest of such Member at the fair
value of such interest, and if the Company does not exercise such right to
purchase the remaining Members shall have such right on the same terms. Failure
to exercise such right of purchase shall not limit any right of first refusal
otherwise available under this Agreement. Each Member acknowledges and agrees
that this provision is not unreasonable under the circumstances existing as of
the date hereof .
4.5 Transactions with the Company. Notwithstanding that it may
--------------------------------
constitute a conflict of interest, any Member, or any of such Member's
Affiliates, may engage in any transaction with the Company (including making
loans or causing loans to be made to the Company) so long as: (a) such
transaction is not expressly prohibited by this Agreement; (b) the terms and
conditions of such transaction, on an overall basis, are fair and reasonable to
the Company and are at least as favorable to the Company as those that are
generally available from Persons, not Members (or their Affiliates), dealing
with the Company on an arms-length basis; (c) the nature of such transaction is
fully disclosed to the Manager; and (d) any such transaction that involves a
contract for services is approved by Members holding 100% of the Voting
Interests and not otherwise the subject of Section 4.4.
4.6 Remuneration to Members. Except as otherwise specifically provided
-----------------------
herein, no Member is entitled to remuneration for acting in the Company
business, subject to the entitlement of Members winding up the affairs of the
Company to reasonable compensation pursuant to Section 9.3.
4.7 Members Are Not Agents. The management of the Company is vested in
----------------------
the Manager. The Members shall have no power to participate in the management of
the Company except as expressly authorized by this Agreement or the Certificate
and except as expressly required by the Act. Unless expressly and duly
authorized in writing to do so by the Manager, no Member shall have any power or
authority to bind or act on behalf of the Company in any way (as agent or
otherwise).
4.8 Voting Rights. Except as otherwise specifically provided herein,
-------------
Members shall have no voting, approval, or consent rights. A Member may vote
either in person or by written proxy or consent signed by the Member or such
Member's duly authorized attorney-in-fact. Members shall have the right to
approve or disapprove matters as specifically stated in this Agreement,
including the following:
8
<PAGE>
4.8.1 Unanimous Approval. The following matters shall require
------------------
the vote, approval or consent of Members holding 100% of the Voting Interests
and who are not otherwise the subject Section 4.4: (a) a decision to continue
the business of the Company after the occurrence of a Dissolution Event; (b) the
transfer of a Membership Interest except as permitted in Article 7 or the
admission of an assignee as a substitute Member of the Company; (c) a change in
the purpose of the Company other than as provided in Section 2.6; (d) the
admission of a new member to the Company; (e) the merger or consolidation of the
Company or a sale of substantially all of its assets that is coupled with the
granting of a noncompete; (f) any amendment of the Certificate or this Agreement
that could have a material adverse effect on the economic interests of a Member;
(g) a decision to compromise the obligation of a Member to make a Capital
Contribution or return money or property paid or distributed in violation of the
Act; (h) the declaration or making of any payment or distribution not
contemplated by Article 6; or (i) any other matter for which unanimous consent
is specifically provided for in this Agreement.
4.8.2 Approval by Members Holding a Majority Voting Interest.
-------------------------------------------------------
Except as set forth in Section 4.8.1, in all other matters in which a vote,
approval or consent of the Members is required, the vote, consent, or approval
of Members holding a Majority Voting Interest (or, in instances in which there
are defaulting or interested members, non-defaulting or disinterested Members,
as applicable, who hold a majority of the Voting Interests held by all
non-defaulting or disinterested, as applicable, Members) shall be sufficient to
authorize or approve such act. Without limiting the generality of the foregoing
or any other provision to the contrary, but subject to Section 4.8.1, the
affirmative vote or written consent of Members holding a Majority Voting
Interest shall be required to approve the following matters (provided that the
Members shall not vote for or consent to any such action if prohibited under any
contract or agreement to which the Company is a party): (a) the dissolution or
winding up of the Company; (b) the sale, exchange, mortgage, pledge,
encumbrance, lease or other disposition or transfer of all or substantially all
of the assets of the Company that is not coupled with the granting of a
noncompete; or (c) the declaration or payment of any payment or distribution
contemplated by Article 6. Prior to taking any action taken pursuant to an
affirmative vote under subsections (a) or (b) above, the dissenting Members
shall have the right to propose, within 30 days of such vote, a more
economically advantageous alternative to the proposed action. If such a proposal
is made, the Members shall hold a meeting in accordance with Section 4.9 to
discuss and vote on it.
4.9 Meetings.
--------
4.9.1 Meetings of Members. Meetings of Members for any proper
-------------------
purpose may be called at any time and from time to time by any Member. Members
may participate in any meeting through the use of a conference telephone or
similar communications equipment by means of which all individuals participating
in the meeting can hear each other, and such participation shall constitute
presence in person at the meeting. The Company shall give written notice of the
date, time, place and purpose of any meeting to all Members at least ten (10)
days and not more than sixty (60) days prior to the date fixed for the meeting.
Notice may be waived by any Member, which waiver will be in writing.
4.9.2 Consent of Members. Any action required or permitted to
------------------
be taken at any annual or special meeting of Members may be taken by a written
consent without a meeting, without prior notice and without a vote. The written
consent shall set forth the action so taken and shall be signed by Members
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all Members entitled to vote
thereon were present and voting. Prompt notice of the taking of action by
written consent shall be given to all Members who did not sign the written
consent.
9
<PAGE>
ARTICLE 5
=========
Management and Control of the Company
=====================================
5.1 Management of the Company by the Manager.
----------------------------------------
5.1.1 Exclusive Management by the Manager. Except for
----------------------------------------
situations in which the approval of the Members is expressly required by the
Certificate or this Agreement, the business, property, and affairs of the
Company shall be managed exclusively by, or under the authority of, the Manager.
The Manager may, from time to time, appoint Persons to act on behalf of the
Company and may hire employees and agents and appoint officers to perform such
functions as from time to time shall be delegated to such employees, agents, and
officers by the Manager. The Manager may, from time to time, determine the
compensation of any employees, agents, or officers of the Company or may
delegate some or all compensation decisions to officers or employees of the
Company. Pursuant and subject to the terms and conditions of the McDermitt
Employment Agreement, the Manager hereby appoints McDermitt as the initial
President of the Company. Pursuant and subject to the terms and conditions of
the Isard Employment Agreement, the Manager hereby appoints Isard as the initial
Vice President of Marketing of the Company.
5.1.2 Initial Manager; Term. The initial Manager shall be
-----------------------
Point West. The Manager shall hold office until the effective date of the
earlier of its resignation or removal hereunder. Any new or replacement Manager
shall be elected by the affirmative vote or written consent of Members holding
100% of the Voting Interest, which consent shall not be unreasonably withheld.
The Manager need not be a Member, an individual, a resident of the State of
Delaware, or a citizen of the United States.
5.1.3 Resignation. The Manager may resign at any time by
-----------
giving written notice to the Members without prejudice to the rights, if any, of
the Company under any contract to which the Manager is a party; provided that,
--------
if the Manager is also a Member, then the Manager's resignation shall not affect
the Manager's rights as a Member or constitute a withdrawal of such Member and
provided, further, unless the Manager cannot act as a matter of law, no such
- --------- -------
resignation shall be effective until a replacement manager has been appointed.
The Manager shall immediately tender its resignation upon any transfer for value
(other than by way of general encumbrance, pledge, lien or the like or pursuant
to Section 7.4) and upon any admission of a substitute Member as to all or
substantially all of its Membership Interest (other than pursuant to Section
7.4).
5.1.4 Removal. The Manager may be removed with or without
-------
cause by the affirmative vote of Members holding a Majority Voting Interest;
provided that, if the Manager is also a Member, then such removal shall not
- --------
affect the Manager's rights as a Member or constitute a withdrawal of such
Member and provided, further, unless the Manager cannot act as a matter of law,
-------- -------
no such removal shall be effective until a replacement manager has been
appointed.
5.1.5 Standard of Operations. The Manager shall, to the extent
----------------------
practicable, consistent with its responsibilities and those of the Company under
this Agreement, and adhering to professional lending and credit standards,
manage the Company with a view towards maximizing the monetary value to the
Members (taken as a whole) of the Company as an operating entity independent
from its Members. Notwithstanding the foregoing, if the Manager is also a
Member, nothing in this provision shall be construed so as to impose an economic
obligation on such Member other than that imposed on Members generally under
this Agreement.
5.1.6 Executive Committee. Prior to taking actions material to
-------------------
the operations of the Company, the Manager shall consult with an Executive
Committee which shall be comprised of Isard, McDermitt, Alan Perper, Brad Rotter
and Ward Rotter and shall make non-binding recommendations.
10
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5.2 Performance of Duties: Liability of the Manager. The Manager shall
------------------------------------------------
carry out its duties hereunder in good faith and with reasonable care. Subject
to the foregoing, the Manager shall not be liable to the Company or to any
Member for any loss or damage sustained by the Company or any Member, unless the
loss or damage shall have been the result of fraud, deceit, gross negligence,
willful or reckless misconduct, or a knowing violation of law by the Manager. In
performing its duties, the Manager shall be entitled to rely on information,
opinions, reports, or statements, including financial statements and other
financial data, from officers, agents, attorneys, accountants, or other Persons
employed by the Company or the Manager, unless it has knowledge concerning the
matter in question that would cause such reliance to be unwarranted.
5.3 Devotion of Time. The Manager is not obligated to devote all of its
----------------
time or business efforts to the affairs of the Company. The Manager shall devote
whatever time, effort, and skill as it reasonably deems appropriate for the
operation of the Company.
5.4 Competing Activities. While acting as Manager of the Company and
---------------------
for 18 months thereafter, the Manager and its officers, directors, shareholders,
partners, members, managers, agents, employees, and Affiliates shall not engage
or invest in, independently or with others, any business activity of any type or
description that might be the same as or similar to the Company's business as
described in the second sentence of Section 2.6 and that might be in direct or
indirect competition with the Company. Notwithstanding the foregoing, no
activity involving any of the following shall be deemed to be in competition
with the business of the Company: (i) the origination, acquisition, holding or
disposition of viatical settlements, (ii) the acquisition, holding or
disposition of debt or equity securities of any public company or investment
vehicle, or (iii) any transactions or programs directly by the Manager or
indirectly through a debtor of the Manager involving the extension of credit of
any type which transactions or programs do not describe or promote activities
that are the same as or in competition with the Company's business as described
in the second sentence of Section 2.6. The Members acknowledge that the Manager
and its Affiliates own or manage other businesses, including businesses that may
compete with the Company for the Manager's time. Except as provided in Section
5.3 and this Section, the Members hereby waive any and all rights and claims
which they may otherwise have against the Manager and its officers, directors,
shareholders, partners, members, managers, agents, employees, and Affiliates as
a result of any of such activities.
5.5 Transactions between the Company and the Manager. Notwithstanding
-------------------------------------------------
that it may constitute a conflict of interest, the Manager may, and may cause
its Affiliates to, engage in any transaction (including the purchase, sale,
lease, or exchange of any property or the rendering of any service, or the
establishment of any salary, other compensation, or other terms of employment)
with the Company so long as: (a) such transaction is not expressly prohibited by
this Agreement; and (b) the terms and conditions of such transaction, on an
overall basis, are (i) fair and reasonable to the Company and are at least as
favorable to the Company as those that are generally available from Persons
capable of similarly performing them and in similar transactions between parties
operating at arm's length and (ii) approved in writing by more than fifty
percent (50%) of the Membership Interests of Members having no interest in such
transaction (other than their interests as Members), which consent shall not be
unreasonably withheld.
5.6 Payments to the Manager. The Manager shall not be entitled to any
-----------------------
compensation for its services as Manager, but shall be reimbursed by the Company
for any reasonable out-of-pocket expenses incurred by the Manager on behalf of
the Company.
5.7 Limited Liability of the Manager. Except as required under the Act
--------------------------------
or as expressly set forth in this Agreement, no Person who is a Manager shall be
personally liable under any judgment of a court, or
11
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in any other manner, for any debt, obligation, or liability of the Company,
whether that liability or obligation arises in contract, tort, or otherwise.
12
<PAGE>
ARTICLE 6
=========
Allocations of Net Profits, Net Losses and Distributions
========================================================
6.1 Allocations of Net Profit and Net Loss.
--------------------------------------
6.1.1 Net Loss. Net Loss for each taxable year shall be
---------
allocated as follows:
(a) First, to the Members in accordance with their respective
Membership Interests until the cumulative amount of Net Losses allocated to the
Members pursuant to this Section 6.1.1(a) equals the cumulative amount of Net
Profits allocated to the Members pursuant to Section 6.1.2(d);
(b) Second, to Point West until the cumulative amount of Net Losses
allocated to Point West pursuant to this Section 6.1.1(b) equals the sum of the
cumulative amount of Net Profits allocated to it pursuant to Section 6.1.2(a)
and (b) plus its Capital Contributions included for purposes of its Adjusted
Capital Contribution; and
(c) Third, to the Members in accordance with their respective
Membership Interests.
Notwithstanding the foregoing, loss allocations to a Member shall be
made only to the extent that such loss allocations will not create a deficit
Capital Account balance for that Member in excess of an amount, if any, equal to
such Member's share of Company Minimum Gain that would be realized on a
foreclosure of the Company's property. Any loss not allocated to a Member
because of the foregoing provision shall be allocated to the other Members (to
the extent the other Members are not limited in respect of the allocation of
losses under this Section 6.1.1). Any loss reallocated under this Section 6.1.1
shall be taken into account in computing subsequent allocations of income and
losses pursuant to this Article 6, so that the net amount of any item so
allocated and the income and losses allocated to each Member pursuant to this
Article 6, to the extent possible, shall be equal to the net amount that would
have been allocated to each such Member pursuant to this Article 6 if no
reallocation of losses had occurred under this Section 6.1.1.
6.1.2 Net Profit. Net Profit of the Company for each taxable
----------
year shall be allocated as follows:
(a) First, to Point West in an amount equal to the sum of the Point
West Primary Preferred Return plus any Point West Carryforwards; provided that,
--------
if the Company does not have sufficient Net Profits in a given year to make such
allocation in full, then any shortfall (the "Point West Carryforwards") shall be
------------------------
carried forward indefinitely to the next taxable year or years in which Net
Profits are sufficient to make such allocation;
(b) Second, to Point West in an amount equal to the Point West
Secondary Preferred Return; provided that, if the Company does not have
--------
sufficient Net Profits in a given year to make such allocation, then any
shortfall shall not be carried forward;
(c) Third, to Point West to the extent of any Net Losses allocated
to Point West pursuant to Section 6.1.1(b); and
(d) Fourth, to the Members in accordance with their respective
Membership Interests.
13
<PAGE>
6.2 Special Allocations.
-------------------
6.2.1 Minimum Gain Chargeback. Notwithstanding Section 6.1, if
-----------------------
there is a net decrease in Company Minimum Gain during any Fiscal Year, each
Member shall be specially allocated items of Company income and gain for such
Fiscal Year (and, if necessary, in subsequent fiscal years) in an amount equal
to the portion of such Member's share of the net decrease in Company Minimum
Gain that is determined in accordance with Regulations Section 1.704-2(g)(2).
This Section 6.2.1 is intended to comply with the minimum gain chargeback
requirement contained in Regulations Section 1.704-2(f) and shall be interpreted
consistently therewith.
6.2.2 Chargeback of Minimum Gain Attributable to Member
-------------------------------------------------------
Nonrecourse Debt. Notwithstanding Section 6.1 of this Agreement, if there is a
- ----------------
net decrease in Company Minimum Gain attributable to a Member Nonrecourse Debt,
during any Fiscal Year, each Member who has a share of the Company Minimum Gain
attributable to such Member Nonrecourse Debt shall be specially allocated items
of Company income and gain for such Fiscal Year (and, if necessary, in
subsequent Fiscal Years) in an amount equal to that portion of such Member's
share of the net decrease in Company Minimum Gain attributable to such Member
Nonrecourse Debt. A Member's share of net decrease in Company Minimum Gain
attributable to each Member Nonrecourse Debt shall be determined pursuant to
Regulations Section 1.702-2(g)(2). This Section 6.2.2 is intended to comply with
the minimum gain chargeback requirement contained in Regulations Section
1.704-2(i)(4) and shall be interpreted consistently therewith.
6.2.3 Nonrecourse Deductions. Notwithstanding Section 6.1, any
----------------------
nonrecourse deductions (as defined in Regulations Section 1.704-2(b)(1)) for any
Fiscal Year or other period shall be specially allocated to the Members in
proportion to their Membership Interests.
6.2.4 Member Nonrecourse Deductions. Notwithstanding Section
------------------------------
6.1, those items of Company loss, deduction, or Code Section 705(a)(2)(B)
expenditures which are attributable to Member Nonrecourse Debt for any Fiscal
Year or other period shall be specially allocated to the Member who bears the
economic risk of loss with respect to the Member Nonrecourse Debt to which such
items are attributable in accordance with Regulations Section l.704-2(i).
6.2.5 Qualified Income Offset. Notwithstanding Section 6.1, if
-----------------------
a Member unexpectedly receives any adjustments, allocations, or distributions
described in Regulations Section 1.704-l(b)(2)(ii)(d)(4), (5) or (6), or any
other event creates a deficit balance in such Member's Capital Account in excess
of such Member's share of Company Minimum Gain, items of Company income and gain
shall be specially allocated to such Member in an amount and manner sufficient
to eliminate such excess deficit balance as quickly as possible. Any special
allocations of items of income and gain pursuant to this Section 6.2.5 shall be
taken into account in computing subsequent allocations of income and gain
pursuant to this Article 6 so that the net amount of any item so allocated and
the income, gain, and losses allocated to each Member pursuant to this Article 6
to the extent possible, shall be equal to the net amount that would have been
allocated to each such Member pursuant to the provisions of this Section 6.2.5
if such unexpected adjustments, allocations, or distributions had not occurred.
6.3 Code Section 704(c) Allocations. Notwithstanding any other
-----------------------------------
provision in this Article 6, in accordance with Code Section 704(c) and the
Regulations promulgated thereunder, income, gain, loss, and deduction with
respect to any property contributed in-kind to the capital of the Company shall,
solely for tax purposes, be allocated among the Members so as to take account of
any variation between the adjusted basis of such property to the Company for
federal income tax purposes and its fair market value on the date of
contribution. Allocations pursuant to this Section 6.3 are solely for purposes
of federal, state and local taxes.
14
<PAGE>
As such, they shall not affect or in any way be taken into account in computing
a Member's Capital Account or share of profits, losses, or other items of
distributions pursuant to any provision of this Agreement.
6.4 Allocation of Net Profits and Losses and Distributions in Respect
-------------------------------------------------------------------
of a Transferred Interest. If any Membership Interest is transferred, or is
- --------------------------
increased or decreased by reason of the admission of a new Member or otherwise,
during any Fiscal Year of the Company, unless the Members determine that another
method permitted under the Code is more equitable, each item of income, gain,
loss, deduction, or credit of the Company for such Fiscal Year shall be assigned
pro rata to each day in the particular period of such fiscal year to which such
item is attributable (i.e., the day on or during which it is accrued or
otherwise incurred) and the amount of each such item so assigned to any such day
shall be allocated to the Member based upon such Person's respective Membership
Interest at the close of such day.
However, for purposes of accounting convenience and simplicity, the
Company shall treat a transfer of, or an increase or decrease in, a Membership
Interest which occurs at any time during a semi-monthly period (commencing with
the semi-monthly period including the date hereof) as having been consummated on
the last day of such semi-monthly period, regardless of when during such
semi-monthly period such transfer, increase, of decrease actually occurs (i.e.,
sales and dispositions made during the first fifteen (15) days of any month will
be deemed to have been made on the fifteenth day of the month).
Notwithstanding any provision above to the contrary, gain or loss of
the Company realized in connection with a sale or other disposition of any of
the assets of the Company shall be allocated solely to the parties owning
Membership Interests as of the date such sale or other disposition occurs.
6.5 Distributions by the Company. Subject to applicable law and any
-----------------------------
limitations contained elsewhere in this Agreement, distributions of cash or
other assets of the Company shall be made in the following order of priority:
6.5.1 First, to Point West an amount sufficient to reduce its
Adjusted Capital Contribution to zero; and
6.5.2 Second, to the Members in accordance with their
Membership Interests.
Notwithstanding the foregoing, to the extent that cash would be
available for distribution hereunder, the Company shall first (i) advance to
each Member an amount (a "Tax Advance") sufficient to cover the estimated
federal and state taxes of such Member (based on the combined maximum effective
federal and state income tax rates then in effect for each such Member)
resulting from estimated allocations of Net Profits to such Member for prior
quarters and for which no prior Tax Advance or distribution has been made and
(ii) upon filing of the Company's federal and state tax returns for a Fiscal
Year, distribute an amount to each Member at least equal to the amount of such
Member's federal and state taxes (based on the combined maximum effective
federal and state income tax rates then in effect for each such Member) on the
Net Profits actually allocated to such Member for such Fiscal Year, computed
taking into account any prior allocations of Net Losses available to offset such
income and other distributions to such Member in such Fiscal Year and each
Member shall repay any outstanding Tax Advances related to such Fiscal Year.
All distributions shall be made only to the Persons who, according to
the books and records of the Company, are the holders of record of the
Membership Interests in respect of which such distributions are made on the
actual date of distribution. Neither the Company nor any Member shall incur any
liability for making distributions in accordance with this Section 6.5.
15
<PAGE>
6.6 Form of Distribution. A Member, regardless of the nature of the
---------------------
Member's Capital Contribution, has no right to demand and receive any
distribution from the Company in any form other than cash. Except upon a
dissolution and the winding up of the Company, or as agreed to by Members
holding 100% of the Voting Interests, no Member may be compelled to accept, nor
shall it accept, a distribution in kind.
6.7 Restriction on Distributions.
----------------------------
6.7.1 No distribution shall be made if, after giving effect to
the distribution: (a) the Company would not be able to pay its debts as they
become due in the usual course of business; (b) the Company's ability to effect
its business plan over the following twelve months would be impaired; or (c) the
Company's total assets would be less than the sum of its total liabilities plus,
unless this Agreement provides otherwise, the amount that would be needed if the
Company were to be dissolved at the time of the distribution, to satisfy the
preferential rights of other Members, if any, upon dissolution that are superior
to the rights of the Member receiving the distribution.
6.7.2 The Manager may base a determination that a distribution
is not prohibited on any of the following: (a) financial statements prepared on
the basis of generally accepted accounting practices and principles then
generally employed by the Company; (b) a determination of fair market value by a
qualified unrelated third party or, if agreed to by the Members holding 100% of
the Voting Interests, by the Manager; or (c) any other method that is reasonable
in the circumstances and agreed to by Members holding 100% of the Voting
Interests.
The effect of a distribution is measured as of the date the
distribution is authorized if the payment occurs within 120 days after the date
of authorization, or the date payment is made if it occurs more than 120 days of
the date of authorization.
6.7.3 A Member or Manager who votes for a distribution in
violation of this Agreement or the Act is personally liable to the Company for
the amount of the distribution that exceeds what could have been distributed
without violating this Agreement or the Act if it is established that the Member
or Manager did not act in compliance with Section 6.7.2 or Section 9.4. Any
Member or Manager who is so liable shall be entitled to compel contribution
from: (a) each other Member or Manager who also is so liable; and (b) each
Member or Manager for the amount the Member received with knowledge of facts
indicating that the distribution was made in violation of this Agreement or the
Act.
6.8 Return of Distributions. Except for distributions made in violation
-----------------------
of the Act or this Agreement, no Member shall be obligated to return any
distribution to the Company or pay the amount of any distribution for the
account of the Company or to any creditor of the Company. The amount of any
distribution returned to the Company by a Member or paid by a Member for the
account of the Company or to a creditor of the Company shall be added to the
account or accounts from which it was subtracted when it was distributed to the
Member.
6.9 Obligations of Members to Report Allocations. The Members are aware
--------------------------------------------
of the income tax consequences of the allocations made by this Article 6 and
hereby agree to be bound by the provisions of this Article 6 in reporting their
shares of Company income and loss for income tax purposes.
6.10 Withholding. Each of the Members hereby authorizes the Company to
-----------
withhold from distributions to be made to such Member, or with respect to
allocations to be made to such Member, and to pay over to a federal, state or
local government, any amounts required to be withheld pursuant to the Code or
any provisions of any other federal, state or local law. Any amounts so withheld
shall be treated as
16
<PAGE>
distributed to such Member pursuant to this Article 6 for all purposes of this
Agreement and shall be offset against the net amounts otherwise distributable to
such Member. The Company may also withhold from distributions that would
otherwise be made to such Member, and apply to the obligations of such Member,
any amounts that such Member owes to the Company. In addition, any tax imposed
upon the Company resulting from the Membership Interest of any Member shall be
treated as a distribution to such Member and shall be offset against future
distributions to such Member.
6.11 Status of the Company. The Members acknowledge that this Agreement
---------------------
creates a partnership for federal and state income tax purposes (and only for
such purposes) and hereby agree not to elect to be excluded from the application
of Subchapter K of Chapter 1 of Subtitle A of the Code or any similar state
statute.
6.12 Tax Elections. The Manager shall, upon the written request of any
-------------
Member benefited thereby, cause the Company to file an election under Section
754 of the Code and the Treasury Regulations thereunder to adjust the basis of
the Company assets under Section 734(b) or 743(b) of the Code and a
corresponding election under the applicable sections of state and local law. The
Manager shall have the authority to make all other Company elections permitted
under the Code, including elections of methods of depreciation.
6.13 Company Tax Returns. The Manager shall cause the necessary federal
-------------------
income and other tax returns and information returns for the Company to be
prepared. Each Member shall provide such information, if any, as may be needed
by the Company for purposes of preparing such tax returns and information
returns. The Manager shall deliver to each Member within ninety (90) days after
the end of each fiscal year a copy of the federal income tax returns for the
Company as filed with the appropriate taxing authorities, and upon the written
request of any Member, a copy of any state and local income tax return as filed.
6.14 Certain Tax Matters.
-------------------
6.14.1 The Manager is hereby appointed as the initial tax
matters partner of the Company. The tax matters partner of the Company is
authorized to and shall (a) maintain Capital Accounts and make partnership
allocations and (b) file, if necessary, a Form 8832 with the Internal Revenue
Service and make the election provided for to have the Company be classified as
a partnership for federal income tax purposes. If at any time the Manager cannot
or elects not to serve as the tax matters partner of the Company, is removed by
the Members from acting in such capacity, or ceases to be a Member, Members
holding a Majority Voting Interest shall select another Member to be the tax
matters partner of the Company. The tax matters partner of the Company, as an
authorized representative of the Company, shall direct the defense of any claims
made by the Internal Revenue Service or other tax authority to the extent that
such claims relate to the adjustment of Company items at the Company level.
6.14.2 The Manager shall promptly deliver to each Member a
copy of all notices, communications, reports or writings of any kind with
respect to income or similar taxes received from any state or local taxing
authority relating to the Company that might materially and adversely affect any
Member, and shall keep Members advised of all material developments with respect
to any proposed adjustment of Company items that come to its attention.
6.14.3 Each Member shall continue to have the rights described
in this Section 6.14 with respect to tax matters relating to any period during
which it was a Member, whether or not it is a Member at the time of the tax
audit or contest.
17
<PAGE>
ARTICLE 7
=========
Transfers of Membership Interests; Admission of Members
=======================================================
7.1 Transfers of Member Interests Generally.
---------------------------------------
7.1.1 No Member shall be entitled to transfer, assign, convey,
sell, encumber or in any way alienate all or any part of such Person's
Membership Interest or to cause any permitted transferee to become a substituted
Member except as provided in Section 7.2, 73. and 7.4 below. The consent of any
Member that is required pursuant to this Article may be given or withheld,
conditioned or delayed (as allowed by this Agreement or the Act), as such Member
may determine in its sole discretion. Notwithstanding any transfer of any part
of a Membership Interest, the Membership Interest so transferred shall continue
to be subject to the terms and provisions of this Agreement and any further
transfers shall be required to comply with all the terms and provisions of this
Agreement.
7.1.2 Notwithstanding any other provision in the Article 7, no
admission (or purported admission) of a Member, and no transfer (or purported
transfer) of all or any part of a Member's interest (economic or otherwise) in
the Company, whether to another Member or to a Person not a Member, shall be
effective, and any such admission or transfer (or purported admission or
transfer) shall be void ab initio, and no Person shall otherwise become a Member
if (a) at the time of such admission or transfer (or purported admission or
transfer) any interest (economic or otherwise) in the Company is traded on an
established securities market or readily tradeable on a secondary market or the
substantial equivalent thereof or (b) after such admission or transfer (or
purported admission or transfer) the Company would have more than 100 Members.
For purposes of clause (a) of the immediately preceding sentence, an established
securities market is a national securities exchange that is either registered
under Section 6 of the Securities Exchange Act of 1934 or exempt from
registration because of the existence or involvement of a limited volume of
transactions, a foreign securities exchange that, under the law of the
jurisdiction where it is organized, satisfies regulatory requirements that are
analogous to the regulatory requirements of the Securities Exchange Act of 1934,
a regional or local exchange, or an interdealer quotation system that regularly
disseminates firm buy or sell quotations by identified brokers or dealers by
electronic means or otherwise. For purposes of such clause (a), any interest
(economic or otherwise) in the Company is readily tradeable on a secondary
market or the substantial equivalent thereof if (i) interests (economic or
otherwise) in the Company are regularly quoted by any Person, such as a broker
or dealer, making a market in the interests, (ii) any Person regularly makes
available to the public (including customers or subscribers) bid or offer quotes
with respect to interests (economic or otherwise) in the Company and stands
ready to effect buy or sell transactions at the quoted prices for itself or on
behalf of others, (iii) the holder of an interest (economic or otherwise) in the
Company has a readily available, regular, and ongoing opportunity to sell or
exchange such interest through a public means of obtaining or providing
information of offers to buy, sell or exchange such interests, or (iv)
prospective buyers and sellers otherwise have the opportunity to buy, sell or
exchange interests (economic or otherwise) in the Company in a time frame and
with the regularity and continuity that is comparable to that described in
clauses (i), (ii) and (iii) of this sentence. For purposes of determining
whether the Company will have more than 100 Members, each Person indirectly
owning an interest (economic or otherwise) in the Company through a partnership
(including any entity treated as a partnership for federal income tax purposes),
a grantor trust or an S corporation shall be treated as a Member unless the
Manager determines in its sole and absolute discretion that less than
substantially all of the value of the beneficial owner's interest in any such
entity is attributable to such entity's interest (direct or indirect) in the
Company.
7.2 Permitted Transfers of Interests. A Member shall be permitted to
transfer, assign, convey, sell, encumber or otherwise alienate its economic
rights associated with its Membership Interest without the consent of other
Members so long as such transaction: (a) is not prohibited by Sections 7.1.2 or
11.9
18
<PAGE>
hereof, (b) would not cause a material adverse tax consequence to the
Company or the other Members, and (c) has complied with Section 7.5 hereof. If a
permitted transfer of a Membership Interest does not comply with Section 7.3
hereof as to admissions, the transferee shall have no right to vote or
participate in the management of the business, property and affairs of the
Company or to exercise any rights of a Member other than the right to receive
proceeds of a Membership Interest.
7.3 Admission and Substitution of Members. A new Member may be admitted
-------------------------------------
only if (a) Members holding 100% of the Voting Interests consent to such
admission; (b) such Person becomes a party and agrees to be bound by the terms
and provisions of this Agreement; and (c) such Person pays any reasonable
expenses in connection with such Person's admission as a Member. A permitted
transferee of a Membership Interest shall have the right to be admitted as a
substitute Member only if the requirements of Sections 7.1 and 7.2 have been met
and the conditions set forth in the prior sentence have been met. The admission
of a substitute Member shall not result in the release of the Member who
assigned the Membership Interest from any liability of such Member accrued prior
to such date.
7.4 Family and Affiliate Transfers. Subject to compliance with Section
------------------------------
7.1, 7.2 and 7.3(b) and (c), the Membership Interest of any Member may be
transferred as follows, and the transferee thereof admitted as a substitute
Member without the prior written consent of all Members but with the consent of
the Manager, which shall not be unreasonably withheld: (a) by inter vivos gift
or by testamentary transfer to any spouse, parent, sibling, in-law, child or
grandchild of the Member, or to a trust for the benefit of the Member or such
spouse, parent, sibling, in-law, child or grandchild of the Member; or (b) to
any Affiliate of the Member so long as such Affiliate is majority owned and
controlled by such Member; it being agreed that, in executing this Agreement,
each Member has consented to such transfers.
7.5 Right of First Refusal. Each time a Member proposes to transfer,
-----------------------
assign, convey, sell, encumber, or in any way alienate all or any part of such
Person's Membership Interest , including by operation of law, by foreclosure or
other involuntary transfer but not including a transfer pursuant to Section 7.4
or the granting by a Member of a security interest in its assets generally, such
Member shall first offer such Membership Interest to the Company and the
non-transferring Members in accordance with the following provisions:
7.5.1 Such Member shall deliver a written notice (a "Transfer
Notice") to the Company and the other Members stating: (a) such Member's bona
fide intention to transfer such Membership Interest; (b) the name and address of
the proposed transferee; (c) the Membership Interest to be transferred; and (d)
the terms of payment for which the Member proposes to transfer such Membership
Interest.
7.5.2 Within thirty (30) days after receipt of the Transfer
Notice, each non-transferring Member shall notify the other Members in writing
of such Person's desire to purchase a portion of the Membership Interest being
so transferred. The failure of any Member to submit a notice within the
applicable period shall constitute an election on the part of that Member not to
purchase any of the Membership Interest which may be so transferred. Each Member
so electing to purchase shall be entitled to purchase a portion of such
Membership Interest in the same proportion that the Membership Interest of such
Member bears to the aggregate of the Membership Interests of all of the Members
electing to so purchase the Membership Interest being transferred. In the event
any Member elects to purchase none or less than all of such Person's pro rata
share of such Membership Interest, then the other Members can elect to purchase
more than their pro rata share. If such Members fail to purchase the entire
Membership Interest being transferred, the Company may, with the consent of the
non-transferring Members, purchase any remaining share of such Membership
Interest.
19
<PAGE>
7.5.3 Within sixty (60) days after receipt of the Transfer
Notice, the Company and the Members electing to purchase such Membership
Interest shall have the first right to purchase or obtain such Membership
Interest upon the price and terms of payment designated in such notice. If such
notice provides for the payment of non-cash consideration, then the Company and
such purchasing Members each shall pay the consideration in cash equal to the
good faith estimate of the present fair market value of the noncash
consideration offered.
7.5.4 If the Company or the other Members elect not to
purchase or obtain all of the Membership Interest designated in such notice,
then the transferring Member may transfer the Membership Interest described in
the notice to the proposed transferee, providing such transfer: (a) is completed
within thirty (30) days after the expiration of the Company's and the other
Members' right to purchase such Membership Interest; (b) is made substantially
on the terms designated in the Transfer Notice; and (c) the requirements of
Section 7.2 are otherwise met. If such Membership Interest is not so
transferred, then the transferring Member must give notice in accordance with
this Section prior to any other or subsequent transfer of such Membership
Interest.
20
<PAGE>
ARTICLE 8
=========
Accounting, Records, and Reporting
==================================
8.1 Books and Records. The Company shall maintain complete and accurate
-----------------
books and records of the Company's business and affairs in accordance with
generally accepted accounting principles, consistently applied. The books and
records shall be maintained at the principal place of business of the Company
and shall be accessible to the Members in accordance with the Act.
8.2 Fiscal Year; Accounting. The Company's fiscal year shall be the
-----------
calendar year. The accounting methods and principles to be followed by the
Company shall be those selected from time to time by the Manager and approved in
advance by Members holding 100% of the Voting Interests.
8.3 Reports. The Company shall provide to the Members reports
-------
concerning the financial condition and results of operation of the Company and
the Members' Capital Accounts within ninety (90) days after the end of each
fiscal year and interim operating reports at least quarterly.
8.4 Bank Accounts. The Manager shall maintain the funds of the Company
-------------
in one or more separate bank accounts in the name of the Company and shall not
permit the funds of the Company to be commingled in any fashion with the funds
of any other Person. The funds of the Company shall be deposited in such bank or
other financial institution account or accounts, or invested in such
interest-bearing or non-interest-bearing investments, as shall be designated by
the Manager in investments that are at least rated investment grade by one
nationally recognized statistical rating agency. All withdrawals from any such
bank account(s) shall be made only by the Manager or by such Persons as are duly
appointed by the Manager.
21
<PAGE>
ARTICLE 9
=========
Dissolution and Winding Up
==========================
9.1 Dissolution. The Company shall be dissolved, its assets shall be
-----------
disposed of, and its affairs wound up on the first to occur of the following:
(a) upon the happening of any event of dissolution specified in the Certificate;
(b) 90 days after the occurrence of a Dissolution Event with respect to any
Member unless the remaining Members vote within such 90 days to continue the
Company; (c) upon the entry of a decree of judicial dissolution pursuant to the
Act; (d) 60 days after the vote of Members holding a Majority in Interest or of
non-defaulting Members holding a majority of the Membership Interests held by
all non-defaulting Members (provided that the Members shall not vote for or
consent to a dissolution or winding up of the Company if prohibited under any
agreement or contract to which the Company is a party); or (e) the sale of all
or substantially all of the assets of Company.
9.2 Certificate of Dissolution. As soon as possible following the
-----------------------------
occurrence of any of the events specified in Section 9.1, the Manager, to the
extent it has not wrongfully dissolved the Company, or, if so, then the Members,
shall execute a Certificate of Dissolution in such form as shall be prescribed
by the Delaware Secretary of State and file such certificate as required by the
Act.
9.3 Winding Up. Upon the occurrence of any event specified in Section
----------
9.1, the Company shall continue solely for the purpose of winding up its affairs
in an orderly manner, liquidating its assets, and satisfying the claims of its
creditors. The Manager, to the extent it has not wrongfully dissolved the
Company, or, if so, then the Members, shall be responsible for overseeing the
winding up and liquidation of Company. The Persons winding up the affairs of the
Company shall be entitled to such reasonable compensation as has been approved
by the Members.
9.4 Distributions in Kind. Any noncash asset distributed to one or more
---------------------
Members shall first be valued at its fair market value to determine the Net
Profit or Net Loss that would have resulted if such asset were sold for such
value, such Net Profit or Net Loss shall then be allocated pursuant to Article
6, and the Members' Capital Accounts shall be adjusted to reflect such
allocations. The amount distributed and charged to the Capital Account of each
Member receiving an interest in such distributed asset shall be the fair market
value of such interest (net of any liability secured by such asset that such
Member assumes or takes subject to). The fair market value of such asset shall
be determined by a qualified unrelated third party, or if Members holding 100%
of the Voting Interest shall agree, the Manager.
9.5 Distribution of Assets. Upon the dissolution or winding up of the
----------------------
Company, the Manager shall pay or make reasonable provision to pay all claims
and obligations of the Company, including all costs and expenses of the
liquidation and all contingent, conditional, or unmatured claims and obligations
that are known to the Manager but for which the identity of the claimant is
unknown. If there are sufficient assets, then such claims and obligations shall
be paid in full and any such provision shall be made in full. If there are
insufficient assets, then such claims and obligations shall be paid or provided
for according to their priority and, among claims and obligations of equal
priority, ratably to the extent of assets available therefor. Any remaining
assets shall be distributed to the Members in accordance with their respective
positive Capital Accounts, after giving effect to all Capital Contributions,
distributions, and allocations for all periods.
9.6 Limitations on Payments Made in Dissolution. Except as otherwise
--------------------------------------------
specifically provided in this Agreement, each Member shall only be entitled to
look solely at the assets of Company for the return of such Member's positive
Capital Account balance and shall have no recourse for such Member's Capital
Contribution or share of Net Profits (upon dissolution or otherwise) against the
Manager or any other Member except as provided in Article 10.
22
<PAGE>
ARTICLE 10
==========
Indemnification and Insurance
=============================
10.1 Indemnification of Agents. To the fullest extent permitted by law,
-------------------------
the Company shall be permitted to indemnify any Person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit, or proceeding by reason of the fact that such Person is or was a Member,
Manager, officer, employee, attorney, accountant, or other agent of the Company
or that, being or having been such a Manager, Member, officer, employee,
attorney, accountant, or other agent of the Company, such Person is or was
serving at the request of the Company as a manager, director, officer, employee,
attorney, accountant, or other agent of another limited liability company,
corporation, partnership, joint venture, trust, or other enterprise (any such
Person being referred to hereinafter as an "Indemnified Person") against all
-------------------
claims, damages, liabilities, losses, expenses (including reasonable attorneys'
fees and expenses and other costs and expenses incurred in defending such
action, suit, or proceeding), judgments, fines, and amounts paid in settlement
actually incurred by such Indemnified Person in connection with such action,
suit, or proceeding, except to the extent that such claims, damages,
liabilities, losses, expenses, judgments, fines, or amounts paid in settlement
arise by virtue of such Indemnified Person's fraud, deceit, gross negligence, or
willful misconduct. The Manager is authorized, on behalf of the Company, to
enter into indemnity agreements from time to time with any Person entitled to be
indemnified by the Company hereunder (i) consistent with the foregoing (or
lesser) terms, or (ii) on such other terms as Members holding 100% of the Voting
Interests may approve.
10.2 Expenses. Expenses (including attorneys' fees and expenses)
--------
incurred by an Indemnified Person in defending a civil, criminal,
administrative, or investigative action, suit, or proceeding may be paid by the
Company in advance of the final disposition of such action, suit, or proceeding
upon receipt of an undertaking, in form and substance acceptable to the Manager,
by or on behalf of the Indemnified Person to repay such amount if it shall
ultimately be determined that such Indemnified Person is not entitled to be
indemnified by the Company under this Article 10 or under any other contract or
agreement between such Indemnified Person and the Company. Such expenses
(including attorneys' fees and expenses) incurred by employees or agents of the
Company may be so paid upon the receipt of the undertaking previously referred
to and such other terms and conditions, if any, as the Manager deems
appropriate.
10.3 Not Exclusive. The indemnification and advancement of expenses
-------------
provided by this Article 10 shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled
under any by-law, agreement, vote of Members or otherwise, both as to action in
such Indemnified Person's official capacity and as to action in another capacity
while holding such office, and shall continue as to a Person who has ceased to
be a Member, Manager, officer, employee, attorney, accountant, or other agent
and shall inure to the benefit of the successors, assigns, heirs, executors and
administrators of such a Person.
10.4 Insurance. The Company shall have the power to purchase and
---------
maintain insurance on behalf of any Person who is or was an Indemnified Person
against any liability asserted against such Person and incurred by such Person
in any such capacity, or arising out of such Person's status as an Indemnified
Person, whether or not the Company would have the power to indemnify such Person
against such liability under the provisions of Section 10.1 or under applicable
law.
23
<PAGE>
ARTICLE 11
==========
Investment Representations
==========================
Each Member represents and warrants to, and agrees with, the other
Members and the Company as follows:
11.1 Pre-existing Relationship or Experience. (a) Such Member has a
-----------------------------------------
preexisting personal or business relationship with the Company or one or more of
the other Members; or (b) by reason of such Member's business or financial
experience, or by reason of the business or financial experience of such
Member's financial advisor who is unaffiliated with and who is not compensated,
directly or indirectly, by the Company or any affiliate or selling agent of the
Company, such Member is capable of evaluating the risks and merits of the
investment to be made by such Person hereunder and of protecting such Person's
interests in connection with such investment.
11.2 No Advertising. Such Member has not seen, received, been presented
--------------
with, or been solicited by any leaflet, public promotional meeting, newspaper or
magazine article or advertisement, radio or television advertisement, or any
other form of advertising or general solicitation with respect to the sale of
the Membership Interests.
11.3 Investment Intent. Such Member is acquiring a Membership Interest
-----------------
for investment purposes and for such Person's own account only and not with a
view to, or for sale in connection with, any distribution of all or any part of
the Membership Interests, and no other Person will have any direct or indirect
beneficial interest in or right to the Membership Interests purchased by such
Person except as permitted hereby.
11.4 Purpose of Entity. If such Member is a corporation, partnership,
-----------------
limited liability company, trust, or other entity, then (a) such Member was not
organized for the specific purpose of acquiring any Membership Interests, and
(b) such Member may legally acquire, invest in and own Membership Interests, and
(c) such Member may legally act as Manager of the Company.
11.5 Economic Risk. Such Member is financially able to bear the
--------------
economic risk of the investment being made by such Member, including the total
loss of such Person's Membership Interests.
11.6 No Registration of Membership Interests. Such Member acknowledges
---------------------------------------
that: (a) the sale of the Membership Interests referred to herein has not been
registered under the Securities Act or qualified under the Delaware General
Corporation Law, as amended, or any other applicable securities or blue sky laws
of any state or jurisdiction in reliance, in part, on such Member's
representations, warranties, and agreements contained herein; and (b) the
Membership Interests may not be resold unless the resale is registered under the
Securities Act and qualified under all applicable securities or blue sky laws
(or is exempt from these registration and qualification requirements).
11.7 Membership Interests are Restricted Securities. Such Member
--------------------------------------------------
understands that the Membership Interests are or may be restricted securities
under the Securities Act in that the Membership Interests will be acquired from
the Company in a transaction not involving a public offering, and that the
Membership Interests may be resold without registration under the Securities Act
only in certain limited circumstances and that otherwise the Membership
Interests must be held indefinitely. In this connection, such Member understands
the resale limitations imposed by the Securities Act and is familiar with SEC
Rule 144, as presently in effect, and the conditions which must be met in order
for that Rule to be available for resale of restricted securities, including the
requirement that the securities must be held for at least two (2) years after
purchase thereof from the Company prior to resale (three (3) years in the
absence of publicly available information about the Company) and the condition
that there be available to the public current information
24
<PAGE>
about the Company under certain circumstances. Such Member understands that the
Company has not made such information available to the public and has no present
plans to do so.
11.8 No Obligation to Register. Such Member represents, warrants, and
-------------------------
agrees that the Company and the other Members are under no obligation to
register or qualify the Membership Interests under the Securities Act or under
any state securities or blue sky laws, or to assist such Member in complying
with any exemption from registration and qualification.
11.9 No Disposition in Violation of Law. Without limiting the
---------------------------------------
representations set forth above or the other provisions of this Agreement, such
Member shall not make any disposition of all or any part of such Person's
Membership Interests which would result in the violation by such Person or by
the Company of the Securities Act, the Act, Delaware General Corporation Law, as
amended, or any other applicable securities or blue sky laws. Without limiting
the generality of the foregoing, such Member agrees not to make any disposition
of all or any part of the Membership Interests acquired by such Person unless
and until: (a) there is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition is made
in accordance with such registration statement and any applicable requirements
of state securities laws; or (b) such Person has notified the Company of the
proposed disposition and has furnished the Company with a detailed statement of
the circumstances surrounding the proposed disposition, and, if reasonably
requested by the other Members, such Person has furnished the Company with a
written opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of any securities under the Securities
Act or the consent of or a permit from appropriate authorities under any
applicable state securities law.
In the case of any disposition of all or any part of such Member's
Membership Interests pursuant to SEC Rule 144, such Person shall, among other
things, promptly forward to the Company a copy of any Form 144 filed with the
SEC with respect to such disposition and a letter from the executing broker
satisfactory to the Company evidencing compliance with SEC Rule 144. If SEC Rule
144 is amended or if the SEC's interpretations thereof in effect at the time of
any such disposition have changed from its present interpretations thereof, such
Member shall provide the Company with such additional documents as the other
Member or the Company may reasonably require.
11.10 Legends. Such Member understands that the certificates (if any)
-------
evidencing the Membership Interests may bear one or all of the following legends
or other legends as may be appropriate:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER THE SECURITIES OR BLUE
SKY LAWS OF ANY STATE OR JURISDICTION, INCLUDING THE STATE OF DELAWARE, AND HAVE
BEEN TAKEN BY THE ISSUEE FOR SUCH PERSON'S OR ENTITY'S OWN ACCOUNT AND NOT WITH
A VIEW TO THEIR DISTRIBUTION. NEITHER SUCH SECURITIES NOR ANY INTEREST THEREIN
MAY BE SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS
THEY ARE REGISTERED UNDER SUCH ACT AND QUALIFIED UNDER ALL APPLICABLE SECURITIES
AND BLUE SKY LAWS, OR IN THE OPINION OF COUNSEL TO THE COMPANY, EXEMPTIONS FROM
REGISTRATION AND QUALIFICATION ARE AVAILABLE. THESE SECURITIES ARE ALSO SUBJECT
TO CERTAIN RESTRICTIONS DESCRIBED IN THE LIMITED LIABILITY AGREEMENT DATED AS OF
SEPTEMBER 4, 1997, AS AMENDED FROM TIME TO TIME."
(b) Any legend required by applicable state securities or blue
sky laws.
25
<PAGE>
11.11 Investment Risk. Such Member acknowledges that such Member's
----------------
investment as provided for herein is a speculative investment that involves a
substantial degree of risk of loss by such Member, including such Person's
entire investment in the Company, that such Member understands and takes full
cognizance of the risk factors related to such Person's investment outlined
herein, and that the Company is newly organized and has no financial or
operating history.
11.12 Investment Experience. Unless otherwise disclosed, such Member is
---------------------
an experienced investor in unregistered and restricted securities of
corporations, limited liability companies, limited partnerships, or closely held
companies.
11.13 Restrictions on Transferability. Such Member acknowledges that
--------------------------------
there are substantial restrictions on the transferability of the Membership
Interests pursuant to this Agreement, that there is no public market for the
Membership Interests and none is expected to develop, and that, accordingly, it
may not be possible for such Member to liquidate such Member's investment in the
Company.
11.14 Information Reviewed. Such Member has received and reviewed all
---------------------
information such Person considers necessary or appropriate for deciding whether
to make the investment contemplated hereby, has had an opportunity to ask
questions and receive answers from the Company and the other Members regarding
the terms and conditions of the investments contemplated hereby (including the
purchase of the Membership Interests) and regarding the business, financial
affairs, and other aspects of the Company, and has had the opportunity to obtain
all information (to the extent the Company possesses or can acquire such
information without unreasonable effort or expense) which such Person deems
necessary to evaluate the investment and to verify the accuracy of information
otherwise provided to such Person.
11.15 No Representations by the Company. Neither any Manager, nor any
---------------------------------
agent or employee of the Company or of any Manager, nor any other Person has at
any time expressly or implicitly represented, guaranteed, or warranted to such
Member that such Member may freely transfer any of the Membership Interests
acquired by such Member pursuant to the terms hereof, that past performance or
experience on the part of any such Person or their Affiliates or any other
Person in any way indicates the predictable results of the ownership of the
Membership Interests or of the overall Company business, that any cash
distributions from Company operations or otherwise will be made to the
Membership Interests by any specific date or will be made at all, or that any
specific tax benefits will accrue as a result of an investment in the Company.
11.16 Consultation with Attorney. Such Member has been advised to
----------------------------
consult with such Member's own attorney regarding all legal matters concerning
an investment in the Company and the tax consequences of investing and
participating in the Company and has either done so or voluntarily and knowingly
elected not to seek such advice.
11.17 Tax Consequences; Consultation with Tax Advisors. Such Member
---------------------------------------------------
acknowledges that the tax consequences to such Member of the transactions
contemplated hereby will depend on such Member's particular circumstances, and
neither the Company, nor the Manager, nor the other Members, nor the partners,
shareholders, members, managers, agents, officers, directors, employees,
Affiliates, attorneys, accountants or consultants of any of them will be
responsible or liable for the tax consequences to such Member of its investment
or participation in the Company unless otherwise expressly agreed. Such Member
has and will look solely to, and rely upon, such Member's own tax advisors with
respect to the tax consequences of its investment and participation in the
Company.
11.18 Indemnity. Such Member shall indemnify and hold harmless the
---------
Company, each and every Manager, each and every other Member, and any officers,
directors, shareholders, managers, members, employees, partners, agents,
attorneys, accountants, registered representatives, and control persons of any
26
<PAGE>
such entity who was or is a party or is threatened to be made a party to any
threatened, pending, or completed action, suit, or proceeding, whether civil,
criminal, administrative, or investigative, by reason of or arising from any
misrepresentation or misstatement of facts or omission to represent or state
facts made by such Member, including the information in this Agreement, against
losses, liabilities, and expenses of the Company, each and every Manager, each
and every other Member, and any officers, directors, shareholders, managers,
members, employees, partners, attorneys, accountants, agents, registered
representatives, and control persons of any such Person (including attorneys'
fees, judgments, fines, and amounts paid in settlement, payable as incurred)
incurred by such Person in connection with such action, suit, proceeding, or the
like.
27
<PAGE>
ARTICLE 12
==========
General Provisions
==================
12.1 Further Assurances. Each party to this Agreement shall perform
-------------------
any further acts and execute and deliver any additional documents that may be
reasonably necessary to carry out the provisions of this Agreement.
12.2 Time. Time is of the essence in the performance of all provisions
----
under this Agreement.
12.3 Remedies Cumulative. The remedies under this Agreement are
--------------------
cumulative and shall not exclude any other remedies to which any person may be
lawfully entitled.
12.4 Estoppel Certificate. Each Member shall, within ten (10) days
---------------------
after written request by any Manager or other Member, deliver to the requesting
Person a certificate stating, to the Member's knowledge, that: (a) this
Agreement is in full force and effect; (b) this Agreement has not been modified
except by any instrument or instruments identified in the certificate; and (c)
there is no default hereunder by the requesting Person or, if there is a
default, the nature or extent thereof.
12.5 Specific Performance. The parties recognize that irreparable
---------------------
injury will result from a breach of any provision of this Agreement and that
money damages will be inadequate to fully remedy the injury. Accordingly, in the
event of a breach or threatened breach of one or more of the provisions of this
Agreement, any party who may be injured (in addition to any other remedies which
may be available to that party) shall be entitled to one or more preliminary or
permanent orders: (a) restraining and enjoining any act which would constitute a
breach; or (b) compelling the performance of any obligation which, if not
performed, would constitute a breach.
12.6 Authority of Persons Signing Agreement. Each Member represents and
--------------------------------------
warrants to the other Members that it is duly authorized to enter into this
Agreement and that the Agreement is valid, binding and enforceable as to it. If
a Member is not a natural person, neither the Company nor any Member will: (a)
be required to determine the authority of the individual signing this Agreement
to make any commitment or undertaking on behalf of such Person or to determine
any fact or circumstance bearing upon the existence of the authority of such
individual; or (b) be responsible for the application or distribution of
proceeds paid or credited to individuals signing this Agreement on behalf of
such Person.
12.7 Parties in Interest. Except as expressly provided in the Act,
--------------------
nothing in this Agreement shall confer any rights or remedies under or by reason
of this Agreement on any Persons other than the Members and their respective
successors and assigns nor shall anything in this Agreement relieve or discharge
the obligation or liability of any other Person to any party to this Agreement,
nor shall any provision give any other Person any right of subrogation or action
over or against any party to this Agreement.
12.8 Notices. All notices required to be given to any party hereunder
-------
shall be deemed given upon the first to occur of: (a) either (i) five days after
deposit thereof in the United States mail, certified mail, First Class postage
prepaid or (ii) forty-eight (48) hours after delivery to an aviation express
delivery service; and transmittal by electronic means (with a copy sent by
regular United States mail) to a receiver under the control of the party to whom
notice is being given; or (b) actual receipt by the party to whom notice is
being given, or an employee or agent of thereof. For purposes hereof, the
addresses of the parties are as set forth on Schedule I hereof or as may
otherwise be specified from time to time in a writing sent to the other parties
in accordance with the provisions of this Section.
28
<PAGE>
12.9 Amendments and Waivers. The provisions of this Agreement may be
-----------------------
waived, altered, amended, or repealed in whole or in part only upon the written
consent of the Members as provided in Section 4.8 hereof. Any waiver of any of
the terms hereof shall only be valid and effective in the instance given and
shall not be valid or effective in any other instance. No waiver of any of the
terms hereof shall require or imply that a like waiver will be made in any other
instance(s). Copies of all proposed waivers or amendments to this Agreement or
the Certificate shall be delivered to all Members 3 days prior to their becoming
effective.
12.10 Severability of Provisions. If any one or more of the provisions
--------------------------
contained in this Agreement is held to be invalid, illegal, or unenforceable in
any respect, then such provision(s) shall be ineffective only to the extent of
such prohibition or invalidity, and the validity, legality, and enforceability
of the remaining provisions contained herein shall not in any way be affected or
impaired thereby.
12.11 Successors and Assigns. Subject to the provisions hereof relating
----------------------
to transferability, this Agreement shall be binding on and shall inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
successors, and assigns.
12.12 Counterparts; Effectiveness. This Agreement may be signed in any
----------------------------
number of counterparts, each of which shall be an original, with the same effect
as if all signatures were upon the same instrument. Delivery of an original
executed counterpart of the signature page to this Agreement by telefacsimile
shall be effective as manual delivery of an original executed original
counterpart of this Agreement, and any party delivering such an original
executed counterpart of the signature page to this Agreement by telefacsimile to
any other party shall thereafter also promptly deliver an original executed
counterpart of this Agreement to such other party by mail or personal delivery,
provided that the failure to so deliver such original executed counterpart shall
- --------
not affect the validity, enforceability, or binding effect of this Agreement.
This Agreement shall be effective as of the date first written above upon the
execution and delivery of a counterpart hereof by each of Point West, Isard, and
McDermitt.
12.13 Legal Counsel and Representation; Accountants. The parties hereto
---------------------------------------------
have agreed to the preparation of this Agreement by Giancarlo & Gnazzo, A
Professional Corporation, counsel for Point West, not withstanding any conflict
of interest(s) that may exist between or among any of the other parties hereto
or the Company. Each Member who is a party hereto and not represented by
Giancarlo & Gnazzo, A Professional Corporation further acknowledges that such
Person has been advised to seek advice of such Person's own independent counsel
regarding the transactions contemplated herein and has either done so or
voluntarily and knowingly elected not to seek such advice. Each such Person
further acknowledges that this Agreement and any other agreements, documents,
and instruments referenced herein may have tax consequences for such Person and
that such Person has been advised to seek advice of independent accountants or
other tax advisors as to such matters and has either done so or voluntarily and
knowingly elected not to seek such advice.
12.14 Ambiguities. The parties have carefully read all of the terms of
-----------
this Agreement and all of the agreements attached hereto and have had an
opportunity to ask questions regarding the language used therein and to suggest
changes thereto. Therefore, the parties waive any rule of construction that
ambiguities are to be construed more harshly against any party as drafter.
12.15 Fees, Costs, and Expenses; Recovery. The prevailing party in any
------------------------------------
action, proceeding or arbitration arising out of or related to this Agreement or
any agreement, document, or instrument referred to herein, shall be entitled to
reasonable fees, costs, and expenses (including reasonable attorneys' fees,
costs, and expenses) incurred by or on behalf of such Person in connection with
such action or proceeding, as determined by the court or arbitrator(s).
29
<PAGE>
12.16 Complete Agreement. This Agreement and the Certificate constitute
------------------
the complete and exclusive statement of agreement among the Members with respect
to the subject matter herein and therein and replace and supersede all prior
written and oral agreements, representations, or statements by and among the
Members or any of them. No representation, statement, condition or warranty not
contained in this Agreement or the Certificate will be binding on the Members or
have any force or effect whatsoever. To the extent that any provision of the
Certificate conflict with any provision of this Agreement, the Certificate shall
control.
12.17 Arbitration. ANY CONTROVERSY OR CLAIM BETWEEN THE PARTIES HERETO
-----------
RISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED
HEREUNDER, INCLUDING, WITHOUT LIMITATION, THE CONSTRUCTION OR APPLICATION OF ANY
OF THE TERMS, COVENANTS, OR CONDITIONS OF THIS AGREEMENT, SHALL, ON WRITTEN
REQUEST OF ONE PARTY SERVED UPON THE OTHER, BE SUBMITTED TO FINAL AND BINDING
ARBITRATION GOVERNED BY THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN
ARBITRATION ASSOCIATION AND, TO THE EXTENT NOT INCONSISTENT, THE CALIFORNIA CODE
OF CIVIL PROCEDURE. THE ARBITRATOR SHALL MAKE THE DETERMINATION AS TO WHETHER
THE CONTROVERSY IS SUBJECT TO THIS ARBITRATION PROVISION; IN ADDITION, THE
ARBITRATOR SHALL HAVE THE POWER TO ISSUE INJUNCTIVE RELIEF. THE ARBITRATION
SHALL TAKE PLACE IN THE CITY OF SAN FRANCISCO, CALIFORNIA AND SHALL BE CONDUCTED
BY ONE (1) ARBITRATOR. EACH OF THE PARTIES SPECIFICALLY ACKNOWLEDGES THAT THE
OTHER PARTY IN SUCH ARBITRATION SHALL HAVE THE RIGHT TO DISCOVERY. ARBITRATION
SHALL BE THE EXCLUSIVE REMEDY OF EACH OF THE PARTIES HEREUNDER AND ANY AWARD OF
THE ARBITRATOR(S) SHALL BE FINAL AND BINDING UPON THE PARTIES HERETO. JUDGMENT
UPON THE ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION.
12.18 Governing Law. EXCEPT AS SPECIFICALLY STATED IN SECTION 12.17,
-------------
THIS AGREEMENT AND ALL TRANSACTIONS CONTEMPLATED HEREUNDER OR EVIDENCED HEREBY
SHALL BE GOVERNED BY, CONSTRUED UNDER, AND ENFORCED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF DELAWARE.
30
<PAGE>
IN WITNESS WHEREOF, all of the Members of the Company have executed
this Agreement as of the date first written above.
POINT WEST CAPITAL CORPORATION
By:/s/Alan B. Perper
----------------------------------
Title: President
By:/s/ Michael W. McDERMITT,
-----------------------------------
an individual
By:/s/ Daniel M. Isard,
-----------------------------------
an individual
<PAGE>
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
---------------------------------------------
OF
--
ALLEGIANCE CAPITAL, LLC
-----------------------
SCHEDULE I
==========
Member Information Member's Percentage Interest
================== ============================
Point West Capital Corporation 51%
c/o Dignity Partners, Inc.
1700 Montgomery Street, Suite 250
San Francisco, CA 94111
Attn: Alan Perper
TIN: 94-3165263
Telephone Number: (415) 394-9467
Facsimile Number: (415) 394-9471
Michael W. McDermitt 24.5%
c/o Westhill Financial Inc.
11400 W. Olympic Blvd., 2nd Floor
Los Angeles, CA 90064
SSN: ###-##-####
Telephone Number: (310) 312-9535
Facsimile Number: (310) 312-9536
Daniel M. Isard 24.5%
c/o Foresight Analysts, Inc.
5353 N. 16th Street, Suite 370
Phoenix, AZ 85016
SSN: ###-##-####
Telephone Number: (602) 274-6464
Facsimile Number: (602) 277-6722
with a copy to:
Renee Gerstman, Esq.
Gerstman & Associates, PC
5353 N. 16th Street, Suite 320
Phoenix, AZ 85016
Facsimile Number: 602-265-9415
FOURTEEN HILL CAPITAL, L.P.
AGREEMENT OF LIMITED PARTNERSHIP
[revised 8/13/97]
THIS AGREEMENT OF LIMITED PARTNERSHIP ("Agreement") is dated and
effective as of August 13, 1997, by and among FOURTEEN HILL MANAGEMENT, LLC, a
Delaware limited liability company (the "General Partner") and the list of
Persons set forth in Schedule A attached hereto (the "Limited Partners"). Terms
set forth herein with initial capital letters are used with the meanings
specified for such terms below in Section 1.1 or as may be defined elsewhere
herein.
Background
----------
FOURTEEN HILL CAPITAL, L.P. (the "Partnership") is being formed as a
limited partnership under the Delaware Revised Uniform Limited Partnership Act
(Title 6, Chapter 17, of the Delaware Code (the "Delaware Act")) by the General
Partner.
The parties hereto intend that, if the Partnership obtains a license as
a Small Business Investment Company ("SBIC") from the U. S. Small Business
Administration ("SBA"), during the term of such license, the Partnership will
operate solely for the purpose of operating as an SBIC licensed by the SBA
pursuant to the Small Business Investment Act of 1958, as amended (the "SBIC
Act"), and the rules and regulations promulgated thereunder by the SBA, as in
effect from time to time.
WITNESSETH
----------
NOW, THEREFORE, the parties hereto, intending to be legally bound
hereby, agree as follows:
ARTICLE 1
---------
GENERAL PROVISIONS
-------------------
1.1 DefinitionsDefinitions. For the purposes of this Agreement,
the following terms shall have the following meanings:
"Additional Limited Partners" shall mean any Person who becomes a
Limited Partner after the date hereof in accordance with the terms hereof.
"Advisory Boards" shall mean those boards which may be authorized to
perform the functions set forth in Section 2.6 herein.
<PAGE>
"Affiliates" shall mean, with respect to any Person, any Person(s)
controlling, controlled by or under common control with such Person; provided,
however, that Limited Partners (other than a Limited Partner which is also an
Affiliate of a General Partner) and issuers of Investment Securities owned by
the Partnership shall not be deemed to be Affiliates of the Partnership.
"Assets Under Management" shall mean, as of any specified date, the
value of all Securities owned by the Partnership (such value to be determined as
provided in Section 3.6 herein), including cash and cash equivalents.
"Capital Account" shall mean the account of each Partner maintained and
adjusted as provided in this Agreement.
"Capital Contributions" shall mean, with respect to each Partner, that
portion of such Partner's Commitment that has been provided to the Partnership
either by payment in cash or the provision of goods or services from time to
time.
"Certificate of Limited Partnership" shall mean the Certificate of
Limited Partnership filed in connection with the formation of the Partnership,
as amended from time to time.
"Closing Capital Account" shall mean, with respect to any fiscal
period, the Opening Capital Account of each Partner for such fiscal period
adjusted in accordance with Section 3.5(a) herein.
"Code" shall mean the Internal Revenue Code of 1986, and the
regulations and interpretations thereof promulgated by the Internal Revenue
Service, as amended and supplemented from time to time.
"Commitments" shall mean the capital contributions to the Partnership
which the Partners have made or are obligated to make to the Partnership, as
increased or decreased from time to time as provided in this Agreement. The
amounts and terms of the Commitments of the Partners shall be as defined in this
Agreement.
"Debentures" shall have the meaning set forth in the SBIC Act.
"Delaware Act" shall have the meaning ascribed thereto in the
Background section above.
"Distributive Share" shall mean the amount that a Partner would have
received pursuant to Section 3.7(a) herein if the Partnership had been
liquidated and all adjustments pursuant to Section 3.5 herein had been made at
the date in question and all assets of the Partnership had been converted to
cash in an amount equal to the value of all such assets computed in accordance
with Section 3.6 herein.
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<PAGE>
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the regulations and interpretations thereof promulgated by the
U. S. Securities and Exchange Commission ("SEC").
"General Partner" shall have the meaning ascribed thereto in the
Preamble to this Agreement.
"Initial Public Offering" shall mean the agreement to sell
substantially all of the Partners' ownership interest in the Partnership; the
offering of securities representing the Partners' ownership interest in the
Partnership or any portion thereof in either a private placement or public
offering; or the conversion of the Partnership into another entity with the
intention to offer to the public securities representing the ownership of that
entity.
"Investment Advisers Act" shall mean the Investment Advisers Act of
1940, as amended, and the regulations and interpretations thereof promulgated by
the SEC.
"Investment Company Act" shall mean the Investment Company Act of 1940,
as amended, and the regulations and interpretations thereof promulgated by the
SEC.
"Investment Adviser/Manager" shall mean any Person selected as such
under Section 2.1(b) herein.
"Investment Securities" shall mean Securities that do not constitute
cash, bank deposits or so-called "money market" instruments.
"Legal Representative" shall mean any executor, administrator,
committee, guardian, conservator or trustee of any Partner.
"Leverage" shall have the meaning set forth in the SBIC Act.
"Limited Partners" shall mean the Limited Partners set forth in
Schedule A attached hereto as of the date hereof and any Additional Limited
Partners for so long as such Persons continue as limited partners of the
Partnership.
"Management Compensation" shall mean the amounts payable by the
Partnership, as provided in Sections 2.5(a), (d) and (e) herein, to the General
Partner.
"Net Losses" shall mean, with respect to any fiscal period, the excess,
if any, of (i) all expenses and losses (including realized and unrealized
capital depreciation and Operating Expenses) incurred during such fiscal period
by the Partnership, over (ii) the aggregate revenue, income and gains (including
realized and unrealized capital appreciation, but not including any Net
Short-Term Investment Income) earned during such fiscal period by the
Partnership from all
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<PAGE>
sources; provided, however, that such realized gains or losses shall, as to each
-------- -------
Security owned by the Partnership, be taken into account only to the extent of
any differences between the actual amount of such gains or losses and the
aggregate amount of unrealized appreciation or depreciation as to each such
Security as of the close of the preceding fiscal period. For purposes of
determining Net Losses, realized and unrealized appreciation and depreciation
shall be included without regard to their treatment for Federal, state or local
income tax purposes.
"Net Profits" shall mean, with respect to any fiscal period, the
excess, if any, of (i) the aggregate revenue, income and gains (including
realized and unrealized capital appreciation, but not including any Net
Short-Term Investment Income) earned during such fiscal period by the
Partnership from all sources, over (ii) all expenses and losses (including
realized and unrealized capital depreciation and Operating Expenses) incurred
during such fiscal period by the Partnership; provided, however, that such
-------- -------
realized gains or losses shall, as to each Security owned by the Partnership, be
taken into account only to the extent of any differences between the actual
amount of such gains or losses and the aggregate amount of unrealized
appreciation or depreciation as to each such Security as of the close of the
preceding fiscal period. For purposes of determining Net Profits, realized and
unrealized appreciation and depreciation shall be included without regard to
their treatment for Federal, state or local income tax purposes.
"Net Short-Term Investment Income" shall mean, with respect to any
fiscal period, the income received by the Partnership during such fiscal period
from investments in Securities which are issued by any governmental authority,
or which are bank certificates of deposit, time deposits, commercial paper or
other so-called "money-market instruments."
"Opening Capital Account,"with respect to any fiscal period,shall mean:
(i) with respect to any Partner admitted during such fiscal
period, that Partner's initial Capital Contribution; and
(ii) with respect to any Partner admitted during any prior
fiscal period, that Partner's Closing Capital Account for the preceding
fiscal period.
"Operating Expenses" shall mean, with respect to any fiscal period,
Management Compensation, interest expenses and any other expenses of the
Partnership, including amortization, if any, of Organization Expenses but
excluding realized and unrealized capital depreciation.
"Optioned Partnership Interest" shall have the meaning ascribed thereto
in Section 3.3(d) herein.
"Optionee" shall have the meaning ascribed thereto in Section 3.3(d)
herein.
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<PAGE>
"Optionor" shall have the meaning ascribed thereto in Section 3.3(d)
herein.
"Organization Expenses" shall mean all reasonable expenses incurred in
the formation and marketing of the Partnership, the development of specialized
credit approval and review systems for the Partnership, and the offering of
limited partnership interests in the Partnership (including reimbursement of the
General Partner and the officers and employees of the General Partner for such
expenses);
"Outstanding Leverage" shall mean the total amount of outstanding
Debentures and other securities issued by the Partnership which qualify as
Leverage and which have not been repaid for purposes of and as provided in the
SBIC Act.
"Partners" shall mean the General Partner, the Limited Partners and any
Person who after the date hereof becomes a general partner under the terms
hereof.
"Partnership" shall have the meaning ascribed thereto in the Preamble
to this Agreement.
"Partner's Percentage" shall mean the percentage determined, for each
of the Partners, by dividing (i) the aggregate Capital Contributions with
respect to each Partner's Commitment and credited to such Partner's Capital
Account as provided in Section 3.5(a)(i) herein at the time of any relevant
calculation by (ii) the aggregate Capital Contributions of all Partners and so
credited with respect to such Partners' Commitments at such time, and taking
into account any adjustment made pursuant to Section 3.3(d) (viii) herein. The
sum of the respective Partners' Percentages shall at all times equal 100%.
"Person" shall mean any natural person, corporation, general
partnership, limited partnership, proprietorship, other business organization,
trust, association or other legal entity.
"Publicly Traded Security" shall mean a Security that is traded (i) on
a recognized national or foreign securities exchange, or (ii) in the
over-the-counter market, and that the General Partner determines to be so
actively traded as to have a readily ascertainable market value.
"Purchase Price" shall have the meaning ascribed thereto in Section
3.3(d) herein.
"Remaining Portion" shall have the meaning ascribed thereto in Section
3.3(d) herein.
"Return of Capital" shall mean the time when the Limited Partners shall
have received distributions, on a cumulative basis, in an aggregate amount equal
to the aggregate Capital Contributions of all such Limited Partners on the date
of distribution.
"SBA" shall mean the United States Small Business Administration.
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<PAGE>
"SBIC" shall mean a small business investment company licensed under
the SBIC Act.
"SBIC Regulations" shall mean all laws, rules, regulations and standard
operating procedures or other promulgations of the SBA that may be applicable
from time to time to an SBIC.
"Securities" shall mean and include common and preferred stock
(including warrants, rights and other options relating thereto or any
combination thereof), notes, bonds, debentures, trust receipts and other
obligations, instruments or evidences of indebtedness, and other properties or
interests commonly regarded as securities, and in addition interests in real
property, whether improved or unimproved, and interests in personal property of
all kinds, tangible or intangible, chooses in action and cash, bank deposits and
so-called "money market instruments."
"Securities Act" shall mean the Securities Act of 1933, as amended, and
the rules, regulations and interpretations thereof promulgated by the SEC.
"SEC" shall mean the U. S. Securities and Exchange Commission.
"Voting Interest," as to any Partner, shall mean the Partner's
Percentage for such Partner.
1.1.1 Superseding Definitions. To the extent that any of the
-------------------------
definitions set forth herein conflict with the definition of those terms as set
forth in the SBIC Act or regulations promulgated pursuant thereto, the
definitions contained in the SBIC Act or regulations promulgated pursuant
thereto shall control.
1.2 Name. The Partnership shall conduct its activities under the
----
name of "Fourteen Hill Capital, L.P." The General Partner shall have the power
at any time to change the name of the Partnership without obtaining the approval
of any Limited Partners. The General Partner shall thereafter give notice of any
such change to each Partner.
1.3 Principal Office, Registered Office and Qualification.
-------------------------------------------------------
(a) The principal executive office of the Partnership shall be
Incline Village, 917 Tahoe Boulevard, Suite 204, Incline Village, Nevada 89452,
or such other place as may from time to time be designated by the General
Partner. The registered office of the Partnership in the State of Delaware shall
be located at 1220 N. Market Street, Suite 606, Wilmington, DE 19801, or such
other place as may from time to time be designated by the General Partner. The
name of the Partnership's registered agent at such address is Registered Agents,
Ltd.
(b) The General Partner shall use its best efforts to qualify
the Partnership to do business in each jurisdiction where the activities of the
Partnership make such qualification necessary. The General Partner shall have
the power at any time to qualify the Partnership under
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<PAGE>
any name when the Partnership's name is unavailable for use in a particular
jurisdiction. The General Partner shall also have the power to designate any
registered offices or registered agents, or both, that the General Partner may
deem appropriate in connection with any such qualification to do business.
1.4 Duration. The Partnership shall continue through the close
--------
of business on December 31, 2024 (the "Initial Term"), unless sooner terminated
pursuant to the provisions of Article 4 hereof, provided, however, that the
-------- -------
General Partner may, at any time, extend the life of the Partnership for a
period of up to ten years following the Initial Term, and for up to five
successive ten-year periods thereafter.
1.5 Partners.
---------
(a) Schedule A attached hereto sets forth the name and address
of the General Partner and the Limited Partners as of the date hereof and the
aggregate Commitment of each Partner to the Partnership.
(b) No one shall be admitted as a General Partner or an
Additional Limited Partner without subscribing and delivering to the Partnership
a counterpart of this Agreement and any initial Capital Contribution to be made
by such Partner in accordance with Section 3.1 herein or Section 3.2 herein.
(c) The addition to the Partnership at any time of one or more
Partners shall not be a cause for dissolution of the Partnership, and all the
Partners shall continue to be subject to the provisions of this Agreement in all
respects.
(d) The Limited Partners shall take no part in the control or
management of the business or affairs of the Partnership, nor shall the Limited
Partners have any authority to act for or on behalf of the Partnership, except
as specifically provided in this Agreement. The Limited Partners shall not act
in any way which would conflict with the SBIC Act, the Delaware Act, the Code or
any other statute or provision referenced herein.
(e) The Limited Partners may not delegate their voting rights
to any other Person without the prior approval of the General Partner and the
SBA. This restriction does not apply to (i) a proxy given by a Limited Partner
to vote at a single specified meeting or (ii) the delegation by a Limited
Partner of voting rights to such Limited Partner's investment advisor, provided
that such investment advisor is not an Affiliate.
-7-
<PAGE>
1.6 Liability of Partners.Losses, liabilities and expenses incurred by
---------------------
the Partnership during any fiscal period shall be allocated among the Partners
in accordance with the procedures set forth in Section 3.5 herein. The
General Partner shall have unlimited liability for the repayment,satisfaction
and discharge of all losses, liabilities and expenses of the Partnership
to the extent provided under the Delaware Act; provided, however, that the
-------- -------
General Partner shall not be obligated to restore by way of a contribution
to capital or otherwise any deficits in the respective Capital Accounts of
the Limited Partners should such deficits occur. Except as otherwise required
under the Delaware Act (including where required under Sections 17-303, 17-502
and 17-607 of the Delaware Act), no Limited Partner shall in any event be
liable for or subject to any loss, liability or expense whatsoever of the
Partnership beyond that portion of such Limited Partner's Commitment not
actually paid to the Partnership.
1.7 Purpose and Powers. If the Partnership obtains an SBIC license
------------------
from the SBA, during the term of such license, the Partnership's
sole purpose shall be to perform functions and to conduct activities that are
contemplated by the SBIC Act for an SBIC. In furtherance of its purposes, the
Partnership shall have all powers necessary, suitable or convenient for their
accomplishment, alone or with others, as principal or agent, including the
following:
(a) to buy, sell and invest in Securities, regardless of
whether such Securities are readily marketable, and to reinvest the
proceeds of any Securities in other Securities;
(b) to hold, receive, mortgage, pledge, lease, transfer,
exchange, otherwise dispose of, grant options with respect to and
otherwise deal in and exercise all rights, powers, privileges and other
incidents of ownership or possession with respect to all property owned
or held by the Partnership;
(c) to borrow, raise money, issue promissory notes, drafts,
bills of exchange, warrants, bonds, debentures and other negotiable and
non-negotiable instruments and evidences of indebtedness, to guarantee
the obligations of others or incur lease obligations from time to time,
to secure the payment of the principal of any such indebtedness and the
interest thereon or any other such obligation by mortgage, pledge,
conveyance or assignment in trust of the whole or any part of the
property of the Partnership, whether at the time owned or thereafter
acquired, and to buy, sell, pledge or otherwise dispose of any such
instrument or evidence of indebtedness (subject to the limitations set
forth below);
(d) in such reasonable degree and manner as the General
Partner may deem appropriate, to have and maintain one or more offices
within or without the States of Nevada or California, to rent or
acquire office space, to engage personnel and compensate them and to do
such other acts as the General Partner may deem appropriate in
connection with the maintenance of such office or offices;
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<PAGE>
(e) to open, maintain and close accounts with brokers;
(f) to open, maintain and close bank accounts and draw checks
and other orders for the payment of moneys;
(g) to engage accountants, custodians, Investment
Advisers/Managers, attorneys, consultants and any and all other agents
and assistants, both professional and nonprofessional, and to
compensate them in such reasonable degree and manner as may be
necessary or advisable;
(h) to form or cause to be formed and to own the stock of one
or more corporations, whether foreign or domestic, and to form or cause
to be formed and to participate, but only as a limited partner or
participant with limited liability, in partnerships and joint ventures,
whether foreign or domestic;
(i) to enter into, make and perform all contracts, agreements
and other undertakings as the General Partner may deem appropriate to
carry out the purposes hereof;
(j) to sue, prosecute, settle or compromise all claims against
third parties, to compromise, settle or accept judgment with respect to
claims against the Partnership and to execute all documents and make
all representations, admissions and waivers in connection therewith;
(k) to take any actions that the General Partner may deem
appropriate in order to obtain the approval of the SBA therefor; and
(l) to engage in any other lawful act or activity for which
limited partnerships may be organized under the Delaware Act and which
conform with SBIC Regulations.
If the Partnership fails to obtain an SBIC license from the SBA, the Partnership
shall have all powers set forth in subparagraphs (a) through (j) above and shall
also have the power to engage in any other lawful act or activity for which
limited partnerships may be organized under the Delaware Act.
1.8 Applicable Law. This Agreement shall be governed by, and
---------------
construed in accordance with, the laws of the State of Delaware.
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<PAGE>
l.9 SBIC.
----
(a) If the Partnership becomes an SBIC, the Partnership shall
not be required to take any action or refrain from any action that may be
necessary for the Partnership to maintain its status as an SBIC if the General
Partner, in its sole discretion, determines that it would be desirable for the
Partnership to cease being an SBIC.
(b) In order to permit the Partnership to become an SBIC, the
General Partner shall have the authority, without obtaining the approval of any
Limited Partners, to amend this Agreement to the extent necessary to comply with
any applicable SBIC Regulations or to obtain SBA approval of the Partnership's
Application to become an SBIC, including any of the following matters: the
dissolution and/or reorganization of the Partnership, the removal of the General
Partner, the rights of any transferee of or successor to the General Partner and
the indemnification of the General Partner. However, (i) the General Partner
shall not have the authority to amend any of the Sections included in Article 3
herein or Section 1.6 herein without the written consent of a majority of the
Limited Partners with each Limited Partner having such Partner's Voting
Interest, and (ii) the General Partner shall have the authority to amend Section
2.5(a) herein only to the extent to comply with any applicable SBIC Regulation
or to obtain SBA approval of the Partnership's Application to become an SBIC.
1.10 Incorporation of SBA Annexes.
----------------------------
(a) The provisions of SBA Annex GDP ("Annex GDP") attached to
this Agreement are incorporated in this Agreement with the same force and effect
as if fully set forth herein. The provisions of SBA Annex OP ("Annex OP")
attached to this Agreement are incorporated in this Agreement with the same
force and effect as if fully set forth herein.
(b) The provisions of this Agreement shall be interpreted to
the fullest extent possible in a manner consistent with the provisions of the
SBIC Act, Annex GDP and Annex OP. In the event of any conflict between any
provision of the Agreement, Annex GDP, or Annex OP and the provisions of the
SBIC Act, the provisions of the SBIC Act shall control.
(c) In the event of any conflict between any provision of this
Agreement and any provision of either Annex GDP or Annex OP, the provision of
Annex GDP or Annex OP shall control.
(d) In the event of any conflict between any provision of
Annex GDP and any provision of Annex OP, the provision of Annex GDP shall
control.
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<PAGE>
ARTICLE 2
=========
MANAGEMENT
==========
2.1 Authority of General Partner.
----------------------------
(a) The management and operation of the Partnership and the
formulation and execution of investment policy shall be vested exclusively in
the General Partner. The General Partner shall, in its sole discretion, exercise
all powers on behalf and in the name of the Partnership that the General Partner
deems appropriate for carrying out the purposes of the Partnership.
(b) The General Partner may, but is not required to, delegate
any part of its authority under this Agreement to an Investment Adviser/Manager
chosen by the General Partner. The General Partner may enter into agreements
with the Investment Adviser/Manager delegating its authority, limiting the
authority so delegated and specifying that such authority shall be exercised in
conformity with the terms and conditions of such agreements and this Agreement;
provided, however, that (i) no such delegation shall in any way limit the
representations, fiduciary responsibility and obligations of the General Partner
under this Agreement, which shall continue notwithstanding any such delegation,
and (ii) any compensation to be paid to any Investment Adviser/Manager shall be
paid by the General Partner.
(c) Upon the occurrence of any of the events specified in 13
C.F.R. ss.107.1810(d)(1) through (d)(6) or (f)(1) through (f)(3), as determined
by the SBA, the SBA shall have the right, upon written notice, to require the
Partnership to remove the person(s) responsible for such occurrence, and in such
an event, the General Partner shall take all necessary actions to comply with
the directives of the SBA.
(d) The General Partner shall, so long as it remains the
general partner of the Partnership, devote substantially all of its activities
to the conduct of the business of the Partnership and shall not engage actively
in any other business unless such engagement is related to and in furtherance of
the affairs of the Partnership.
(e) Limited Partners shall not be obligated to refer
investments to the Partnership, and no Limited Partner shall be restricted or
precluded hereby in any investment it may make, including any investment
opportunity in which the Partnership is actively considering investing or in
which the Partnership invests. The General Partner may, in its sole discretion,
offer certain or all Limited Partners the opportunity to invest directly in
particular investments in which the Partnership is also investing in situations
where the General Partner decides that making such co-investment opportunities
available to one or more Limited Partners would be in the best interests of the
Partnership. Limited Partners shall not be obligated to invest in any such
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<PAGE>
co-investment opportunities that may be presented to them, nor shall they be
entitled to object if certain co-investment opportunities shall be offered only
to other Limited Partners.
(f) This Agreement shall not be construed to preclude any
Affiliate of the General Partner or any officer or director of the General
Partner or of any such Affiliate from engaging in any business or investment
activity (including buying or selling Securities for its own account) and
receiving compensation or profit therefrom. In particular, any of such Persons
shall be entitled to co-invest in transactions in which the Partnership shall
invest, and any such co-investment shall not be deemed a violation of this
Agreement or of any duty that may be owed by any of such Persons to the
Partnership or the Partners.
2.2 Investment Company Act; Investment Advisers Act. The Partnership is
-----------------------------------------------
being formed in such fashion as to be exempt from the Investment Company Act.
The relationship between the Partnership, on the one hand, and the General
Partner, on the other hand, is being structured in such manner as to exempt th
General Partner, Affiliates of the General Partner and the officers and
directors of either the General Partner or Affiliates of the General Partner
from the requirements of the Investment Advisers Act. Existing laws, regulations
and interpretations or changes thereto may make it necessary or advisable to
register the Partnership under the Investment Company Act or to register
the General Partner, any Affiliates thereof or the officers or directors
of either the General Partner or any Affiliates thereof under the Investment
Advisers Act. The General Partner shall have the power to take such action as it
may deem advisable in light of existing or changing regulatory conditions in
order to permit the Partnership to continue in existence. The General Partner
shall also have the power to register the Partnership under the Investment
Company Act, and to take any and all action necessary to secure such
registration and to secure appropriate exemptions under the Investment Advisers
Act for the General Partner, any Affiliates thereof and the officers and
directors of either the General Partner or any Affiliates thereof (including
an exemption from the provisions of Section 205(a) thereof). In addition,
subject to the approval in writing by the Limited Partners (or as may be
otherwise required for an amendment by Section 6.7 herein), the General
Partner shall have the power to modify the present fee structure in Section 2.5
herein if the General Partner, any Affiliates thereof, or the officers or
directors of either the General Partner or any Affiliate thereof is required to
register under the Investment Advisers Act. This Section shall not give the
General Partner any power to amend this Agreement otherwise than as provided
pursuant to Section 6.7 herein.
2.3 Standard of Care.
----------------
(a) Neither the General Partner, any Investment Adviser/Manager,
any partner, shareholder, director, officer or employee nor any Affiliate of any
of them shall be liable to the Partnership or any Partner for any action taken
or omitted to be taken by it or any other Partner or other person in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the Partnership, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was
unlawful.
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<PAGE>
(b) Neither any Limited Partner, nor any member of any
Partnership committee or board who is not an Affiliate of the General Partner,
shall be liable to the Partnership or any Partner as the result of any decision
made in good faith by such Limited Partner or member, in his capacity as such.
(c) The General Partner and any Investment Adviser/Manager,
the stockholders, directors, officers, employees and partners of any of them,
any Limited Partner and any member of a Partnership committee or board, may
consult with reputable legal counsel selected by them and shall be fully
protected, and shall incur no liability to the Partnership or any Partner, in
acting or refraining to act in good faith in reliance upon the opinion or advice
of such counsel.
(d) This Section 2.3 shall not constitute a modification,
limitation or waiver of Section 314(b) of the SBIC Act, or a waiver by the SBA
of any of its rights pursuant to such Section 314(b).
2.4 [intentionally deleted]
2.5 Management Compensation and Expenses.
-------------------------------------
(a) As basic compensation for services rendered in the management of
the Partnership, the Partnership shall pay the General Partner, the maximum
management fee permitted under the Act and regulations, interpretations, or
policy statements promulgated or issued thereunder. Such management fee, with
respect to each fiscal quarter, shall be paid quarterly in advance, and shall
equal the greater of (i) In the first five fiscal years, .625% of the aggregate
Regulatory Capital and two tiers (two times Regulator Capital) of Leverage as if
committed and/or granted to the Partnership. Thereafter, with respect to each
fiscal quarter, .625% of Combined Capital, as defined in SBA Regulations
(ss 107.50) as of the close of business on the last day of the preceding fiscal
quarter or (ii) such other percentage approved by the SBA. In addition, the
Partnership shall pay the General Partner an additional $31,250 per fiscal
quarter as compensation for management services until such time as the Combined
Capital equals or exceeds Twenty Million Dollars ($20,000,000).
(b) Except as provided in Section 2.5(c) herein, the General Partner
shall pay (i) the compensation of all professional and other employees who
render services to the Partnership and (ii) the cost of providing support and
general services to the Partnership, including expenses of insurance (except as
otherwise specifically provided in Section 2.5(c)(iii) herein), office rental
expenses (provided, however, that responsibility for the payment of such office
rental expenses does not preclude the Partnership from being the lessee of any
rental property dedicated to the Partnership's use now or in the future, such
office rental expenses then being borne by the Partnership after being deducted
from the General Partner's Management Compensation) and secretarial, clerical
and bookkeeping expenses.
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<PAGE>
(c) The Partnership shall pay the following Partnership
expenses: (i) expenses of the Advisory Boards for the Partnership; (ii) expenses
incurred in the actual or proposed acquisition or disposition of Securities,
including accounting fees, brokerage fees, legal fees, transfer taxes and costs
related to the registration or qualification for sale of Securities; (iii) other
legal, accounting and auditing expenses and the reasonable expenses of limited
partnership reimbursement insurance for the Partnership (if any); (iv) all
expenses of consultants for specialized or technical services related to the
actual or proposed acquisition or disposition of Investment Securities; (v)
expenses incurred by the General Partner in connection with meetings of and on
behalf of the Partnership, including meetings of the Advisory Boards; (vi) all
Organization Expenses; and (vii) taxes payable by the Partnership to Federal,
state, local and other governmental agencies. The payment of such expenses by
the Partnership shall be due and payable on a regular basis as billed to the
Partnership, against appropriate supporting documentation.
(d) If the effective date of the Partnership's dissolution or
the date that the General Partner ceases to be the general partner of the
Partnership is not the last day of a fiscal quarter, the Management Compensation
for the period between the effective date of such dissolution and the close of
the preceding fiscal quarter, or for the period between the date that the
General Partner ceases to be the general partner and the close of the preceding
fiscal quarter, shall be computed on a pro rata basis for such period pursuant
--- -----
to Section 2.5(a) herein. Any difference between the amount of Management
Compensation paid by the Partnership pursuant to Section 2.5(a) herein with
respect to such fiscal period and the amount due under this Section shall be
repaid to the Partnership within 30 days after either the effective date of the
Partnership's dissolution or the date that the General Partner ceases to be the
general partner of the Partnership, as the case may be.
(e) The Management Compensation payable with respect to the
period commencing on the date of filing of the Certificate of Limited
Partnership and ending on the last day of the first fiscal quarter of the
Partnership after the date hereof shall be computed on a pro rata basis for such
--- ----
period and shall be due and payable in advance on the date hereof. Management
Compensation payable with respect to the Commitment of any Additional Limited
Partner or any increase in the Commitment of any Limited Partner for the period
commencing on the date of admission of such Additional Limited Partner or the
effective date for the increase of any Limited Partner's Commitment to the end
of that fiscal quarter shall be computed with respect to such Commitment or
increase in such Commitment as of the date of admission of such Additional
Limited Partner or the effective date for the increase in such Limited Partner's
Commitment, on a pro rata basis for such quarter. Management Compensation shall
--- ----
be due and payable in advance on the first business day following the date of
admission of any Additional Limited Partner or the effective date for any
increase in any Limited Partner's Commitment; provided, however, that
notwithstanding anything to the contrary contained herein, the initial payment
of Management Compensation with respect to the admission of each Limited Partner
and
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each Additional Limited Partner shall be equal to the sum of the pro rata
--- ----
payment for that fiscal quarter, as provided above.
2.6 Advisory Boards. The members of any Advisory Boards shall consist
---------------
of business persons, scientists and other persons generally recognized for their
standing and reputation, all of whom shall be designated by the General Partner.
Members of the Advisory Boards may receive a fee for their service as
consultants on an Advisory Board, as determined by the General Partner, plus
reasonable out-of-pocket expenses. The Advisory Boards shall hold periodic
meetings, as determined by the General Partner. The Advisory Boards shall serve
as an adviser to the General Partner on behalf of the Partnership and shall
consult with the General Partner concerning the Partnership's activities and
operations as to business, scientific and technical matters; provided, however,
-------- -------
that the Advisory Boards shall take no part in the control or management of the
Partnership nor shall the Advisory Boards or any member thereof have any
authority to act for or on behalf of the Partnership.
ARTICLE 3
---------
CAPITAL ACCOUNTS
----------------
3. 1 Capital Contribution.
--------------------
(a) The General Partner and the Limited Partners hereby commit
to make contributions to the capital of the Partnership in the amounts set forth
opposite their respective names in Schedule A attached hereto. On the date
hereof, any Limited Partner who is an individual and whose net worth (excluding
the value of any equity in such Limited Partner's most valuable residence) is
under $2,000,000 shall contribute to the Partnership the entire amount of such
Limited Partner's Commitment. On the date hereof, the General Partner may permit
any Limited Partner who is an individual and whose net worth (excluding the
value of any equity in such Limited Partner's most valuable residence) is at
least $2,000,000 but is under $10,000,000 to merely contribute to the
Partnership a capital contribution in an amount which will reduce the amount of
such Limited Partner's remaining unfunded Commitment to an amount which is not
greater than ten percent of such Limited Partner's net worth. Upon not less than
30 days prior notice from the General Partner, each Limited Partner (including
each Additional Limited Partner) which has not yet contributed to the
Partnership the entire amount of such Limited Partner's Commitment shall pay
such percentage of its Commitment (in 5% increments) as is demanded by the
General Partner, in cash and at such times as shall be determined by the General
Partner, and each such notice from the General Partner shall specify the date
such payment shall be due and the percentage of the Limited Partners'
Commitments then due. On the date of admission of any Additional Limited
Partner, the General Partner may permit such Additional Limited Partner to
merely pay such percentage of its Commitment as will equal the percentage of the
Commitment which one or more existing Limited Partners have paid. Any Limited
Partner may elect to
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contribute all or any portion of its Commitment prior to the date such portion
would be due pursuant to this Section 3.1(a); any such advance contribution
with respect to a Commitment will be applied to the amount due from such Limited
Partner with respect to the next required contribution (or contributions) and
shall be credited to such Limited Partner's Capital Account when and to the
extent so applied, as provided in Section 3.5(a)(i) herein.
(b) The General Partner shall contribute an amount equal to
not less than one percent of the total Commitments of the Limited Partners.
Except as otherwise provided in Section 3.1(c) herein, the General Partner may
pay its Commitment in the form of a promissory note, bearing interest at the
minimum rate necessary to avoid the imputation of interest or the creation of
original issue discount under the Code, interest and the principal of which
shall be payable to the Partnership in full upon the termination or dissolution
of the Partnership. If necessary, such promissory note shall be amended from
time to time to account for the Commitments of any Additional Limited Partners
and any increase in the Commitments of any Limited Partners, and to account for
any distributions to the General Partner.
(c) If at the time any distribution in cash is to be made to
the General Partner under Section 3.7(a) herein, the aggregate percentage of the
Commitment of the General Partner which has been paid or set off against its
promissory note is lower than the aggregate percentage of the Commitments of the
Limited Partners which have become due or with respect to which a notice
requiring a contribution has been given pursuant to Section 3.1(a) herein as of
such date, then a portion of such distribution (up to the maximum amount
provided below) shall be contributed to the Partnership as a Capital
Contribution with respect to the General Partner's Commitment and such amount
shall be set off against its promissory note. The portion of any such
distribution which shall be so contributed shall be the lesser of (i) the amount
required to cause the aggregate percentage of the Commitment of the General
Partner which has been paid or set off against its promissory note to be equal
to the aggregate percentage of the Commitments of the Limited Partners which
have become due or with respect to which a notice requiring a contribution has
been given pursuant to Section 3.1(a) herein or, (ii) the amount of such
distribution less a percentage of such distribution equal to the combined
highest marginal Federal and applicable state income tax rates for individual
taxpayers. Capital Contributions pursuant to this Section shall be applied to
the promissory note, first against interest and then to principal. The date any
contribution is made pursuant to this Section shall be the date such
contribution is due and received for purposes of Section 3.5(a)(i) herein.
(d) Upon the dissolution or termination of the Partnership, the General
Partner will contribute to the Partnership an amount equal to the deficit
balance in its Capital Account.
3.2 Additional Limited Partners and Increased Commitments. The
--------------------------------------------------------
General Partner may, from time to time after the date hereof, admit one or more
Additional Limited Partners or permit any Limited Partner to increase its
Commitment, under the following terms and conditions:
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(a) Each Additional Limited Partner and Limited Partner increasing its
Commitment shall execute and deliver to the Partnership a counterpart of this
Agreement, thereby evidencing such Limited Partner's agreement to be bound by
and comply with the terms and provisions hereof as if such Limited Partner were
an original signatory to this Agreement. Thereupon, the General Partner shall
amend Schedule A attached to this Agreement to reflect such Limited Partner's
name, address and Commitment (or the increase in such Limited Partner's
Commitment, as the case may be).
(b) Each Additional Limited Partner shall be admitted to the
Partnership as of the date that (i) an executed counterpart of this Agreement
has been delivered to and accepted by the Partnership and (ii) such Additional
Limited Partner has paid, by way of contribution to the Partnership, cash in an
amount equal to 25% of its Commitment (plus any additional proportionate amount
due with respect to such Commitment pursuant to any cash call made by the
General Partner prior thereto pursuant to Section 3.1(a) herein).
(c) In the case of each Limited Partner whose Commitment has been
increased, such increased Commitment shall be effective as of the date that (i)
an executed counterpart of this Agreement reflecting such increased Commitment
has been delivered to and accepted by the Partnership and (ii) such Limited
Partner has paid, by way of contribution to the Partnership, cash in an amount
equal to 25% of the increased amount of its Commitment (plus any additional
proportionate amount due with respect to such increased Commitment pursuant to
any cash call made by the General Partner prior thereto pursuant to Section 3.1
(a) herein).
(d) Upon the admission of an Additional Limited Partner to the
Partnership or an increase in the Commitment of any Limited Partner pursuant to
this Section 3.2 herein, the opening Capital Account of such Additional Limited
Partner or Limited Partner, as the case may be, shall be debited with an amount
equal to (i) such Additional Limited Partner's or Limited Partner's pro rata
share (in proportion to the respective Commitments of the Partners in the case
of an Additional Limited Partner or in the proportion that the amount of such
increase bears to the Commitments of the Partners in the case of an increased
Commitment) of all expenses delineated in Section 2.5(c) herein incurred by the
Partnership in the period from the date of filing of the Certificate of Limited
Partnership to the date of such admission or increase in Commitment, plus (ii)
all expenses incurred by the Partnership in connection with the admission of
such Additional Limited Partner or the increase in the Commitment of such
Limited Partner pursuant to this Section 3.2. Any such amounts debited from the
Capital Account of any such Additional Limited Partner or Limited Partner
increasing its Commitment shall be credited to the Capital Accounts of the other
Partners in the manner provided in Section 3.5(a)(iv) herein.
(e) The General Partner shall determine the price for each Partner's
Percentage to be issued to each Additional Limited Partner or each Limited
Partner whose Commitment is to be increased, which price shall be known as the
"Offering Price."
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(i) In determining the Offering Price, the General Partner
shall not set the price at less than the book value of the percentage of the
Partnership's Assets Under Management reflected in the Partner's Percentage to
be issued; however, the General Partner, in its sole discretion, may set an
Offering Price in excess of the book value of the percentage of the
Partnership's Assets Under Management to be issued to the Additional Limited
Partner or to the Limited Partner increasing its Commitment.
(ii) In the event that, by a majority vote of the Limited
Partners with each Limited Partner having such Partner's Voting Interest, the
Limited Partners decide that the Offering Price does not fairly represent the
fair market value of the Partner's Percentage to be issued, then the Offering
Price of such Partner's Percentage to be issued shall be determined by a
recognized appraisal or investment firm with experience in making determinations
of value of the type required to be made herein. In such an event, the General
Partner and the Limited Partners shall agree on an independent appraiser, and
such independent appraiser shall be directed to determine the fair market value
of such Partner's Percentage to be issued as soon as practicable. The appraised
value shall be calculated by determining the appraised value of the Partnership
as a whole and dividing that value by the Partner's Percentage to be issued. The
determination by the appraiser of the fair market value will be conclusive and
binding on all Partners.
(iii) To the extent that the Offering Price exceeds the book
value of the percentage of the Partnership's Assets Under Management, any such
surplus shall be credited to the Capital Accounts of the other Partners in the
manner provided in Section 3.5(a)(iv) herein.
3.3 Noncontributing Partners.
------------------------
(a) The Partnership shall be entitled to enforce the
obligations of each Partner to make the contributions to capital specified in
Sections 3.1 and 3.2 herein, and the Partnership shall have all remedies
available at law or in equity in the event any such contribution is not so made,
including any or all of the remedies set forth in Sections 3.3(b), (c), (d) or
(e) herein.
(b) If any Limited Partner fails to make a contribution
required under Section 3.1 or 3.2 herein within 10 days after the date such
contribution is due, then interest at an annual rate equal to the lesser of (i)
the highest prime rate reported in The Wall Street Journal, from time to time,
plus two percent or (ii) the highest rate of interest such Limited Partner is
legally permitted to pay in such circumstance, shall be charged on the amount
due from the date such amount became due until the earlier of (x) the date paid
or (y) the date of any notice given to such Limited Partner by the General
Partner pursuant to Section 3.3(c) or (d) herein. Such interest shall be
deducted from such Partner's Capital Account on a periodic basis at the end of
each fiscal quarter; provided, however, that the amount of interest charged as
provided in this Section 3.3(b) shall not exceed the amount of such Limited
Partner's Capital Account. Any interest deducted from such Limited Partner's
Capital Account shall be credited to the Capital Accounts of the other Partners
in the manner provided in Section 3.5(a)(iv) herein.
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<PAGE>
(c) In addition, if any Limited Partner fails to make a
contribution required under Section 3.1 or 3.2 herein within 20 days after the
date such contribution is due, unless the General Partner has acted pursuant to
Section 3.3(d) herein, the General Partner may, in its sole discretion, elect to
declare, by notice to such Limited Partner, that such Limited Partner's
Commitment shall be deemed to be reduced to the amount of any contributions of
capital timely made pursuant to Section 3.1 or 3.2 herein. Upon such notice,
such Limited Partner shall have no right to make any contribution thereafter
(including the contribution as to which the nonpayment occurred and any
contribution otherwise required to be made thereafter pursuant to the terms of
Section 3.1 or 3.2 herein). Upon such notice, the General Partner shall amend
Schedule A to this Agreement.
(d) If any Limited Partner fails to make a contribution
required under Section 3.1 or 3.2 herein within 20 days after the date such
contribution is due, unless the General Partner has acted pursuant to Section
3.3(c) herein, the General Partner may, in its sole discretion, elect to
declare, by notice to such Limited Partner, that such Limited Partner is in
default. If the General Partner so elects to declare such Limited Partner in
default (such Limited Partner being hereinafter referred to as the "Optionor"),
then the other Limited Partners that are not in default (the "Optionees") and
the General Partner shall have the right and option to acquire the Partnership
interest, which shall include the Optionor's Capital Account, of the Optionor
(the "Optioned Partnership Interest") on the following terms:
(i) The General Partner shall give the Optionees notice
promptly after declaration of any such default. Such notice
shall advise each Optionee of the portion of the Optioned
Partnership Interest available to it and the price therefor
(as hereinafter determined). The portion available to each
Optionee shall be that portion of the Optioned Partnership
Interest that bears the same ratio to the Optioned
Partnership Interest as each Optionee's Partner's Percentage
bears to the aggregate Partners' Percentages, exclusive of
the Partner's Percentage of the Optionor. The aggregate
price for the Optioned Partnership Interest shall be the
assumption of the unpaid Commitment (both that portion then
due and amounts due in the future) of the Optionor (the
"Purchase Price"). The Purchase Price for each Optionee
shall be prorated according to the portion of the Optioned
Partnership Interest purchased by each such Optionee so that
the percentage of the unpaid Commitment assumed by each
Optionee is the same as the percentage of the Optioned
Partnership Interest purchased by such Optionee. The option
granted hereunder shall be exercisable by each Optionee, in
whole only, at any time within 30 days of the date of the
notice from the General Partner by the delivery to the
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General Partner of (A) a notice of exercise of option, and
(B) the contribution to capital due in accordance with
Section 3.3(d)(v)(A) herein. The General Partner shall
forward the above notices of exercise of option received to
the Optionor.
(ii) Should any Optionee not exercise its option within
the 30 day period provided in Section 3.3(d)(i) herein, the
General Partner, within 10 days of the end of such period,
shall notify the other Optionees who have previously
exercised their options in full, that such Optionees have
the right and option ratably among them to acquire the
portion of the Optioned Partnership Interest not previously
acquired (the "Remaining Portion") within 10 days of the
date of the notice specified in this Section 3.3(d) (ii) on
the same terms as provided in Section 3.3(d)(i) herein.
(iii) The amount of the Remaining Portion not acquired
by the Optionees pursuant to Section 3.3(d) (ii) herein may
be acquired by the General Partner within 10 days of the
expiration of the 10 day period specified in Section 3.3(d)
(ii) herein on the same terms as set forth in Section
3.3(d)(i) herein.
(iv) To the extent that the Remaining Portion is not
fully acquired by the Optionees and the General Partner
pursuant to Section 3.3(d)(ii) and (iii) herein, the
Partnership and/or the General Partner may, in their sole
discretion, elect to exercise one or more of the remedies
provided in Section 3.3(a), (b) or (c) with respect to such
unacquired Remaining Portion. Alternatively, the amount of
the Remaining Portion not acquired by the Optionees and the
General Partner pursuant to Section 3.3(d)(ii) and (iii)
herein may, if the General Partner deems it in the best
interest of the Partnership, be sold to any other Person on
terms not more favorable to such purchaser than the
Optionees' option (and the General Partner may admit any
such third party purchaser as a Limited Partner). Any
consideration received by the Partnership for such amount of
the Optionor's interest in the Partnership in excess of the
Purchase Price therefor shall be retained by the Partnership
and allocated among the Partners' Capital Accounts in the
manner provided by Section 3.5(a) (iv) herein.
(v) Upon exercise of any option hereunder, such
Optionee (or the General Partner, if it has exercised its
right pursuant to Section 3.3(d) (iii) herein) shall be
deemed to have assumed that
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portion of the Optionor's unpaid Commitment representing the
Purchase Price of the purchased portion of the Optioned
Partnership Interest and shall be obligated (A) to
contribute to the Partnership the portion of the Commitment
then due from the Optionor equal to the percentage of the
Optioned Partnership Interest purchased by such Optionee and
(B) to pay to the Partnership the same percentage of any
further contributions which would have otherwise been due
from such Optionor.
(vi) Upon the General Partner's purchase of any portion
of the Optioned Partnership Interest pursuant to Section
3.3(d) (iii) herein, the General Partner shall also become a
Limited Partner to the extent of such interest.
(vii) Upon the purchase of any portion of the Optioned
Partnership Interest by an Optionee, the General Partner or
other Person pursuant to this Section 3.3(d), the Optionor
shall have no further rights or obligations under this
Agreement with respect to such portion.
(viii) Upon the purchase of any portion of the Optioned
Partnership Interest, for purposes of computing such
purchaser's Partner's Percentage, such purchaser shall be
deemed to have a Partner's Percentage (or the Partner's
Percentage of any Optionee, shall be increased by an amount)
equal to the percentage which the purchased portion of the
Optioned Partnership Interest represents of the defaulting
Limited Partner's entire Partnership Interest, and the
Partner's Percentage of such defaulting Limited Partner
shall be reduced by a corresponding amount.
(e) Each Limited Partner hereby grants to the Partnership a security
interest in such Limited Partner's interest to secure the full and prompt
payment to the Partnership of such Limited Partner's Commitment.
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3.4 Capital Accounts. For each fiscal quarter while the Partnership is
----------------
in effect, there shall be established on the books of the Partnership an Opening
Capital Account for each Partner in accordance with the definitions and methods
of adjustment prescribed herein. No adjustment shall be made to any Opening
Capital Account until the close of each fiscal quarter except upon (i) the date
of the admission of an Additional Limited Partner pursuant to Section 3.2
herein, (ii) the date of an increase in the Commitment of a Limited Partner
pursuant to Section 3.2 herein, (iii) the date of the dissolution of the
Partnership, or (iv) the date prior to a distribution pursuant to Sections 3.7
herein or 4.5 herein (or if a distribution of Securities in kind is being made
on the date of an initial public offering of such Securities, then on the date
of such distribution). Additionally, as of the close of business on the last day
of each fiscal quarter of the Partnership, the Opening Capital Account of each
Partner shall be adjusted in accordance with Section 3.5 herein.
3.5 Adjustments.
-----------
(a)As of the close of business on each of the dates provided for in
Section 3.4 herein,the Opening Capital Account of each Partner shall be adjusted
to arrive at such Partner's Closing Capital Account for such quarter or other
period as follows:
(i) The amount of any Capital Contributions paid by
such Partner during such quarter or period shall be credited
to such Opening Capital Account (other than Capital
Contributions referred to in the definition of "Opening
Capital Account" provided in Section 1.1 herein); provided,
however, that:
(A) Any such Capital Contribution shall
be edited to such Partner's Opening Capital
Account on the later of the date such Capital
Contribution was due as provided in Section 3.1 or
3.2 herein or the date on which such Capital
Contribution was actually received by the
Partnership; and
(B) The General Partner may elect to pay
its Capital Contributions in a timely manner by
amending its promissory note accordingly;
(ii) The amount of any distributions made to such
Partner pursuant to Sections 3.7(a), 3.7(c) or 4.4 herein
during such quarter or period shall be debited against such
Opening Capital Account;
(iii) Net Short-Term Investment Income, if any, shall
be credited to such Opening Capital Account, allocated among
the
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Partners (to be apportioned among them in accordance with
their respective Partners' Percentages);
(iv) Net Profits, if any, (reduced by the amount, if
any, allocated pursuant to Section 3.5(a)(iii) herein) shall
be credited to such Opening Capital Account and Net Losses,
if any, (increased by the amount, if any, allocated pursuant
to Section 3.5(a)(iii) herein) shall be debited against such
Opening Capital Account and allocated among the Partners (to
be apportioned among them in accordance with their
respective Partners' Percentages); and
(v) The amount of any reallocation pursuant to Section
3.2 or 3.3 herein shall be debited or credited to the
Partners' Opening Capital Accounts in accordance with such
Sections.
(b) For Federal, state and local income tax purposes, each item of
Partnership income, credit, gain or loss shall be allocated among the Partners
in accordance with the allocation of such income, credit, gain or loss among the
Partners as provided in Section 3.5(a) herein for computing their respective
Capital Accounts, except as otherwise provided in the Code or other applicable
law. The General Partner shall be the "tax matters partner" (as such term is
used in the Code) and shall have the power to make such allocation and to take
any and all action necessary under the Code or other applicable law to effect
such allocation and to maintain the substantial economic effect thereof;
provided, however, that the General Partner shall not make any allocations under
this provision in a manner different from that provided for under this
Agreement. The General Partner shall keep the Partners informed of all
administrative and judicial proceedings with respect to Partnership tax returns
or for the adjustment of Partnership items. Any Partner who enters into a
settlement agreement with respect to Partnership items shall promptly notify the
General Partner of such settlement agreement and its terms as they relate to the
Partnership items. In the event of any admission of any Limited Partner or
transfer by any Limited Partner of its Partnership interest, the General Partner
shall allocate items of income, credit, gain or loss in accordance with the Code
and may make such elections thereunder as the General Partner determines to be
necessary or appropriate.
(c) Notwithstanding any other provision of this Agreement, the
interests of the General Partner in each material item of Partnership income,
credit, gain, loss, or deduction shall be equal to at least 1% of each such item
at all times during the existence of the Partnership.
(d) If the book value of any asset differs from its adjusted tax
basis, the tax allocations of income, credit, gain, loss and deduction shall be
shared among the Partners in a manner that takes into account the variation
between such book value and adjusted tax basis, pursuant to Section 704(c) of
the Code or pursuant to the principles thereof. Allocations made under this
Section 3.5(d) are made solely for Federal, state or local income tax purposes
and shall
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not affect, or any way be taken into account in computing, any
Partner's Capital Account or share of Profits, Losses, other items or
distributions pursuant to any provision of this Agreement.
3.6 Valuation. The value of any Security shall be determined
---------
in accordance with a Valuation Policy to be adopted by the General Partner.
3.7 Distributions.
-------------
(a) Distributions of cash or property (including Investment
Securities), if any, shall be made (subject to the provisions of this Section
3.7) at such times as the General Partner shall determine in conformance with
the following:
(i) cash that the General Partner decides to distribute
that is attributable to Net Short-Term Investment Income will
be distributed to Partners (to be apportioned among them in
accordance with their respective Partners' Percentages as
most recently adjusted (after giving effect to any amount
distributed to the General Partner with respect to tax
liability pursuant to Section 3.7(c) herein and not yet
deducted from the General Partner's Opening Capital
Account)); and
(ii) cash that the General Partner decides to distribute
that is attributable to net operating income, consisting of
operating income (including fee income, interest income and
any other operating income but excluding Net Short-Term
Investment Income) less Operating Expenses, will be
distributed to Partners (to be apportioned among them in
accordance with their respective Partners' Percentages as
most recently adjusted (after giving effect to any amount
distributed to the General Partner with respect to tax
liability pursuant to Section 3.7(c) herein and not yet
deducted from the General Partner's Opening Capital
Account)); and
(iii) subject to Section 3.7(b) herein, Investment
Securities in kind and the proceeds from the sale or exchange
of Investment Securities that the General Partner decides to
distribute will be distributed to the Partners, with respect
to each such Investment Security, amount of proceeds or
amount of other cash, as follows:
(A) a portion of the Investment
Securities being distributed in kind or the
proceeds from the sale or exchange of Investment
Securities, the value of which exceeds the
Partnership's actual cost for
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the total amount of such Investment Securities or
proceeds being distributed, will be distributed to
the Partners (to be apportioned among them
according to their respective Partners'Percentages
as most recently adjusted); and
(B) the remaining portion of such
Investment Securities being distributed in kind or
the proceeds from the sale or exchange of
Investment Securities will be distributed to the
Partners (to be apportioned among them in
accordance with their respective Partners'
Percentages, after giving effect to the
distributions made pursuant to clause (i) and
clause (iii)(A) above and not yet deducted from
such Partners' Opening Capital Accounts).
(b) It is the General Partner's intention, where consistent
with the exercise of due care, prudence and its fiduciary duty to the
Partnership, to prefer to make distributions in cash; however, the General
Partner may, in its sole discretion, at any time distribute Investment
Securities in kind, pro rata with respect to such distribution of each group of
--- ----
each separate Investment Security of each issuer that has a different tax basis,
as part of any distribution pursuant to this Section 3.7 or Section 4.4 herein.
Investment Securities distributed in kind pursuant to this Agreement shall be
subject to such conditions and restrictions as the General Partner determines
are legally or otherwise required, including such conditions and restrictions as
the General Partner determines are required to assure compliance by the Partners
or the Partnership with the aggregation rules and volume limitations under SEC
Rule 144 promulgated pursuant to the Securities Act.
(c) Anything contained herein to the contrary notwithstanding,
the General Partner shall at all times be entitled to receive distributions from
the Partnership (after taking into account any other distributions received by
the General Partner in such fiscal year) in amounts sufficient to enable the
General Partner and the shareholders of the General Partner to discharge any
actual Federal, state and local tax liability (after taking into account all
actual Federal, state and local tax savings of the shareholders of the General
Partner as a result of the allocations of Partnership deductions, credits and
losses to the General Partner in such fiscal year) arising as a result of the
General Partner's interest in the Partnership. Such distributions shall be
debited to such Partner's Capital Account, as provided in Section 3.5(a)(ii)
herein.
(d) The Partnership shall at all times be entitled to make
payments with respect to any Partner in amounts required to discharge any legal
obligation of the Partnership to withhold or make payments to any governmental
authority with respect to any Federal, state and local tax liability of such
arising as a result of such Partner's interest in the Partnership. Each such
payment
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shall be deemed to be a loan by the Partnership to such Partner and shall not be
deemed to be a distribution for purposes of Section 3.7(a) herein. The amount of
such payments made with respect to any Partner, plus interest at an annual rate
equal to the highest prime rate reported in The Wall Street Journal from time to
time, plus 2% on each such amount from the date of each such payment until such
amount is repaid to the Partnership, shall be repaid to the Partnership by (i)
deduction from any distributions made to any such Partner pursuant to this
Agreement or (ii) earlier payment of such amounts and interest by the Partner to
the Partnership.
(e) The General Partner shall use commercially reasonable
efforts to distribute in accordance with Section 3.7(a) herein (i) within 90
days after the receipt thereof, the cash proceeds from any sale of any
Investment Securities, net of any expenses related to such sale, revenues or
amounts required in the good faith judgment of the General Partner to be
retained to meet future expenses or liabilities of the Partnership and any
amounts the General Partner elects to retain for the purchase of Investment
Securities and (ii) within 90 days of the end of each fiscal year, to the extent
not distributed pursuant to clause (i) hereof, a portion of the net realized
gain (including items of ordinary income) for the preceding fiscal year that is
equal to the maximum U.S. Federal rate applicable to individuals.
(f) Anything herein contained to the contrary notwithstanding,
no distribution may be made by the Partnership if and to the extent that such
distribution would violate Section 17--607 of the Delaware Act.
ARTICLE 4
---------
TERMINATION AND DISSOLUTION
---------------------------
4.1 Termination.
------------
(a) The Partnership shall be dissolved on the later to occur
of (i) the date of dissolution set forth in Section 1.4 herein or (ii) two years
after all Outstanding Leverage shall have matured. The date of dissolution
provided for in this Section 4.1(a) shall be known as the "Statutory Ultimate
Date of Dissolution."
(b) The General Partner and the Limited Partners may elect to
dissolve the Partnership at any time after ten (10) years, provided that (i) all
Outstanding Leverage has been repaid and (ii) all amounts due the SBA, its agent
or trustee have been paid. The date after which such a dissolution may occur
shall be known as the "Statutory Permissive Date of Dissolution." The election
provided for in this Section 4.1(b) shall be made by the majority vote of the
Partners with each Partner having such Partner's Voting Interest.
-26-
<PAGE>
(c) Following the Statutory Permissive Date of Dissolution,
the General Partner may decide to dissolve the Partnership at any time. In such
an event, the General Partner shall give notice to each Limited Partner of such
dissolution not less than 90 days before the effective date of such dissolution.
(d) The Partnership shall not dissolve upon the dissolution,
bankruptcy, death or adjudication of incompetency or insanity of any Limited
Partner.
(e) Subject to Section 4.3 herein, when the Partnership is
dissolved, the property and business of the Partnership shall be liquidated by
the General Partner or, in the event of (i) the unavailability of the General
Partner or (ii) the withdrawal of the General Partner pursuant hereto, a Person
designated by a majority vote of the Limited Partners with each Limited Partner
having such Partner's Voting Interest.
(f) Within 60 days after the effective date of dissolution of
the Partnership, whether by expiration of its full term or otherwise, the
Partnership's assets (except for amounts reserved pursuant to Section 4.6
herein), subject to applicable provisions of the Delaware Act, shall be
distributed in the following manner and order:
(i) the claims of all creditors of the Partnership
who are not Partners shall be paid and discharged or
reasonable provision shall be made therefor;
(ii) the claims of all creditors of the
Partnership who are Limited Partners shall be paid and
discharged or reasonable provision shall be made therefor;
(iii) the claims of all creditors of the
Partnership who are General Partners (including any claims
for unpaid Management Compensation) shall be paid and
discharged or reasonable provision shall be made therefor;
(iv) any amounts contributed by Limited Partners
prior to the time such Capital Contributions were due and
no credited to such Limited Partners' Capital Accounts
pursuant to Section 3.5(a)(i) herein shall be paid to such
Limited Partners; and
(v) the remainder shall be distributed to the
Partners in accordance with the respective Partners'
Percentages.
(g) During the term of the Partnership set forth in Section
1.4 herein, the General Partner shall not voluntarily withdraw from the
Partnership except by an assignment made
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<PAGE>
pursuant to the provisions of Section 6.1(b) herein and shall not voluntarily
dissolve and commence winding up proceedings with respect to itself.
4.2 Death, Disability, Separation or Divorce of a Natural Person
------------------------------------------------------------------
Limited Partner. If a natural person who is a Limited Partner shall die or
- ----------------
become incapacitated, or shall become separated or divorced and thereby
transfers all or any portion of his interest in the Partnership pursuant to a
divorce decree or property settlement agreement to such Limited Partner's spouse
or former spouse, then such Limited Partner's Legal Representative, spouse, or
former spouse (as the case may be) shall have the rights of an assignee of a
limited partnership interest under the Delaware Act and shall not be substituted
as a Limited Partner unless the General Partner consents to such substitution
and the party agrees to be bound by all of the terms and conditions of this
Agreement.
4.3 Withdrawal of the General Partner and Continuation of the
------------------------------------------------------------------
Partnership.
- -----------
(a) If an event of withdrawal (as defined in the Delaware Act)
of the General Partner occurs, the rights of the Limited Partners to continue
the Partnership shall be as set forth in Section 17-801(3) of the Delaware Act.
(b) Upon an event of withdrawal of the General Partner without
continuation of the Partnership as provided above, the affairs of the
Partnership shall be wound up in accordance with the provisions of Section 4.1
herein.
(c) Upon the occurrence of any of the events specified in 13
C.F.R. ss.107.1810(d)(1) through (d)(6) or (f)(1) through (f)(3), as determined
by the SBA, the SBA shall have the right, upon written notice, to require the
Partnership to remove the General Partner, and in such an event, the General
Partner shall withdraw from the Partnership. In such an event, the rights of the
Limited Partners to continue the Partnership shall be as set forth in Section
17-801(3) of the Delaware Act.
(d) Notwithstanding any other provisions of this Agreement,
(i) the General Partner and any successor general partner that may be approved
by the SBA shall not be removed or replaced by the Limited Partners without the
prior written approval of the SBA and (ii) any transferee of, or successor in
interest to, the General Partner or any such successor general partner,
including any assignee approved by the Limited Partners under Section 6.1(b)
herein, shall have only the rights and liabilities of a Limited Partner pending
the SBA's written approval of such transfer or succession.
4.4 Withdrawal from the Partnership. No Limited Partner may withdraw
--------------------------------
from the Partnership before its dissolution or termination pursuant to Section
1.4 or 4.1 herein.
-28-
<PAGE>
4.5 Amounts Reserved and Pending Claims.
-----------------------------------
(a) If there are any assets that, in the judgment of the
General Partner, cannot be sold, or be properly distributed in kind in the case
of dissolution without sacrificing a significant portion of the value thereof,
then the value of a Partner's interest in each separate group of such assets may
be excluded from such Partner's Capital Account for purposes of computing a
Partner's Distributive Share. Any Partner's interest, including his pro rata
--- ----
interest in any gains, losses or distributions, in assets so excluded, shall not
be paid or distributed until such time as the General Partner shall determine.
(b) If there is any pending transaction or claim by or against
the Partnership as to which the interest or obligation of any Partner therein
cannot, in the judgment of the General Partner, be then ascertained, then the
value thereof or probable loss therefrom may be excluded from the valuation of
assets for purposes of computing any Partner's Distributive Share. No amount
shall be paid or charged to any such Partner or his Legal Representative on
account of any such transaction or claim until its final settlement or such
earlier time as the General Partner shall determine; the Partnership may
meanwhile retain from other sums due such Partner or his Legal Representative an
amount that the General Partner estimates to be sufficient to cover the share of
such Partner in any probable loss or liability on account of such transaction or
claim.
(c) Upon determination by the General Partner that
circumstances no longer require the exclusion of assets or retention of sums as
provided in Sections 4.5(a) and (b) herein, the General Partner shall, at the
earliest practicable time, pay such sums or distribute such assets or the
proceeds realized from the sale of such assets to each Partner from whom such
sums or assets have been withheld.
(d) Any assets excluded or retained pursuant to this Section
4.5 herein at the time of the dissolution of the Partnership shall be held by
the General Partner after the dissolution of the Partnership in trust for the
benefit of the Partners on the same terms as provided in this Agreement and
distributed to the Partners pursuant to Section 4.5(c) herein.
ARTICLE 5
----------
REPORTS TO PARTNERS
--------------------
5.1 Books of Account. Appropriate records and books of account shall
----------------
be kept, on the accrual basis, at 1700 Montgomery Street, Suite 250, San
Francisco, CA 94111, and each Partner shall have access to all records and books
of account and the right to receive copies thereof; provided, however, that the
Partnership shall not be required to disclose to the Limited Partners any
confidential or proprietary information received by the Partnership in
connection with its investment operations, unless the Limited Partner signs a
confidentiality agreement acceptable to the General Partner.
-29-
<PAGE>
5.2 Reports.
-------
(a) The books and records of the Partnership shall be kept
according to generally accepted accounting principles, except as otherwise
provided herein, and shall be audited as of the end of each fiscal year by a
firm of independent certified public accountants selected by the General
Partner. Within 120 days of the end of each fiscal year, the Partnership shall
prepare and mail to each Partner a report, setting forth as of the end of and
for such fiscal year:
(i) a balance sheet of the Partnership;
(ii) a statement of the Net Profits Losses, if
any, for such year and such Partner's share
thereof, and
(iii) such Partner's Closing Capital Account.
Within 90 days of the end of each fiscal year, the Partnership shall prepare and
mail to each Partner information setting forth as of the end of such fiscal year
the amount of such Partner's share in the Partnership's taxable income or loss
for such year, in sufficient detail to enable it to prepare its Federal, state
and other tax returns.
(b) On a regular basis, not less frequently than once each
fiscal year, the Partnership shall prepare and mail to each Partner a report
(subject to any restrictions on the disclosure of confidential or proprietary
information received by the Partnership) providing summary information on all
investments and potential investments considered by the Partnership.
5.3 Fiscal Year. The fiscal year of the Partnership shall be a
------------
twelve-month year (except for the first partial year) ending on December 31.
ARTICLE 6
---------
MISCELLANEOUS
-------------
6.1 Assignability.
-------------
(a) No Limited Partner may assign, pledge or otherwise grant a
security interest in its interest in the Partnership or in this Agreement,
except with the written consent of the General Partner (which consent may be
withheld in the sole discretion of the General Partner). In addition, a Limited
Partner's interest may be assigned by operation of law, but any such assignee
shall receive only the Limited Partner's economic interest in the Partnership
(to the extent assigned) and shall not become a partner of the Partnership,
except as provided in the immediately preceding sentence.
-30-
<PAGE>
(b) No assignment, pledge or grant pursuant to this Section
6.1 shall be allowed if the actions to be taken in connection with such
assignment, pledge or grant would (i) cause the termination or dissolution of
the Partnership; (ii) cause it to be classified other than as a partnership for
Federal income tax purposes; (iii) result in a violation of the Securities Act;
(iv) require the Partnership to register as an investment company under the
Investment Company Act; (v) require the Partnership or the General Partner to
register as an investment adviser under the Investment Advisers Act; (vi) result
in a termination of the partnership for Federal or state income tax purposes;
(vii) cause the Partnership to be classified as a "Publicly Traded Partnership"
within the meaning of Section 7704 of the Code; (viii) result in a violation of
any law, rule or regulation by the Limited Partner, the Partnership or the
General Partner effecting the assignment, pledge or grant; or (ix) result in a
violation of any SBIC Regulations. Any assignee of any interest in the
Partnership pursuant to an assignment in compliance with this Section 6.1 shall
become a substituted Partner hereunder upon delivery and execution of a
counterpart hereof, shall have the same rights and responsibilities under this
Agreement as his assignor and shall succeed to the Capital Account and balance
thereof. Any act by a Limited Partner or the General Partner in violation of
this Section 6.1 shall be null and void ab initio and shall not be recognized by
the Partnership for any purpose.
6.2 Authority to Act. Notwithstanding anything to the contrary
------------------
contained herein, the General Partner shall have the sole authority to bind the
Partnership in carrying on the business of the Partnership, subject to the terms
and conditions of this Agreement.
6.3 Binding Agreement. This Agreement shall be binding upon the heirs,
-----------------
successors, assigns and Legal Representatives of the Partners.
6.4 Interpretation. Unless the context of this Agreement clearly
--------------
requires otherwise, (a) references to the plural include the singular, the
singular the plural and the part the whole, (b) the reference to any gender
includes all genders, (c) "or" has the inclusive meaning frequently identified
with the phrase "and/or" and (d) "including" has the inclusive meaning
frequently identified with the phrase "but not limited to." The section and
other headings contained in this Agreement are for reference purposes only and
shall not control or affect the construction of this Agreement or the
interpretation thereof in any respect. Section, subsection, schedule and exhibit
references are to this Agreement unless otherwise specified. Each accounting
term used herein that is not specifically defined herein shall have the meaning
given to it under generally accepted accounting principles.
-31-
<PAGE>
6.5 Notice. All notices hereunder shall be in writing and shall be
------
deemed to have been duly given (i) upon receipt, if personally delivered, (ii)
one fifth day after mailing, if mailed by registered or certified mail, return
receipt requested, (iii) upon confirmation by facsimile machine report, if sent
by telecopier or (iv) upon receipt, if sent by overnight courier service. All
notices shall be sent to the Partnership at the address or telecopier number, as
the case may be, of the General Partner set forth in Schedule A attached hereto,
or at such other addresses or telecopier numbers as to which the Partners shall
have been given notice and to other Limited Partners, at such other addresses or
telecopier numbers as to which the Partnership shall have been given notice in
accordance with this Section 6.5.
6.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by any combination of the parties hereto in separate
counterparts, each of which counterparts shall be an original and all of which
taken together shall constitute one and the same agreement.
6.7 Entire Agreement; Amendments. This Agreement sets forth the entire
-----------------------------
understanding of all the parties hereto and except as specified below in this
Section 6.7, this Agreement shall not be amended except by an instrument in
writing executed by 66-2/3 % in Voting Interest of the Limited Partners as of
the effective date of such amendment and the General Partner; provided, however,
--------- -------
that no such amendment shall increase the amount of any Limited Partner's
Commitment without such Limited Partner's consent; and provided further,
-----------------
however, that each Limited Partner hereby consents to any amendment that the
- -------
General Partner may deem desirable in connection with: (i) the admission of
Additional Limited Partners in accordance with Section 3.2 herein and (ii) the
assignment of a Limited Partner's interest in accordance with Section 6.1 herein
and the admission of a substituted Limited Partner pursuant thereto or pursuant
to Section 4.2 herein. Any amendment of this Agreement or the Certificate of
Limited Partnership necessary to effect any such admission or assignment may be
effected by the General Partner without obtaining the approval of any Limited
Partners. In addition, notwithstanding the foregoing provisions of this Section
6.7 or any other provisions of this Agreement, the General Partner shall have
the authority to amend this Agreement without obtaining the approval of any
Limited Partners to the extent that Section l.9(b) herein provides for certain
amendments without approval by any Limited Partners. This Section 6.7 shall only
be amended by an instrument in writing executed by all Limited Partners as of
the effective date of such amendment and the General Partner.
-32-
<PAGE>
6.8 Goodwill. The Partnership's name and goodwill shall belong to the
--------
General Partner or any successor thereof, and no Limited Partner shall have any
right or claim individually to the use thereof.
6.9 Merger and Consolidation. Pursuant to an agreement of merger or
-------------------------
consolidation, the Partnership may merge or consolidate with or into another
business entity, with such other business entity being the surviving business
entity. Such merger or consolidation shall not occur, except with the advance
approval in writing of the SBA and the General Partner. The Limited Partners
shall not have the right to approve such merger or consolidation.
ARTICLE 7
---------
REPRESENTATIONS, WARRANTIES AND COVENANTS
OF LIMITED PARTNERS
-------------------
7.1 Representations and Warranties. Each Limited Partner, by signing
-------------------------------
this Agreement or a Counterpart Signature Page hereof, hereby represents and
warrants to the Partnership as follows:
(a) The Limited Partner has received and carefully read the
material documents and agreements relating to the Partnership,
including the Agreement of Limited Partnership (the "Documents"), is
familiar with and understands the Documents, has based its decision to
invest on the information contained in the Documents and has not been
furnished with any offering literature or prospectus other than such
information.
(b) The Limited Partner is acquiring its interest as a limited
partner of the Partnership (the "Interest") for its own account, as
principal, for investment and not with a view toward resale or
distribution.
(c) The Limited Partner (i) is an "accredited investor" as
such term is defined in Rule 501(a) of Regulation D, promulgated under
the Securities Act, and (ii) has such knowledge and experience in
financial and business matters that it is capable of evaluating the
merits and risks of the investment in the Interest.
(d) The Limited Partner is able to bear the economic risk of
losing its entire investment in the Interest.
(e) The Limited Partner's overall commitment to investments
that are not readily marketable is not disproportionate to its net
worth, and its investment in the Interest will not cause such overall
commitment to become excessive.
-33-
<PAGE>
(f) The Limited Partner, by reason of its business or
financial experience, has the capacity to protect its own interests in
connection with the purchase of the Interest.
(g) The Limited Partner maintains its domicile and principal
residences (and is not a transient or temporary resident) at the
address shown below and has no present intention of becoming a resident
of any other state or jurisdiction; if a corporation, trust,
partnership, joint venture or other organization, the Limited Partner
has its domicile, principal place of business or principal office at
the address shown below and has no present intention of relocating such
domicile, principal place of business or principal office to any other
state or jurisdiction.
(h) The Limited Partner understands that it is not entitled to
cancel, terminate or revoke this Agreement or any part hereof,
including the power of attorney granted hereby, and that it is
unconditionally obligated to pay its Commitment regardless of any
adverse change in the Partnership or the Partnership's properties,
business, financial condition or prospects.
(i) The Limited Partner understands that (i) the Interest has
not been registered under the Securities Act or any state securities or
"Blue Sky" laws pursuant to exemptions therefrom, and the Partnership
has not registered under the Investment Company Act pursuant to an
exemption therefrom, (ii) the Partnership has no obligation to register
the Interest for resale under any Federal or state securities laws, to
register the Partnership under the Investment Company Act or to take
any action (including the filing of reports or the publication of
information required by Rule 144 under the Securities Act or the
Investment Company Act) that would make available any exemption from
the registration requirements of such laws, and (iii) it is likely that
the Limited Partner, therefore, may be precluded from selling or
otherwise transferring or disposing of the Interest or any portion
thereof and may, therefore, have to bear the economic risk of
investment in the Interest for an indefinite period.
(j) The Limited Partner understands that no Federal or state
agency has approved or disapproved the Interest, passed upon or
endorsed the merits of the offering thereof, or made any finding or
determination as to the fairness of the Interest for investment.
(k) The Limited Partner acknowledges that all material
documents, records and books pertaining to the Partnership have, on
request, been made available to it, and that the Partnership has made
available to it, the opportunity to ask questions of, and receive
answers from, the Partnership concerning the terms and conditions of
the offering and to obtain any additional information, to the extent
that the
-34-
<PAGE>
Partnership possesses such information, or can acquire it
without unreasonable effort or expense, necessary to verify the
accuracy of the information given to it or otherwise to make an
informed investment decision.
(l) The Limited Partner understands that by executing this
Agreement or a Counterpart Signature Page hereof, it is irrevocably
appointing the General Partner (with power of substitution) (and any
additional or successor general partners) to be its agent and
attorney-in-fact for certain purposes.
(m) The Limited Partner certifies, under penalties of perjury,
that it has not been notified that it is subject to backup withholding
as a result of a failure to report all interest or dividends, or the
Internal Revenue Service has notified the Limited Partner that it is no
longer subject to backup withholding.
(n) [intentionally deleted]
(o) If the Limited Partner is not a natural person, (i) the
Limited Partner is duly organized and validly existing under the laws
of the jurisdiction of its organization, and has full power and
authority to enter into and perform this Agreement and the transactions
contemplated hereby, (ii) the execution, delivery and performance by
the Limited Partner of this Agreement and the transactions contemplated
hereby have been duly authorized by all requisite action of it, and
(iii) the Limited Partner was not organized or formed for the purpose
of investing in the Interest. This Agreement is a valid and binding
obligation of the Limited Partner, enforceable against the Limited
Partner in accordance with its terms.
(p) The Limited Partner understands that the Interest is being
offered and sold in reliance on specific exemptions from the
registration requirements of Federal and state securities laws and that
the Partnership, the General Partner and controlling persons thereof
are relying upon the truth and accuracy of the representations,
warranties, agreements, acknowledgments and understandings set forth
herein, in order to determine the applicability of such exemptions and
the suitability of the Limited Partner to acquire the Interest, and
represents and warrants that the information set forth herein is true
and correct.
-35-
<PAGE>
7.2 Restrictions on Transfer.The Limited Partner will not sell,
--------------------------
transfer, assign or otherwise dispose of the Interest or any rights therein
unless and until the Limited Partner (i) obtains any consent required under this
Agreement, (ii) complies with all applicable requirements of Federal and state
securities laws; and (iii) provides the Partnership with an opinion of counsel
which is satisfactory to the General Partner (both as to the issuer of the
opinion and the form and substance thereof) that the Interest may be sold,
transferred, assigned or disposed of without registration of the Interest under
the Securities Act, and without violation of any applicable state securities
laws (including any investor suitability standards) and the transfer will not
cause the Partnership to be required to register under the Investment Company
Act or to lose the "safe harbor" exemption from registration under the
Investment Company Act that relates to the number of beneficial owners of the
securities issued by the Partnership.
7.3 Power of Attorney.
-----------------
(a) The Limited Partner, by executing this Agreement or a
Counterpart Signature Page hereof, hereby constitutes and appoints the General
Partner (and any additional or successor general partner), each officer of the
General Partner and each of their respective successors, its true and lawful
attorney-in-fact with full power of substitution, with such attorney having full
power and authority for the Limited Partner and in its name, place and stead to
execute, acknowledge, deliver, swear to, certify, verify, publish, file and
record at the appropriate public offices such documents as may be necessary or
appropriate to carry out the provisions of this Agreement, including the
following:
(i)all certificates and other instruments, including
counterparts of this Agreement, the Partnership's Certificate
of Limited Partnership, and amendments to the Partnership's
Certificate of Limited Partnership necessary or appropriate
to reflect the admission of additional or substitute Limited
Partners or any other change in the Partnership or
Partnership Agreement and fictitious name certificates, and
any amendment of any thereof, and all certificates and
instruments that the General Partner deems appropriate to
qualify or continue the Partnership as a limited partnership,
or as a partnership in which the Limited Partners have
limited liability in the jurisdictions in which the
Partnership may conduct business;
(ii) all instruments that the General Partner deems
appropriate to reflect a change or modification of the
Partnership in accordance with the terms of the Delaware Act
or this Agreement;
(iii) all instruments necessary to effect a dissolution,
termination and liquidation of the Partnership and
cancellation of
-36-
<PAGE>
the Certificate of Limited Partnership as provided in the Delaware
Act or this Agreement;
(iv) all instruments necessary to perfect the security
interest in the Interest granted hereunder by the Limited
Partner to the Partnership, the General Partner and their
respective assignees, including financing statements pursuant
to the Uniform Commercial Code as adopted by the applicable
jurisdictions; and
(v) any other document or instrument that the General
Partner deems necessary or desirable to carry out the
provisions and purposes of this Agreement, including in
connection with an offer and sale of the Interest of a
Limited Partner that is in default of its obligations
hereunder.
(b) The Limited Partner hereby (i) authorizes such
attorney-in-fact to take any further action that such attorney-in-fact shall
consider necessary or advisable in connection with any of the foregoing, (ii)
gives such attorney-in-fact full power and authority to do and perform each and
every act or thing whatsoever requisite or advisable to be done in and about the
foregoing as fully and to the same extent as such Limited Partner might or could
do if personally present, and (iii) ratifies and confirms all that such
attorney-in-fact shall lawfully do or cause to be done by virtue hereof;
provided, that in no event may the General Partner utilize this power of
attorney to cast any vote or consent of a Limited Partner as to the matters with
respect to which the Limited Partners are entitled to vote under the terms of
this Agreement.
(c) The Limited Partner shall execute any and all additional
forms, documents or instruments as may be reasonably necessary or required by
the General Partner to evidence the power of attorney granted in this Section
7.3.
(d) The power of attorney granted in this Section 7.3 shall be
deemed to be coupled with an interest, shall be irrevocable and shall survive
the death, disability, dissolution, merger or other termination of the Limited
Partner.
7.4 Indemnification. The Limited Partner shall indemnify and hold
---------------
harmless the Partnership, the General Partner, its officers and directors, other
Partners and all Persons deemed to be Affiliates of any of the foregoing from
and against any and all losses, costs, expenses, damages, liabilities and
interest (including court costs and attorneys' fees) arising out of or due to a
breach by the Limited Partner of any provisions of this Agreement, including the
representations and warranties set forth in this Article 7. All such
representations shall survive the admission of the Limited Partner as a limited
partner of the Partnership.
-37-
<PAGE>
7.5 Jurisdiction. In any suit, action or proceeding arising out of or
------------
in connection with the Limited Partner's investment in the Partnership, the
Limited Partner consents to the in personam jurisdiction of any court of
------------
competent jurisdiction and proper venue within the state in which the
Partnership has its principal place of business at the time of any suit, action
or proceeding.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as
of the date first written
GENERAL PARTNER:
---------------
FOURTEEN HILL MANAGEMENT, LLC
By:/s/JOHN WARD ROTTER
----------------------------
LIMITED PARTNERS:
-----------------
DIGNITY PARTNERS, INC.
By:/s/JOHN WARD ROTTER
----------------------------
By:/s/JAMES MCGORRY
----------------------------
-38-
<PAGE>
SCHEDULE A
----------
PARTNERS
--------
General Partner
---------------
Fourteen Hill Management, LLC
917 Tahoe Boulevard, Suite 204
Incline Village, Nevada 89452
(415) 362-1977
(415) 394-9471 (fax)
EIN: 94-3272241
TOTAL $5,000,000
CASH INVESTMENT AT CLOSING $5,000,000
AMOUNT OF COMMITMENT $5,000,000
Limited Partners
----------------
Dignity Partners, Inc.
1700 Montgomery Street, Suite 250
San Francisco, California 94111
(415) 394-9467
(415) 394-9471
EIN: 94-3165263
TOTAL $1,000
CASH INVESTMENT AT CLOSING $1,000
AMOUNT OF COMMITMENT $1,000
James McGorry
103 Wood Sorrell Way
Cary, North Carolina
(919) 383-9883
TOTAL $100
CASH INVESTMENT AT CLOSING $100
AMOUNT OF COMMITMENT $100
<PAGE>
- -10-
SBA Annex GDP Version 1.1 March 1, 1996
===============================================================================
-------------------------------------------------------------
SBA ANNEX GDP
VERSION 1.1
GENERAL AND DEBENTURE RELATED PROVISIONS
-------------------------------------------------------------
SBA ANNEX OF GENERAL PROVISIONS FOR
AN AGREEMENT OF LIMITED PARTNERSHIP
FOR A SECTION 301(C) LICENSEE
WITHOUT LEVERAGE OR ONLY ISSUING DEBENTURES
================================================================================
This document has been drafted by the law firm of O'Sullivan Gracy & Karabell,
in collaboration with the law firms of Pepper, Hamilton & Scheetz and, Hoag &
Eliot, the National Association of Small Business Investment Companies, and the
Office of the General Counsel of the United States Small Business
Administration.
The Small Business Administration does not endorse or approve law firms. The
above legend is not an endorsement or approval by the Small Business A of any
law firm identified therein, and no representation to the contrary by any party
is authorized.
<PAGE>
================================================================================
SBA ANNEX GDP
================================================================================
TABLE OF CONTENTS Page
ARTICLE I General Provisions..............................................1
1.1. Definitions.....................................................1
1.2. Conflict With the SBIC Act......................................2
1.3. Conflict With Other Provisions of the Agreement.................2
1.4. Effective Date of Incorporated SBIC Act Provisions..............2
1.5. Incorporation of this Annex into the Agreement..................3
ARTICLE II Purpose and Powers..............................................3
ARTICLE III Management......................................................3
3.1. Authority of General Partner....................................3
3.2. Valuation of Assets.............................................4
ARTICLE IV Small Business Investment Company Matters.......................4
4.1. Provisions Required by the SBIC Act for Issuers of Debentures...4
4.2. SBA as Third Party Beneficiary..................................4
4.3. Representations of Private Limited Partners.....................5
4.4. Notices With Respect to Representations by Private Limited
Partners........................................................6
ARTICLE V Partner's Commitments...........................................6
5.1 Conditions to the Commitments of the General Partner and the
Private Limited Partners........................................6
5.2. Failure to Make Required Capital Contributions..................7
5.3. Termination of the Obligation to Contribute Capital.............7
5.4. Withdrawal by ERISA Regulated Pension Plans.....................8
5.5. Withdrawal by Government Plans Complying with State and Local
Law.............................................................8
5.6. Withdrawal by Government Plans Complying with ERISA.............8
5.7. Withdrawal by Tax Exempt Private Limited Partners...............9
5.8. Withdrawal by Registered Investment Companies...................9
5.9. Notice and Opinion of Counsel...................................9
5.10. Cure, Termination of Capital Contributions and Withdrawal.......9
5.11. Distributions on Withdrawal.....................................9
ARTICLE VI Dissolution....................................................10
ARTICLE VII Audit and Report...............................................10
ARTICLE VIII Miscellaneous..................................................10
8.1. Assignability..................................................10
8.2. Amendments.....................................................11
<PAGE>
===============================================================================
SBA ANNEX GDP
==============================================================================
ARTICLE I
---------
General Provisions
==================
1.1. Definitions. For the purposes of this Annex, the following
===========
terms shall have the following meanings:
"Act" shall mean the state statute under which the Partnership is
organized.
"Agreement" shall mean the agreement of limited partnership of the
Partnership to which this Annex is attached and incorporated as a provision
thereof. References to the Agreement shall be deemed to include all provisions
incorporated in the Agreement by reference.
"Assets" shall mean and include common and preferred stock (including
warrants, rights and other options relating thereto or any combination thereof),
notes, bonds, debentures, trust receipts and other obligations, instruments or
evidences of indebtedness, and other properties or interests commonly regarded
as securities, and in addition, interests in real property, whether improved or
unimproved, and interests in personal property of all kinds, tangible or
intangible, choses in action, and cash, bank deposits and so-called "money
market instruments".
"Code" shall mean the Internal Revenue Code of 1986, and the
regulations and interpretations thereof promulgated by the Internal Revenue
Service, as amended and supplemented from time to time.
"Commitments" shall mean the capital contributions to the Partnership
which the Partners have made or are obligated to make to the Partnership. The
amounts and terms of the Commitments of the General Partner and the Private
Limited Partners shall be as defined in the Agreement.
"Debentures" shall have the meaning set forth in the SBIC Act.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended, and the regulations and interpretations thereof promulgated by the
Department of Labor.
"General Partner" shall mean the general partner or general partners of
the Partnership.
"Institutional Investor" shall have the meaning set forth in the SBIC
Act.
"Investment Company Act" shall mean the Investment Company Act of 1940,
as amended, and the regulations and interpretations thereof promulgated by the
Securities and Exchange Commission.
"Leverage" shall have the meaning set forth in the SBIC Act.
-1-
<PAGE>
"Outstanding Leverage" shall mean the total amount of outstanding
Debentures and other securities issued by the Partnership which qualify as
Leverage and have not been repaid for purposes of and as provided in the SBIC
Act.
"Partners" shall mean the General Partner and the Private Limited
Partners.
"Partnership" shall mean the limited partnership established by the
Agreement.
"Private Limited Partners" shall mean any limited partners of the
Partnership.
"Qualified Nonprivate Funds" shall have the meaning set forth in the
SBIC Act.
"Regulatory Capital" shall have the meaning set forth in the SBIC Act.
"SBA" shall mean the United States Small Business Administration.
"SBA Annex PS" shall mean the version of such Annex, if any, which is
attached to and incorporated as a part of the Agreement.
"SBIC Act" shall mean the Small Business Investment Act of 1958, as
amended, and the rules and regulations promulgated thereunder by the SBA, as in
effect from time to time.
1.2. Conflict With the SBIC Act. The provisions of this Annex and the
--- ==========================
Agreement shall be interpreted to the fullest extent possible in a manner
consistent with the SBIC Act. In the event of any conflict between any provision
of the Agreement and the provisions of the SBIC Act (including, without
limitation, any conflict with respect to the rights of the SBA hereunder), the
provisions of the SBIC Act shall control.
1.3. Conflict With Other Provisions of the Agreement.(a) The provisions
--- ===============================================
of the Agreement shall be interpreted to the fullest extent possible in a manner
consistent with the provisions of this Annex. In the event of any conflict
between any provision of this Annex and any other provision of the Agreement,
the provisions of this Annex shall control.
(b) If this Annex and SBA Annex PS are both incorporated in the
Agreement, in the event of any conflict between the provisions of this Annex and
SBA Annex PS, the provisions of SBA Annex PS shall control.
1.4. Effective Date or Incorporated SBIC Act Provisions. (a) Subject to
--- ==================================================
Section 1.4(b), any section of this Annex relating to Debentures issued by the
Partnership which incorporates or refers to a provision of the SBIC Act
including, without limitation, 13 C.F.R. ss.ss. 107.1830 - 107.1850, shall, with
respect to the rights of the SBA (or any other holder of any such Debenture)
under any such section as to each Debenture, be deemed to refer to such SBIC Act
provision as in effect on the date on which such Debenture was purchased from
the Partnership.
(b) Notwithstanding Section 1.4(a), the provisions of 13 C.F.R. ss.
107.1810(i) incorporated by reference in Section 4.1 shall be deemed to be such
provisions as in effect on the date of the first purchase of a Debenture from
the Partnership after April 25, 1994. If 13 C.F.R. ss. 107.1810(i) is amended
subsequent to the date such section is incorporated in the Agreement pursuant
-2-
<PAGE>
to this Section 1.4(b), then unless the SBA shall otherwise give its written
consent, before the Partnership may issue additional Leverage, this Section
1.4(b) must be amended to incorporate the version of 13 C.F.R. ss 107.1810(i)
then in effect.
(c) This Section 1.4 applies to the rights of the SBA in its capacity
as a holder or guarantor of Debentures. This Section 1.4 shall not be construed
to apply to the provisions of the SBIC Act which relate to the regulatory
authority of SBA under the SBIC Act over the Partnership as a licensed small
business investment company. References to the provisions of the SBIC Act
relating to the SBA's regulatory authority shall mean such provisions as in
effect from time to time.
1.5. Incorporation of this Annex into the Agreement. The Agreement
--- ================================================
shall contain the following provision evidencing the incorporation of this
Annex:
"The provisions of SBA Annex GDP attached to this Agreement
are incorporated in this Agreement with the same force and
effect as if fully set forth herein."
ARTICLE II
----------
Purpose and Powers
===================
The Partnership is being organized solely for the purpose of
operating as a small business investment company under the SBIC Act and
conducting the activities described under Title III of the SBIC Act, and shall
have the powers, responsibilities, and be subject to the limitations, provided
in the SBIC Act.
ARTICLE III
-----------
Management
==========
3.1. Authority of General Partner. (a) The management and
--- ==============================
operation of the Partnership and the formulation of investment policy shall be
vested exclusively in the General Partner.
(b) The General Partner shall, so long as it remains the General
Partner of the Partnership, comply with the requirements of the SBIC Act,
including, without limitations 13 C.F.R. ss 107.160(a) and (b),* as in effect
from time to time.
3.2. Valuation of Assets. (a) The Partnership shall adopt written
--- ===================
guidelines for determining the value of its Assets. Assets held by the
Partnership shall be valued by the Genera Partner in a manner consistent
with such guidelines and the SBIC Act.
*These regulations describe the number of individuals required and the
organizational requirements for the General Partner.
-3-
<PAGE>
(b) To the extent that the SBIC Act requires any Asset held by the
Partnership to be valued other than as provided in the Agreement, the General
Partner shall value such Asset in such manner as it determines to be consistent
with the SBIC Act.
(c) Assets held by the Partnership shall be valued not less often
than annually (or more often, as the SBA may require), and shall be valued not
less often than semi-annually(or more often, as the SBA may require) at any time
that the Partnership has Outstanding Leverage.*
ARTICLE IV
----------
Small Business Investment Company Matters
==========================================
4.1. Provisions Required by the SBIC Act for Issuers or Debentures.
--- =============================================================
** (a) The provisions of 13 C.F.R. ss 107.1810(i) are hereby incorporated by
reference in this Annex as if fully set forth herein.
(b) The Partnership and the Partners hereby consent to the
exercise by the SBA of all of the rights of the SBA under 13 C.F.R. ss. 107.1810
(i), and agree to take all actions which the SBA may require in accordance
with 13 C.F.R. ss 107.1810(i).
(c) This Section 4.1 shall be in effect at any time that the
Partnership has outstanding Debentures and shall not be in effect at any time
that the Partnership does not have any outstanding Debentures.
(d) Nothing in this Section 4.1 shall be construed to limit the
ability or authority of the SBA to exercise its regulatory authority
over the Partnership as a licensed small business investment company under the
SBIC Act.
4.2. SBA as Third Party Beneficiary. The SBA shall be deemed an
--- ==============================
express third party beneficiary of the provisions of the Agreement (including,
without limitation,this Annex) to the extent of the rights of the SBA thereunder
and under the Act, and the SBA shall be entitled to enforce such provisions
(including, without limitation, those provisions setting forth the obligations
of each Partner to make capital contributions) for the benefit of the holders of
Debentures and for its benefit, as if the SBA were a party thereto.
4.3. Representations or Private Limited Partners. (a) Each Private
--- ============================================
Limited Partner represents to the Partnership and the SBA that it is an
Institutional Investor with respect to the Partnership; provided, however, that
-------- --------
in lieu of making representation, any Private Limited Partners
*See 13 C.F.R. ss 107.503(d),which requires valuation of assets on a semi-annual
basis if there is outstanding Leverage.
**This Section incorporates regulations relating to the special rights of the
SBA when the Partnership has outstanding Debentures.
-4-
<PAGE>
may provide the Partnership with a separate written representation describing
its status under the definition of an Institutional Investor.*
(b) Each Private Limited Partner represents to the Partnership and the
SBA that its Commitment qualifies as Private Capital, and none of its Commitment
constitutes Qualified Nonprivate Funds whose source is Federal funds; provided,
--------
however, that in lieu of making this representation any Private Limited Partner
- -------
may provide the Partnership with a separate written representation stating the
amount of its Commitment which qualifies as Private Capital and the amount of
its Commitment which constitutes Qualified Nonprivate Funds whose source is
Federal funds.**
(c) Each Private Limited Partner represents to the Partnership and the
SBA that (i) its net worth or (in the case of any employee benefit plan, pension
plan or government plan as defined under ERISA) net assets available for
benefits equals or exceeds $10 million (exclusive, in the case of any
individual, of the value of any equity in such individual's most valuable
residence), (ii) its Commitment to the Partnership represents less than ten
percent (10%) of such Private Limited Partner's net worth or (in the case of any
employee benefit plan, pension plan or government plan as defined under ERISA)
net assets available for benefits, and (iii) if such Private Limited Partner is
a natural person, such person is a permanent resident of the United States;
provided, however, that in lieu of making this representation any Private
- -------- -------
Limited Partner may provide the Partnership with a separate written
representation stating the amount of its net worth (exclusive, in the case of
any individual, of the value of any equity in such individual's most valuable
residence) or net assets available for benefits (in the case of any such
employee benefit plan, pension plan or government plan), the percentage of such
net worth or net assets available for benefits represented by such Private
Limited Partner's Commitment to the Partnership and the country (if other than
the United States) in which such Private Limited Partner is a permanent
resident.***
(d) Each Private Limited Partner which directly or indirectly owns or
controls a limited partner's interest which constitutes ten percent (10%) or
more of the partnership capital (as such term is used in the SBIC Act),
represents to the Partnership and the SBA that its Commitment to the Partnership
does not (i) constitute thirty-three percent (33%) or more of the partnership
capital or (ii) exceed five percent (5 %) of such Private Limited Partner's net
worth or net assets available for benefits (in the case of any employee benefit
plan, pension plan or government plan); provided, however, that in lieu of
-------- -------
making this representation any Private Limited Partner may provide the
Partnership with a separate written representation stating the percentage of the
partnership capital which the limited partner's interest directly or indirectly
owned or controlled by it constitutes, and the percentage of its net worth
represented by such limited partner's interest.****
*See the definition of "Institutional Investor" at 13 C.F.R. ss107.50.
**See the definitions of "Regulatory Capital", "Qualified Nonprivate Funds" and
"Leverageable Capital" at 13.C.F.R. ss 107.50.
***See the definations of "Private Capital" and "Regulatory Capital" at 13
C.F.R. ss 107.50.
****See the definition of "Associate" at 13 C.F.R. ss 107.50.
-5-
<PAGE>
(e) Each Private Limited Partner represents to the Partnership and the
SBA that such Private Limited Partner has full power and authority to execute
and deliver the Agreement and to act as a Private Limited Partner thereunder;
the Agreement has been authorized by all necessary actions by it; the Agreement
has been duly executed and delivered by it; and the Agreement is a legal, valid
and binding obligation of it, enforceable against it according to its terms.
4.4 Notices With Respect to Representations by Private Limited
--- ==================================================================
Partners. (a) In the event that the representation made by a Private Limited
========
Partner in Section 4.3(a), (b), (c) or (d) shall cease to be true (including any
separate written representation previously provided by such Private Limited
Partner to the Partnership as provided in such Sections), then such Private
Limited Partner shall promptly provide the Partnership with a correct separate
written representation as provided in each such Section.
(b) The Partnership shall give the SBA prompt written notice of any
notice received from any Private Limited Partner pursuant to Section 4.4(a) with
respect to the representations of such Private Limited Partner.
ARTICLE V
---------
Partners' Commitments
=====================
5.1. Conditions to the Commitments of the General Partner and the
--- =================================================================
Private Limited Partners. (a) Notwithstanding any provision in the Agreement to
========================
the contrary, the General Partner and the Private Limited Partners shall be
obligated to contribute any amount of their respective Commitments, not
previously contributed to the Partnership, upon the earlier of (i) completion of
the liquidation of the Partnership or (ii) one year from the commencement of
such liquidation if and to the extent that the other Assets of the Partnership
have not been sufficient to permit at such time the redemption of all
Outstanding Leverage, the payment of all amounts due with respect to the
Outstanding Leverage as provided in the SBIC Act and the payment of all amount
owed by the Partnership to the SBA.
(b) Notwithstanding any provision in the Agreement to the contrary
(except as expressly provided in this Section 5.1(b)), in the event that the
Partnership is subject to restricted operations(as such term is used in the SBIC
Act) and prior to the liquidation of the Partnership the SBA requires the
General Partner and the Private Limited Partners to contribute any amount of
their respective Commitments not previously contributed to the Partnership, the
obligation to make such contributions shall not be subject to any conditions set
forth in the Agreement other than limitations on the amount of capital which a
Partner is obligated to contribute (i) within any specified time period or (ii
prior to any specified date.
(c) The provisions of this Section 5.1 shall not apply to the
Commitment of any Private Limited Partner whose obligation to make capital
contributions has been terminated or who has withdrawn from the Partnership
pursuant to a provision of this Article V or any agreement, release, settlement
or action under any provision of the Agreement which has been taken with the
consent of the SBA as provided in Section 5.2. No Private Limited Partner or
General Partner shall have any right to delay, reduce or offset any capital
contribution obligation to the Partnership called under this Section 5.1 by
reason of any counterclaim or right to offset by such Partner or the
Partnership against SBA.
-6-
<PAGE>
5.2. Failure to Make Required Capital Contributions. (a) The
--- ====================================================
Partnership shall be entitled to enforce the obligations of each Partner to make
the contributions to Capital specified in the Agreement, and the Partnership
shall have all rights and remedies available at law or equity in the event any
such contribution is not so made.*
(b) The Partnership shall give the SBA prompt written notice of any
default by a Private Limited Partner in making any capital contribution to the
Partnership required under the Agreement which continues beyond any applicable
grace period specified in the Agreement.
(c) The Partnership shall not enter into any agreement (whether oral or
written), release or settlement with any Partner or take any action under any
provision of the Agreement, which defers, reduces, or terminates the obligations
of any such Partner to make contributions to the capital of the Partnership, or
commence any legal proceeding or arbitration, which seeks any such deferral,
reduction or termination of such obligation, and no such agreement, release,
settlement or action taken under any provision of the Agreement shall be
effective with respect to the Partnership or any such Partner, without the prior
written (except as provided in Section 5.2(d)) consent of the SBA.
(d) If the Partnership has given the SBA thirty (30) days prior written
notice of any proposed legal proceeding, arbitration or other action under the
provisions of the Agreement with respect to any default by a Private Limited
Partner in making any capital contribution to the Partnership required under the
Agreement and for which SBA consent is required as provided in Section 5.2(c),
and the Partnership shall not have received written notice from the SBA that it
objects to such proposed action within such thirty (30) day period, then SBA
shall be deemed to have consented to such proposed Partnership action.
(e) Section 5.2(c) shall be in effect at any time that the Partnership
has Outstanding Leverage and shall not be in effect at any time the Partnership
has no Outstanding Leverage.
5.3. Termination or the Obligation to Contribute Capital.
--- ================================================================
Notwithstanding any other provision of the Agreement (including, without
limitation, the provisions of this Annex), any Private Limited Partner may elect
to terminate its obligation in whole or in part to make a capital contribution
required pursuant to the Agreement or upon demand by the General Partner shall
no longer be entitled to make such capital contribution, in the event that such
Private Limited Partner or the General Partner shall obtain an opinion of
counsel to the effect that making such contribution would require such Private
Limited Partner to withdraw from the Partnership pursuant to Sections 5.4
through 5.8. Upon receipt by the General Partner of an opinion and notice as
required under Section 5.9, unless cured within the period provided under
Section 5.10, the Commitment of the Private Limited Partner delivering such
opinion shall be deemed to be reduced by the amount of such capital contribution
and the Agreement shall be deemed amended to reflect a corresponding reduction
of aggregate Commitments to the Partnership.
5.4. Withdrawal by ERISA Regulated Pension Plans. Notwithstanding any
--- ===========================================
other provision of the Agreement (including, without limitation, the provisions
of this Annex), any Private Limited Partner that is an "employee benefit plan"
within the meaning of, and subject to the provisions of, ERISA, may elect to
withdraw from the Partnership in whole or in part, or upon demand by the General
Partner shall withdraw from the Partnership in whole or in part, if either such
Private Limited
*See also the rights of the SBA as a third party beneficiary under Section 4.2.
-7-
<PAGE>
Partner or the General Partner shall obtain an opinion of counsel to the effect
that, as a result of ERISA, (i) the withdrawal of such Private Limited Partner
from the Partnership to such extent is required to enable such Private Limited
Partner to avoid a violation of, or breach of the fiduciary duties of any person
under (other than a breach of the fiduciary duties of any such person based upon
the investment strategy or performance of the Partnership), ERISA or any
provision of the Code related to ERISA or (ii) all or any portion of the assets
of the Partnership (as opposed to such Private Limited Partner's partnership
interest) constitute assets of such Private Limited Partner for purposes of
ERISA and are subject to the provisions of ERISA to substantially the same
extent as if owned directly by such Private Limited Partner.
5.5. Withdrawal by Government Plans Complying with State and Local Law.
--- =================================================================
Notwithstanding any other provision of the Agreement (including, without
limitation, the provisions of this Annex), any Private Limited Partner that is a
"government plan" within the meaning of ERISA may elect to withdraw from the
Partnership in whole or in part, or upon demand by the General Partner shall
withdraw from the Partnership in whole or in part, if either such Private
Limited Partner or the General Partner shall obtain an opinion of counsel to the
effect that as a result of state statutes, regulations, case law, administrative
interpretations or similar authority applicable to such "government plan", the
withdrawal of such Private Limited Partner from the Partnership to such extent
is required to enable such Private Limited Partner or the Partnership to avoid a
violation (other than a violation based upon investment performance of the
Partnership) of such applicable state law.
5.6. Withdrawal by Government Plans Complying with ERISA.
--- ================================================================
Notwithstanding any other provision of the Agreement (including, without
limitation, the provision of this Annex), any Private Limited Partner that is a
"government plan" within the meaning of ERISA may elect to withdraw from the
Partnership in whole or in part, if such "government plan" shall obtain an
opinion of counsel to the effect that, as a result of ERISA, (i) the withdrawal
of such "government plan" from the Partnership to such extent would be required
if it were an "employee benefit plan" within the meaning of, and subject to the
provisions of, ERISA, to enable such "government plan" to avoid a violation of,
or breach of the fiduciary duties of any person under (other than a breach of
the fiduciary duties of any such person based upon the investment strategy or
performance of the Partnership), ERISA or any provision of the Code related to
ERISA in the manner which would be required were it an "employee benefit plan"
within the meaning of, and subject to the provisions of, ERISA, or (ii) all or
any portion of the assets of the Partnership would constitute assets of such
"government plan" for the purposes of ERISA, if such "government plan" were an
"employee benefit plan" within the meaning of, and subject to the provisions of,
ERISA and would be subject to the provisions of ERISA to substantially the same
extent as if owned directly by such "government plan."
5.7. Withdrawal by Tax Exempt Private Limited Partners. Notwithstanding
--- =================================================
any other provision of the Agreement (including, without limitation, the
provision of this Annex), any Private Limited Partner that is exempt from
taxation under Section 501(a) or 501(c)(3) of the Code may elect to withdraw
from the Partnership in whole or in part, if such Private Limited Partner shall
obtain an opinion of counsel to the effect that as a result of applicable
statutes, regulations, case law, administrative interpretations or similar
authority, the withdrawal of such Private Limited Partner from the Partnership
to such extent is required to enable such tax exempt Private Limited Partner to
avoid loss of its tax exempt status under Section 501(a) or 501(c)(3) of the
Code.
5.8. Withdrawal by Registered Investment Companies. Notwithstanding any
--- =============================================
other provision of the Agreement (including, without limitation, the provision
of this Annex), any Private
-8-
<PAGE>
Limited Partner that is an "investment company" subject to registration under
the Investment Company Act, may elect to withdraw from the Partnership in Whole
or in part, or upon demand by the General Partner shall withdraw from the
Partnership in whole or in part, if either such Private Limited Partner or the
General Partner shall obtain an opinion of counsel to the effect that, as a
result of the Investment Company Act, the withdrawal of such Private Limited
Partner from the Partnership to such extent is required to enable such Private
Limited Partner or the Partnership to avoid a violation of applicable provisions
of the Investment Company Act or the requirement that the Partnership register
as an investment company under the Investment Company Act.
5.9. Notice and Opinion of Counsel. In the event of the issuance of an
--- =============================
opinion of counsel described in Sections 5.3 through 5.8, a copy of such opinion
shall be sent by the General Partner to the SBA, together with the written
notice of the election of the Private Limited Partner to which such opinion
relates to terminate its obligation to make further capital contributions with
respect to its Commitment or withdraw from the Partnership in whole or in part,
or the written demand of the General Partner for such termination or withdrawal,
as the case may be. Any counsel rendering an opinion pursuant to Sections 5.3
through 5.8 shall be subject to the approval of the General Partner and the SBA,
and any such opinion shall be satisfactory in form and substance to the General
Partner and the SBA.
5.10. Cure, Termination of Capital Contributions and Withdrawal. Unless
---- =========================================================
within ninety (90) days after the giving of written notice and satisfactory
opinion of counsel, as provided in Section 5.9, the Private Limited Partner or
the Partnership eliminates the necessity for termination of the obligation of
such Private Limited Partner to make further capital contributions or for the
withdrawal of such Private Limited Partner from the Partnership in whole or in
part to the reasonable satisfaction of such Private Limited Partner and the
General Partner, such Private Limited Partner shall withdraw from the
Partnership in whole or in part to the extent required, effective as of the end
of such ninety (90) day period. Subject to the provisions of Section 5.2, in its
discretion the General Partner may waive all or any part of the ninety (90) day
cure period and cause such termination of capital contributions or withdrawal to
be effective at an earlier date as set forth in such waiver.
5.11. Distributions on Withdrawal. Upon withdrawal pursuant to any
---- ============================
provision of the Agreement, a Private Limited Partner shall have the rights to
distributions set forth in the Act with respect to distributions to be made to
limited partners upon withdrawal from a limited partnership; provided, however,
-------- -------
that any distribution by the Partnership to a Private Limited Partner pursuant
to its withdrawal pursuant to any provision of the Agreement shall be subject to
the provisions of the SBIC Act and the prior written consent of the SBA.
-9-
<PAGE>
ARTICLE VI
----------
Dissolution
===========
The Partnership shall be dissolved on the later to occur of (i) the
date of dissolution set forth in the Agreement or (ii) two years after all
Outstanding Leverage shall have matured. The Agreement may provide that the
General Partner and the Private Limited Partners may elect to dissolve the
Partnership at any time after ten (10) years; provided, that (i) all Outstanding
--------
Leverage has been repaid and (ii) all amounts due SBA, its agent or trustee have
been paid.*
ARTICLE VII
-----------
Audit and Report
================
The Partnership shall maintain books and records in accordance with
Treasury Regulation ss 1.704 - 1(b), the provisions of the SBIC Act regarding
financial accounts and reporting and generally accepted accounting principles
(except as otherwise provided herein), and the financial statements of the
Partnership shall be audited and certified as of the end of each fiscal year by
a firm of independent certified public accountants selected by the Partnership.
ARTICLE VIII
------------
Miscellaneous
=============
8.1. Assignability. (a) The General Partner may not assign, pledge or
---- =============
otherwise grant a security interest in its interest in the Partnership or in
this Agreement, except with the prior written consent of the SBA.
(b) No transfer of any interest in the Partnership shall be allowed if
the actions to be taken in connection with such transfer would (i) result in any
violation of the SBIC Act;** or (ii) result in a violation of any law, rule or
regulation by the Partnership.
8.2. Amendments. Any amendment of the Agreement which would affect
--- ==========
this Annex or the rights, obligations or liabilities of the SBA shall require
the prior written consent of the SBA.
*See 13 C.F.R. ss107.160(c)(1) which specifies the minimum duration for an SBIC
in limited partnership form.
**See 13 C.F.R. ss 107.400 which requires SBA approval for any transfer which
would result in any person owning more than specified percentage of any class
of partnership capital.
-10-
<PAGE>
SBA Annex OP, Version 1.1 March 1, 1996
================================================================================
-------------------------------------------------------------
SBA ANNEX OP
VERSION 1.1
ANNEX OF OPTIONAL PROVISIONS
-------------------------------------------------------------
SBA ANNEX OF OPTIONAL PROVISIONS FOR
AN AGREEMENT OF LIMITED PARTNERSHIP
FOR A SECTION 301(C) LICENSEE
================================================================================
This document has been drafted by the law firm of O'Sullivan Gracy & Karabell,
in collaboration with the law firms of Pepper, Hamilton & Scheetz and Foley,
Hoag & Eliot, the National Association of Small Business Investment Companies,
and the Office of the General Counsel of the United States Small Business
Administration.
The Small Business Administration does not endorse or approve law firms. The
above legend is not an endorsement or approval by the Small Business A of any
law firm identified therein, and no representation to the contrary by any party
is authorized.
<PAGE>
================================================================================
-i-
================================================================================
SBA ANNEX OP
TABLE OF CONTENTS
Page
ARTICLE I General Provisions..............................................1
1.1. Definitions.....................................................1
1.2. Conflict with SBIC Act..........................................3
1.3. Conflict With Other Provisions of the Agreement.................3
1.4. Deletion of Certain Provisions..................................3
1.5. Incorporation of this Annex into the Agreement..................3
ARTICLE II Remedies for Failure of a Private Limited Partner to Make a
Contribution to Capital.........................................4
2.1. Interest on Overdue Contributions...............................4
2.2. Termination of Right to Make Further Capital Contributions......4
2.3. Forfeiture of Interest in the Partnership.......................4
2.4. Withholding and Application of Distributions....................5
2.5. Required Sale of Interest in the Partnership....................5
ARTICLE III Small Business Investment Company Matters.......................7
ARTICLE IV Indemnification.................................................7
4.1. Standard of Care................................................7
4.2. Indemnification.................................................8
ARTICLE V Amendments......................................................9
<PAGE>
SBA ANNEX OP
------------
ARTICLE I
---------
General Provisions
===================
1.1 Definitions. For the purposes of this Annex, the following terms
--- ============
shall have the following meanings:
"Affiliate" shall have the meaning set forth in the SBIC Act.
"Agreement" shall mean the agreement of limited partnership of the
Partnership to which this Annex is attached and incorporated as a provision
thereof. References to the Agreement shall be deemed to include all provisions
incorporated in the Agreement by reference.
"Assets" shall mean and include common and preferred stock (including
warrants, rights and other options relating thereto or any combination thereof,
notes, bonds, debentures, trust receipts and other obligations, instruments or
evidences of indebtedness, and other properties or interests commonly regarded
as securities, and in addition, interests in real property, whether improved or
unimproved, and interests in personal property of all kinds, tangible or
intangible, choses in action, and cash, bank deposits and so-called "money
market instruments".
"Assets Under Management" shall mean, as of any specified date, the
value of all Assets owned by the Partnership (such value to be determined as
provided in the Agreement), including contributions requested and due from
Partners and uncalled amounts of Commitments less the amount of any liabilities
----
of the Partnership determined in accordance with generally accepted accounting
principles.
"Associate" shall have the meaning set forth in the SBIC Act.
"Capital Account" shall mean the account of each Partner that reflects
its interest in the Partnership determined in accordance with Article V of SBA
Annex PS (if such Annex is incorporated as part of the Agreement) or as
otherwise set forth in the Agreement.
"Commitments" shall mean the capital contributions to the Partnership
which the Preferred Limited Partners have made and the other Partners have made
or are obligated to make to the Partnership. The terms of the Commitments of the
Preferred Limited Partners shall be as set forth in SBA Annex PS (if SBA Annex
PS is incorporated in the Agreement, or if not then as otherwise set forth in
the Agreement); provided, that any Commitment by a Preferred Limited Partner
---------------
shall include only the amount such Preferred Limited Partner has actually
contributed to the Partnership, and shall not include any amount under any
agreement by any such Partner or SBA to provide Leverage to the Partnership
which has not been contributed to the Partnership. The amounts and terms of the
Commitments of the General Partner and the Private Limited Partners shall be as
defined in the Agreement.
"Control Person" shall have the meaning set forth in the SBIC Act.
-1-
<PAGE>
"General Partner" shall mean the general partner or general partners
of the Partnership.
"Investment Advisor/Manager" shall have the meaning set forth in the
SBIC Act.
"Leverage" shall have the meaning set forth in the SBIC Act.
"Optionor" shall have the meaning set forth in Section 2.5.
"Optionees" shall have the meaning set forth in Section 2.5.
"Optioned Partnership Interest" shall have the meaning set forth in
Section 2.5.
"Option Price" shall have the meaning set forth in Section 2.5.
"Participating Security" shall have the meaning set forth in the SBIC
Act.
"Partnership" shall mean the limited partnership established by the
Agreement.
"Partners" shall mean the General Partner,the Private Limited Partners
and the Preferred Limited Partners, if any, of the Partnership.
"Preferred Limited Partner" shall mean the SBA, in its capacity as a
Preferred Limited Partner, or any other person holding one or more Preferred
Limited Partnership Interests in the Partnership.
"Preferred Limited Partnership Interest" shall mean a preferred limited
partnership interest in the Partnership which qualifies as a Participating
Security.
"Private Limited Partners" shall mean any limited partners of the
Partnership, other than any Preferred Limited Partner.
"Remaining Portion" shall have the meaning set forth in Section 2.5.
"SBA" shall mean the United States Small Business Administration.
"SBA Annex GDP" shall mean the version of such Annex, if any, which is
attached to and incorporated as a part of the Agreement.
"SBA Annex PS" shall mean the version of such Annex, if any, which is
attached to and incorporated as a part of the Agreement.
"SBA Annex OP" shall mean the version of this Annex which is attached
to and incorporated as a part of the Agreement.
"SBIC Act" shall mean the Small Business Investment Act of 1958, as
amended, and the rules and regulations promulgated thereunder by the SBA, as in
effect from time to time
-2-
<PAGE>
1.2. Conflict with SBIC Act. The provisions of this Annex and the
--- =======================
Agreement shall be interpreted to the fullest extent possible in a manner
consistent with the SBIC Act. In the event of any conflict between any provision
of the Agreement or this Annex and the provisions of the SBIC Act (including,
without limitation, any conflict with respect to the rights of the SBA or the
respective Partners hereunder), the provisions of the SBIC Act shall control.
1.3. Conflict With Other Provisions or the Agreement. The provisions of
--- ===============================================
the Agreement shall be interpreted to the fullest extent possible in a manner
consistent with the provisions of this Annex. In the event of any conflict
between any provision of this Annex and any other provision of the Agreement
(other than the provisions of SBA Annex PS and SBA Annex GDP, if either of such
Annexes is incorporated as part of the Agreement), the provisions of this Annex
shall control. In the event of any conflict between any provision of this Annex
and any provision of SBA Annex PS or SBA Annex GDP, the provisions of SBA Annex
PS or SBA Annex GDP (if such Annex is incorporated as part of the Agreement)
shall control.
1.4. Deletion of Certain Provisions. (a) The specific sections of this
--- ==============================
Annex identified in clauses (c) and (d) of this Section may be deleted at the
option of the Partnership from the form of the Annex that is attached to and
incorporated in the Agreement. Blank spaces for periods, interest rates or
percentages appearing in any section of this Annex may be filled in by the
Partnership or left blank. In the case of any such blank space in a section
which is not filled in by the Partnership, the space must be lined through and
the period, interest rate or percentage which appears in bold face type
immediately before such blank space will apply. References in this Annex to the
provisions or sections of this Annex shall refer only to those provisions which
have not been so deleted, giving effect to any periods, interest rates or
percentages filled in by the Partnership in such sections. The footnote numbers
which appear in certain sections and the notes which appear in certain sections
and the notes which appear at the end of this Annex are for convenience only and
shall neither be considered part of this Annex nor be given any legal effect.
(b) The deletion of any section of this Annex shall be indicated by
striking through that Section (note that subsections of an included section may
not be deleted).
(c) In Article II, the Partnership may elect to delete any of the
Sections.
(d) In Article IV, the Partnership may elect to delete either all
sections or Section 4.2; if Section 4.2 is included, Section 4.1 may not be
deleted.
1.5. Incorporation of this Annex Into the Agreement. The Agreement
--- ================================================
shall contain the following provision evidencing the incorporation of this
Annex:
"The provisions of SBA Annex OP attached to this Agreement are
incorporated in this Agreement with the same force and effect
as if fully set forth herein."
-3-
<PAGE>
ARTICLE II
----------
Remedies for Failure of a Private Limited Partner
-------------------------------------------------
to make a Contribution to Capital
=================================
2.1. Interest on Overdue Contribution. In the event that any Private
--- =================================
Limited Partner fails to make a contribution required under the Agreement within
thirty (30) days (unless another period is specified here: ( )
--------------
days) [1] after the date such contribution is due, then the General Partner may,
---
in its sole discretion, elect to charge such Private Limited Partner interest at
an annual rate equal to ten percent (10%) (unless another rate is specified
here: ) [2] on the amount due from the date such amount became due
------------- ---
until the earlier of (i) the date on which such payment is received by the
Partnership or (ii) the date of any notice given to such Private Limited Partner
by the General Partner pursuant to Sections 2.3, 2.4 or 2.5. Any distributions
to which such Private Limited Partner is entitled shall be reduced by the amount
of such interest, and such interest shall be deemed to be income to the
Partnership. The amount of interest charged as provided in this Section 2.1
shall not exceed the amount of such Private Limited Partner's Capital Account.
[3]
- ---
2.2. Termination of Right to Make Further Capital Contributions. In the
--- ===========================================================
event that any Private Limited Partner fails to make contribution required under
the Agreement within thirty (30) (unless another period is specified here:
( )) days after the date such contribution is due, the General Partner
- ----------
may, in its sole discretion (and with the consent of SBA given as provided in
Section 7.2 of SBA Annex PS or Section 5.2 of SBA Annex GDP, if SBA Annex PS or
SBA GDP is incorporated in the Agreement), elect to declare, by notice to such
Private Limited Partner, that:
(a) Such Private Limited Partner's Commitment shall be deemed
to be reduced to the amount of any contributions of capital timely made
pursuant to the Agreement; and
(b) Upon such notice (i) such Private Limited Partner shall
have no right to make any capital contribution thereafter (including the
contribution as to which the default occurred and any contribution
otherwise required to be made thereafter pursuant to the terms of the
Agreement) and (ii) to this Agreement shall be deemed amended to reflect
such reduced Commitment.
2.3. Forfeiture of Interest in the Partnership. In the event that any
--- =========================================
Private Limited Partner fails to make a contribution required under the
Agreement, within thirty (30) (unless another period is specified here:
( )) days after notice by the General Partner to such Private Limited
- ----------
Partner that it has failed to make its contribution on the date such
contribution was due, the General Partner may in its sole discretion (and with
the consent of SBA given as provided in Section 7.2 of SBA Annex PS or Section
5.2 of SBA Annex GDP, if SBA Annex PS or SBA Annex GDP is incorporated in the
Agreement) declare, by notice of forfeiture to such Private Limited Partner,
that one hundred percent (100%) (unless another percentage is specified here:
percent (_ %)) of the interest of such Private Limited Partner in
- -------------
the Partnership (including amounts in its Capital Account as well as any
interest in future profits, losses or distributions of the Partnership) is
forfeited, effective as of the date of such Private Limited Partner's failure to
make such required contribution, in which event, as of the date of such notice
of forfeiture (i) the Private Limited Partner shall cease to be a Partner with
respect to such forfeited interest; provided, however, that such forfeited
-------- -------
Private Limited Partner shall cease to have any liability for the payment of the
forfeited percentage of any capital contributions due at such time or in the
future and (ii) the forfeited percentage of such Private Limited Partner's
Capital Account shall be held by the Partnership and reallocated among the
Capital Accounts of the Partners one
-4-
<PAGE>
percent (1%) (unless another percentage is specified here:
---------------
percent ( %)) to the General Partner and ninety-nine percent (99%) (unless
another percentage is specified here: percent (_ %)) to the
--------------
Private Limited Partners (other than such forfeited Private Limited Partner) to
be apportioned among such Private Limited Partners in accordance with their
respective aggregate capital contributions. [4]
---
2.4. Withholding and Application of Distributions. No part of any
--- ================================================
distribution shall be paid to any Private Limited Partner from which there is
then due and owing to the Partnership, at the time of such distribution, any
amount required to be paid to the Partnership. At the election of the General
Partner, which it may make in its sole discretion, the Partnership may either
(i) apply all or part of any such withheld distribution in satisfaction of the
amount then due to the Partnership from such Private Limited Partner or (ii)
withhold such distribution until all amounts then due are paid to the
Partnership by such Private Limited Partner. Upon payment of all amounts due to
the Partnership (by application of withheld distributions or otherwise), the
General Partner shall distribute any unapplied balance of any such withheld
distribution to such Private Limited Partner. No interest shall be payable on
the amount of any distribution withheld by the Partnership pursuant to this
Section.
2.5. Required Sale of Interest in the Partnership. In the event that
--- ============================================
any Private Limited Partner fails to make a contribution required under the
Agreement within thirty (30) (unless another period is specified
------ ----
here: ( )) days after notice by the General Partner to such Private
-------------
Limited Partner that it has failed to make its contribution on the date such
contribution is due, unless the General Partner has acted pursuant to Sections
2.2 or 2.3 (if either of such Sections are included in the version of this Annex
incorporated in the Agreement) the General Partner may, in its sole discretion,
(and with the consent of SBA given as provided in Section 7.2 of SBA Annex PS or
Section 5.2 of SBA Annex GDP, if SBA Annex PS or SBA Annex GDP is incorporated
in the Agreement) elect to declare such Private Limited Partner in default. If
the General Partner so elects to declare such Private Limited Partner in default
(such Private Limited Partner being hereinafter referred to as the "Optionor"),
then the other Private Limited Partners of the Partnership which are not in
default (the "Optionees") and the General Partner shall have the right and
option to acquire one hundred percent (100%) (unless another percentage is
specified here: percent ( _%)) of the Partnership interest, which
--------------
shall include one hundred percent (100%) (unless another percentage is specified
--------------------------
here: percent ( %)) of the Capital Account (the "Optioned
--------------
Partnership Interest") [5] of the Optionor on the following terms:
---
(i) The General Partner shall give the Partners
notice promptly after declaration of any such default. Such notice shall
advise each Optionee of the portion of the Optioned Partnership Interest
available to it and the price therefor. The portion available to each
Optionee shall be that portion of the Optioned Partnership Interest that
bears the same ratio to the Optioned Partnership Interest as each
Optionee's capital contributions to the Partnership bears to the
aggregate capital contributions to the Partnership, exclusive of the
capital contributions to the Partnership of the Optionor. The aggregate
price for the Optioned Partnership Interest shall be the assumption of
the unpaid Commitment obligation (both that portion then due and amounts
due in the future) of the Optionor (the "Option Price"). [5] The Option
---
Price for each Optionee shall be prorated according to the portion of the
Optioned Partnership Interest purchased by each such Optionee so that the
percentage of the unpaid Commitment assumed by each Optionee is the same
as the percentage of the Optioned Partnership Interest purchased by such
Optionee. The option granted hereunder shall be exercisable by each
Optionee in whole only at any time within thirty (30) days of the date of
the notice from the General Partner by the delivery to the General
-5-
<PAGE>
Partner of (A) a notice of exercise of option, and (B) the capital
contribution due in accordance with clause 2.5(v)(A). The General Partner
shall forward the above notices of exercise of option received to the
Optionor.
(ii) Should any Optionee not exercise its option
within the period provided in clause (i), the General Partner, within ten
(10) (unless another period is specified here: ( )) days of
----------
the end of such period, shall notify the other Optionees who have
previously exercised their options in full, which Optionees shall have
the right and option ratably among them to acquire the portion of the
Optioned Partnership Interest not so acquired (the "Remaining Portion")
within ten (10) (unless another period is specified here:
---------------
( )) days of the date of the notice specified in this Section 2.5(ii) on
the same terms as provided in clause (i).
(iii) The amount of the Remaining Portion not
acquired by the Optionees pursuant to clause (ii) may be acquired by the
General Partner within ten (10) (unless another period is specified here:
( )) days of the expiration of the period specified in clause
------------
(ii) on the same terms as set forth in clause (i).
(iv) The amount of the Remaining Portion not acquired
by the Optionees and the General Partner pursuant to clause (iii) may, if
the General Partner deems it in the best interest of the Partnership, be
sold to any other corporations, partnerships, individuals or other
entities on terms not more favorable to such purchaser than the
Optionees option (and the General Partner may admit any such third party
purchaser as a Private Limited Partner, subject to the approval of SBA,
if required under the SBIC Act). Any consideration received by the
Partnership for such amount of the Optionor's interest in the Partnership
in excess of the Option Price therefor shall be retained by the
Partnership and allocated among the Partners Capital Accounts in
proportion to the respective Partners capital contributions.
(v) Upon exercise of any option hereunder, such
Optionee (or the General Partner, if it has exercised its rights pursuant
to clause (iii)) shall be deemed to have assumed that portion of the
Optionor's unpaid Commitment representing the Option Price of the
purchased portion of the Optioned Partnership Interest and shall be
obligated (A) to contribute to the Partnership the portion of the capital
contribution then due from the Optionor equal to the percentage of the
Optioned Partnership Interest purchased by such Optionee and (B) to pay
the same percentage of any further contributions which would have
otherwise been due from such Optionor.
(vi) Upon the purchase by the General Partner of any
portion of the Optioned Partnership Interest in the Partnership pursuant
to clause (iii), the General Partners shall also become a Private Limited
Partner to the extent of such interest.
(vii) Upon the purchase of any portion of any
Optioned Partnership Interest by an Optionee, the General Partner or
other person pursuant to this Section 2.5, the Optionor shall have no
further rights or obligations under this Agreement with respect to such
portion.
(viii) Upon the purchase of any portion of the
Optioned Partnership Interest, for purposes of computing such purchaser's
aggregate capital contributions, such purchaser shall be deemed to have
aggregate capital contributions (or the aggregate capital contributions
of any
-6-
<PAGE>
Optionee, shall be increased by an amount) equal to the percentage of the
defaulting Private Limited Partner's aggregate capital contribution which
the purchased portion of the Optioned Partnership Interest represents of
the defaulting Private Limited Partner's entire Partnership interest, and
the aggregate capital contributions of such defaulting Private Limited
Partner shall be reduced by a corresponding amount.
ARTICLE III
-----------
Small Business Investment Company Matters
=========================================
The SBA shall be deemed an express third party beneficiary of the
provisions of the Agreement (including, without limitation, this Annex) to the
extent of the rights of the SBA thereunder and under the Act, and the SBA shall
be entitled to enforce such provisions for its benefit, as if the SBA were a
party thereto.
ARTICLE IV
----------
Indemnification
================
4.1. Standard of Care. (a) Neither the General Partner, any Investment
--- ================
Advisor/Manager nor any partner, shareholder, director, officer or employee nor
any Affiliate of any thereof shall be liable to the Partnership or any Partner
for any action taken or omitted to be taken by it or any other Partner or other
person in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the Partnership, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful.
(b) Neither any Private Limited Partner, nor any member of any
Partnership committee or board who is not an Affiliate of the General Partner,
shall be liable to the Partnership or any Partner as the result of any decision
made in good faith by such Private Limited Partner or member, in his capacity as
such.
(c) The General Partner and any Investment Advisor/ Manager, the
stockholders, directors, officers, employees and partners of either thereof, any
Private Limited Partner and any member of a Partnership committee or board, may
consult with reputable legal counsel selected by them and shall be fully
protected, and shall incur no liability to the Partnership or any Partner, in
acting or refraining to act in good faith in reliance upon the opinion of advice
of such counsel.
(d) This Section 4.1 shall not constitute a modification, limitation or
waiver of Section 314(b) of the SBIC Act, or a waiver by the SBA of any of its
rights pursuant to such Section 314(b).*
(e) In addition to the standards of care set forth in this Section 4.1,
the Agreement may also provide for additional standards of care which must also
be met.
*This provision relates to the fiduciary duty of SBIC managers.
-7-
<PAGE>
4.2. Indemnification. (b) The Partnership shall indemnify and hold
--- ===============
harmless, but only to the extent of Assets Under Management, the General
Partner, the general and limited partners of the General Partner, any Investment
Advisor/Manager and any partner, shareholder, director, officer, employee or any
Affiliate of any thereof from any and all costs, expenses, damages, claims,
liabilities, fines and judgments (including the reasonable cost of the defense
of any claim or action and any sums which may be paid with the consent of the
Partnership in settlement thereof) which may be incurred by or asserted against
such person or entity, by reason of any action taken or omitted to be taken on
behalf of the Partnership and in furtherance of its interests.
(b) The Partnership shall indemnify and hold harmless, but only to the
extent of Assets Under Management, the Private Limited Partners, and members of
any Partnership committee or board who are not Affiliates of the General Partner
or any Investment Advisor/Manager from any and all costs, expenses, damages,
claims, liabilities, fines and judgements (including the reasonable cost of the
defense of any claim or action and any sums which may be paid with the consent
of the Partnership in settlement thereof) which may be incurred by or asserted
against such person or entity, by any third party on account of any matter or
transaction of the Partnership, which matter or transaction occurred during the
time that such person has been a Private Limited Partner or such member.
(c) The Partnership shall have power, in the discretion of the General
Partner, to agree to indemnify on the same terms as set forth in Section 4.2(b)
any person who is or was serving, pursuant to a prior written request from the
Partnership, as a consultant to, agent for or representative of the Partnership
as a director, officer, employee, agent of or consultant to another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against such person and incurred by such person in any such capacity,
or arising out of such person's status as such.
(d) No person shall be entitled to claim any indemnity or reimbursement
under Section 4.2(a), (b) or (c) in respect of any cost, expense, damage,
liability, claim, fine, judgment (including any cost of the defense of any
claim, action, suit, proceeding or investigation, by or before any court or
administrative or legislative body or authority) that may be incurred by such
person which results from the failure of such person to act in accordance with
the provisions of this Agreement and the applicable standard of care set forth
in Section 4. 1. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
---- ----------
equivalent, shall not, of itself, preclude a determination that such person
acted in accordance with the applicable standard of care set forth in Section 4.
1.
(e) To the extent that a person claiming indemnification under Section
4.2(a), (b) or (c) has been successful on the merits in defense of any action,
suit or proceeding referred to in Section 4.2(a), (b) or (c) or in defense of
any claim, issue or matter therein such person shall be indemnified with
respect, to such matter as provided in such Section. Except as provided in the
foregoing sentence and as provided in Section 4.2(h) with respect to advance
payments, any indemnification under this Section 4.2 shall be paid only upon
determination on that the person to be indemnified has met the applicable
standard of conduct set forth in Section 4. 1 (a) or (b).
(f) A determination that a person to be indemnified under this Section
4.2 has met the applicable standard set forth in Section 4.1(a) or (b) shall be
made by (i) the General Partner, with respect to the indemnification of any
person other than a person claiming indemnification under Section 4.2(a), (ii) a
committee of the Partnership whose members are not affiliated with the General
Partner or any Investment Advisor/Manager with respect to indemnification of any
person indemnified under Section
-8-
<PAGE>
4.2(a) or (iii) at the election of the General Partner, independent legal
counsel selected by the General Partner, with respect to the indemnification of
any person indemnified under Section 4.2, in a written opinion.
(g) In making any such determination with respect to indemnification
under Section 4.2(f), the General Partner, a committee of the Partnership whose
members are not affiliated with the General Partner or any Investment
Advisor/Manager or independent legal counsel, as the case may be, shall be
authorized to make such determination on the basis of its evaluation of the
records of the General Partner, the Partnership or any Investment
Advisor/Manager to the Partnership and of the statements of the party seeking
indemnification with respect to the matter in question and shall not be required
to perform any independent investigation in connection with any such
determination. Any party making any such determination is authorized, however,
in its sole discretion, to take such other actions (including engaging counsel)
as it deems advisable in making such determination.
(h) Expenses incurred by any person in respect of any such costs,
expenses, damages, claims, liabilities, fines, and judgments (including any cost
of the defense of any claim, action, suit, proceeding or investigation, by or
before any court or administrative or legislative body or authority) may be paid
by the Partnership in advance of the final disposition of any such claim or
action upon receipt of an undertaking by or on behalf of such person to repay
such amount unless it shall ultimately be determined as provided in Section
4.2(e) or (f) that such person is entitled to be indemnified by the Partnership
as authorized in this Section.
(i) The rights provided by this Section 4.2 shall inure to the benefit
of the heirs, executors, administrators, successors, and assigns of each person
eligible for indemnification hereunder.
(j) The rights to indemnification provided in this Section 4.2 shall be
the exclusive rights of all Partners to indemnification by the Partnership. No
Partner shall enter into, or make any claim under, any other agreement with the
Partnership (whether direct or indirect) providing for indemnification. The
General Partner shall not enter into any agreement with any person which is an
employee, officer, director, partner or shareholder, or an Affiliate, Associate
or Control Person of any of the foregoing, providing for indemnification of any
such person unless such agreement provides for a determination with respect to
such indemnification as provided under Section 4.2(f)(ii) or (iii). The
provisions of this Section 4.2 shall not apply to indemnification of any person
which is not at the expense (whether in whole or in part) of the Partnership.
(k) The Partnership may purchase and maintain insurance on its own
behalf, or on behalf of any person or entity, with respect to liabilities of the
types described in this Section 4.2. The Partnership may purchase such insurance
regardless of whether such person is acting in a capacity described in this
Section 4.2 or whether the Partnership would have the power to indemnify such
person against such liability under the provisions of this Section 4.2.
ARTICLE V
---------
Amendments
==========
Any amendment of the Agreement which would affect (i) this Annex, (ii)
or the rights, obligations or liabilities of the SBA shall require the prior
written consent of the SBA.
-9-
<PAGE>
NOTES
=====
1. All notice periods are variable.
2. Any interest rate may be selected.
3. The rotation on the amount of interest is optional.
4. Forfeitures may be in whole or in part. The sum of the reallocation
percentages to the General Partner and the Private Limited Partner must
equal 100%. The elimination of liability after forfeiture is optional; a
forfeited limited partner may remain liable for capital contributions.
Reallocation of a forfeited interest can be freely determined.
5. Any percentage of a defaulted limited partner's interest can be sold. A
variety of pricing mechanisms can be used: fixed, formula or appraisal.
-10-
FOURTEEN HILL MANAGEMENT, L.L.C.
--------------------------------
OPERATING AGREEMENT
-------------------
by
--
Point West Capital Corporation
------------------------------
and
---
Fourteen Hill Management, L.L.C.
--------------------------------
as of
-----
June 9, 1997
------------
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
====
SECTION I. DEFINED TERMS................................. 1
SECTION II. FORMATION AND NAME; OFFICE; PURPOSE; TERM..... 3
2.1 ORGANIZATION................................................. 3
2.2 NAME OF THE COMPANY.......................................... 3
2.3 PURPOSE...................................................... 3
2.4 TERM......................................................... 4
2.5 PRINCIPAL OFFICE............................................. 4
2.6 RESIDENT AGENT............................................... 4
2.7 MEMBERS...................................................... 4
2.8 OFFICERS,DIRECTORS, AND MANAGERS............................. 4
SECTION III. MEMBERS; CAPITAL; CAPITAL ACCOUNTS............ 4
3.1 INITIAL CAPITAL CONTRIBUTIONS................................ 4
3.2 NO OTHER CAPITAL CONTRIBUTIONS REQUIRED...................... 4
3.3 LOANS........................................................ 4
SECTION IV. PROFIT, LOSS AND DISTRIBUTIONS................ 4
4.1 DISTRIBUTIONS OF CASH FLOW................................... 4
4.2 ALLOCATION OF PROFIT OR LOSS................................. 4
4.3 LIQUIDATION AND DISSOLUTION.................................. 4
SECTION V. MANAGEMENT: RIGHTS, POWER AND DUTIES.......... 5
5.1 MANAGEMENT................................................... 5
5.2 PERSONAL SERVICES............................................ 5
5.3 LIABILITY AND INDEMNIFICATION................................ 5
SECTION VI. TRANSFER OF INTERESTS AND WITHDRAWALS OF MEMBERS... 5
6.1 TRANSFERS.................................................... 5
6.2 TRANSFER TO A SUCCESSOR...................................... 5
SECTION VII. DISSOLUTION, LIQUIDATION AND TERMINATION OF THE
COMPANY............................................ 5
7.1 EVENTS OF DISSOLUTION........................................ 5
7.2 PROCEDURE FOR WINDING UP AND DISSOLUTION..................... 6
7.3 FILING OF ARTICLES OF CANCELLATION........................... 6
SECTION VIII. BOOKS, RECORDS, ACCOUNTING AND TAX ELECTIONS....... 6
(i)
<PAGE>
TABLE OF CONTENTS -Cont.
-----------------
Page
----
8.1 BANK ACCOUNTS................................................ 6
8.2 BOOKS AND RECORDS............................................ 6
8.3 ANNUAL ACCOUNTING PERIOD..................................... 6
8.4 DISREGARD OF ENTITY.......................................... 6
8.5 TAX MATTERS PARTNER.......................................... 6
SECTION IX. GENERAL PROVISIONS................................. 7
9.1 ASSURANCES................................................... 7
9.2 NOTIFICATIONS................................................ 7
9.3 SPECIFIC PERFORMANCE......................................... 7
9.4 COMPLETE AGREEMENT........................................... 7
9.5 APPLICABLE LAW............................................... 7
9.6 SECTION TITLES............................................... 7
9.7 BINDING PROVISIONS........................................... 8
9.8 JURISDICTION AND VENUE....................................... 8
9.9 TERMS........................................................ 8
9.10 SEPARABILITY OF PROVISIONS................................... 8
9.11 COUNTERPARTS................................................. 8
Exhibit A - Member Taxpayer Identification and Percentage
- ---------
Exhibit B - Point West's Cash and Property Contribution
- ---------
(ii)
<PAGE>
.
FOURTEEN HILL MANAGEMENT, L.L.C.
--------------------------------
OPERATING AGREEMENT
-------------------
This Operating Agreement (this "Agreement") is entered into as of this
9th day of June, 1997, by and among Point West Capital Corporation, a Delaware
corporation ("Point West") and Fourteen Hill Management, L.L.C.
(the "Company").
EXPLANATORY STATEMENT
=====================
The Company was organized as a limited liability company in Delaware on
June 5, 1997 in accordance with the terms of, and subject to the conditions set
forth in, this Agreement. This Agreement sets forth the agreements under which
the Company will operate. The Company was formed as a single Member limited
liability company, which is intended to be disregarded for federal income tax
purposes.
NOW, THEREFORE, for good and valuable consideration, the parties,
---------------
intending legally to be bound, agree as follows:
I.
DEFINED TERMS
-------------
The following capitalized terms shall have the meanings specified in
this Section I. Other terms are defined in the text of this Agreement; and,
throughout this Agreement, those terms shall have the meanings respectively
ascribed to them.
"Agreement" means this Agreement, as amended from time to time.
---------
"Code" means the Internal Revenue Code of 1986, as amended, or any
----
corresponding provision of any succeeding law.
"Company" means the limited liability company organized in accordance
-------
with this Agreement.
"Delaware Act" means the Delaware Limited Liability Company Act, as
-------------
amended from time to time.
"Interest" means a Person's share of the Profits and Losses of, and the
--------
right to receive distributions from, the Company.
"Interest Holder" means any Person who holds an Interest, whether as a
---------------
Member or as an unadmitted assignee of a Member.
<PAGE>
"Involuntary Withdrawal" means, with respect to Point West, the
-----------------------
occurrence of any of the following events:
(a) Point West makes an assignment for the benefit of creditors;
---
(b) Point West files a voluntary petition of bankruptcy;
---
(c) Point West is adjudged bankrupt or insolvent or there is
---
entered against Point West an order for relief in any bankruptcy or
insolvency proceeding;
(d) Point West files a petition or answer seeking for Point
---
West any reorganization, arrangement, composition, readjustment,
liquidation, dissolution, or similar relief under any statute, law, or
regulation;
(e) Point West seeks, consents to, or acquiesces in the
---
appointment of a trustee for, receiver for, or liquidation of Point
West or of all or any substantial part of Point West's properties;
(f) Point West files an answer or other pleading admitting or
---
failing to contest the material allegations of a petition filed against
Point West in any proceeding described in subsections (a) through (e);
(g) any proceeding against Point West seeking reorganization,
---
arrangement, composition, readjustment, liquidation, dissolution, or
similar relief under any statute, law, or regulation, continues for one
hundred twenty (120) days after the commencement thereof, or the
appointment of a trustee, receiver, or liquidator for Point West or all
or any substantial part of Point West's properties without Point West's
Agreement or acquiescence, which appointment is not vacated or stayed
for one hundred twenty (120) days or, if the appointment is stayed, for
one hundred twenty (120) days after the expiration of the stay during
which period the appointment is not vacated; or
(h) Point West's death or adjudication by a court of competent
---
jurisdiction as incompetent to manage Point West's person or property.
"Member" means Point West and any Person who subsequently is admitted
========
as a member of the Company.
"Membership Rights" means all of the rights of a Member in the Company,
===================
including a Member's (a) Interest; (b) right to inspect the Company's books and
records; (c) right to participate in the management of and vote on matters
coming before the Company; and (d) unless this Agreement or the Articles of
Organization provide to the contrary, right to act as an agent of the Company.
2
<PAGE>
"Person" means and includes an individual, corporation, partnership,
--------
association, limited liability company, trust, estate, or other entity.
"Positive Capital Account" means a Capital Account with a balance
----------------------------
greater than zero.
"Profit" and "Loss" means, for each taxable year of the Company (or
-------- ----
other period for which Profit or Loss must be computed) the Company's taxable
income or loss determined in accordance with the Code.
"Regulation" means the income tax regulations, including any temporary
------------
regulations, from time to time promulgated under the Code.
"Successor" means all Persons to whom all or any part of an Interest is
-----------
transferred either because of (a) the sale or gift by Point West of all or any
part of its Interest, (b) an assignment of Point West's Interest due to Point
West's Involuntary Withdrawal, or (c) because such Person dies and the persons
are such Person's personal representatives, heirs, or legatees.
"Transfer" means, when used as a noun, any voluntary sale,
----------
hypothecation, pledge, assignment, attachment, or other transfer, and, when used
as a verb, means voluntarily to sell, hypothecate, pledge, assign, or otherwise
transfer.
"Withdrawal" means a Member's dissociation from the Company by any
------------
means.
SECTION II.
-----------
FORMATION AND NAME; OFFICE; PURPOSE; TERM
=========================================
II.1 ORGANIZATION. Point West has organized a limited liability
---- ============
company pursuant to the Act and the provisions of this Agreement and, for that
purpose, has caused Articles of Organization to be prepared, executed and filed
under the Delaware Act on June 5, 1997.
II.2 NAME OF THE COMPANY. The name of the Company shall be "Fourteen
---- ===================
Hill Management,L.L.C.". The Company may do business under that name and under
any other name or names upon which Point West may, in its sole discretion,
determine. If the Company does business under a name other than that set forth
in its Articles of Organization, then the Company shall file a trade name
certificate as required by law.
II.3 PURPOSE. Company is organized solely for the purpose of serving
---- =======
as the general partner of one or more small business investment company.
3
<PAGE>
II.4 TERM. The term of the Company began upon the filing of the
---- ====
Articles of Organization under the Delaware Act and shall continue in existence
until June 30, 2027, unless its existence is sooner terminated pursuant to
Section VII of this Agreement.
II.5 PRINCIPAL OFFICE. The principal office of the Company in the
---- ================
State of Delaware shall be located at 1220 North Market Street, Suite 606,
Wilmington, Delaware 19801, or at any other place within the State of Delaware
which Point West, in its sole discretion, determines.
II.6 RESIDENT AGENT. The name and address of the Company's resident
---- ===============
agent in the State of Delaware shall be Registered Agents, Ltd.
II.7 MEMBERS. The name, present mailing address, taxpayer
---- =======
identification number and Percentage of each Member are set forth on Exhibit
-------
"A".
- --
II.8 OFFICERS, DIRECTORS AND MANAGERS. The Small Business
---- =================================
Administration must approve any person who will serve as an officer, director,
manager, or general partner of the Company.
SECTION III.
------------
MEMBERS; CAPITAL; CAPITAL ACCOUNTS
==================================
III.1 INITIAL CAPITAL CONTRIBUTIONS. Upon the execution of this
----- ===============================
Agreement, Point West shall contribute to the Company the cash and property set
forth on Exhibit "B", as the single and sole Member of the Company.
----------
III.2 NO OTHER CAPITAL CONTRIBUTIONS REQUIRED. No Member shall be
----- =======================================
required to contribute any additional capital to the Company, and except as set
forth in the Act,no Member shall have any personal liability for any obligations
of the Company.
II.3 LOANS. Any Member may, at any time, make or cause a loan to be
---- =====
made to the Company in any amount and on those terms upon which the Company
and the Member agree.
IV.
--
PROFIT, LOSS AND DISTRIBUTIONS
==============================
IV.1 DISTRIBUTIONS OF CASH FLOW. Cash Flow for each taxable year
---- ============================
of the Company shall be distributed to Point West no later than seventy-five
(75) days after the end of the taxable year.
IV.2 ALLOCATION OF PROFIT OR LOSS. All Profit or Loss shall be
---- ============================
allocated to Point West, as the single and sole Member of the Company.
4
<PAGE>
IV.3 LIQUIDATION AND DISSOLUTION. If the Company is liquidated,
---- =============================
the assets of the Company shall be distributed to Point West or to a
Successor or Successors.
V.
--
MANAGEMENT: RIGHTS, POWER AND DUTIES
====================================
V.1 MANAGEMENT. The Company shall be managed solely by the Members.
--- ==========
V.2 PERSONAL SERVICES. No member shall be required to perform
--- =================
services for the Company solely by virtue of being a Member.
V.2 LIABILITY AND INDEMNIFICATION.
--- =============================
1. The Members shall not be liable, responsible, or
--
accountable, in damages or otherwise, to the Company for any act
performed by any of them with respect to Company matters, except for
fraud.
2. The Company shall indemnify Members for any act performed
--
by any of them with respect to Company matters, except for fraud.
VI.
---
TRANSFER OF INTERESTS AND
=========================
WITHDRAWALS OF MEMBERS
======================
VI.1 TRANSFERS.Point West may Transfer all, or any portion of,
---- =========
or its interest or rights in, its Membership Rights to one or more Successors.
VI.2 TRANSFER TO A SUCCESSOR. In the event of any Transfer of all
---- ==========================
or any part of Point West's Interest to a Successor, the Successor shall
thereupon become a Member and the Company shall be continued.
VII.
----
DISSOLUTION, LIQUIDATION AND
----------------------------
TERMINATION OF THE COMPANY
==========================
VII.1 EVENTS OF DISSOLUTION. The Company shall be dissolved upon the
----- =====================
happening of any of the following events:
1. When the period fixed for its duration in Section 2.4 has
--
expired; or
2. If one or all of the Members unanimously determine to
--
dissolve the Company.
5
<PAGE>
The Company shall not dissolve merely because of Point West's
Involuntary Withdrawal.
VII.2 PROCEDURE FOR WINDING UP AND DISSOLUTION. If the Company is
----- ========================================
dissolved, the affairs of the Company shall be wound up. On winding up of the
Company, the assets of the Company shall be distributed, first, to creditors of
the Company in satisfaction of the liabilities of the Company, and then to the
Persons who are the Members of the Company in proportion to their Interests.
VII.3 FILING OF ARTICLES OF CANCELLATION. If the Company is dissolved,
----- ==================================
Articles of Cancellation shall be promptly filed with the Delaware Secretary of
State. If there are no remaining Members, the Articles shall be filed by the
last Person to be a Member; if there are no remaining Members, or a Person who
last was a Member, the Articles shall be filed by the legal or personal
representatives of the Person who last was a Member.
VIII.
-----
BOOKS, RECORDS, ACCOUNTING
--------------------------
AND TAX ELECTIONS
=================
VIII.1 BANK ACCOUNTS. All funds of the Company shall be deposited in
------ ==============
a bank account or accounts opened in the Company's name. The Member shall
unanimously determine the institution or institutions at which the accounts
will be opened and maintained, the types of accounts, and the Persons who will
have authority with respect to the accounts and the funds therein.
VIII.2 BOOKS AND RECORDS. The Members shall keep or cause to be kept
------ =================
complete and accurate books and records of the Company and supporting
documentation of the transactions with respect to the conduct of the Company's
business. The books and records shall be maintained in accordance with
sound accounting principles and practices.
VIII.3 ANNUAL ACCOUNTING PERIOD. The annual accounting period of the
------ =========================
Company shall be its taxable year.The Company's taxable year shall be selected
by the members, subject to the requirements and limitations of the Code.
VIII.4 DISREGARD OF ENTITY. Point West and the Company intend for the
------ ===================
Company to be treated as a partnership for federal income tax purposes, if the
Company has two or more Members, and otherwise as an entity that is disregarded
as an entity separate from its owner for federal income tax purposes pursuant
to Treasury Regulation Section 301.7701-3.
VIII.5 TAX MATTERS PARTNER. To the extent applicable, Point West shall
------ ===================
act as the "tax matters partner" within the meaning of Section 623(a)(7) of the
Code.
6
<PAGE>
IX.
---
GENERAL PROVISIONS
==================
IX.1 ASSURANCES. Each Member shall execute all such certificates and
---- ==========
other documents and shall do all such filing, recording, publishing, and other
acts as the Members deem appropriate to comply with the requirements of law for
the formation and operation of the Company and to comply with any laws, rules,
and regulations relating to the acquisition, operation, or holding of the
property of the Company.
IX.2 NOTIFICATIONS. Any notice, demand, consent, election, offer,
---- =============
approval, require, or other communication (collectively, a "notice") required or
------
permitted under this Agreement must be in writing and either delivered
personally or sent by certified or registered mail, postage prepaid, return
receipt requested. A notice must be addressed to an Interest Holder at the
Interest Holder's last known address on the records of the Company. A notice to
the Company must be addressed to the Company's principal office. A notice
delivered personally will be deemed given only when acknowledged in writing by
the person to whom it is delivered. A notice that is sent by mail will be deemed
given three (3) business days after it is mailed. Any party may designate, by
notice to all of the others, substitute addresses or addresses for notices; and,
thereafter, notices are to be directed to those substitute addresses or
addressees.
IX.3 SPECIFIC PERFORMANCE. The parties recognize that irreparable
---- =====================
injury will result from a breach of any provision of this Agreement and that
money damages will be inadequate to fully remedy the injury. Accordingly, in the
event of a breach or threatened breach of one or more of the provisions of this
Agreement, any party who may be injured (in addition to any other remedies which
may be available to that party) shall be entitled to one or more preliminary or
permanent orders 1. restraining and enjoining any act which would constitute a
-
breach or 2. compelling the performance of any obligation which, if not
-
performed, would constitute a breach.
IX.4 COMPLETE AGREEMENT. This Agreement constitutes the complete and
---- ==================
exclusive statement of the agreement among the Company and the original Member.
It supersedes all prior written and oral statements, including any prior
representation, statement, condition, or warranty. Except as expressly provided
otherwise herein, this Agreement may not be amended without the written consent
of all of the Members.
IX.5 APPLICABLE LAW. All questions concerning the construction,
---- ===============
validity, and interpretation of this Agreement and the performance of the
obligations imposed by this Agreement shall be governed by the internal law, not
the law of conflicts, of the State of Delaware.
IX.6 SECTION TITLES. The headings herein are inserted as a matter of
---- ===============
convenience only, and do not define, limit or describe the scope of this
Agreement or the intent of the provisions hereof.
7
<PAGE>
IX.7 BINDING PROVISIONS. This Agreement is binding upon, and inures to
---- ==================
the benefit of, the parties hereto and their respective heirs, executors,
administrators, personal and legal representatives, Successors, and permitted
assigns.
IX.8 JURISDICTION AND VENUE. Any suit involving any dispute or matter
---- ======================
arising under this Agreement may only be brought in the United States District
Court for the District of Delaware or any Delaware State Court having
jurisdiction over the subject matter of the dispute or matter. All Members
hereby consent to the exercise of personal jurisdiction by any such court with
respect to any such proceeding.
IX.9 TERMS. Common nouns and pronouns shall be deemed to refer to the
---- =====
masculine, feminine, neuter, singular and plural, as the identity of the Person
may in the context require.
IX.10 SEPARABILITY OF PROVISIONS. Each provision of this Agreement
----- ============================
shall be considered separable; and if, for any reason, any provision or
provisions herein are determined to be invalid and contrary to any existing or
future law, such invalidity shall not impair the operation of or affect those
portions of this Agreement which are valid.
IX.11 COUNTERPARTS. This Agreement may be executed simultaneously in
----- ============
two or more counterparts each of which shall be deemed an original, and all of
which, when taken together, constitute one and the same document. The signature
of any party to any counterpart shall be deemed a signature to, and may be
appended to, any other counterpart.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed, or caused this Agreement
------------------
to be executed, under seal, as of the date set forth hereinabove.
WITNESS OR ATTEST:
=================
FOURTEEN HILL MANAGEMENT, L.L.C.
------------------------------
By:/s/Joanna Woodward By:/s/JOHN WARD ROTTER
- ------------------------------ ------------------------------
Title:PRINCIPAL
POINT WEST CAPITAL CORPORATION
By:/s/Joanna Woodward
- ----------------------------- By:/s/ALAN B. PERPER
--------------------
PRESIDENT
9
<PAGE>
Exhibit A
---------
Point West Capital Corporation
1700 Montgomery Street, Suite 250
San Francisco, CA 94111
EIN: 94-3165263
Percentage of Member: 100%
10
<PAGE>
Exhibit B
---------
3.1 INITIAL CAPITAL CONTRIBUTIONS.
Cash contribution to Fourteen Hill Management, LLC
$5,000,000
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001002813
<NAME> Point West Capital Corporation
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Sep-30-1997
<CASH> 18,247,437
<SECURITIES> 5,750,508
<RECEIVABLES> 146,000
<ALLOWANCES> 0
<INVENTORY> 37,586,356 <F1>
<CURRENT-ASSETS> 724,854
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 62,455,155
<CURRENT-LIABILITIES> 4,426,647
<BONDS> 38,804,107 <F2>
0
0
<COMMON> 42,918
<OTHER-SE> 19,181,483
<TOTAL-LIABILITY-AND-EQUITY> 62,455,155
<SALES> 377,450
<TOTAL-REVENUES> 3,489,545
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,386,362
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,721,030
<INCOME-PRETAX> 1,617,847
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,617,847
<DISCONTINUED> 0
<EXTRAORDINARY> 2,827,594
<CHANGES> 0
<NET-INCOME> 1,209,747
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0
<FN>
<F1>INCLUDES ASSETS HELD FOR SALE AND PURCHASED LIFE INSURANCE POLICY.
<F2>REPRESENTS LONG TERM BORROWINGS OF THE COMPANY.
</FN>
</TABLE>
