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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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: 1-13993
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FREEDOM SECURITIES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 04-3335712
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE BEACON STREET,
BOSTON, MASSACHUSETTS 02108
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(617) 725-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
<S> <C>
Common Stock, par value $.01 per share New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At March 21, 2000, the registrant had 22,275,048 shares of common stock
outstanding. The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant as of March 21, 2000 was
approximately $232,538,604 (based on the closing price on the New York Stock
Exchange on that date).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the registrant's annual
meeting of shareholders to be held May 18, 2000 are incorporated by reference
into Part III of this Form 10-K.
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PART I
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K, including without limitation "Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 7A Quantitative and Qualitative Disclosures About Market
Risk," contains or incorporates both historical and "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Words such as
"anticipates", "believes", "expects", "intends", "future" and similar
expressions identify forward-looking statements. Any such "forward-looking"
statements in this report reflect the Company's current views with respect to
future events and financial performance, and are subject to a variety of factors
that could cause the actual results or performance to differ materially from
historical results or from the anticipated results or performance expressed or
implied by such forward-looking statements. Because of such factors, there can
be no assurance that the actual results or developments anticipated by the
Company will be realized or, even if substantially realized, that they will have
the anticipated results. The risks and uncertainties that may affect the
Company's business include but are not limited to: volatility in the stock
markets, economic conditions, governmental regulations, technological advances
affecting the Company's industry, pricing and competition, retention of key
personnel, the Company's ability to successfully integrate acquired businesses,
the Company's relationship with its clearing agent, the communications and
information systems of the Company and its business partners, the sufficiency of
financial resources to sustain and expand the Company's operations, civil and
enforcement liability related to operating in the securities industry, and other
factors described elsewhere in this report and in prior filings with the
Securities and Exchange Commission (the "Commission" or "SEC"). Readers should
not place undue reliance on such forward-looking statements, which speak only as
of the date hereof, and should be aware that, except as may be otherwise legally
required of the Company, the Company undertakes no obligation to publicly revise
any such forward-looking statements to reflect events or circumstances that may
arise after the date hereof.
ITEM 1. BUSINESS
COMPANY OVERVIEW
Freedom Securities Corporation is a holding company which together with its
subsidiaries (collectively, the "Company" or "Freedom") is a full-service retail
brokerage, investment banking and asset management firm. The Company provides a
wide range of products and investment services including securities brokerage
and trading services, investment banking and research, and asset management and
other investment advisory services.
The Company was formed in November 1996 to effect the acquisition (the
"Acquisition") of Freedom Securities Holding Corporation and its subsidiaries
(collectively, the "Predecessor Company") from John Hancock Mutual Life
Insurance Company ("Hancock"). The Acquisition was financed through purchases of
equity securities by approximately 350 employees of the Company including senior
management and investment executives as well as by affiliates of Thomas H. Lee
Company and SCP Private Equity Partners, L.P. and through borrowings under a
credit facility.
In April 1998, the Company completed its initial public offering of 7.4
million shares plus an over allotment of 1.1 million shares, including 4.2
million shares of common stock sold by the Company.
Management believes that it can best serve the needs of its clients in
various regions through separate, independently managed operating companies,
while avoiding cost duplication by using shared clearing and support services.
This approach enables the Company to capitalize on each organization's name
recognition, historical areas of expertise and close community ties while
lessening the Company's reliance on a single region's economy. The Company's
four principal operating subsidiaries are described below:
- Tucker Anthony Incorporated ("Tucker Anthony"), headquartered in
Boston, is a brokerage and investment banking firm. Tucker Anthony's
divisions include Tucker Anthony Cleary Gull
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("Tucker Cleary"), an investment banking and institutional brokerage
firm; Gibraltar Securities Co. ("Gibraltar"), a New Jersey-based
brokerage and investment advisory firm acquired by the Company in the
third quarter of 1999; and Tucker Anthony MidAtlantic Division ("TA
MidAtlantic"), formerly Hopper Soliday & Co., Inc. ("Hopper Soliday"),
a Pennsylvania-based municipal finance and underwriting brokerage firm
acquired by the Company in the first quarter of 1999.
- Sutro & Co. Incorporated ("Sutro"), headquartered in San Francisco, is
a West Coast regional brokerage and investment banking firm.
- Hill, Thompson, Magid & Co., Inc. ("Hill Thompson") is a New
Jersey-based over-the-counter trading firm that the Company acquired
in the fourth quarter of 1999.
- Freedom Capital Management Corporation ("Freedom Capital") is a
Boston-based asset management firm.
The consolidated financial statements and other data included elsewhere in
this report include the results of operations of the acquired companies from
their respective dates of acquisition.
Tucker Anthony, Sutro and Cleary Gull Investment Management Services, Inc.
("Cleary Gull IMS") clear their securities transactions on a fully disclosed
basis through Wexford Clearing Services Corporation ("Wexford"), a guaranteed
wholly-owned subsidiary of Prudential Securities Incorporated ("Prudential").
Hill Thompson clears all proprietary securities transactions on a self-clearing
basis and substantially all customer transactions through Schroder & Co., Inc.
on a fully disclosed basis.
The Company employed 2,535 people at December 31, 1999.
DESCRIPTION OF BUSINESS ACTIVITIES
The Company's four main areas of business, described below, are its (1)
full-service retail brokerage operations; (2) equity capital markets activities;
(3) asset management business and (4) trading activities.
Retail Operations
In its retail operations, the Company focuses on maintaining and developing
strong client relationships through a dedicated community focus while providing
the breadth and quality of services and products offered by national brokerage
firms. Tucker Anthony and Sutro provide their retail clients with a broad range
of services delivered in a personalized, service-oriented manner. In addition to
recommending and effecting transactions in securities, the Company makes
available equity research reports prepared by Tucker Cleary, Sutro, and other
research analysts and offers services such as financial and tax planning, and
trust and estate advice to its retail clients. The Company believes that the
personalized nature and range of services it provides to its clients is a key
factor in the success of its retail brokerage businesses.
The retail operations of Tucker Anthony and Sutro, conducted in 18 states
and the District of Columbia, have together generated 54%, 51% and 57% of the
Company's net revenues in 1999, 1998 and 1997, respectively, and have
historically represented the Company's core business. A large portion of the
Company's revenues is generated from commissions or fees earned as a broker or
dealer for individual clients in the purchase and/or sale of equity securities,
fixed income securities, mutual funds, insurance products, options and U.S.
government and municipal securities.
As of December 31, 1999, retail customers had approximately $43 billion of
assets in over 238,000 brokerage accounts. Management believes that the
experience of its 900 investment executives and their strong ties to their
communities help differentiate the Company from its competitors and enable the
Company to more effectively access and serve its clients. The Company's strategy
of providing its investment executives with a high level of support and the
flexibility to operate in an entrepreneurial manner has allowed the Company to
recruit and retain highly effective, motivated investment executives, many of
whom have significant tenure at their local branch offices. Management believes
that Tucker Anthony and Sutro have been able to successfully recruit and retain
investment executives for a number of reasons, including a
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corporate culture that rewards performance, encourages employee ownership, and
provides advanced technology, competitive payouts, no discount sharing and a
service-driven rather than a product-driven environment.
The Company is currently beta testing its technology for on-line trading
and plans to offer on-line trading capabilities to certain of its fee-based
retail clients in the near future. The Company continues to enhance its
commitment to customer service by providing its investment executives with
upgraded account information systems and flexibility in determining fee
schedules for certain services based upon the level of customer needs, and by
providing an array of one-stop investment and financial planning services. The
Company plans to continue to improve the profitability of its retail operations
primarily by hiring additional experienced and highly productive investment
executives who are attracted to the Company because of its entrepreneurial
culture, high level of product offerings and technological support.
Equity Capital Markets
The Company's equity capital markets business consists of equity research,
investment banking, institutional sales, trading and syndication services. Each
of Tucker Cleary and Sutro has historically demonstrated strengths in offering
various investment banking services, including merger and acquisition services,
public offerings and private placements to clients. The respective research and
investment banking departments of Tucker Cleary and Sutro target emerging and
middle-market companies within the industries in which they specialize, such as
consumer products, healthcare, financial services, distribution and logistics,
internet and technology and business services. Within each of these industries,
Tucker Cleary and Sutro have focused on various niches which each believes
offers it the greatest opportunities. Each firm focuses its equity capital
markets group on coordinating its research, institutional sales, corporate
finance, trading and syndication functions. Management believes that its
research will be a key factor in growing its equity capital markets activities.
The Company's revenues from equity capital markets activities generated 13%, 20%
and 14% of the Company's net revenues in 1999, 1998 and 1997, respectively.
Tucker Cleary and Sutro execute securities transactions for institutional
investors such as banks, mutual funds, insurance companies and pension and
profit-sharing plans. These investors normally purchase and sell securities in
large quantities, which transactions require specialized marketing and trading
expertise. In order to service these institutional accounts, the Company has
established a network of institutional offices located in New York, Boston, San
Francisco, Los Angeles, Milwaukee, Chicago, Denver and Washington, D.C.
Institutional transactions are executed by the Company acting as agent or
principal. The Company permits discounts from its commission schedule to its
institutional customers. The amount of such discounts can vary with the size of
particular transactions and other factors. The Company believes that it receives
a significant portion of its institutional brokerage commissions as a
consequence of its research advice and services regarding specific corporations
and industries, its principal transactions business and its investment banking
activities.
The Company's investment banking activities are performed by the corporate
finance and syndicate departments of Tucker Cleary and Sutro. The corporate
finance groups manage and underwrite public offerings of equity and, to a
significantly lesser extent, debt securities, arrange private placements of
equity and debt securities and provide financial advice in connection with
mergers and acquisitions, divestitures and other corporate reorganizations and
restructurings. The managed public equity offerings and merger and acquisition
transactions of Tucker Cleary and Sutro are typically undertaken for emerging or
middle-market companies in the consumer products, healthcare, financial
services, distribution and logistics, technology and business services sectors
or for companies located in each firm's respective geographic region.
Historically, the Company's merger and acquisition advisory business has
been a significant component of the Company's investment banking revenues. The
Company believes that it has a well established merger and acquisition advisory
business and plans to capitalize on this strength by further building upon the
equity capital markets groups of Tucker Cleary and Sutro.
The syndicate departments coordinate the distribution of managed and
co-managed corporate securities offerings and accept invitations to participate
in underwritings managed by other investment banking firms.
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The Company, through certain subsidiaries and employee incentive
arrangements, has participated from time to time in the past and may participate
from time to time in the future as an equity investor in connection with
specific transactions.
The Company intends to continue to increase its equity capital markets
business by committing greater resources to and carefully focusing its research
and investment banking coverage on geographical regions and industries which
management believes offer the greatest opportunities. Management also believes
that consolidations within the investment banking industry, as a whole, will
offer enhanced opportunities for those firms which maintain their local and
industry specific focus.
Asset Management
The Company provides investment advisory and portfolio management services
to institutions, pension and endowment funds, money market funds, professional
firms, individuals and trusts. The asset management business consists of Freedom
Capital, Cleary Gull IMS and asset management business from Tucker Anthony and
Sutro. As of December 31, 1999, total assets under management were over $11.0
billion. Asset management revenues in 1999 increased 42% over the prior year and
have represented 12%, 11% and 9% of the Company's net revenues in 1999, 1998 and
1997, respectively.
Freedom Capital, headquartered in Boston, was formed in 1930. Freedom
Capital has developed a leading position in the management of public funds for
local Massachusetts municipalities and agencies, has developed an increasing
presence in certain sectors of the union pension fund market and has expanded
its high net worth asset management business. As of December 31, 1999, Freedom
Capital had $7.8 billion in assets under management of which $3.7 billion are in
money market funds for which it acts as an investment advisor. As with other
aspects of the Company's business, Freedom Capital is focused on service and
client communication. To foster active and attentive management, Freedom Capital
limits the number of client relationships of each portfolio manager. This policy
is intended to provide each portfolio manager with the time necessary to foster
ongoing client relationships and the opportunity to discuss portfolio strategies
with the client. In addition, Freedom Capital provides its clients with economic
commentary and investment letters on a regular basis.
Cleary Gull IMS is an asset management firm based in Milwaukee and a
wholly-owned subsidiary of the Company. Cleary Gull IMS provides primarily
investment management services to institutional accounts and high net worth
individuals and had almost $1.0 billion in assets under management at December
31, 1999. The Company acquired Cleary Gull Reiland & McDevitt Inc. ("Cleary
Gull") in the second quarter of 1998. During 1999, the investment banking,
equity research and institutional brokerage activities of Cleary Gull and Tucker
Anthony were combined to form Tucker Cleary, a division of Tucker Anthony. The
remaining business of Cleary Gull, now Cleary Gull IMS, is investment management
services provided to institutional accounts and high net worth individuals.
Freedom Trust Company, a New Hampshire chartered trust company and a
subsidiary of Freedom Capital, commenced operations in early 1996 to provide
clients the opportunity to place their assets in trust so that the Company may
continue to provide asset management services to such trusts after the client's
death. Freedom Trust Company had assets under custody of $576 million as of
December 31, 1999.
Trading and Other Broker-Dealer Activities
Tucker Anthony, Sutro and Hill Thompson make markets, buying and selling as
principal, in common stocks, convertible preferred stocks, warrants and other
securities traded on Nasdaq or other over-the-counter ("OTC") markets. As of
December 31, 1999, the Company made markets in equity securities of over 9,000
issuers compared to 535 issuers as of December 31, 1998. The increase in market
making activity in 1999 from prior years is mainly due to the acquisition of
Hill Thompson whose primary business is market making in Nasdaq Small Cap, OTC
Bulletin Board and Pink Sheets stocks. The majority of Hill Thompson's trading
represents dealer-to-dealer transactions with major wire houses, wholesale
market makers, discount brokerages and internet trading firms as well as trading
on a principal basis with mutual funds, banks, insurance companies and other
financial service institutions. Tucker Anthony's and Sutro's market making
activities are
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primarily in securities in which there is substantial continuing client interest
and include securities which the Company has underwritten or on which it
provides research reports. The Company also effects transactions in blocks of
securities, usually with institutional investors and generally involving 10,000
or more shares of listed stocks. Such transactions are handled on an agency
basis to the extent possible, although the Company may take a long or short
position as principal to the extent that no buyer or seller is immediately
available. By engaging in block positioning as a principal, the Company places a
portion of its capital at risk to facilitate transactions for clients.
The Company provides clients access to a range of fixed income products
including municipal securities, U.S. government and agency securities, mortgage
related securities including those issued through Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal
Home Loan Mortgage Corp. ("FHLMC"), and corporate investment-grade and
high-yield bonds. The Company takes positions on a principal basis in municipal,
U.S. government, agency and corporate securities to facilitate transactions for
its clients. Additionally, trading activities include the purchase of securities
under agreements to resell at future dates (reverse repurchase agreements) and
the sale of the same or similar securities under agreements to repurchase at
future dates (repurchase agreements). The Company actively participates on a
principal basis in the mortgage-backed securities markets through the purchase
or sale of GNMA, FNMA, FHLMC, mortgage pass-through securities, collateralized
mortgage obligations and other mortgage related securities in order to meet
client needs. The Company finances the majority of its trading positions as part
of its Wexford clearing arrangement, through overnight borrowings and through
repurchase agreements.
Revenues derived from principal trading in OTC markets and fixed income
products were 9%, 7% and 8% of the Company's net revenues in 1999, 1998 and
1997, respectively.
Tucker Anthony and Sutro are each municipal securities dealers in both the
primary and secondary markets, buying and selling securities for their own
accounts and for clients. The public finance departments of Tucker Anthony and
Sutro provide financial consulting, advisory and underwriting services to
municipalities and public service districts. These subsidiaries manage and
underwrite offerings of municipal securities to finance the construction and
maintenance of a broad range of public-related facilities, including healthcare,
housing, education, public power, water and sewer, airports, highways and other
infrastructure needs. Over the last several years, the public finance industry
has generally experienced diminishing spreads. Nevertheless, both firms have
experienced increased revenues in this sector by concentrating on regionally
focused community projects.
Tucker Anthony engages in the purchase and sale of convertible and equity
securities to take advantage of market price differences. Tucker Anthony's
arbitrage activities include both convertible and risk arbitrage. To the extent
that purchase and sale transactions are not simultaneous, or the closing of a
position is subject to a subsequent event such as the successful consummation of
a corporate merger, Tucker Anthony places a portion of its capital at risk.
Sutro does not engage in significant arbitrage activities. In 1999, arbitrage
revenues represented less than three percent of the Company's net revenues.
Tucker Anthony and Sutro hold memberships in the New York Stock Exchange,
Inc. (the "NYSE") and in other major securities exchanges in the United States
in order to provide services to their brokerage clients in the purchase and sale
of listed securities.
The Company's wholly-owned subsidiary, Freedom Specialist Inc., has a 25%
interest in the profits and losses of a joint specialist account in which it
participates with RPM Specialist Corp. and R. Adrian & Co., two other NYSE
specialist firms. Specialists are responsible for executing transactions and
maintaining a fair and orderly market in securities under NYSE rules and
regulations. In this function, a specialist firm acts as an agent in executing
orders entrusted to it and/or acts as a dealer on the opposite side of public
orders in the security executed on the floor of the NYSE. As of December 31,
1999, the joint specialist account acted as a specialist in 36 equity issues.
Stock settlement and clearing activities for the joint specialist account are
provided by RPM Clearing Corporation.
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Securities transactions for clients are executed on either a cash or margin
basis. In most margin transactions, credit is extended to a client through the
Wexford clearing arrangement for the purchase of securities, using the
securities purchased and/or other securities in the client's account as
collateral for amounts loaned. The Company receives income from interest charged
on such extensions of credit. The financing of margin purchases can be an
important source of revenue to the Company, since the interest rate paid by the
client on funds loaned through Wexford exceeds the Company's interest costs paid
to Wexford for net customer debit balances. The amount of the Company's net
interest income is affected not only by prevailing interest rates, but also by
the volume of business conducted on a margin basis. Net interest income
generated 5%, 6% and 6% of the Company's net revenues in 1999, 1998 and 1997,
respectively. By permitting a client to purchase on margin, the Company takes
the risk that the client will not perform its obligations under the margin loan
to maintain adequate collateral in the event that market declines reduce the
value of the collateral below the principal amount loaned. Amounts loaned are
limited by margin regulations of the Board of Governors of the Federal Reserve
System and other regulatory authorities and are subject to credit review and
daily monitoring by Wexford, Tucker Anthony, Sutro and Cleary Gull IMS.
STRATEGIC ACQUISITIONS
During 1999, the Company continued its growth strategy by completing four
acquisitions. Management believes these acquisitions strengthen and expand the
Company's geographic and product offering base while reducing the Company's
costs by leveraging its infrastructure. The 1999 acquisitions are summarized
below.
TA MidAtlantic (formerly Hopper Soliday)
On January 19, 1999, the Company acquired certain assets and liabilities of
Hopper Soliday, renamed TA MidAtlantic, and transferred them to Tucker Anthony.
TA MidAtlantic is an investment and municipal banking operation founded in 1872
and based in Lancaster, Pennsylvania. The acquisition of TA MidAtlantic, which
had 1998 revenues of approximately $20 million, enhanced the Company's
investment and municipal finance business and provided greater penetration into
markets in Pennsylvania.
Charter Investment Group, Inc.
On February 1, 1999, the Company, through its Sutro subsidiary, acquired
the business and substantially all of the assets of Charter Investment Group,
Inc. ("Charter"), a brokerage firm based in Portland, Oregon. Charter, which had
1998 revenues of approximately $7.5 million and approximately $900 million in
brokerage accounts as of December 31, 1998, added 28 investment executives to
the Company's West Coast retail operations and provided market penetration into
Oregon.
Gibraltar
On September 1, 1999, the Company acquired Gibraltar, a regional brokerage
and investment advisory services firm based in New Jersey, and merged it with
Tucker Anthony. Gibraltar, which was formed in 1968, added more than 40,000
accounts to the Company's retail client base and had revenues of approximately
$38 million in 1999, including results after its acquisition by the Company.
Hill Thompson
On October 29, 1999, the Company acquired The Hill Thompson Group, Ltd.
("Hill Thompson Group"), including its primary operating subsidiary, Hill
Thompson, a New Jersey based OTC trading firm founded in 1932. Hill Thompson
makes markets in almost 9,000 Nasdaq Small Cap, OTC Bulletin Board and Pink
Sheets stocks and had revenues of approximately $44 million in 1999, including
results after its acquisition by the Company.
RELATIONSHIP WITH WEXFORD
With the exception of Hill Thompson, the Company clears all securities
transactions, and carries accounts for customers and its proprietary accounts,
with Wexford. Wexford furnishes the Company with
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information necessary to run the Company's business, including commission runs,
transaction summaries, data feeds for various reports including compliance and
risk management, execution reports, trade confirmations and monthly account
statements; cashiering functions and the handling of margin accounts. As a
result of its arrangement with Wexford, the Company has achieved substantial
savings in its clearing and related operations. Under the Wexford arrangement,
management believes that the Company's cost of clearing its transactions is very
competitive with the industry's costs. The Company pays a fixed fee per trade,
subject to an aggregate annual minimum payment, for clearing trades through
Wexford. The agreement between subsidiaries of the Company and Wexford has a
fixed term of five years expiring in April 2001, with provisions for negotiated
extensions.
The Company has an uncommitted financing arrangement with Wexford pursuant
to which the Company finances most of its customer accounts, broker-dealer
balances and firm trading positions through Wexford. Although the customer
accounts and such broker-dealer balances are not reflected on the Company's
statements of financial condition, the Company has agreed to indemnify Wexford
for losses it may sustain in connection with accounts of the Company's customers
and therefore retains risk with respect thereto. The Company seeks to control
the risks associated with these activities by requiring customers to maintain
margin collateral in compliance with various regulatory and internal guidelines.
The Company and Wexford monitor required margin levels daily and, pursuant to
such guidelines, require customers to deposit additional collateral or reduce
securities positions when necessary.
SEGMENT REPORTING
The Company has two reportable segments: broker-dealer and asset
management. The Company's broker-dealer segment includes its retail operations,
investment banking, research, institutional sales and syndication service
businesses as well as its OTC, fixed income and arbitrage trading activities.
The asset management segment consists of Freedom Capital, Cleary Gull IMS and
asset management business from Tucker Anthony and Sutro. For further
information, see Note 18 of the audited financial statements contained in Item 8
of this report.
EFFECTS OF INTEREST RATES
The Company's business is affected by general economic conditions,
including movements of interest rates. Interest rate movements may have direct
effects. For example, the Company's inventory of fixed income securities may
fluctuate as interest rates change, and the Company's interest income and
interest expense may likewise change as interest rates change. However, interest
rates have indirect effects on other aspects of the Company's business as well.
As interest rates increase, the price of equity securities may decline,
partially reflecting the increased competition posed by more attractive rates on
fixed income securities and partially reflecting the fact that interest rate
increases may tend to dampen economic activity by increasing the cost of capital
for investment and expansion, thereby reducing corporate profits and the value
of securities. As interest rates decline, securities may tend to rise in value.
The impact of these changes may affect the Company's inventory of securities,
which may change in value, and may also affect the profitability of the
Company's investment banking activities. Retail commission revenue may also be
affected by changes in interest rates and any resulting indirect impact on the
value of securities.
The Company's asset management revenues are derived from fees which are
generally based on the market value of assets under management. Consequently,
significant fluctuations in the values of securities, which can occur as a
result of changes in interest rates or changes in other economic factors, may
materially affect the amount of assets under management and thus the Company's
revenues and profitability.
COMPETITION
All aspects of the Company's business and of the securities industry in
general are highly competitive. The Company competes directly with national and
regional full-service broker-dealers, and to a lesser extent with discount
brokers and dealers, investment banking firms, investment advisors and certain
commercial
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banks. Also, recent and pending legislative and regulatory initiatives intended
to ease restrictions on the sale of securities by commercial banks are already
beginning to increase competition from domestic and international banks. In
addition, the Company competes indirectly for investment assets with insurance
companies and others.
In recent years the financial services industry has undergone significant
consolidation as numerous securities firms have either ceased operations or have
been acquired by or merged into other firms. These mergers and acquisitions have
further concentrated equity capital and other financial resources in the
industry and increased competition. Many of the Company's competitors use their
greater financial capital and scope of operations to offer their customers more
product offerings, broader research capabilities, access to international
markets, and other products and services not offered by the Company.
Entities offering electronic and/or discount brokerage services are
increasing competition in the securities industry. Competitors offering
internet-based or other electronic brokerage services may have lower costs and
offer their customers more attractive pricing than other service providers in
the industry. The Company also anticipates that additional competition may arise
from underwriters who will attempt to conduct offerings of securities for
emerging and middle-market companies through new distribution channels such as
the internet. Issuers may bypass financial intermediaries altogether and offer
their shares directly to purchasers through the internet and other electronic
channels.
In addition, the Company faces competition for investment professionals.
Although the Company strives to maintain strong relationships with its
investment executives, the demand for investment executives has increased and
employers in the industry are increasingly offering guaranteed contracts,
upfront payments and increased compensation in an attempt to attract and retain
qualified personnel.
The Company believes that the principal competitive factors positively
influencing the Company's business are: (1) the qualifications and experience of
its professional staff; (2) its reputation in the marketplace; (3) its existing
client relationships; (4) its ability to commit capital to client transactions;
(5) the mix of market capabilities offered by the Company; and (6) the adequacy
of its capital levels and its ability to raise additional capital.
REGULATION
The securities and commodities industry is one of the nation's most
extensively regulated industries. Moreover, the regulations are subject to
change at any time, which can affect competition in the industry, capital
requirements and the Company's compliance costs.
The SEC is responsible for carrying out the federal securities laws and
serves as a supervisory body over all national securities exchanges and
associations. In many respects, the regulation of broker-dealers has been
delegated by the federal securities and commodities laws to self-regulatory
organizations ("SROs"). These SROs include all the national securities and
commodities exchanges, the National Association of Securities Dealers (the
"NASD") and the Municipal Securities Rulemaking Board (the "MSRB"). Subject to
review by the SEC and the Commodity Futures Trading Commission (the "CFTC"),
these SROs adopt rules that govern the industry and conduct periodic
examinations of the operations of certain subsidiaries of the Company. The NYSE
has been designated as the primary regulator of certain of the Company's
subsidiaries, including Tucker Anthony and Sutro. The NASD has been designated
as the primary regulator of Hill Thompson. In addition, these subsidiaries are
subject to regulation under the laws of the 50 states, the District of Columbia,
Puerto Rico and certain foreign countries in which they are registered to
conduct securities, investment banking, insurance or commodities business.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods, trade practices, use and
safekeeping of customers' funds and securities, capital structure of securities
firms, record-keeping and the conduct of directors, officers and employees.
Violation of applicable regulations can result in the revocation of broker-
dealer licenses, the imposition of censures or fines and the suspension or
expulsion of a firm, its officers or employees.
8
<PAGE> 10
As registered broker-dealers or member firms of the NYSE or NASD, Tucker
Anthony, Sutro, Cleary Gull IMS, Hill Thompson and Freedom Specialist Inc. are
subject to certain net capital requirements set forth in Rule 15c3-1 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and NYSE Rule
325 ("the Net Capital Rules"). Freedom Distributors Corporation, a subsidiary of
Freedom Capital, is also subject to Rule 15c3-1. The Net Capital Rules, which
specify minimum net capital requirements for registered broker-dealers, are
designed to measure the financial soundness and liquidity of broker-dealers. The
Net Capital Rules also (1) require that broker-dealers notify the SEC, in
writing, two business days prior to making withdrawals or other distributions of
equity capital or lending money to certain related persons if those withdrawals
would exceed, in any 30-day period, 30% of the broker-dealer's excess net
capital, and that they provide such notice within two business days after any
such withdrawal or loan that would exceed, in any 30-day period, 20% of the
broker-dealer's excess net capital; (2) prohibit a broker-dealer from
withdrawing or otherwise distributing equity capital or making related party
loans if after such distribution or loan, the broker-dealer's net capital is
less than 120% of its minimum net capital dollar amount or if the aggregate
indebtedness of the broker-dealer's consolidated entities would exceed 1,000% of
the broker-dealer's net capital and in certain other circumstances; and (3)
provide that the SEC may, by order, prohibit withdrawals of capital from a
broker-dealer for a period of up to 20 business days, if the withdrawals would
exceed, in any 30-day period, 30% of the broker-dealer's excess net capital and
if the SEC believes such withdrawals would be detrimental to the financial
integrity of the firm or would unduly jeopardize the broker-dealer's ability to
pay its customer claims or other liabilities. Under NYSE Rule 326, a
broker-dealer that is a NYSE member is required to reduce its business if its
net capital (after giving effect to scheduled maturities of subordinated
indebtedness or other planned withdrawals of regulatory capital during the
following six months) is less than either 125% of its minimum net capital dollar
amount or 4% of aggregate debit items (or 6% of the funds required to be
segregated pursuant to the Commodity Exchange Act) for fifteen consecutive days.
NYSE Rule 326 also prohibits the expansion of a member's business if its net
capital (after giving effect to scheduled maturities of subordinated
indebtedness or other planned withdrawals of regulatory capital during the
following six months) is less than either 150% of its minimum net capital dollar
amount or 5% of aggregate debit items (or 7% of the funds required to be
segregated pursuant to the Commodity Exchange Act) for fifteen consecutive days.
For information concerning compliance by the Company's subsidiaries with the Net
Capital Rules, see Note 12 of the audited financial statements included in Item
8 of this report.
The Company also is subject to "Risk Assessment Rules" imposed by the SEC
which require, among other things, that certain broker-dealers maintain and
preserve certain information, describe risk management policies and procedures
and report on the financial condition of certain affiliates whose financial and
securities activities are reasonably likely to have a material impact on the
financial and operational condition of the broker-dealers. Certain "Material
Associated Persons" (as defined in the Risk Assessment Rules) of the
broker-dealers and the activities conducted by such Material Associated Persons
may also be subject to regulation by the SEC. In addition, the possibility
exists that, on the basis of the information it obtains under the Risk
Assessment Rules, the SEC could seek authority over the Company's unregulated
subsidiaries either directly or through its existing authority over the
Company's regulated subsidiaries.
Tucker Anthony, Sutro, Cleary Gull IMS, Freedom Capital and other
subsidiaries are registered with the SEC as investment advisors under the
Investment Advisors Act of 1940 (the "Advisors Act") and are subject to the
requirements of regulation pursuant to both the Advisors Act and certain state
securities laws and regulations. Such requirements relate to, among other
things, limitations on the ability of investment advisors to charge
performance-based or non-refundable fees to clients, record-keeping and
reporting requirements, disclosure requirements, limitations on principal
transactions between an advisor or its affiliates and advisory clients, as well
as general anti-fraud prohibitions. The state securities law requirements
applicable to registered investment advisors are in certain cases more
comprehensive than those imposed under federal securities laws.
As registered investment advisors under the Advisors Act, Tucker Anthony,
Sutro, Cleary Gull IMS, Freedom Capital and certain other subsidiaries of the
Company are subject to regulations which cover various aspects of the Company's
business, including compensation arrangements. Under the Advisors Act, every
investment advisory agreement with the Company's clients must expressly provide
that such contract may not be assigned by the investment advisor without the
consent of the client. Under the Investment Company Act
9
<PAGE> 11
of 1940 (the "Investment Company Act"), every investment advisor's agreement
with a registered investment company must provide for the agreement's automatic
termination in the event it is assigned. Under both the Advisors Act and the
Investment Company Act, an investment advisory agreement is deemed to have been
assigned when there is a direct or indirect transfer of the agreement, including
a direct assignment or a transfer of a "controlling block" of the firm's voting
securities or, under certain circumstances, upon the transfer of a "controlling
block" of the voting securities of its parent corporation. A transaction is not,
however, an assignment under the Advisors Act or the Investment Company Act if
it does not result in a change of actual control or management of the investment
advisor. Any assignment of the Company's investment advisory agreements would
require, as to any registered investment company client, the prior approval of a
majority of its shareholders, and as to the Company's other clients, the prior
consent of such clients to such assignments.
The Company is also subject to the risk of losses as a result of employee
errors, misconduct and fraud (including unauthorized transactions by traders)
and failures in connection with the processing of securities transactions. In
the fourth quarter of 1997, the Company determined that a former employee
improperly valued securities positions of the Company over the first eleven
months of 1997 in order to conceal trading losses of $2.6 million. The Company
recognized these losses in its 1997 financial results and notified the SEC and
the NYSE of this situation. The Company has conducted an internal review of the
specific trading loss and the Company's reports and procedures relating thereto,
and the Company has enhanced procedures where appropriate. The SEC is
investigating this matter. The Company does not expect that the results of this
investigation will have a material adverse effect on the Company's business,
financial condition or operating results.
ITEM 2. PROPERTIES
The principal executive offices of the Company are located at One Beacon
Street, Boston, Massachusetts under a lease expiring in December 2005. The
Company is currently leasing approximately 104,000 square feet at that location.
Additionally, the Company has a number of offices in leased premises
throughout the United States. The Company's primary operating subsidiaries hold
leases for their principal offices as follows:
- approximately 88,000 square feet (of which 18,000 square feet has been
sublet) at One World Financial Center in New York expiring January
2005.
- approximately 64,000 square feet (of which 8,000 square feet has been
sublet) at 201 California Street, San Francisco, California expiring
July 2003.
- approximately 13,000 square feet at 15 Exchange Place, Jersey City,
New Jersey expiring September 2007.
The properties are shared by the Company's two reportable segments, except
for the Jersey City property which is occupied by Hill Thompson and used solely
by the Company's broker-dealer segment.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various civil actions and
arbitrations incidental to its securities business. Some of these legal actions
involve claims for substantial amounts. The defense of such legal proceedings
may divert the attention of the Company's management, and the Company may incur
significant legal expenses in defending such claims or litigation. While the
ultimate outcome of these matters cannot be ascertained at this time, it is the
opinion of management, after consultation with legal counsel, that the
resolution of such suits will not have a material adverse effect on the
Company's consolidated financial position or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
<PAGE> 12
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the executive officers
of the Company as of March 21, 2000. The executive officers of the Company hold
office until their successors are appointed and qualify.
<TABLE>
<CAPTION>
EXECUTIVE OFFICER
OF THE COMPANY
OR THE PREDECESSOR
NAME AGE POSITION COMPANY SINCE
---- --- -------- ------------------
<S> <C> <C> <C>
John H. Goldsmith............... 58 Chairman of the Board of Directors and Chief 1988
Executive Officer of the Company and Chief
Executive Officer of Tucker Anthony
Kenneth S. Klipper.............. 41 Executive Vice President and Chief Financial 2000
Officer of the Company
John F. Luikart................. 50 Director of the Company and Chairman and Chief 1995
Executive Officer of Sutro
Kevin J. McKay.................. 51 Executive Vice President, General Counsel and 1994
Secretary of the Company
David P. Prokupek............... 38 Director of the Company, President of Tucker 1998
Cleary and Chairman and Chief Executive Officer
of Cleary Gull IMS
Mark T. Whaley.................. 45 Director of the Company and President of 1999
Gibraltar
Robert H. Yevich................ 51 Director of the Company and President of Tucker 1995
Anthony
</TABLE>
JOHN H. GOLDSMITH. Mr. Goldsmith joined the Company (previously the
Predecessor Company) in 1988 and has served as Chairman, Director and Chief
Executive Officer of the Company as well as CEO of Tucker Anthony since that
time. Prior to joining the Company, Mr. Goldsmith served in various capacities
at Prescott, Ball & Turben in Cleveland, Ohio, including as Managing Partner and
Chief Executive Officer from 1978 to 1982 and as President and Chief Executive
Officer from 1982 to 1988. Mr. Goldsmith worked in the institutional sales
department of L.F. Rothschild from 1963 to 1971.
KENNETH S. KLIPPER. Mr. Klipper, a CPA, was named Executive Vice President
and Chief Financial Officer of the Company in January 2000. Prior to joining the
Company, Mr. Klipper served in various capacities at Fidelity Investments from
1994 to 2000, including most recently as Chief Financial Officer for its two
principal broker-dealer subsidiaries, Fidelity Brokerage Services, Inc. and
National Financial Services Corp. Previously, Mr. Klipper was Managing Director
and Controller of Wheat First Butcher Singer, Inc. from 1992 to 1994 and held
various positions at KPMG Peat Marwick from 1981 to 1992.
JOHN F. LUIKART. Mr. Luikart joined Sutro in 1988 as Executive Vice
President and was responsible for directing all of the firm's capital markets
activities. Mr. Luikart became President of Sutro in 1990. Mr. Luikart was
appointed Chief Executive Officer of Sutro in October 1995 and subsequently
elected to the Board of Directors of the Company in 1996. Mr. Luikart became
Chairman of Sutro in October 1998. Prior to joining Sutro, Mr. Luikart served as
General Partner and Executive Vice President at Prescott, Ball & Turben in
Cleveland, Ohio. Mr. Luikart is a former Chairman of the NASD District Business
Conduct Committee and is a member of the New York Stock Exchange Regional Firm
Advisory Committee.
KEVIN J. MCKAY. Mr. McKay joined the Company in 1994 and has served as
General Counsel and Secretary since that time. Prior to joining the Company, Mr.
McKay was General Counsel of Prudential Securities Incorporated from 1990 to
1994. Mr. McKay has over 20 years of experience in the legal and compliance
field of the securities industry. Mr. McKay is a past President of the
Compliance & Legal Division of the Securities Industry Association.
11
<PAGE> 13
DAVID P. PROKUPEK. Mr. Prokupek was appointed to the Company's Board of
Directors in May 1998, following the acquisition of Cleary Gull. He joined
Cleary Gull as Managing Director of the Investment Banking Department in 1992,
was elected a director in 1994, was named Chief Executive Officer in 1996 and
currently serves as President of Tucker Cleary and Chairman and CEO of Cleary
Gull IMS. Prior to joining Cleary Gull, Mr. Prokupek was a Managing Director of
American Asset Management, a New York-based investment counselor and merchant
bank, and from 1987 to 1989 he was a member of Bankers Trust Company's Merchant
Banking Group.
MARK T. WHALEY. Mr. Whaley was appointed to the Company's Board of
Directors in September 1999, following the acquisition of Gibraltar. Mr. Whaley
joined Gibraltar in 1982, was elected Executive Vice President in 1996 and was
promoted to President of Gibraltar in 1999. Mr. Whaley has more than 18 years of
experience in the brokerage industry as a stockbroker, training manager and
director of sales.
ROBERT H. YEVICH. Mr. Yevich joined Tucker Anthony in 1985 and became
National Sales Manager in 1988. Mr. Yevich was elected to the Board of Directors
of the Company and promoted to President of Tucker Anthony in 1995. Mr.Yevich
has more than 25 years of experience in the retail brokerage business as a
stockbroker, branch manager and research associate. Prior to joining Tucker
Anthony, Mr. Yevich served as branch manager with PaineWebber.
12
<PAGE> 14
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's common stock is listed on the NYSE under the symbol "FSI."
The high and low sales prices per share of the Company's common stock by quarter
since the Company's public offering in April 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
QUARTER HIGH LOW HIGH LOW
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First......................................... $18 $14 1/8 $-- $--
Second........................................ 19 14 3/8 23 1/8 17 3/16
Third......................................... 17 1/8 12 9/16 21 1/2 11 11/16
Fourth........................................ 15 10 1/4 19 9 3/8
</TABLE>
As of March 21, 2000, the closing sales price per share of the Company's
common stock was $14 1/8.
(b) Holders
As of February 11, 2000, there were approximately 618 record holders of the
Company's common stock, according to the records maintained by the Company's
transfer agent. As of February 11, 2000, the Company estimates that there were
over 6,000 beneficial owners of the Company's common stock.
(c) Dividends
Through December 31, 1999, cash dividends per common share declared and
paid by the Company each quarter since its public offering in April 1998 were as
follows:
<TABLE>
<CAPTION>
QUARTER 1999 1998
------- ----- -----
<S> <C> <C>
First.................................................. $0.04 $ --
Second................................................. 0.05 --
Third.................................................. 0.05 0.04
Fourth................................................. 0.05 0.04
</TABLE>
The timing and amount of future dividends will be determined by the
Company's Board of Directors and will depend, among other factors, upon the
Company's earnings, financial condition and cash requirements at the time such
payment is considered. The Company has historically funded its quarterly
dividend payments through dividends received from its subsidiaries whose ability
to pay dividends is limited by the Net Capital Rules of various regulatory
bodies. Additionally, the Company's dividend payments are restricted by its
revolving credit agreement. See Notes 10 and 12 of the Company's audited
financial statements in Item 8 of this report.
(d) Unregistered Securities
During the fourth quarter of 1999, the Company issued 1,233,405 shares of
its common stock to the former owners of Hill Thompson Group to acquire their
firm in a private placement transaction exempt under section 4(2) of the
Securities Act.
Additionally, the Company issued 4,645 shares of common stock during the
1999 fourth quarter in private placement transactions exempt under section 4(2)
of the Securities Act to John Hancock Subsidiaries, Inc. pursuant to the
Additional Share Agreement entered into in connection with the acquisition of
the Company's subsidiaries from Hancock.
13
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMBINED
YEARS ENDED DECEMBER 31 YEAR ENDED YEAR ENDED
------------------------------- DECEMBER 31 DECEMBER 31
1999 1998 1997 1996(A) 1995(B)
-------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
FINANCIAL RESULTS
Net revenues(c)........................... $553,336 $440,376 $376,814 $350,239 $ 332,762
Income before income taxes................ $ 47,985 $ 44,594 $ 32,435 $ 21,807 $ 22,284
Net income before extraordinary item...... $ 29,117 $ 26,411 $ 18,698 $ 12,283 $ 13,064
Net income after extraordinary item(d).... $ 29,117 $ 25,135 $ 18,698 $ 12,283 $ 13,064
PER COMMON SHARE
Basic earnings before extraordinary
item.................................... $ 1.45 $ 1.41 $ 1.31 -- --
Basic earnings after extraordinary item
(d)..................................... $ 1.45 $ 1.34 $ 1.31 -- --
Diluted earnings before extraordinary item... $ 1.39 $ 1.34 $ 1.27 -- --
Diluted earnings after extraordinary item
(d)..................................... $ 1.39 $ 1.28 $ 1.27 -- --
Cash dividends declared................... $ 0.19 $ 0.08 -- -- --
Book value at end of year................. $ 12.51 $ 11.13 $ 6.96 $ 5.55 --
FINANCIAL CONDITION
Total assets.............................. $818,003 $606,250 $727,587 $516,952 $1,214,003
Long-term borrowings...................... $ 61,303 $ 16,709 $101,446 $110,819 --
Stockholders' equity...................... $272,216 $223,390 $102,326 $ 79,468 $ 152,781
Common shares outstanding at end of
year.................................... 21,752 20,079 14,704 14,313 1
OTHER FINANCIAL DATA
EBITDA (e)................................ $ 75,368 $ 61,446 $ 52,540 $ 37,424 $ 34,246
Pre-tax margin............................ 8.7% 10.1% 8.6% 6.2% 6.7%
Return on average equity (f).............. 12.4% 14.5% 21.2% 8.0% 8.6%
Assets in retail brokerage accounts at end
of year (in billions)................... $ 43.0 $ 31.7 $ 27.5 $ 23.4 $ 20.8
</TABLE>
- ---------------
(a) Based on the consolidated results of the Predecessor Company for the eleven
months ended November 29, 1996 combined with the consolidated results of the
Company for one month ended December 31, 1996.
(b) Predecessor Company.
(c) Certain amounts have been reclassified to conform with 1999 financial
statement presentation.
(d) Extraordinary item of $1.2 million after tax represents the write-off of
capitalized debt costs as a result of the retirement of $77.5 million in
debt following the Company's April 2, 1998 initial public offering.
(e) EBITDA represents earnings before extraordinary item, acquisition interest
expense, taxes, depreciation and amortization. EBITDA is a supplemental
measure of operating results or cash flow from operations and is a widely
accepted financial indicator of a Company's liquidity. It is not an
alternative measure of operating results or cash flow from operations as
determined in accordance with generally accepted accounting principles.
(f) Return on average equity has been restated to conform with current year
methodology. Return on average equity for 1998 is before extraordinary item.
14
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS ENVIRONMENT
The Company's retail securities brokerage activities, as well as its
investment banking, asset management, institutional sales and trading and equity
research services, are in highly competitive markets and subject to various
risks including volatile trading markets and fluctuations in the volume of
market activity. These markets are affected by general economic and market
conditions, including fluctuations in interest rates, volume and price levels of
securities, flows of investor funds into and out of mutual funds and pension
plans and by factors that apply to particular industries such as technological
advances and changes in the regulatory environment.
Declining interest rates and an improving economic environment contributed
to a significant increase in activity in the equity markets in the United States
throughout 1997. The United States economy remained strong during 1998, with
stable interest rates and low inflation. However, the financial markets
experienced periods of heavy volatility during August and September 1998,
resulting in a difficult operating environment for the third quarter,
particularly in trading and investment banking activities. The year 1999 saw a
continuation of positive monetary conditions and low inflation which continued
to propel the United States equity markets. Financial market conditions remained
favorable in 1999 despite some uncertainty over the direction of U.S. interest
rates during the last three quarters of the year. The Company's financial
results have been and may continue to be subject to fluctuations due to the
changing economic environment. Consequently, the results of operations for a
particular period may not be indicative of results to be expected for other
periods.
COMPANY DEVELOPMENTS
During 1999, the Company continued its growth strategy which resulted in
several new acquisitions summarized below.
- In January 1999, the Company acquired certain assets and liabilities
of Hopper Soliday & Co., Inc. ("Hopper Soliday"), renamed Tucker
Anthony MidAtlantic Division ("TA MidAtlantic") and transferred them
to Tucker Anthony. TA MidAtlantic is an investment and municipal
banking operation based in Pennsylvania.
- In February 1999, the Company, through its Sutro subsidiary, acquired
the business and substantially all of the assets of Charter Investment
Group, Inc. ("Charter"), a retail brokerage firm based in Oregon.
- In September 1999, the Company acquired Gibraltar Securities Co.
("Gibraltar"), a regional brokerage and investment advisory service
firm located in New Jersey which was merged with and operates as a
division of Tucker Anthony.
- In October 1999, the Company acquired The Hill Thompson Group, Ltd.
("Hill Thompson Group"), including its primary operating subsidiary
Hill, Thompson, Magid & Co., Inc. ("Hill Thompson"), a New
Jersey-based over-the-counter trading firm.
During 1998, the Company undertook two key initiatives as highlighted
below:
- On April 2, 1998, the Company completed its initial public offering of
7.4 million shares plus an over-allotment of 1.1 million shares,
including 4.2 million shares of common stock sold by the Company. The
Company's public offering raised approximately $75.7 million for the
Company, after deducting underwriting discounts, commissions and
expenses. The Company used the proceeds and available cash to repay
$77.5 million of debt.
- In May 1998, the Company completed its acquisition of Cleary Gull
Reiland & McDevitt Inc. ("Cleary Gull"), a privately held investment
banking, institutional brokerage and investment advisory firm
headquartered in Milwaukee, Wisconsin. During 1999, the investment
banking, equity research and institutional brokerage activities of
Cleary Gull and Tucker Anthony were combined to form Tucker Anthony
Cleary Gull ("Tucker Cleary"), a division of Tucker Anthony. The
remaining business of Cleary Gull, now Cleary Gull IMS, is primarily
investment management services provided to institutional accounts and
high net worth individuals.
15
<PAGE> 17
COMPONENTS OF REVENUES AND EXPENSES
REVENUES. Commission revenues include retail and institutional commissions
received by the Company as an agent in securities transactions, including all
exchange listed, over-the-counter agency, mutual fund, insurance and annuity
transactions. Principal transactions revenues include principal sales credits
and dividends as well as gains and losses from the trading of securities by the
Company. Investment banking revenues include selling concessions, underwriting
fees and management fees received from the underwriting of corporate or
municipal securities as well as fees earned from providing merger and
acquisition and other financial advisory services. Asset management revenues
include fees generated from providing investment advisory, portfolio management
and custodial services to clients, as well as managed account fees and 12b-1
distribution fees. Other revenues primarily consist of retirement plan revenue,
third party correspondent clearing fees and other transaction fees. Net interest
income equals interest income less interest expense. Interest income primarily
consists of interest earned on margin loans made to customers, securities
purchased under agreements to resell and fixed income securities held in the
Company's trading accounts. Interest expense includes interest paid under its
Wexford financing arrangement and on bank borrowings, securities sold under
agreements to repurchase, fixed asset financing and cash balances in customer
accounts held by Wexford.
EXPENSES. Compensation and benefits expense includes sales, trading and
incentive compensation, which are primarily variable based on revenue production
and/or business unit profit contribution, and salaries, payroll taxes and
employee benefits which are relatively fixed in nature. Incentive compensation,
including bonuses for eligible employees, is accrued proratably throughout the
year based on actual or estimated annual amounts. Occupancy and equipment
expense includes rent and operating expenses for facilities, expenditures for
repairs and maintenance, and depreciation and amortization of furniture,
fixtures and leasehold improvements. Communications expense includes charges for
telecommunications, news and market data services. Brokerage and clearance
expense includes the cost of securities clearance, floor brokerage and exchange
fees. Promotional expense includes travel, entertainment and advertising. Other
expenses include general and administrative expenses, such as professional
services, litigation expenses, goodwill amortization, data processing and other
miscellaneous expenses. Acquisition interest expense represents the interest
expense incurred to fund acquisitions through borrowings under revolving credit
agreements.
16
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth year-to-year increases (decreases) in the
major revenue and expense categories (in thousands):
<TABLE>
<CAPTION>
1999 1998
TWELVE MONTHS ENDED COMPARED TO COMPARED TO
DECEMBER 31, 1998 1997
---------------------------------- ------------------ ---------------------
1999 1998(a) 1997(a) AMOUNT PERCENT AMOUNT PERCENT
-------- -------- ------------ -------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Commissions......................... $228,198 $178,959 $157,193 $ 49,239 28 $21,766 14
Principal transactions.............. 146,638 98,287 97,958 48,351 49 329 0
Investment banking.................. 72,852 82,255 57,683 (9,403) (11) 24,572 43
Asset management.................... 67,106 47,294 34,376 19,812 42 12,918 38
Net interest income(b).............. 28,893 25,012 21,628 3,881 16 3,384 16
Other............................... 9,649 8,569 7,976 1,080 13 593 7
-------- -------- -------- -------- -------
Net revenues................... 553,336 440,376 376,814 112,960 26 63,562 17
Expenses:
Compensation and benefits........... 362,239 286,072 245,159 76,167 27 40,913 17
Occupancy and equipment............. 28,566 23,557 21,431 5,009 21 2,126 10
Communications...................... 22,355 18,373 17,105 3,982 22 1,268 7
Brokerage and clearance............. 21,662 14,430 11,739 7,232 50 2,691 23
Promotional......................... 18,112 14,115 10,452 3,997 28 3,663 35
Other............................... 51,607 37,771 32,441 13,836 37 5,330 16
-------- -------- -------- -------- -------
Total expenses................. 504,541 394,318 338,327 110,223 28 55,991 17
Acquisition interest expense............ 810 1,464 6,052 (654) (45) (4,588) (76)
-------- -------- -------- -------- -------
Income before income taxes.............. 47,985 44,594 32,435 3,391 8 12,159 37
Income tax expense...................... 18,868 18,183 13,737 685 4 4,446 32
-------- -------- -------- -------- -------
Net income before extraordinary item.... 29,117 26,411 18,698 2,706 10 7,713 41
Extraordinary item (net of
tax)(d)........................... -- (1,276) -- 1,276 (c) (1,276) (c)
-------- -------- -------- -------- -------
Net income after extraordinary item..... $ 29,117 $ 25,135 $ 18,698 $ 3,982 16 $ 6,437 34
======== ======== ======== ======== =======
</TABLE>
- ---------------
(a) Certain amounts have been reclassified to conform with 1999 financial
statement presentation.
(b) Net interest income is net of interest expense of $37,335 in 1999, $25,836
in 1998 and $22,428 in 1997.
(c) Not meaningful.
(d) Extraordinary item is related to the write-off of capitalized debt costs as
a result of the retirement of $77.5 million in debt in conjunction with the
Company's April 2, 1998 initial public offering.
1999 Compared to 1998
Net revenues were a record $553.3 million for 1999, up $112.9 million or
26% from $440.4 million in 1998. The Company's net revenue growth primarily
stems from the expansion of its retail business combined with growth through new
acquisitions. Net revenues increased $48.9 million in 1999 as a result of the
acquisitions of Hopper Soliday, Charter, Gibraltar and Hill Thompson in 1999 and
Cleary Gull in the second quarter of 1998 (collectively, the "acquired
companies"). Net income for the year ended December 31, 1999 was $29.1 million,
a 16% increase from $25.1 million a year ago and a 10% increase from 1998 net
income before extraordinary item of $26.4 million. Earnings per common share
(diluted) before extraordinary item were $1.39 compared with $1.34 for the year
ended December 31, 1998.
Commission revenues increased 28% or $49.2 million to $228.2 million in
1999 from $179.0 million in 1998. The current year increase is primarily due to
higher average productivity from existing investment executives combined with
production from new investment executives as a result of the Company's
aggressive expansion of its retail business.
Principal transactions revenues were $146.6 million in 1999, up $48.3
million or 49% when compared to $98.3 million in 1998. The revenue increase is
primarily attributable to a significant rise in fixed income
17
<PAGE> 19
related revenues as well as higher over-the-counter and arbitrage trading
revenues when compared with 1998 which was adversely affected by turbulent
financial market conditions during the 1998 third quarter.
Investment banking revenues were $72.9 million in 1999, down 11% from $82.3
million in 1998. Despite a significant improvement in municipal finance fees,
investment banking revenues were down due to reduced equity underwriting
activity and to the transitional effects of realigning much of the Company's
equity capital market businesses.
Asset management revenues rose 42% to $67.1 million in 1999 from $47.3
million in 1998, primarily due to increased revenues earned on assets under
management. Assets under management grew to $11.0 billion at year end 1999 from
$9.0 billion in 1998 as a result of both new money added to the funds and asset
appreciation.
Net interest income was $28.9 million in 1999, up $3.9 million or 16% from
$25.0 million in 1998. The increase in net interest income was mainly due to
higher average customer margin balances resulting from growth in the Company's
retail businesses.
Compensation and benefits expense was $362.2 million in 1999 compared to
$286.1 million in 1998, an increase of $76.1 million or 27% of which $28.7
million was attributable to acquired companies. The remainder of the increase
was due to higher production related compensation based on the Company's
improved operating results and to costs of recruiting new investment executives.
Compensation and benefits as a percentage of net revenues were 65% in both 1999
and 1998.
Non-compensation related operating expenses were $142.3 million in 1999, an
increase of $34.1 million or 31% when compared with $108.2 million in 1998.
Included in 1999 operating expenses are costs from acquired companies of $15.5
million which were not included in 1998. Non-compensation related operating
expenses as a percentage of net revenues was 26% for 1999 compared with 25% in
1998. Occupancy and equipment expense increased $5.0 million or 21% in 1999
primarily due to additional office space, expansion within the Company's retail
business and $2.6 million of costs from acquired companies. Communications
expense was $22.4 million in 1999 compared to $18.4 million in 1998, an increase
of 22 % or $4.0 million of which $2.3 million stems from acquired companies with
the remainder mostly related to new retail branches. Brokerage and clearance
expense was $21.7 million in 1999, up $7.3 million or 50% (including $2.6
million from acquired companies) compared with $14.4 million in 1998 mainly
reflecting additional execution clearing costs resulting from higher business
volumes. Promotional expense increased $4.0 million or 28% (including $1.8
million from acquired companies) to $18.1 million in 1999 from $14.1 million a
year ago due to increased spending on business development, advertising and
travel. Other expenses, which include information systems, professional fees,
data processing, printing, postage and license/registration fees, increased
$13.8 million (including $6.2 million from acquired companies) to $51.6 million
in 1999 from $37.8 million in 1998. This increase partly stems from investments
in technology, increased professional fees associated with new hiring and
additional goodwill amortization resulting from acquisitions.
The Company's income tax provisions for 1999 and 1998 were $18.9 million
and $18.2 million, respectively. The effective tax rate was 39% for 1999, down
from 41% in 1998 reflecting an increase in income not subject to tax and a
decrease in state taxes due to higher taxable income in states with lower tax
rates.
1998 Compared to 1997
The Company achieved record net revenues in 1998 compared to 1997. Net
revenues increased $63.6 million or 17% to $440.4 million in 1998 from $376.8
million in 1997 and, with the exception of principal transactions, reflected
increases in all revenue categories. Net income before extraordinary item was
$26.4 million for 1998, up $7.7 million or 41%, versus $18.7 million in 1997.
Earnings per common share (diluted) before extraordinary item were $1.34 in
1998, compared to $1.27 in 1997. Earnings per common share in 1998 were
significantly impacted by the increase in the number of shares outstanding
following the Company's initial public offering.
Commission revenues increased $21.8 million or 14% to $179.0 million in
1998 from $157.2 million in 1997, due to higher institutional sales as well as
increased volume in the Company's retail businesses, resulting
18
<PAGE> 20
from increased average production per retail investment executive, a greater
number of investment executives and penetration into new markets. The Company
opened three new retail branches in 1998 and hired 105 new investment
executives.
Principal transactions revenues of $98.3 million in 1998 were essentially
flat when compared to $98.0 million in 1997. Although fixed income related
revenues rose 14% from 1997, this increase was offset by lower over-the-counter
and arbitrage trading revenues. Arbitrage trading activities were adversely
impacted by turbulent financial market conditions in the 1998 third quarter, but
rebounded during the fourth quarter and were profitable for the year.
Investment banking revenues increased $24.6 million or 43% to $82.3 million
in 1998 from $57.7 million in 1997. The improvement in investment banking
revenues resulted from higher public offering revenues during the first six
months of the year, continued growth in merger and acquisition and advisory
activities, and the inclusion of Cleary Gull for eight months in 1998.
Asset management revenues grew $12.9 million or 38% to $47.3 million in
1998 from $34.4 million in 1997, and represented 11% of the Company's total net
revenues versus 9% in 1997. This revenue increase reflected the overall growth
in assets under management, which grew 38% to $9.0 billion at year end 1998 and
resulted from both new money added to the funds as well as asset appreciation
arising from equity market performance.
Net interest income was $25.0 million in 1998, up $3.4 million or 16% from
$21.6 million in 1997 primarily due to higher average customer margin balances.
Acquisition interest expense decreased $4.6 million during 1998 reflecting the
retirement of debt following the Company's public offering.
Compensation and benefits expense increased $40.9 million or 17% to $286.1
million in 1998 from $245.2 million in 1997, primarily due to increased
incentive and production-related compensation attributable to higher revenues
and the inclusion of Cleary Gull in 1998. Compensation and benefits as a
percentage of net revenues were 65% for both 1998 and 1997.
Non-compensation related operating expenses increased an aggregate of $15.0
million or 16% to $108.2 million in 1998 from $93.2 million in 1997. The
increase in 1998 included approximately $6.7 million of operating expenses for
Cleary Gull which was not included in 1997. Non-compensation related operating
expenses as a percentage of net revenues were 25% in both 1998 and 1997.
Promotional expenses increased $3.7 million or 35% (including $1.2 million from
Cleary Gull) to $14.1 million in 1998 from $10.4 million in 1997 due to
increased spending on research conferences, advertising, business development
and travel. Other expenses, which include professional fees, data processing,
printing, postage and license/registration fees, increased $5.4 million or 16%
(including $2.7 million from Cleary Gull) to $37.8 million in 1998 from $32.4
million in 1997.
The Company's income tax provisions for 1998 and 1997 were $18.2 million
and $13.7 million, respectively. The effective tax rate was 41% for 1998, down
from 42% in 1997 reflecting an increase in income not subject to tax.
LIQUIDITY AND CAPITAL RESOURCES
The Company receives dividends, interest on loans and other payments from
its subsidiaries, which are the Company's main sources of funds to pay expenses,
service debt and pay dividends. Distributions and interest payments to the
Company from its registered broker-dealer subsidiaries, the Company's primary
sources of liquidity, are restricted as to amounts which may be paid by
applicable law and regulations. The Net Capital Rules are the primary regulatory
restrictions regarding capital resources. The Company's rights to participate in
the assets of any subsidiary are also subject to prior claims of the
subsidiary's creditors, including customers of the broker-dealer subsidiaries.
The assets of the Company's primary operating subsidiaries are highly
liquid with the majority of their assets consisting of securities inventories
and collateralized receivables, both of which fluctuate depending on
19
<PAGE> 21
the levels of customer business. Collateralized receivables consist mainly of
securities purchased under agreements to resell, which are secured by U.S.
government and agency securities.
The majority of the subsidiaries' assets are financed through Wexford, by
securities sold under repurchase agreements and by securities sold, not yet
purchased. The Company's principal source of short-term financing stems from its
clearing arrangement with Wexford under which the Company can borrow on an
uncommitted collateralized basis against its proprietary inventory positions.
This financing generally is obtained from Wexford at rates based upon prevailing
market conditions. The Company monitors overall liquidity by tracking the extent
to which unencumbered marketable assets exceed short-term unsecured borrowings.
Repurchase agreements are used primarily for customer accommodation
purposes and to finance the Company's inventory positions in U.S. government and
agency securities. These positions provide products and liquidity for customers
and are not maintained for the Company's investment or market speculation. The
level of activity fluctuates depending on customer and inventory needs; however,
these fluctuations have not materially affected liquidity or capital resources.
The Company monitors the collateral position and counterparty risk on these
transactions daily.
The subsidiaries' total assets and short-term liabilities and the
individual components thereof may vary significantly from period to period
because of changes relating to customer needs and economic and market
conditions. The Company's total assets at December 31, 1999 and December 31,
1998 were $818.0 million and $606.3 million, respectively. The Company's
operating activities generate cash resulting from net income earned during the
period and fluctuations in its current assets and liabilities. The most
significant fluctuations have resulted from changes in the level of customer
activity and securities inventory changes resulting from proprietary arbitrage
trading strategies dictated by prevailing market conditions and the effects of
acquired companies.
In addition to normal operating requirements, capital is required to
satisfy financing and regulatory requirements. The Company's overall capital
needs are continually reviewed to ensure that its capital base can appropriately
support the anticipated capital needs of the subsidiaries. The excess regulatory
net capital of the Company's broker-dealer subsidiaries may fluctuate throughout
the year reflecting changes in inventory levels and/or composition, investment
banking commitments and balance sheet components. For a description of the
Company's net capital requirements, see Note 12 of the audited financial
statements contained in Item 8 of this report. Management believes that existing
capital, funds provided by operations, the credit arrangements with Wexford and
funds available from a revolving credit agreement will be sufficient to finance
the operating subsidiaries' ongoing businesses. In 1999, the Company financed
acquisitions with cash, stock or a combination of both. Future acquisitions, if
any, would likely be financed in the same manner. Funds available from a
revolving credit agreement are expected to be sufficient to finance acquisitions
in the near future.
During 1999, the Company amended its $50 million revolving credit agreement
(the "Credit Agreement") to increase the total commitments of participating
banks to $100 million. At December 31, 1999, the Company had borrowings
outstanding of $50 million, the proceeds of which were used to finance the
acquisitions of Gibraltar and Hill Thompson Group. The Credit Agreement matures
in November 2003 with all outstanding loans payable at that date.
The Company maintains, through two subsidiaries, a fixed asset credit
facility (the "Fixed Asset Facility") secured by certain of the Company's fixed
assets. During 1999, the Company refinanced a portion of the Fixed Asset
Facility and secured additional financing which was used to upgrade its computer
systems. At December 31, 1999, the Company had borrowings outstanding under the
Fixed Asset Facility of $11.3 million, of which $9.0 million is payable in
monthly installments until December 2001 and $2.3 million is payable in monthly
installments through June 2003. The Company has historically financed capital
expenditures through internal cash generation and through the Fixed Asset
Facility. For the years ended December 31, 1999, 1998 and 1997, the Company had
capital expenditures of approximately $9.5 million, $5.1 million and $2.0
million, respectively, which were funded from operations.
In September 1998, the Board of Directors approved a stock repurchase
program that permits the Company's management to purchase at its discretion up
to five percent of the Company's common stock
20
<PAGE> 22
outstanding or approximately one million shares. In April 1999, the Board of
Directors authorized the purchase of an additional one million shares. To date,
the Company has funded its stock repurchases from internal sources. During 1999,
the Company's treasury stock activities consisted of repurchased shares of
1,777,763 at an average price of $15.60 per share. Included in the shares
repurchased, but not part of the stock repurchase program are 494,748 shares
acquired from SCP Private Equity Partners, L.P., one of the original equity
investors in the Company, and 256,973 shares acquired in private transactions.
As of March 21, 2000, the Company was authorized to repurchase an additional
906,758 shares under the repurchase program.
CASH FLOWS
For the year ended December 31, 1999, cash and cash equivalents increased
$13.4 million. Funds generated from operating activities were $56.2 million
including net income of $29.1 million and depreciation, amortization and other
non-cash charges to net income of $24.5 million.
During 1999, the Company invested cash of $62.0 million including $52.3
million for acquisitions and $9.5 million for fixed asset purchases and
leasehold improvements.
Cash provided by financing activities in 1999 amounted to $19.2 million
comprised principally of $43.2 million in net proceeds from bank borrowings
partially offset by $21.7 million in purchases of treasury stock and $3.8
million of dividend payments.
RISK MANAGEMENT
The Company's primary risk exposures are market risk (particularly equity
price and interest rate risk) and credit risk. Market risk refers to the risk
that a change in the level of equity prices, interest rates or other factors
could result in trading losses. Credit risk refers to the risk that a
counterparty to a transaction might fail to perform under its contractual
commitment resulting in the Company incurring losses. Tucker Anthony's, Sutro's
and Hill Thompson's risk management focuses on the trading of securities,
extension of credit to counterparties and investment banking activities, as well
as the extension of credit to retail and institutional customers. Tucker
Anthony, Sutro and Hill Thompson monitor their market and credit risks daily
though a number of control procedures designed to identify and evaluate the
various risks to which they are exposed.
Market Risk
Tucker Anthony, Sutro and Hill Thompson may act as a principal to
facilitate customer-related transactions in financial instruments which expose
the firm to market risks. Tucker Anthony, Sutro and Hill Thompson may make
markets in equity and debt securities and Tucker Anthony trades for its own
account in arbitrage-related trading activities. Whether acting as principal to
facilitate customer transactions or trading for their own account, Tucker
Anthony, Sutro and Hill Thompson monitor market risk very closely.
Managing market risk exposure includes: limiting firm commitments by
position levels both long and short for every product that is traded; limiting
the type of trade that can occur in each inventory account; and tactically
employing certain hedging techniques that reduce the level of risk taken.
Management believes that the risk management practices of Tucker Anthony, Sutro
and Hill Thompson aid in managing the Company's market exposure.
Tucker Anthony, Sutro and Hill Thompson manage daily risk exposure in their
firm inventory accounts by requiring various levels of management review of
these accounts. The primary purpose of risk management is to participate in the
establishment of position limits, as well as to monitor both the buy and sell
activity in the firm's trading accounts. Trading activities of Tucker Anthony,
Sutro and Hill Thompson result in the creation of inventory positions. Position
and exposure reports indicating positions by product or trader are prepared,
distributed and reviewed each day. These reports enable Tucker Anthony, Sutro
and Hill Thompson to control inventory levels, monitor daily trading results by
product, as well as review inventory aging, pricing and concentration.
The Company is exposed to changes in interest rates as a result of its
borrowings under its Credit Agreement. The amount of the Company's long-term
debt may vary as a result of future business
21
<PAGE> 23
requirements, market conditions and other factors. For a description of the
terms of the Company's long term debt, see Note 10 of the audited financial
statements contained in Item 8 of this report.
Credit Risk
Tucker Anthony and Sutro deal with counterparties or other broker-dealers
in conducting business for their clients or for their own accounts. Financing
extended to counterparties is provided against collateral through Wexford. The
Company reviews counterparties to establish appropriate exposure levels on an
account by account basis. Tucker Anthony and Sutro manage daily credit exposure
by monitoring the level of collateral and creditworthiness of counterparties and
their related trading limits.
Tucker Anthony and Sutro, through Wexford, extend credit to retail
customers. Amounts loaned are limited by the margin regulations of the Board of
Governors of the Federal Reserve System and other regulatory authorities and are
subject to credit review and daily monitoring by Wexford, Tucker Anthony and
Sutro.
Risks associated with investment banking activities are controlled through
capital commitment committees within Tucker Anthony and Sutro. These commitment
committees review every significant proposed investment banking transaction
prior to its acceptance by Tucker Anthony or Sutro. These respective capital
committees review major proposed transactions in order to determine the effect
of such transactions on regulatory capital prior to their approval. Only after
acceptance by the committee within each firm will that subsidiary's commitment
to underwrite a specific security be extended to the investment banking client.
Value at Risk
Under Securities and Exchange Commission rules, the Company is required to
disclose information about its exposure to market risk. As permitted by SEC
rules, the Company used a statistical technique known as Value-at-Risk ("VaR")
to estimate the potential daily earnings effect of adverse changes in fair value
of its trading positions. VaR incorporates numerous variables that could impact
the fair value of the Company's trading portfolio, including equity and interest
rates, associated volatilities, as well as the correlation that exists among
these variables.
The Company calculated VaR using a variance/covariance model with
confidence level of 95% over a one-day holding period. That is, the Company's
VaR represents a potential one-day loss in value that would be exceeded less
than 2.5% of the time if the portfolio were unchanged.
Among the benefits, a VaR model permits the estimation of a portfolio's
aggregate market risk exposure; incorporates a range of varied market risks in
the calculation; reflects risk reduction due to portfolio diversification; and
is comprehensive yet relatively easy to interpret. However, VaR risk measures
should be interpreted in light of the methodology's limitations, which include
the fact that past changes in market risk will not always accurately predict
future changes in a portfolio's value; the model does not include all of a
trading portfolio's market risk factors; and any published VaR results which
reflect a point in time analysis (i.e., December 31, 1999 positions) do not
fully capture the market risk of positions that may not be liquidated or hedged
within one day. The Company is aware of these and other limitations and
therefore views VaR as only one component in its risk management review process.
22
<PAGE> 24
The table below presents the Company's VaR results for each of the
Company's primary risk exposures as well as on an aggregate basis and
incorporates substantially all financial instruments generating market risk.
Since VaR is based on historical data and changes in market risk factor returns,
VaR should not be viewed as predictive of the Company's future financial
performance or its ability to manage and monitor risk. Also, there can be no
assurance that the Company's actual losses on a particular day will not exceed
the VaR amounts indicated below. The Company's VaR results are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
PRIMARY MARKET RISK 1999 1998
- ------------------- ---- ----
<S> <C> <C>
Interest rate VaR...................................... $1,017 $ 474
Equity VaR............................................. 293 820
------ ------
Sub-total.............................................. 1,310 1,294
Less: Diversification benefit*......................... (296) (617)
------ ------
Total.................................................. $1,014 $ 677
====== ======
</TABLE>
- ---------------
* The diversification benefit represents the elimination of market risks which
are present and are offsetting in both the interest rate VaR and the equity
VaR.
During 1999, the Company's VaR varied from a high of $1.2 million to a low
of $0.7 million primarily due to an increase in financial instruments generating
market risk as a result of current year acquisitions.
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. During 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company did not experience any significant disruptions in mission
critical information technology and non-information technology systems and
believes those systems successfully responded to the Year 2000 change. Through
December 31, 1999, the Company's costs related to Year 2000 were minimal and
were funded out of working capital. The Company is not aware of any material
problems resulting from Year 2000 issues, either with its products, its internal
systems, or the products and services of third parties. The Company will
continue to monitor its mission critical computer applications and those of its
suppliers and vendors throughout the year 2000 to ensure that any unidentified
Year 2000 matters that may arise are addressed promptly.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is contained in "Item 7 Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the caption "Risk Management" and is incorporated by reference herein.
23
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS PAGE
- ----------------------------------------- ----
<S> <C>
Report of Independent Auditors.............................. 25
Consolidated Statements of Financial Condition -- December
31, 1999 and 1998......................................... 26
Consolidated Statements of Income -- For the years ended
December 31, 1999, 1998 and 1997.......................... 27
Consolidated Statements of Changes in Stockholders' Equity
-- For the years ended December 31, 1999, 1998 and 1997... 28
Consolidated Statements of Cash Flows -- For the years ended
December 31, 1999, 1998 and 1997.......................... 29
Notes to Consolidated Financial Statements.................. 30
</TABLE>
24
<PAGE> 26
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF
FREEDOM SECURITIES CORPORATION:
We have audited the accompanying consolidated statements of financial
condition of Freedom Securities Corporation (the "Company") as of December 31,
1999 and 1998 and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years ended December 31, 1999, 1998
and 1997. These financial statements are the responsibility of the management of
the Company. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Freedom
Securities Corporation at December 31, 1999 and 1998 and the consolidated
results of its operations and its cash flows for the years ended December 31,
1999, 1998 and 1997 in conformity with accounting principles generally accepted
in the United States.
/s/ ERNST & YOUNG, LLP
New York, New York
January 24, 2000
25
<PAGE> 27
FREEDOM SECURITIES CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 24,647 $ 11,292
Receivables from brokers and dealers........................ 103,568 88,674
Securities purchased under agreements to resell............. 41,250 119,861
Securities owned, at market................................. 414,245 252,478
Fixed assets, net of accumulated depreciation and
amortization.............................................. 24,644 19,479
Exchange memberships owned, at cost......................... 5,955 5,939
Deferred income taxes....................................... 10,936 10,477
Goodwill, net of accumulated amortization................... 87,083 34,875
Other receivables........................................... 56,684 31,356
Other assets................................................ 48,991 31,819
-------- --------
Total assets...................................... $818,003 $606,250
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Payables to brokers and dealers........................... $ 88,811 $ 85,306
Securities sold under agreements to repurchase............ 10,983 28,582
Securities sold, not yet purchased, at market............. 234,026 124,148
Accrued compensation and benefits......................... 94,341 81,099
Accounts payable and accrued expenses..................... 56,323 47,016
Notes payable to banks.................................... 61,303 16,709
-------- --------
Total liabilities................................. 545,787 382,860
-------- --------
Stockholders' equity:
Common stock (60,000,000 shares authorized, 21,773,841 and
20,155,395 shares issued in 1999 and 1998,
respectively, $.01 par value).......................... 218 201
Additional paid-in capital................................ 207,134 181,391
Retained earnings......................................... 65,175 42,970
Treasury stock (21,967 and 76,290 shares in 1999 and 1998,
respectively, at cost)................................. (311) (1,172)
-------- --------
Total stockholders' equity........................ 272,216 223,390
-------- --------
Total liabilities and stockholders' equity........ $818,003 $606,250
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE> 28
FREEDOM SECURITIES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues
Commissions........................................... $228,198 $178,959 $157,193
Principal transactions................................ 146,638 98,287 97,958
Investment banking.................................... 72,852 82,255 57,683
Asset management...................................... 67,106 47,294 34,376
Net interest income (net of interest expense of
$37,335 in 1999, $25,836 in 1998 and $22,428 in
1997)............................................... 28,893 25,012 21,628
Other................................................. 9,649 8,569 7,976
-------- -------- --------
Net revenues..................................... 553,336 440,376 376,814
Expenses
Compensation and benefits............................. 362,239 286,072 245,159
Occupancy and equipment............................... 28,566 23,557 21,431
Communications........................................ 22,355 18,373 17,105
Brokerage and clearance............................... 21,662 14,430 11,739
Promotional........................................... 18,112 14,115 10,452
Other................................................. 51,607 37,771 32,441
-------- -------- --------
Total expenses................................... 504,541 394,318 338,327
Acquisition interest expense............................... 810 1,464 6,052
-------- -------- --------
Income before income taxes................................. 47,985 44,594 32,435
Income taxes............................................... 18,868 18,183 13,737
-------- -------- --------
Net income before extraordinary item....................... 29,117 26,411 18,698
Extraordinary item (net of tax of $922).................... -- (1,276) --
-------- -------- --------
Net income after extraordinary item........................ $ 29,117 $ 25,135 $ 18,698
======== ======== ========
Net income per share:
Basic before extraordinary item....................... $ 1.45 $ 1.41 $ 1.31
======== ======== ========
Basic after extraordinary item........................ $ 1.45 $ 1.34 $ 1.31
======== ======== ========
Diluted before extraordinary item..................... $ 1.39 $ 1.34 $ 1.27
======== ======== ========
Diluted after extraordinary item...................... $ 1.39 $ 1.28 $ 1.27
======== ======== ========
Cash dividends declared per share.......................... $ 0.19 $ 0.08 $ --
Weighted-average common shares outstanding:
Basic................................................. 20,093 18,701 14,287
Diluted............................................... 20,995 19,705 14,733
</TABLE>
See Notes to Consolidated Financial Statements.
27
<PAGE> 29
FREEDOM SECURITIES CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ADDITIONAL
OUTSTANDING PAID-IN RETAINED SUBSCRIBED TREASURY
SHARES PAR VALUE CAPITAL EARNINGS STOCK STOCK TOTAL
----------- --------- ---------- -------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996..................... 14,313 $143 $ 78,804 $ 740 $ -- $ (219) $ 79,468
Sale of common stock....... 488 4 4,693 -- -- -- 4,697
Net income................. -- -- -- 18,698 -- -- 18,698
Acquisition of treasury
stock.................... (97) -- -- -- -- (537) (537)
Reissuance of treasury
stock.................... -- -- 157 -- (913) 756 --
------ ---- -------- ------- ------- -------- --------
Balance at December 31,
1997..................... 14,704 147 83,654 19,438 (913) -- 102,326
------ ---- -------- ------- ------- -------- --------
Sale of common stock....... 110 1 1,022 -- -- -- 1,023
Issuance of subscribed
stock.................... 136 1 -- -- 913 -- 914
Initial public offering.... 4,200 42 75,699 -- -- -- 75,741
Shares issued to acquire
companies................ 876 9 19,932 -- -- -- 19,941
Stock options exercised.... 129 1 687 -- -- -- 688
Income tax benefit
associated with stock
options.................. -- -- 397 -- -- -- 397
Net income................. -- -- -- 25,135 -- -- 25,135
Dividends declared......... -- -- -- (1,603) -- -- (1,603)
Acquisition of treasury
stock.................... (76) -- -- -- -- (1,172) (1,172)
------ ---- -------- ------- ------- -------- --------
Balance at December 31,
1998..................... 20,079 201 181,391 42,970 -- (1,172) 223,390
------ ---- -------- ------- ------- -------- --------
Sale of common stock....... 29 -- 756 -- -- -- 756
Shares issued to acquire
companies................ 2,812 15 23,575 (2,120) -- 21,601 43,071
Stock options exercised.... 161 2 884 -- -- -- 886
Income tax benefit
associated with stock
options.................. -- -- 528 -- -- -- 528
Net income................. -- -- -- 29,117 -- -- 29,117
Dividends declared......... -- -- -- (3,821) -- -- (3,821)
Acquisition of treasury
stock.................... (1,778) -- -- -- -- (27,726) (27,726)
Reissuance of treasury
shares primarily for
employee benefit and
incentive plans.......... 449 -- -- (971) -- 6,986 6,015
------ ---- -------- ------- ------- -------- --------
Balance at December 31,
1999..................... 21,752 $218 $207,134 $65,175 $ -- $ (311) $272,216
====== ==== ======== ======= ======= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE> 30
FREEDOM SECURITIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $29,117 $ 25,135 $ 18,698
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 24,842 13,908 11,640
Deferred income taxes................................ (459) (1,214) 1,540
Non-cash compensation................................ 164 632 1,432
Extraordinary item; write off of capitalized debt
costs.............................................. -- 2,198 --
Changes in assets and liabilities:
(Increase) decrease in operating assets:
Receivables from brokers and dealers................. (3,252) (8,123) (8,910)
Securities purchased under agreements to resell...... 78,811 (5,022) (29,124)
Securities owned, at market.......................... (95,552) 175,114 (170,416)
Other receivables.................................... (23,106) (12,305) (5,268)
Other assets......................................... (13,742) (9,190) (3,126)
Increase (decrease) in operating liabilities:
Payables to brokers and dealers...................... (35,566) 26,244 (15,069)
Securities sold under agreements to repurchase....... (17,599) 28,582 (44,976)
Securities sold, not yet purchased, at market........ 103,986 (233,439) 253,425
Accrued compensation and benefits.................... 9,882 12,784 10,150
Accounts payable and accrued expenses................ (1,303) 984 (6,380)
------- --------- ---------
Net cash provided by operating activities................. 56,223 16,288 13,616
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets................................. (9,529) (5,081) (1,994)
Proceeds from sale of fixed assets........................ -- -- 711
Acquisitions, net of cash acquired........................ (52,495) (3,072) --
------- --------- ---------
Net cash used in investing activities..................... (62,024) (8,153) (1,283)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net................... 1,462 1,992 2,728
Proceeds from initial public offering, net................ -- 75,741 --
Purchases of treasury stock, net.......................... (21,711) (1,172) --
Payment of dividends...................................... (3,821) (1,603) --
Proceeds from (repayments of) bank borrowings, net........ 43,226 (84,737) (9,373)
------- --------- ---------
Net cash provided by (used in) financing activities....... 19,156 (9,779) (6,645)
Increase (decrease) in cash and cash equivalents.......... 13,355 (1,644) 5,688
Cash and cash equivalents, beginning of year.............. 11,292 12,936 7,248
------- --------- ---------
Cash and cash equivalents, end of year.................... $24,647 $ 11,292 $ 12,936
======= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes......................................... $17,303 $ 11,641 $ 14,859
Interest............................................. $37,777 $ 26,851 $ 28,338
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE> 31
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Freedom Securities Corporation is a holding company which together with its
wholly-owned subsidiaries (collectively, the "Company") is a full-service retail
brokerage, asset management and investment banking firm. The Company is engaged
primarily in the retail and institutional brokerage business including corporate
finance and underwriting services. The consolidated financial statements include
the accounts of the Company including its primary operating subsidiaries:
- Tucker Anthony Incorporated ("Tucker Anthony"), headquartered in
Boston, is a brokerage and investment banking firm. Tucker Anthony's
divisions include Tucker Anthony Cleary Gull ("Tucker Cleary"), an
investment banking and institutional brokerage firm; Gibraltar
Securities Co. ("Gibraltar"), a New Jersey-based brokerage and
investment advisory firm acquired by the Company in the third quarter
of 1999; and Tucker Anthony MidAtlantic Division ("TA MidAtlantic"),
formerly Hopper Soliday & Co., Inc. ("Hopper Soliday"), a
Pennsylvania-based municipal finance and underwriting brokerage firm
acquired by the Company in the first quarter of 1999.
- Sutro & Co. Incorporated ("Sutro"), headquartered in San Francisco, is
a West Coast regional brokerage and investment banking firm.
- Hill, Thompson, Magid & Co., Inc. ("Hill Thompson"), based in New
Jersey, is an over-the-counter trading firm.
- Freedom Capital Management Corporation ("Freedom Capital") is a
Boston-based asset management firm.
Tucker Anthony, Sutro and Cleary Gull Investment Management Services, Inc.
("Cleary Gull IMS") clear their securities transactions on a fully disclosed
basis through Wexford Clearing Services Corporation ("Wexford"), a guaranteed
wholly-owned subsidiary of Prudential Securities Incorporated ("Prudential").
Hill Thompson clears all proprietary securities transactions on a self-clearing
basis and substantially all customer transactions through Schroder & Co. Inc. on
a fully disclosed basis.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
All significant intercompany accounts and transactions have been eliminated
in consolidation. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the consolidated financial
statements and accompanying notes. Management believes that the estimates
utilized in preparing its financial statements are reasonable and prudent.
Actual results could differ from these estimates. Certain prior period amounts
have been reclassified to conform with the current period's financial statement
presentation.
Securities
Securities transactions and related revenues and expenses are recorded on a
trade date basis. Securities owned and securities sold, not yet purchased are
stated at market value with related changes in unrealized appreciation or
depreciation reflected in principal transactions revenues. Market value is
generally based on listed market prices. If listed market prices are not
available, fair value is determined based on other relevant factors, including
broker or dealer price quotations. Securities sold, not yet purchased represent
obligations to deliver specified securities at predetermined prices. The Company
is obligated to acquire the securities sold short at prevailing market prices in
the future to satisfy these obligations. Arbitrage positions included in
securities owned and securities sold, not yet purchased result from buying or
selling a security subject to exchange, conversion or reorganization and selling
or buying the security or securities to be received upon
30
<PAGE> 32
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
completion of the exchange, conversion or reorganization. The Company may from
time to time enter into options and futures contracts. These contracts are
valued at market with related changes in unrealized appreciation or depreciation
reflected in principal transactions revenues.
Investment Banking
Investment banking revenues are recorded as follows: management fees as of
the offering date, sales commissions on the trade date and underwriting fees at
the time the underwriting is completed and the income is reasonably
determinable.
Asset Management Fees
The Company earns fees for investment advisory and custodial services
rendered to its clients. Fees are based on a percentage of the average market
value of net assets managed, a percentage of quarter-end market value of assets
managed or on a fee for account basis, depending on the type of client account.
These fees are recorded as earned and billed monthly or quarterly.
Fixed Assets
Furniture and fixtures are depreciated on a straight-line basis over their
estimated useful lives, generally three to ten years. Leasehold improvements are
amortized on a straight-line basis over the lesser of the economic useful lives
of the improvements or the terms of the respective leases. Fixed assets are
stated at cost net of accumulated depreciation and amortization of $9.6 million
and $7.7 million at December 31, 1999 and 1998, respectively.
Intangibles
Goodwill is stated at cost net of accumulated amortization and is amortized
on a straight-line basis over fifteen years. The accumulated amortization of
intangibles totaled $8.6 million and $4.7 million at December 31, 1999 and 1998,
respectively.
Stock Based Compensation
The Company accounts for its stock-based compensation in accordance with
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees" and, accordingly, recognizes no compensation expense related to
stock option grants issued at fair market value. The Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock-Based Compensation," which encourages, but does not
require, companies to recognize compensation expense for grants of stock and
stock options based on the fair value of those instruments. The Company has
elected, as permitted by SFAS No. 123, to adopt the disclosure requirement of
SFAS No. 123 and to continue to account for stock-based compensation under APB
Opinion No. 25.
Income Taxes
The Company accounts for income taxes using the asset and liability method
required by SFAS No. 109, "Accounting for Income Taxes." Under this method, the
Company recognizes taxes payable or refundable for the current year and deferred
tax liabilities and assets based on temporary differences between the carrying
amounts of assets and liabilities for book purposes versus tax purposes.
31
<PAGE> 33
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash Flows
For purposes of reporting cash flows, the Company considers all highly
liquid investments with original maturities of three months or less to be cash
equivalents. Cash flows for the years ended December 31, 1999 and 1998 are shown
net of the effects of acquired companies (See Note 4).
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which establishes
standards for the accounting and reporting of derivative instruments. This
statement was originally effective for fiscal years beginning after June 15,
1999. However, in June 1999, the FASB issued SFAS No. 137, which delayed the
effective date of SFAS No. 133 by one year. SFAS No. 133 is currently effective
for fiscal years beginning after June 15, 2000. The Company does not expect the
adoption of this statement to have a material impact on the Company's
consolidated financial statements.
3. INITIAL PUBLIC OFFERING
On April 2, 1998, the Company completed its initial public offering of 7.4
million shares plus an over-allotment of 1.1 million shares (the "Offering"),
including 4.2 million shares of $.01 par value common stock sold by the Company.
The Offering raised approximately $75.7 million for the Company after deducting
underwriting discounts, commissions and expenses. The Company used the proceeds
and available cash to repay $77.5 million of existing debt (See Note 10). Also,
the Company wrote-off related debt issuance costs which resulted in an after-tax
extraordinary item of $1.2 million in the consolidated statement of income for
the year ended December 31, 1998.
4. ACQUISITIONS
Hopper Soliday (renamed TA MidAtlantic)
On January 19, 1999 the Company acquired certain assets and liabilities of
Hopper Soliday, renamed TA MidAtlantic, and transferred them to Tucker Anthony.
TA MidAtlantic is an investment and municipal banking operation based in
Pennsylvania and its results are included in the consolidated financial
statements from the date of acquisition. The purchase price was $9.0 million
paid in cash and the acquisition was accounted for using the purchase method of
accounting. The excess of the purchase price over the estimated fair value of
net assets acquired, which was recorded as goodwill, was $1.5 million and is
being amortized over 15 years using the straight-line method of amortization. In
addition, the Company agreed to make certain incentive and retention payments
with a total value of $2.0 million (the majority of which is subject to a three
year vesting period).
Charter
On February 1, 1999 the Company, through its Sutro subsidiary, acquired the
business and substantially all of the assets of Charter Investment Group, Inc.
("Charter"), a brokerage firm based in Portland, Oregon. The consolidated
financial statements include the results of Charter from the date of acquisition
and the acquisition was accounted for using the purchase method of accounting.
The purchase price was $3.6 million which included 203,665 shares of the
Company's common stock valued at $3.1 million and $0.5 million paid in cash. The
excess of the purchase price over the estimated fair value of net assets
acquired, which was recorded as goodwill, was $2.4 million and is being
amortized over 15 years using the straight-line method of amortization.
32
<PAGE> 34
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Gibraltar
On September 1, 1999, the Company acquired Gibraltar, a regional brokerage
and investment advisory service firm based in New Jersey. The acquisition was
accounted for using the purchase method of accounting and the consolidated
financial statements include Gibraltar's results from the acquisition date. The
purchase price was $40.6 million which included 1,380,626 shares of the
Company's common stock, valued at $19.5 million, and $19.6 million in cash. In
addition, stock options to purchase shares of Gibraltar capital stock were
converted into options with a net value of $1.5 million to purchase shares of
the Company's common stock. The excess of the purchase price over the estimated
fair value of net assets acquired, which was recorded as goodwill, was $26.5
million and is being amortized over 15 years using the straight-line method of
amortization. In addition, the Company agreed to make certain retention payments
over a four year period with a total value of $6.75 million.
Hill Thompson
On October 29, 1999, the Company acquired The Hill Thompson Group, Ltd.
("Hill Thompson Group"), including its primary operating subsidiary Hill
Thompson, a New Jersey-based over-the-counter trading firm. The acquisition was
accounted for using the purchase method of accounting and the consolidated
financial statements include the results of Hill Thompson Group from the date of
acquisition. The purchase price was $47.3 million which includes 1,295,895
shares of the Company's common stock (of which 62,490 shares were issued
subsequent to December 31, 1999) valued at $19.4 million and $27.9 million in
cash (of which approximately $1.4 million was paid subsequent to December 31,
1999). The excess of the purchase price over the estimated fair value of net
assets acquired, which was recorded as goodwill, was $25.7 million and is being
amortized over 15 years using the straight-line method of amortization.
Additionally, the Company agreed to issue 666,667 shares of the Company's common
stock valued at $10 million to retain Hill Thompson employees. These shares will
be issued over a four year period beginning one year from the date of the
acquisition.
Cleary Gull
On May 1, 1998, the Company completed its acquisition of Cleary Gull
Reiland & McDevitt Inc. ("Cleary Gull"), a privately held, investment banking,
institutional brokerage and investment advisory firm headquartered in Milwaukee,
Wisconsin. The acquisition was accounted for under the purchase method of
accounting and the consolidated financial statements include the results of
Cleary Gull's operations from the date of acquisition. The purchase price was
$24.7 million which included 875,910 shares of the Company's common stock (a
portion of which is subject to a four year vesting period) valued at $17.4
million and $4.6 million in cash. In addition, stock options to purchase shares
of Cleary Gull capital stock with a value of $2.7 million were converted into
options to purchase shares of the Company's common stock. The excess of the
purchase price over the estimated fair value of net assets acquired, which was
recorded as goodwill, was $12.5 million and is being amortized over 15 years
using the straight-line method of amortization. The Company also granted options
to Cleary Gull employees to purchase an additional 239,250 shares of the
Company's common stock, subsequently canceled these options and re-issued
options to purchase 242,910 shares with an exercise price of $13.00 per share.
During 1999 the investment banking, equity research and institutional
brokerage activities of Cleary Gull and Tucker Anthony were combined to form
Tucker Cleary, a division of Tucker Anthony. The remaining business of Cleary
Gull, now Cleary Gull IMS, is primarily investment management services provided
to institutional accounts and high net worth individuals.
33
<PAGE> 35
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. RECEIVABLES FROM AND PAYABLES TO BROKERS AND DEALERS
Included in the receivables from brokers and dealers are unsettled
proprietary trades, cash on deposit with Hill Thompson's clearing broker and
certain overnight funds with Prudential. Included in payables to brokers and
dealers are the amounts due to Wexford for collateralized financing of
proprietary positions and to the custodian of Freedom Capital's money market
funds. The Company's principal source of short-term financing is provided by
Wexford, from which the Company can borrow on an uncommitted basis against its
proprietary inventory positions, subject to collateral maintenance requirements.
The Company conducts business with brokers and dealers that are members of
the major securities exchanges. The Company monitors the credit standing of such
brokers and dealers, monitors the market value of collateral and requests
additional collateral as deemed appropriate.
Amounts receivable from and payable to brokers and dealers consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
-------- -------
<S> <C> <C>
Receivables from brokers and dealers:
Receivable from Prudential....................... $ 60,890 $78,862
Unsettled proprietary trades, net................ 28,315 292
Receivables from other brokers and dealers....... 14,363 9,520
-------- -------
$103,568 $88,674
======== =======
Payables to brokers and dealers:
Payable to Wexford............................... $ 28,204 $ 8,134
Payable to custodian............................. 60,166 77,077
Payables to other brokers and dealers............ 441 95
-------- -------
$ 88,811 $85,306
======== =======
</TABLE>
6. TRANSACTIONS WITH CUSTOMERS
For transactions in which the Company, through Wexford, extends credit to
customers, the Company seeks to control the risks associated with these
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. The Company and Wexford monitor
required margin levels daily and, pursuant to such guidelines, require customers
to deposit additional collateral or reduce securities positions when necessary.
The Company has agreed to indemnify Wexford for losses that it may sustain
in connection with customer accounts introduced by the Company. At December 31,
1999 there were no amounts known to the Company to be indemnified to Wexford for
these customer accounts.
7. SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are treated as collateralized financing transactions,
and are carried at amounts at which the securities will be subsequently resold
or reacquired plus accrued interest. It is the Company's policy to take
possession or control of securities purchased under agreements to resell. The
Company is required to provide securities to counterparties in order to
collateralize repurchase agreements. The Company minimizes credit risk
associated with these activities by monitoring credit exposure and collateral
values on a daily basis and requiring additional collateral to be deposited or
returned when deemed appropriate.
34
<PAGE> 36
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. TRANSACTIONS WITH AFFILIATES
Effective with the buyout of the Company from John Hancock Mutual Life
Insurance Company ("Hancock"), the Company entered into management agreements
with certain shareholders and agreed to pay annual management fees totaling $0.3
million. These agreements terminated in 1998 upon the initial public offering of
the Company's common stock.
The Company participated in group insurance arrangements through Hancock
until June 30, 1997, when the Company obtained its own insurance arrangements.
The Company paid to Hancock its allocable share of the cost of such insurance
which amounted to $6.1 million for the six month period ended June 30, 1997.
9. SECURITIES
Securities owned and securities sold, not yet purchased are recorded at
market value and consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Securities Owned:
Obligations of the U.S. government or its agencies..... $ 28,935 $ 27,214
State and municipal obligations........................ 114,013 43,487
Arbitrage securities................................... 209,615 133,017
Other corporate obligations............................ 23,320 30,474
Other corporate stocks and warrants.................... 38,362 18,286
-------- --------
$414,245 $252,478
======== ========
Securities Sold, Not Yet Purchased:
Obligations of the U.S. government or its agencies..... $ 42,649 $ 18,775
State and municipal obligations........................ 9,135 1,398
Arbitrage securities................................... 167,088 93,569
Other corporate obligations............................ 5,320 1,712
Other corporate stocks and warrants.................... 9,834 8,694
-------- --------
$234,026 $124,148
======== ========
</TABLE>
10. NOTES PAYABLE TO BANKS
Included in notes payable to banks are the Company's borrowings for fixed
asset financing of approximately $11.3 million and $16.7 million at December 31,
1999 and 1998, respectively. Of the total borrowings, $9.0 million bears
interest at 8.02% annually and is payable in equal monthly installments through
December 2001. During 1999, the Company refinanced a portion of its debt
outstanding under its Fixed Asset Facility. As a result, the remainder of the
fixed asset borrowings outstanding of $2.3 million bears interest at 5.00%
annually and is payable in equal monthly installments through June 2003. These
notes are collateralized by furniture, fixtures and leasehold improvements.
During 1999, the Company amended its $50 million revolving credit agreement
(the "Credit Agreement") to increase total commitments of participating banks to
$100 million. At December 31, 1999, the Company had borrowings outstanding of
$50 million, the proceeds of which were used to finance the acquisitions of
Gibraltar and Hill Thompson Group. These borrowings are at interest rates
ranging from 1% to 1.45% above the federal funds rate. In addition, the Company
must pay a commitment fee of 0.20% on the unused available credit. The Credit
Agreement matures in November 2003 with all outstanding notes payable at that
date. The Company must comply with certain financial covenants under the Credit
Agreement and was in compliance with such covenants at December 31, 1999. The
Credit Agreement also restricts dividend
35
<PAGE> 37
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payments that can be made by the Company. In accordance with provisions of the
Credit Agreement, several of the Company's subsidiaries have executed agreements
to guarantee the borrowings of the Company to the benefit of participating
banks.
Prior to August 1998, the Company maintained a revolving credit agreement
with certain participating banks and at December 31, 1997 had $80 million in
borrowings outstanding. On April 7, 1998, the $77.5 million balance then
outstanding under this revolving credit agreement was repaid in full with the
Company's net proceeds from the Offering and available cash.
The aggregate amount of principal repayment requirements on notes payable
at December 31, 1999 is as follows by year (in thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
2000........................................................ $ 4,990
2001........................................................ 5,316
2002........................................................ 656
2003........................................................ 50,341
-------
Total....................................................... $61,303
=======
</TABLE>
11. INCOME TAXES
The components of income tax expense (benefit) are (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Federal:
Current................................................ $14,260 $13,358 $ 7,693
Deferred............................................... (348) (575) 1,482
State:
Current................................................ 5,067 5,847 4,501
Deferred............................................... (111) (447) 61
------- ------- -------
$18,868 $18,183 $13,737
======= ======= =======
</TABLE>
The effective income tax rate differs from the amount computed by applying
the Federal statutory income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Federal statutory income tax................................ $16,795 $15,608 $11,352
State and local income taxes, net of federal tax benefits... 3,222 3,510 2,965
Tax exempt interest, net.................................... (1,244) (702) (770)
Other, net.................................................. 95 (233) 190
------- ------- -------
Effective income tax........................................ $18,868 $18,183 $13,737
======= ======= =======
</TABLE>
36
<PAGE> 38
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The temporary differences which created deferred tax assets and liabilities
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Deferred compensation................................ $ 4,918 $ 5,038
Reserves............................................. 3,645 3,256
Other................................................ 3,796 3,202
------- -------
Total deferred tax assets....................... 12,359 11,496
------- -------
Deferred tax liabilities:
Deferred rent........................................ 971 605
Other................................................ 452 414
------- -------
Total deferred tax liabilities.................. 1,423 1,019
------- -------
Net deferred tax asset.................................... $10,936 $10,477
======= =======
</TABLE>
The Company has determined that a valuation allowance for the deferred tax
asset is not required since it is likely that the deferred tax asset will be
realized primarily through future reversals of existing taxable temporary
differences.
12. NET CAPITAL REQUIREMENTS
Certain subsidiaries of the Company are subject to the net capital
requirements of the New York Stock Exchange, Inc. ("Exchange") and the Uniform
Net Capital requirements of the Securities and Exchange Commission
("Commission") under Rule 15c3-1. The Exchange and the Commission requirements
also provide that equity capital may not be withdrawn or cash dividends paid if
certain minimum net capital requirements are not met. The Company's principal
regulated subsidiaries are discussed below.
Tucker Anthony is a registered broker and dealer. At December 31, 1999,
Tucker Anthony had net capital of approximately $18.2 million which was $17.2
million in excess of the $1.0 million amount required to be maintained at that
date.
Sutro is a registered broker and dealer. At December 31, 1999, Sutro had
net capital of approximately $11.9 million which was $10.9 million in excess of
the $1.0 million amount required to be maintained at that date.
Cleary Gull IMS is a registered broker and dealer. At December 31, 1999,
Cleary Gull IMS had net capital of approximately $0.4 million which was $0.3
million in excess of the $0.1 million amount required to be maintained at that
date.
Hill Thompson is a registered broker and dealer. At December 31, 1999, Hill
Thompson had net capital of approximately $20.9 million which was $19.9 million
in excess of the $1.0 million amount required to be maintained at that date. In
addition, at December 31, 1999, Hill Thompson had $0.2 million in cash
segregated in a special reserve bank account for the exclusive benefit of
customers pursuant to the reserve formula requirements of Rule 15c3-3.
Freedom Trust Company ("FTC") is a subsidiary of Freedom Capital and is a
limited purpose trust company. Pursuant to state regulations, FTC is required to
meet and maintain certain capital ratios and minimums. At December 31, 1999,
FTC's regulatory capital, as defined, was $1.3 million and FTC was in compliance
with all such requirements.
Under the clearing arrangement with Wexford, Tucker Anthony, Sutro and
Cleary Gull IMS are required to maintain certain minimum levels of net capital
and comply with other financial ratio requirements.
37
<PAGE> 39
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999, Tucker Anthony, Sutro and Cleary Gull IMS were in
compliance with all such requirements.
13. COMMITMENTS AND CONTINGENCIES
The Company leases office space and various types of equipment under
noncancelable leases generally varying from one to ten years, with certain
renewal options for like terms. Occupancy and equipment expense includes net
rentals of $21.2 million, $18.3 million and $15.9 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
At December 31, 1999, the Company's future minimum rental commitments based
upon original terms (including escalation provisions) under noncancelable leases
which have an initial or remaining term of one year or more are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
2000........................................................ $ 22,583
2001........................................................ 21,978
2002........................................................ 21,219
2003........................................................ 19,251
2004........................................................ 16,786
Thereafter.................................................. 18,087
--------
Sub-total......................................... 119,904
Less aggregate sublease income.............................. (4,816)
--------
$115,088
========
</TABLE>
The Company is a defendant or co-defendant in legal actions primarily
relating to its broker-dealer activities. It is the opinion of management, after
consultation with legal counsel, that the resolution of these legal actions will
not have a material adverse effect on the consolidated financial position or
results of operations of the Company.
The Company has outstanding underwriting agreements and when-issued
contracts which commit it to purchase securities at specified future dates and
prices. The Company presells such issues to manage risk exposure related to
these off-balance sheet commitments. Transactions which were open at December
31, 1999 have subsequently settled and had no material effect on the
consolidated statements of income and financial condition.
14. BENEFITS
Certain subsidiaries of the Company have 401(k) and qualified
profit-sharing plans which cover substantially all of their full-time employees.
The plans include employee contributions and matching contributions by the
Company subject to certain limitations. In addition, a subsidiary may contribute
additional amounts to its plans, at its discretion, based upon its profits for
the year.
The aggregate contributions to these plans for the years ended December 31,
1999, 1998 and 1997 were $5.3 million, $5.0 million and $7.1 million,
respectively.
Freedom Capital has a noncontributory defined benefit pension plan covering
substantially all of its employees. Effective August 1, 1997, the plan was
amended to provide that no new pension benefits would accrue and no new
participants would be admitted after August 1, 1997. Amounts related to the plan
are not material to the consolidated financial statements.
Compensation costs recognized for common stock and stock options issued to
employees during 1999, 1998 and 1997 were $0.2 million, $0.6 million and $1.4
million, respectively.
38
<PAGE> 40
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. FINANCIAL INSTRUMENTS
Substantially all of the Company's financial instruments are carried at
fair value or amounts approximating fair value. Assets, including cash and cash
equivalents, securities owned, securities purchased under agreements to resell
and certain receivables are carried at fair value or contracted amounts which
approximate fair value. Similarly, liabilities including securities sold, not
yet purchased, securities sold under agreements to repurchase and certain
payables are carried at fair value or contracted amounts approximating fair
value.
The fair value of the fixed asset financing, estimated using the Company's
incremental borrowing rate, approximated its carrying value at December 31, 1999
and 1998. The carrying value of the Company's debt under the Credit Agreement at
December 31, 1999 approximated its fair value.
In the normal course of business, the Company may enter into transactions
in financial instruments to manage its exposure to market risks. At December 31,
1999 and 1998, the Company had equity options outstanding approximating $13.2
million and $11.3 million, respectively (notional amounts). The notional amounts
are not reflected on the consolidated statements of financial condition and are
indicative only of the volume of activity at December 31, 1999 and 1998. They do
not represent amounts subject to market risks, and in many cases, limit the
Company's overall exposure to market losses by hedging other on-balance sheet
and off-balance sheet transactions. The volume of activity in these contracts
was not significant during the years ended December 31, 1999, 1998 and 1997.
16. EARNINGS PER COMMON SHARE
The Company computes its earnings per share in accordance with SFAS No.
128, "Earnings Per Share." The following table sets forth the computation for
basic and diluted earnings per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- -----------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Numerator:
Net income before extraordinary
item.............................. $29,117 $29,117 $26,411 $26,411 $18,698 $18,698
Less: extraordinary item (net of
tax).............................. -- -- (1,276) (1,276) -- --
------- ------- ------- ------- ------- -------
Net income after extraordinary
item.............................. $29,117 $29,117 $25,135 $25,135 $18,698 $18,698
Denominator:
Weighted-average shares
outstanding....................... 20,093 20,093 18,701 18,701 14,287 14,287
Dilutive effect of:
Stock options and other
exercisable shares(a)........ -- 902 -- 1,004 -- 446
------- ------- ------- ------- ------- -------
Adjusted weighted-average
shares outstanding........... 20,093 20,995 18,701 19,705 14,287 14,733
Earnings Per Share:
Earnings per share before
extraordinary item................ $ 1.45 $ 1.39 $ 1.41 $ 1.34 $ 1.31 $ 1.27
Less: extraordinary item (net of
tax).............................. -- -- (0.07) (0.06) -- --
------- ------- ------- ------- ------- -------
Earnings per share after
extraordinary item................ $ 1.45 $ 1.39 $ 1.34 $ 1.28 $ 1.31 $ 1.27
</TABLE>
- ---------------
(a) Options to purchase 50,625 shares and 239,553 shares of the Company's common
stock were outstanding at December 31, 1999 and 1998, respectively, but were
not included in the computation of diluted earnings per share. Also excluded
from the computation were 738,428 shares of restricted stock that were not
vested at December 31, 1999. The inclusion of such options and restricted
stock would have had an antidilutive effect on the diluted earnings per
share calculation because the options' exercise prices and restricted stock
prices were greater than the average market price of the Company's common
shares for 1999 and 1998.
39
<PAGE> 41
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. INCENTIVE PLANS
The Company has adopted a number of compensation plans to attract, retain
and motivate officers and other key employees to compensate them for their
contributions to growth and profits of the Company and to encourage employee
stock ownership.
Stock Option and Restricted Stock Plans
The Company has three plans under which officers and other key employees
can be granted stock options, stock appreciation rights, restricted stock and
long-term performance awards at the fair market value of the stock on the date
of the grant or on such terms as the administrators, a committee of non-employee
directors, may select.
Some of the options are currently exercisable and others vest in the future
if certain individual and Company performance-based goals are met. The options
expire within approximately seven to ten years from the date of the grant. The
activity during the years ended December 31, 1997, 1998 and 1999 is set forth
below:
<TABLE>
<CAPTION>
EXERCISE PRICE WEIGHTED-AVERAGE
NUMBER OF SHARES PER SHARE EXERCISE PRICE
---------------- -------------- ----------------
<S> <C> <C> <C>
Options outstanding at December 31,
1996................................... -- $ -- $ --
Granted.................................. 2,336,652 5.50 5.50
Exercised................................ -- -- --
Terminated............................... (202,764) 5.50 5.50
---------
Options outstanding at December 31, 1997
(276,247 exercisable).................. 2,133,888 $ 5.50 $ 5.50
Granted.................................. 1,119,066 4.95 - 20.00 13.21
Exercised................................ (128,618) 4.95 - 5.70 5.35
Terminated............................... (327,291) 5.50 - 20.00 16.10
---------
Options outstanding at December 31, 1998
(633,669 exercisable).................. 2,797,045 $4.95 - 13.00 $ 7.35
Granted.................................. 227,218 3.02 - 17.13 8.00
Exercised................................ (160,567) 3.02 - 5.50 5.42
Terminated............................... (198,864) 5.04 - 17.13 6.86
---------
Options outstanding at December 31, 1999
(771,324 exercisable).................. 2,664,832 $3.02 - 17.13 $ 7.56
=========
</TABLE>
During 1999, the Company granted 764,973 shares of restricted stock,
primarily for employee retention programs in connection with the acquisitions of
Hopper Soliday and Hill Thompson Group, and 6,545 of these shares were
forfeited. The remaining shares granted vest mainly over the next three to four
years.
The following table summarizes information about stock options outstanding
at December 31,1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -----------------------------------
WEIGHTED-AVERAGE
WEIGHTED- REMAINING
RANGE OF EXERCISE NUMBER OF SHARES AVERAGE CONTRACTUAL LIFE NUMBER OF SHARES WEIGHTED-AVERAGE
PRICES PER SHARE OUTSTANDING EXERCISE PRICE (YEARS) EXERCISABLE EXERCISE PRICE
- ----------------- ---------------- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$3.02 - 5.49.... 192,534 $ 4.22 8.50 142,504 $4.33
5.50 - 12.99.... 1,728,313 5.50 6.55 628,820 5.50
13.00 - 17.13.... 743,985 13.21 8.81 -- --
--------- -------
$3.02 - 17.13.... 2,664,832 $ 7.56 7.33 771,324 $5.28
========= =======
</TABLE>
40
<PAGE> 42
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for stock option grants in accordance with APB Opinion
No. 25. Pro forma information regarding net income and earnings per share is
required under SFAS No. 123 and has been determined as if the Company had
accounted for all 1999, 1998 and 1997 stock option grants based on the fair
value method. The pro forma information presented below is not representative of
the effect stock options will have on pro forma net income or earnings per share
for future years. The pro forma information for the years ended 1999, 1998 and
1997 was as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
----------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net income.............................. As reported $29,117 $25,135 $18,698
Pro forma $27,050 $23,610 $18,318
Earnings per common share:
Basic before extraordinary item.... As reported $ 1.45 $ 1.34 $ 1.31
Basic after extraordinary item..... Pro forma $ 1.35 $ 1.26 $ 1.28
Diluted before extraordinary As reported
item............................. $ 1.39 $ 1.28 $ 1.27
Diluted after extraordinary item... Pro forma $ 1.30 $ 1.22 $ 1.26
</TABLE>
The fair value of each option granted during the years ended December 31,
1999, 1998 and 1997 is the estimated present value at grant date. The fair value
of 1999 and 1998 options was estimated using the Black-Scholes option pricing
model whereby the expected volatility for 1999 was based on the Company's weekly
historical stock prices and for 1998 on the average volatilities of similar
companies. The fair value of 1997 options was estimated using the minimum value
model. The following weighted-average assumptions were used for 1999, 1998 and
1997, respectively:
- dividend yield of 1.6%, 1.4% and 0.8%, respectively
- expected life of 6, 8 and 6 years, respectively
- risk free interest rate of 6.8%, 5.1% and 5.4%, respectively
- expected volatility of 28.7% and 56.2%, respectively
The weighted-average fair value of options granted during 1999, 1998 and
1997 whose exercise price equals the fair market value of the Company's stock on
grant date was $5.82, $7.47 and $1.30, respectively. The weighted-average fair
value of options granted during 1999, 1998 and 1997 whose exercise price is less
than the fair market value of the Company's stock on grant date was $3.80, $7.71
and $4.37, respectively.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the "ESPP") allows eligible employees to
invest from 1% to 10% of their compensation to purchase shares of the Company's
common stock at a price equal to 85% of its fair market value. The Company
reserved 500,000 shares for purchase by employees under the ESPP and 293,732
shares were purchased through December 31, 1999.
18. SEGMENT REPORTING DATA
In 1998, the Company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company has two reportable segments:
broker-dealer and asset management. The Company's broker-dealer segment includes
the retail operations, equity capital markets and trading businesses of Tucker
Anthony, Sutro and Hill Thompson since they generally offer similar products and
services and are subject to uniform regulatory requirements. The Company offers
its broker-dealer clients a wide range of products and services, including
retail brokerage, investment banking, institutional sales and fixed income
products. The asset management segment includes Freedom Capital, Cleary Gull IMS
and asset management business from Tucker Anthony and Sutro. The Company offers
its asset management clients investment
41
<PAGE> 43
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
advisory, portfolio management and custodial services. Substantially all of the
Company's business is transacted in the United States. The following table
presents information about reported segments (amounts in thousands):
<TABLE>
<CAPTION>
ASSET
BROKER-DEALER MANAGEMENT OTHER(a) TOTAL
------------- ---------- --------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Net revenues.................................. $483,108 $67,383 $ 2,845 $553,336
Income (loss) before income taxes............. 37,077 15,045 (4,137) 47,985
Total assets.................................. 674,595 69,933 73,475 818,003
Year ended December 31, 1998
Net revenues.................................. $390,854 $47,584 $ 1,938 $440,376
Income (loss) before income taxes............. 36,466 10,202 (2,074) 44,594
Total assets.................................. 463,594 92,142 50,514 606,250
Year ended December 31, 1997
Net revenues.................................. $340,427 $34,849 $ 1,538 $376,814
Income (loss) before income taxes............. 30,859 7,042 (5,466) 32,435
Total assets.................................. 620,707 58,580 48,300 727,587
</TABLE>
- ---------------
(a) Other reflects the activities of the Company's holding companies. Income
(loss) before income taxes principally includes amortization of goodwill and
acquisition interest expense. Total assets primarily consist of goodwill and
deferred taxes of Freedom Securities Corporation.
42
<PAGE> 44
FREEDOM SECURITIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
19. QUARTERLY INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1999
Net revenues(a)................................. $122,640 $130,532 $133,832 $166,332
Income before income taxes...................... 11,457 12,253 10,834 13,441
Net income...................................... 6,798 7,452 7,004 7,863
Basic earnings per share........................ $ 0.34 $ 0.38 $ 0.36 $ 0.37
Diluted earnings per share...................... 0.33 0.36 0.34 0.36
Stock price range(b):
High....................................... $ 18.00 $ 19.00 $ 17.13 $ 15.00
Low........................................ $ 14.13 $ 14.38 $ 12.56 $ 10.25
1998
Net revenues(a)................................. $100,110 $121,661 $ 99,862 $118,743
Income before income taxes...................... 8,596 13,238 10,621 12,139
Net income before extraordinary item............ 5,029 7,635 6,670 7,077
Extraordinary item (net of tax)................. -- (1,276) -- --
Net income after extraordinary item............. 5,029 6,359 6,670 7,077
Earnings per share:
Basic before extraordinary item............ $ 0.34 $ 0.39 $ 0.33 $ 0.35
Basic after extraordinary item............. 0.34 0.32 0.33 0.35
Diluted before extraordinary item.......... 0.32 0.36 0.32 0.34
Diluted after extraordinary item........... 0.32 0.30 0.32 0.34
Stock price range(b):
High....................................... -- $ 23.13 $ 21.50 $ 19.00
Low........................................ -- $ 17.19 $ 11.69 $ 9.38
</TABLE>
- ---------------
(a) Certain amounts have been reclassified to conform with 1999 financial
statement presentation.
(b) Prices represent the range of sales per share on the New York Stock Exchange
since the Company's public offering on April 2, 1998.
43
<PAGE> 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in Item 10 will be contained in the Company's
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
close of the fiscal year for which this Report is filed and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required in Item 11 will be contained in the Company's
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
close of the fiscal year for which this Report is filed and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in Item 12 will be contained in the Company's
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
close of the fiscal year for which this Report is filed and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in Item 13 will be contained in the Company's
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
close of the fiscal year for which this Report is filed and is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
A listing of all financial statements filed as part of this Annual
Report on Form 10-K is included in Item 8.
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
(3) Exhibits
The exhibits listed on the accompanying Index to Exhibits below are
filed as part of this Annual Report on Form 10-K.
(b) (1) Reports on Form 8-K
None.
44
<PAGE> 46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ JOHN H. GOLDSMITH
------------------------------------
JOHN H. GOLDSMITH
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND DIRECTOR
Date: March 24, 2000
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 24th day of March, 2000.
<TABLE>
<C> <S>
/s/ JOHN H. GOLDSMITH
- --------------------------------------------------- Chairman of the Board, Chief Executive Officer
JOHN H. GOLDSMITH (Principal Executive Officer) and Director
/s/ KENNETH S. KLIPPER Executive Vice President, Chief Financial
- --------------------------------------------------- Officer (Principal Financial and Accounting
KENNETH S. KLIPPER Officer)
/s/ JOHN F. LUIKART
- ---------------------------------------------------
JOHN F. LUIKART Director
/s/ DAVID P. PROKUPEK
- ---------------------------------------------------
DAVID P. PROKUPEK Director
/s/ MARK T. WHALEY
- ---------------------------------------------------
MARK T. WHALEY Director
/s/ ROBERT H. YEVICH
- ---------------------------------------------------
ROBERT H. YEVICH Director
/s/ C. HUNTER BOLL
- ---------------------------------------------------
C. HUNTER BOLL Director
/s/ WINSTON J. CHURCHILL
- ---------------------------------------------------
WINSTON J. CHURCHILL Director
/s/ THOMAS M. HAGERTY
- ---------------------------------------------------
THOMAS M. HAGERTY Director
/s/ DAVID V. HARKINS
- ---------------------------------------------------
DAVID V. HARKINS Director
/s/ HUGH R. HARRIS
- ---------------------------------------------------
HUGH R. HARRIS Director
/s/ SETH W. LAWRY
- ---------------------------------------------------
SETH W. LAWRY Director
</TABLE>
45
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
+3.1 Restated Certificate of Incorporation of the Company
+3.2 Bylaws of the Company
+10.1 Contribution Agreement by and among the Company, Hancock,
THL and SCP Private Equity Partners, L.P., dated as of
October 4, 1996
+10.2 Stockholders Agreement by and among the Company and the
persons listed on the signature pages thereof as the Initial
Investors, SCP Initial Investor, Employee Investors and
Seller Initial Investor dated as of November 30, 1996
+10.3 Additional Share Agreement by and between the Company and
Hancock, dated as of November 29, 1996
+10.4 Tax Matters Agreement by and between the Company and
Hancock, dated as of November 29, 1996
+10.8 1996 Stock Option Plan
+10.9 Employment Agreement by and between the Company and John H.
Goldsmith, dated as of November 29, 1996
+10.11 Agreement, by and among Prudential Securities Incorporated,
John Hancock Clearing Corporation, Tucker Anthony
Incorporated and Sutro & Co. Incorporated
+10.12 Form of TAMP Incentive Plan Limited Partnership Limited
Partnership, Agreement, dated as of July 1, 1989
+10.13 Form of TAMP II Incentive Plan Limited Partnership Limited
Partnership, Agreement, dated as of February 28, 1995
+10.14 Form of TAMM II Incentive Plan Limited Partnership Limited
Partnership, Agreement, dated April 8, 1984
+10.15 Form of Sutro Venture Partners I, L.P. Limited Partnership
Agreement, dated as of March 21, 1996
+10.16 Form of Sutro Venture Partners II, L.P. Limited Partnership
Agreement, dated as of March 21, 1996
+10.17 Form of Operating Agreement for Sutro Investment Partners
IV, LLC dated as of June 30, 1997
++10.20 Chattel Leasing Security Agreement by and between T.A.
Leasing, Inc. and BancBoston Leasing, Inc., dated November
29, 1996.
++10.21 Amended and Restated Chattel Leasing Promissory Note, by and
between T.A. Leasing, Inc. and BancBoston Leasing, Inc.,
dated February 28, 1997.
++10.22 Chattel Leasing Security Agreement by and between Sutro
Leasing Inc. and BancBoston Leasing, Inc., dated February
28, 1997
++10.23 Chattel Leasing Promissory Note by and between Sutro Leasing
Inc. and BancBoston Leasing, Inc., dated February 28, 1997.
++10.24 1998 Long-Term Incentive Plan
++10.25 1998 Executive Performance Bonus Plan
++10.26 Amendment No. 1 to the Stockholders Agreement dated January
30, 1998
++10.27 Form of Amendment No. 2 to the Stockholders Agreement
++10.28 Form of Amendment No. 3 to the Stockholders Agreement
++10.29 David P. Prokupek Employment Agreement
++10.30 Revolving Credit Agreement, by and among the Company,
BankBoston, N.A., and the other banks party thereto, dated
as of August 21, 1998
++10.31 John F. Luikart Employment Agreement
++10.32 Kevin J. McKay Employment Agreement
</TABLE>
46
<PAGE> 48
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -------- -----------------------
<C> <S>
+++10.33 Form of Sutro Venture Partners III, L.P. Limited Partnership
Agreement
+++10.34 Form of Sutro Venture Partners IV, L.P. Limited Partnership
Agreement
+++10.35 Amendment to Clearing Agreement (September 8, 1995), dated
as of April 23, 1998
10.36 Master Agreement by and between BancBoston Leasing Inc. and
Tucker Anthony Incorporated dated as of January 21, 1999
10.37 Master Agreement by and between BancBoston Leasing Inc. and
Sutro Leasing dated as of January 21, 1999.
10.38 First Amendment to Revolving Credit Agreement, dated as of
November 12, 1999
10.39 Second Amendment to Revolving Credit Agreement, dated as of
February 11, 2000
10.40 Kenneth S. Klipper Employment Agreement
10.41 Form of TACS III Incentive Plan Limited Partnership, Limited
Partnership Agreement, dated as of July 1, 1989
10.42 Form of TACS IV Incentive Plan Limited Partnership, Limited
Partnership Agreement, dated as of March 22, 1995
10.43 Form of Operating Agreement for Sutro Investment Partners V,
LLC dated as of March 19, 1998
10.44 Form of CGRM Investment Partnership General Partnership
Agreement
21 Subsidiaries of the Company
23 Consent of Ernst & Young, LLP, Independent Auditors
27 Financial Data Schedule
</TABLE>
- ---------------
+ Incorporated by reference to the Company's registration statement on Form
S-1 (File No. 333-44938)
++ Incorporated by reference to the Company's registration statement on Form
S-1 (File No. 333-62857)
+++ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1998
Schedules and exhibits to certain exhibits to this Form 10-K have been
omitted, which schedules shall be furnished to the Commission upon request.
47
<PAGE> 1
Exhibit 10.36
[BANKBOSTON LOGO]
MASTER AGREEMENT
This MASTER AGREEMENT, dated as of the 21st day of January, 1999,
which together with all riders and amendments now or hereafter executed and made
a part hereof (the "Master Agreement"), is made at Boston, Massachusetts by and
between BANCBOSTON LEASING INC. ("Lessor"), a Massachusetts corporation with its
principal place of business at 100 Federal Street, Boston, Massachusetts 02110
and Tucker Anthony Incorporated ("Lessee"), a Massachusetts corporation with its
principal place of business at One Beacon Street, Boston, MA 02108.
IN CONSIDERATION OF the mutual promises and covenants contained herein,
Lessor and Lessee hereby agree as follows:
1. Leasing Property. At the request of Lessee and subject to the
terms and conditions of this Master Agreement, Lessor shall lease to Lessee and
Lessee shall lease from Lessor such personal property ("Equipment") as may be
mutually agreed upon by Lessor and Lessee. The Equipment shall be selected by or
ordered at the request of Lessee, identified in one or more lease schedules
substantially in the form as supplied by Lessor (each a "Lease Schedule") and
accepted by Lessee in one or more certificates of acceptance in the form as
supplied by Lessor (each a "Certificate of Acceptance"). Each Lease Schedule
executed by Lessor and Lessee expressly incorporates by reference the terms and
conditions of this Master Agreement and any riders, schedules or amendments, now
or hereafter executed, applicable to such Lease Schedule and shall constitute a
separate, distinct and independent lease and contractual relationship between
Lessor and Lessee.
2. Certain Definitions.
2.1 The "Acquisition Cost" shall mean the total acquisition cost
of the Equipment paid by Lessor as set forth in the applicable Lease Schedule.
2.2 The "Commencement Date" shall mean the date on which the
Equipment identified in the applicable Lease Schedule is accepted and placed in
service by Lessee as evidenced by a Certificate of Acceptance.
2.3 The "Daily Rent" shall mean the per diem amount set forth in
the applicable Lease Schedule.
2.4 The "Initial Term Start Date" shall mean either (i) the first
day of the month immediately following the month in which the Commencement Date
occurs, or (ii) if the Commencement Date occurs on the first day of the month,
the Commencement Date. For all rental periods other than monthly, the Initial
Term Start Date shall be as set forth on the applicable Lease Schedule.
2.5 The "Payment Date" shall mean the date set forth in the
applicable Lease Schedule.
2.6 The "Periodic Rent" shall mean the amount set forth in the
applicable Lease Schedule.
<PAGE> 2
2.7 The words "herein", "hereof", and "hereunder" shall refer to
this Master Agreement and any Lease Schedule as a whole and not to any
particular section. Other capitalized terms shall have the meanings specified
elsewhere in this Master Agreement or the Lease Schedule.
3. Initial Term of Lease; Payment of Rent.
3.1 This Master Agreement shall be effective from and after the
date of execution hereof. The term of lease for the Equipment shall begin on the
Commencement Date set forth in the applicable Certificate of Acceptance and
shall continue during and until the expiration of the Initial Term as defined
and set forth in the applicable Lease Schedule, measured from the Initial Term
Start Date. The Initial Term may not be canceled or terminated except as set
forth in Sections 10.2 or 17.1 below.
3.2 At the expiration of the Initial Term, Lessor and Lessee may
extend the lease of the Equipment for any period as they may agree upon in
writing ("Extended Term") at the then fair market rental value of the Equipment,
as determined in good faith by Lessor.
3.3 Aggregate Daily Rent shall be due and payable by Lessee on the
Initial Term Start Date in an amount equal to the Daily Rent multiplied by the
actual number of days elapsed from, and including, the Commencement Date to, but
excluding, the Initial Term Start Date. The Periodic Rent shall be due and
payable, without prior notice or demand, on the Payment Date and thereafter on
the first day of each month or other applicable period of the Initial Term or
any Extended Term. All Daily Rents and Periodic Rents shall be paid to Lessor at
its principal place of business in Boston, Massachusetts or other location to
which the Lessor may direct in writing.
4. Acceptance of Equipment; Exclusion of Warranties.
4.1 Lessee shall signify its acceptance of the Equipment
identified in the applicable Lease Schedule by promptly executing and delivering
to Lessor a Certificate of Acceptance. Lessee acknowledges that its execution
and delivery of the Certificate of Acceptance shall conclusively establish, as
between Lessor and Lessee, that the Equipment has been inspected by Lessee, is
in good repair and working order, is of the design, manufacture and capacity
selected by Lessee, and is accepted by Lessee under the applicable Lease
Schedule.
4.2 In the event the Equipment is ordered by Lessor from a
manufacturer or supplier at the request of Lessee, Lessor shall not be required
to pay the Acquisition Cost for such Equipment unless and until the applicable
executed Certificate of Acceptance has been received by Lessor. All expenses
incurred in connection with Lessor's purchase of the Equipment (including
shipment, delivery and installation) shall be the responsibility of Lessee and
shall be either capitalized in the Acquisition Cost or paid upon demand. If
Lessee shall refuse to accept delivery of any item of the Equipment, Lessee will
be assigned all rights and shall assume all obligations as purchaser of such
item of the Equipment. Lessee hereby agrees to indemnify, defend and hold Lessor
harmless from any liability to any manufacturer or supplier of the Equipment (in
each case a "Supplier") or any other manufacturer or supplier arising from the
failure of Lessee to lease any Equipment which is ordered by Lessor at the
request of Lessee or for which Lessor has assumed an obligation to purchase at
the request of Lessee.
4.3 Lessor leases the Equipment to Lessee and Lessee leases the
Equipment from Lessor "AS IS" and "WITH ALL FAULTS". Lessee hereby acknowledges
that (i) Lessor is not a manufacturer, supplier or dealer of such Equipment nor
an agent thereof, and (ii) LESSOR HAS NOT MADE, DOES NOT MAKE, AND HEREBY
DISCLAIMS ANY REPRESENTATION OR WARRANTY
<PAGE> 3
WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE EQUIPMENT INCLUDING, BUT NOT
LIMITED TO, ITS DESIGN, CAPACITY, CONDITION, MERCHANTABILITY, OR FITNESS FOR USE
OR FOR ANY PARTICULAR PURPOSE. Lessee further acknowledges that Lessor is not
responsible for any repairs, maintenance, service, latent or other defects in
the Equipment or in the operation thereof, or for compliance of any Equipment
with requirements of any laws, ordinances, governmental rules or regulations
including, but not limited to, laws with respect to environmental matters,
patent, trademark, copyright or trade secret infringement, or for any direct,
indirect, incidental, punitive, consequential or other damages arising out of
the use of or inability to use the Equipment. In addition, Lessor makes no
representation and disclaims any warranty that the Equipment is "Year 2000
Compliant," that is, that any computer applications, imbedded microchips or
other systems, if any, which may be contained or included in the Equipment will
be able to recognize, and perform properly, date sensitive functions involving
certain dates prior to, and any date after, December 31, 1999.
4.4 Provided no Event of Default, as defined in Section 16 below,
has occurred and is continuing, Lessor agrees to cooperate with Lessee, at the
sole cost and expense of Lessee, in making any claim against a manufacturer or
supplier of the Equipment arising from a defect in such Equipment or breach of
warranty, express or implied, and/or arising out of the purchase or supply
agreement between Lessor and Supplier. At the request of Lessee, Lessor shall
assign to Lessee, for the Initial Term and any Extended Term, all warranties on
the Equipment available from Supplier to the full extent permitted by the terms
of such warranties and by applicable law.
5. Ownership; Inspection; Maintenance and Use.
5.1 The Equipment shall at all times be the sole and exclusive
property of Lessor. Any Equipment subject to titling and registration laws shall
be titled and registered by Lessee on behalf of and in the name of Lessor, or in
such name as Lessor may direct, at the sole cost and expense of Lessee. Lessee
shall cooperate with and provide Lessor with any information or documents
necessary for titling and registration of the Equipment. Upon the request of
Lessor, Lessee shall execute any documents or instruments which may be necessary
or appropriate to confirm, to record or to give notice of the ownership of the
Equipment by Lessor including, but not limited to, financing statements under
the Uniform Commercial Code. Lessee, at the request of Lessor, shall affix to
the Equipment, in a conspicuous place, any label, plaque or other insignia
supplied by Lessor designating the ownership of the Equipment by Lessor.
5.2 The Equipment shall be located at the address specified in the
applicable Lease Schedule, which must be within the continental United States,
or such other location as Lessor may agree in writing, and may be removed
therefrom to another location within the continental United States only with
prior written notice to Lessor. Lessor, its agents or employees shall have the
right to enter the premises of Lessee, upon reasonable notice and during normal
business hours, for the purpose of inspecting the Equipment and all maintenance
records kept by Lessee with respect to the Equipment.
5.3 Lessee shall pay all costs, expenses, fees and charges
whatsoever incurred in connection with the use and operation of the Equipment.
Lessee shall, at all times and at its own expense, keep the Equipment in good
repair and working order, reasonable wear and tear excepted. Lessee shall also
use the Equipment solely in the conduct of its business, and shall not
permanently discontinue use of the Equipment. Any maintenance contract required
by a manufacturer or supplier for the care and upkeep of the Equipment shall be
entered into by Lessee at its sole cost and expense. Lessee shall permit the use
and operation of the Equipment only by personnel authorized by Lessee and shall
comply with all laws,
<PAGE> 4
ordinances or governmental rules and regulations and applicable insurance
policies relating to the use and operation of the Equipment.
6. Alterations and Modifications. Lessee may make, or cause to be
made on its behalf, any improvement, modification or addition to the Equipment
with the prior written consent of Lessor, which will not be unreasonably
withheld; provided, however, that such improvement, modification or addition is
readily removable without causing damage to, or impairment of, the functional
effectiveness, remaining economic useful life or fair market value of the
Equipment. Any such improvement, modification or addition which is so readily
removable shall remain the property of Lessee and shall be removed by Lessee
prior to return of the Equipment. To the extent that such improvement,
modification or addition is not so removable, it shall be permitted only with
Lessor's prior written consent, which will be granted at Lessor's sole
discretion, and only if its attachment will not cause damage to, or impairment
of, the functional effectiveness, remaining economic useful life or fair market
value of the Equipment; and such improvement, modification or addition shall
immediately become the property of Lessor and thereupon shall be considered
Equipment for all purposes hereunder. Any modification or addition to the
Equipment which is required by law shall be made by Lessee, at the sole cost and
expense of Lessee, and shall immediately become the property of Lessor and
thereupon shall be considered Equipment for all purposes hereunder. Any
improvement, modification or addition made to the Equipment shall be free of all
liens, claims and encumbrances of third parties.
7. Quiet Enjoyment; No Defense, Setoff or Counterclaims.
7.1 Provided no Event of Default, as defined in Section 16 below,
has occurred and is continuing, Lessee shall have the quiet enjoyment and use of
the Equipment in the ordinary course of its business during the Initial Term or
any Extended Term without interruption by Lessor or any person or entity
claiming through or under Lessor.
7.2 Lessee acknowledges and agrees that ANY DAMAGE TO OR LOSS,
DESTRUCTION, OR UNFITNESS OF, OR DEFECT IN THE EQUIPMENT, OR THE INABILITY OF
LESSEE TO USE THE EQUIPMENT FOR ANY REASON WHATSOEVER, OR ANY OTHER CIRCUMSTANCE
WHATSOEVER SHALL NOT (i) GIVE RISE TO ANY DEFENSE, COUNTERCLAIM, OR RIGHT OF
SETOFF AGAINST LESSOR, OR (ii) PERMIT ANY ABATEMENT OR RECOUPMENT OF, OR
REDUCTION IN DAILY OR PERIODIC RENT, OR (iii) ALLOW LESSEE TO CANCEL, TERMINATE,
MODIFY OR REPUDIATE THE APPLICABLE LEASE SCHEDULE, OR (iv) RELIEVE LESSEE OF, OR
EXCUSE LESSEE FROM, THE PERFORMANCE OF ITS OBLIGATIONS UNDER THE APPLICABLE
LEASE SCHEDULE INCLUDING, BUT NOT LIMITED TO, ITS OBLIGATION TO PAY THE FULL
AMOUNT OF DAILY RENT AND PERIODIC RENT, WHICH OBLIGATIONS ARE ABSOLUTE AND
UNCONDITIONAL. Any claim that Lessee may have which arises from a defect in or
deficiency of the Equipment shall be brought solely against Supplier or any
other manufacturer or supplier of the Equipment and Lessee shall,
notwithstanding any such claim, continue to pay Lessor all amounts due and to
become due under the applicable Lease Schedule.
8. Adverse Claims and Interests.
8.1 Except for any liens, claims, mortgages, pledges, encumbrances
or security interests created by or for the benefit of Lessor, Lessee shall keep
the Equipment at all times, free and clear from all liens, claims, mortgages,
pledges, encumbrances and security interests, other than liens for fees, taxes,
levies, duties or other governmental charges of any kind, liens of mechanics,
materialmen, laborers,
<PAGE> 5
employees or suppliers and similar liens arising by operation of law incurred by
Lessee in the ordinary course of business for sums that are not yet delinquent
or are being contested in good faith by appropriate proceedings which suspend
the collection thereof provided, however, that such proceedings do not involve
any risk of the sale, forfeiture or loss of the Equipment or any interest
therein, or of the imposition of criminal liability on the part of Lessor or
Lessee, which shall be determined by Lessor in its sole discretion. Lessee shall
keep the Equipment at all times free and clear from all levies, seizures and
attachments, and shall defend Lessor's title in and to the Equipment. Without
limitation of the covenants and obligations of Lessee set forth in the preceding
sentence, Lessee shall immediately notify Lessor in writing of the imposition of
any prohibited lien, claim, levy or attachment on or seizure of the Equipment,
at which time Lessee shall provide Lessor with all relevant information in
connection therewith.
8.2 Lessee agrees that the Equipment shall be and at all times
shall remain personal property. Accordingly, Lessee shall take such steps as may
be necessary to prevent any person, including without limitation Lessee's
landlord and such landlord's mortgagee, from acquiring, having or retaining any
rights in or to the Equipment by reason of its being affixed or attached to, or
otherwise located on, real property including, without limitation, obtaining and
delivering to Lessor waivers of any lien, encumbrance or interest which such
person might have or hereafter obtain or claim with respect to the Equipment
which waivers shall be recorded at the sole cost and expense of Lessee.
9. Indemnities; Payment of Taxes.
9.1 Lessee hereby agrees to indemnify, defend and hold harmless
(on an after-tax basis) Lessor, its agents, employees, successors and assigns
from and against any and all claims, actions, suits, proceedings, costs,
expenses, damages and liabilities whatsoever arising out of or in connection
with the manufacture, ordering, selection, specifications, availability,
delivery, titling, registration, rejection, installation, possession,
maintenance, ownership, use, leasing, operation or return of the Equipment
including, but not limited to, any claim or demand based upon (i) any STRICT OR
ABSOLUTE LIABILITY IN TORT, (ii) any violation of any applicable environmental
or other laws or regulations, or (iii) any infringement or alleged infringement
of any patent, trademark, trade secret, license, copyright or otherwise. All
costs and expenses incurred by Lessor in connection with any of the foregoing
including, but not limited to, reasonable legal fees shall be paid by Lessee on
demand. The indemnification provisions of this Section 9.1 shall not, however,
apply to any claim, cost or expense arising from, or in connection with, any
gross negligence or willful misconduct on the part of Lessor, its agents,
employees, its successors and assigns.
9.2 Lessee hereby agrees to indemnify, defend and hold Lessor
harmless, on an after-tax basis, against all federal, state and local taxes,
assessments, licenses, withholdings, levies, imposts, duties, excise taxes,
registration fees and other governmental fees and charges whatsoever, which are
imposed, assessed or levied on or with respect to the Equipment or its use or
related in any way to a Lease Schedule ("Tax Assessments") except for taxes on
or measured by the net income of Lessor determined substantially in the same
manner as under the Internal Revenue Code of 1986, as amended. Lessee shall file
all returns, reports or other such documents required in connection with the Tax
Assessments and shall provide Lessor with copies thereof. Provided no Event of
Default, as defined in Section 16 below, has occurred and is continuing, Lessee
is also authorized, for and on behalf of Lessor, to file abatements or otherwise
seek a refund or reduction of any Tax Assessments provided that no such filing
shall create any risk of loss of or encumbrance on the Equipment. If, under
local law or custom, Lessee is not authorized to make the filings required by a
taxing authority, Lessee shall notify Lessor in writing, and Lessor shall
thereupon file such returns, reports or documents at Lessee's sole cost and
expense.
<PAGE> 6
Without limiting any of the foregoing, Lessee shall indemnify, defend and hold
Lessor harmless from all penalties, fines, interest payments, claims and
expenses, including but not limited to reasonable legal fees, arising from any
failure of Lessee to comply with the requirements of this Section 9.2.
9.3 The obligations and indemnities of Lessee under this Section 9
for events occurring or arising or taxes accruing during the Initial Term or any
Extended Term shall continue and survive in full force and effect,
notwithstanding the expiration or other termination of this Master Agreement or
any Lease Schedule.
10. Risk of Loss; Loss of Equipment.
10.1 Lessee hereby assumes and shall bear the entire risk of loss
for theft, disappearance, damage, seizure, condemnation, casualty, destruction
or other injury whatsoever to the Equipment from any and every cause whatsoever.
Such risk of loss shall be deemed to have been assumed by Lessee from and after
such risk passes from the Supplier by agreement or pursuant to applicable law.
For purposes of this Section 10 only, Equipment shall include any item or unit
thereof.
10.2 In the event of loss or damage to any item of Equipment which
can be repaired by Lessee, Lessee shall, at its cost and expense, promptly
repair and restore such item of Equipment to the condition required by this
Master Agreement. In the event of any loss, seizure, condemnation, casualty or
destruction of the Equipment or damage to the Equipment which cannot be repaired
by Lessee, Lessee shall immediately notify Lessor in writing. Within thirty (30)
days of such notice, during which time Lessee shall continue to pay Periodic
Rent, Lessee shall, at the option of Lessor, either (i) replace the Equipment
with equipment of the same type and manufacture, and having a value, utility and
remaining economic useful life not less than the Equipment replaced, and in good
repair, condition and working order, and transfer title to such equipment to
Lessor free and clear of all liens, claims and encumbrances, whereupon such
equipment shall be deemed Equipment for all purposes of the Lease Schedule, or
(ii) pay to Lessor an amount equal to the present value of both the aggregate of
the remaining unpaid Periodic Rents and the anticipated residual value of the
Equipment plus any other costs actually incurred by Lessor. Lessor and Lessee
agree that the residual value of the Equipment at the expiration of the Initial
Term is reasonably anticipated to be not less than twenty percent (20%) of the
Acquisition Cost of the Equipment. The present value shall be determined by
discounting the aggregate of the remaining unpaid Periodic Rents and the
anticipated residual value of the Equipment to the date of payment by Lessee at
the rate of five percent (5%) per annum. When and as requested by Lessor, Lessee
shall also pay to Lessor amounts due pursuant to Section 18 below, if any,
arising as a result of the loss, seizure, replacement, condemnation or
destruction of the Equipment. Provided no Event of Default, as defined in
Section 16 below, has occurred and is continuing, any insurance or condemnation
proceeds received by Lessor shall be credited to the obligations of Lessee under
this Section 10.2, and the remainder of such proceeds, if any, shall be paid to
Lessee by Lessor in full compensation for the loss of the leasehold interest in
the Equipment by Lessee.
10.3 Upon any replacement of or payment for the Equipment as
provided in Section 10.2 above, the Lease Schedule shall terminate only with
respect to the Equipment so replaced or paid for, and Lessor shall transfer to
Lessee title only to such Equipment "AS IS, WHERE IS", "WITH ALL FAULTS", and
WITH NO WARRANTIES WHATSOEVER, EITHER EXPRESS OR IMPLIED, INCLUDING WITHOUT
LIMITATION ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR USE OR FOR ANY
PARTICULAR PURPOSE. Lessee shall pay any sales or use taxes due on such
transfer.
<PAGE> 7
11. Insurance.
11.1 Lessee shall keep the Equipment insured against all risks of
loss or damage from every cause whatsoever occurring during the Initial Term, or
any Extended Term for an amount not less than the higher of the full replacement
value of the Equipment or the aggregate of unpaid Daily Rent and Periodic Rent
for the balance of the Initial Term or the Extended Term. Lessee shall also
carry public liability insurance, both bodily injury and property damage,
covering the Equipment, and Lessee shall be liable for any deductible portions
of all required insurance.
11.2 All insurance required under this Section 11 shall be primary
and shall name Lessor as additional insured and loss payee. Such insurance shall
also be with such insurers and shall be in such form reasonably satisfactory to
Lessor and in such amounts as are satisfactory to Lessor. All applicable
policies shall provide that no act, omission or breach of warranty by Lessee
shall give rise to any defense against payment of the insurance proceeds to
Lessor. Lessee shall pay the premiums for such insurance and, at the request of
Lessor, deliver to Lessor duplicates of such policies or other evidence
satisfactory to Lessor of such insurance coverage. In any event, Lessee shall
provide Lessor with certificates of insurance or such other evidence of
coverage, to include endorsements upon the policies issued by the insurers which
evidence the existence of insurance coverage required by this Section 11, and by
which the insurers agree to give Lessor written notice at least thirty (30) days
prior to the effective date of any expiration, modification, reduction,
termination, refusal to renew or cancellation of any such policies. Lessee shall
cause to be provided to Lessor, not less than fifteen (15) days prior to the
scheduled expiration or lapse of such insurance coverage, evidence satisfactory
to Lessor of renewal or replacement coverage.
11.3 Provided no Event of Default, as defined in Section 16 below,
has occurred and is continuing, the proceeds of insurance required under this
Section 11 and payable as a result of loss or damage to the Equipment shall be
applied as set forth in Section 10.2 above. Upon the occurrence of an Event of
Default as defined in Section 16 below, Lessee hereby irrevocably appoints
Lessor as its attorney-in-fact, which power shall be deemed coupled with an
interest, to make claim for, receive payment of, execute and endorse all
documents, checks or drafts received in payment for loss or damage under any
insurance policies required by this Section 11.
11.4 Notwithstanding anything herein, Lessor shall not be under any
duty to examine any evidence of insurance furnished hereunder, or to ascertain
the existence of any policy or coverage, or to advise Lessee of any failure to
comply with the provisions of this Section 11.
12. Surrender to Lessor.
12.1 Lessee shall advise Lessor in writing at least ninety (90)
days prior to the expiration of the Initial Term or any Extended Term of its
intent to surrender the Equipment. Upon receipt of such notice, Lessor shall be
authorized to demonstrate the Equipment in operation to potential buyers or
lessees during the normal business hours of Lessee, provided that Lessor has
given reasonable notice to Lessee prior to any such visit.
12.2 If Lessee elects to surrender the Equipment or, alternatively,
upon any other termination of the Lease Schedule, Lessee shall immediately
surrender the Equipment to Lessor by assembling and delivering the Equipment to
a place or places, as Lessor may designate, within the continental United
States. The shipment of the Equipment shall be conducted in accordance with the
manufacturer's
<PAGE> 8
recommendations or, in the absence of such recommendations, in accordance with
generally accepted industry practices for equipment similar to the Equipment.
All costs of deinstalling, preparation for shipment, and shipping shall be borne
by Lessee.
12.3 Upon surrender, the Equipment shall be in good repair, and
working order, in compliance with the manufacturer's recommended tolerances for
operation and performance in all material respects, in the same condition and
appearance as when received (reasonable wear and tear excepted), and with all
engineering and safety changes prescribed by the manufacturer or maintenance
organization incorporated therein. The Equipment shall be complete, with all
parts and pieces and all operating instructions, maintenance documentation,
service manuals and other historical records; shall be capable of being
immediately assembled and operated by a third party for its originally intended
purpose; and shall be in compliance with all applicable laws, regulations and
industry standards, without further repair, replacement of parts, alteration or
improvement. Lessee shall, in a workmanlike manner and without damage to the
Equipment, remove all Lessee-supplied decals, logos, insignias, numbers, and any
similar identifications or markings from the Equipment. In conjunction with its
surrender of the Equipment, Lessee shall provide Lessor with a complete and
reasonably detailed inventory of the Equipment, including model numbers, serial
numbers, and a description of all modifications (if any) made to the Equipment
during the term of the Lease.
12.4 In the event that Lessee fails to comply with the provisions
of this Section 12, the Initial Term or any Extended Term shall be extended on a
day-to-day basis until Lessee shall have complied with such provisions. During
such period, Lessee shall continue paying a per diem rental equal to the Daily
Rent as set forth on the applicable Lease Schedule for each day of such holdover
period until such time as the Equipment shall have been surrendered in
accordance with this Section 12; provided, however, that if Lessor so notifies
Lessee, Lessee shall surrender the Equipment prior to full compliance with this
Section 12 (but not before the expiration of the Initial Term or any Extended
Term). In such case, Lessee shall be liable for (i) the per diem rental set
forth above through the date of actual surrender, plus (ii) any cost or expense
incurred by Lessor in placing the Equipment in the condition required by this
Section 12, both of which amounts shall be deemed additional rent payments due
under the applicable Lease Schedule.
13. Fair Market Value Purchase Option. Lessor hereby grants to
Lessee the option to purchase all, but not less than all, Equipment set forth on
any Lease Schedule at the expiration of the applicable Initial Term or Extended
Term. Lessee shall notify Lessor in writing at least ninety (90) days prior to
the expiration of the Initial Term or any Extended Term of its intent to
exercise its option to purchase the Equipment on the date of such expiration,
which notice shall be final and irrevocable. Any such purchase shall be for cash
in an amount equal to the then fair market value of such Equipment, as
determined in good faith by Lessor (the "Fair Market Value"). This purchase
option may be exercised by Lessee, provided that no Event of Default, as defined
in Section 16 below, has occurred and is continuing. Upon payment of the Fair
Market Value by Lessee to Lessor, Lessor shall transfer title to the Equipment
to Lessee "AS IS, WHERE IS", "WITH ALL FAULTS", and WITH NO WARRANTIES
WHATSOEVER, EITHER EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR USE OR FOR ANY PARTICULAR PURPOSE.
14. Financial Statements. Lessee shall annually, within ninety
(90) days after the close of its fiscal year, furnish to Lessor financial
statements of Lessee, including a balance sheet as of the close of such year and
statements of income and retained earnings for such year, prepared in accordance
with generally accepted accounting principles, consistently applied from year to
year, and certified by
<PAGE> 9
independent public accountants for Lessee reasonably acceptable to Lessor. If
requested by Lessor, Lessee shall also provide quarterly financial statements of
Lessee, similarly prepared for each of the first three quarters of each fiscal
year, certified (subject to normal year-end audit adjustments) by the chief
financial officer of Lessee and furnished to Lessor within forty-five (45) days
following the end of each quarter, and such other financial information as may
be reasonably requested by Lessor.
15. Delayed Payment Charge. Lessee shall pay to Lessor interest
upon the amount of any Daily Rent, Periodic Rent or other sums not paid by
Lessee when due and owing under the applicable Lease Schedule, from the due date
thereof until paid, at the rate of one and one half percent (1.5%) per month,
but if such rate violates applicable law, then at the maximum rate of interest
allowed by such law.
16. Default.
16.1 The occurrence of any of the following events shall constitute
an event of default ("Event of Default") under all Lease Schedules to which
Lessor is a party:
(a) Lessee fails to pay any Daily Rent or any Periodic Rent
when due, and such failure to pay continues for five (5) consecutive
days following written notice from Lessor; or
(b) Lessee fails to pay any other sum required hereunder, and
such failure continues for a period of ten (10) days following the
giving of written notice by Lessor; or
(c) Lessee fails to maintain the insurance as required by
Section 11 above; or
(d) Lessee violates or fails to perform any other term,
covenant or condition of this Master Agreement or any Lease Schedule or
any other document, agreement or instrument executed pursuant hereto or
in connection herewith, which failure is not cured within thirty (30)
days after the giving of written notice by Lessor; provided, however,
that Lessor need not give any written notice in the event of a default
in the performance of any financial covenants undertaken by Lessee in
connection herewith; or
(e) Lessee ceases to exist or terminates its independent
operations by reason of any discontinuance, dissolution, liquidation,
or sale of substantially all of its assets in one transaction or a
series of related transactions, or otherwise ceases doing business as a
going concern; or
(f) Lessee merges into or with any corporation or other legal
entity, and Lessee is not the surviving corporation or the surviving
legal entity; or
(g) Lessee (i) applies for or consents to the appointment of,
or the taking of possession by, a receiver, custodian, trustee,
liquidator or similar official for itself or for all or a substantial
part of its property, (ii) is generally not paying its debts as such
debts become due, (iii) makes a general assignment for the benefit of
its creditors, (iv) commences a voluntary case under the United States
Bankruptcy Code, as now or hereafter in effect, seeking liquidation,
reorganization or other relief with respect to itself or its debts, (v)
files a petition seeking to take advantage of any other law providing
for the relief of debtors, (vi) takes any action under the laws of its
jurisdiction of incorporation or organization similar to any of the
foregoing, (vii) convenes a meeting of its creditors, or (viii) takes
any corporate action for the purpose of effecting any of the foregoing;
or
<PAGE> 10
(h) A proceeding or case is commenced, without the application
or consent of Lessee, in any court of competent jurisdiction, seeking
(i) the liquidation, reorganization, dissolution or winding up of
Lessee or composition or readjustment of the debts of Lessee, (ii) the
appointment of a trustee, receiver, custodian, liquidator or similar
official for Lessee or for all or any substantial part of its assets,
or (iii) similar relief with respect to Lessee under any law providing
for the relief of debtors, and such proceeding or case under any of the
foregoing subsections shall continue undismissed, or unstayed and in
effect, for a period of sixty (60) days; or an order for relief is
entered with respect to Lessee in an involuntary case under the United
States Bankruptcy Code, as now or hereafter in effect, or an action
under the laws of the jurisdiction of incorporation or organization of
Lessee, similar to any of the foregoing, is taken with respect to
Lessee without its application or consent and shall continue unstayed
and in effect for period of sixty (60) days; or
(i) Lessee makes any representation or warranty herein or in
any statement or certificate at any time given in writing pursuant to
or in connection with this Master Agreement or any Lease Schedule,
which is false or misleading in any material respect; or
(j) Lessee defaults under any promissory note, credit
agreement, loan agreement, conditional sales contract, guaranty, lease,
indenture, bond, debenture or other material obligation whatsoever, and
a party thereto or a holder thereof is entitled to accelerate the
obligations of Lessee thereunder; or Lessee defaults in meeting any of
its material trade, tax or other current obligations as they mature,
unless such obligations are being contested diligently and in good
faith; or
(k) Any party to any guaranty, letter of credit, subordination
or credit agreement or other undertaking, given for the benefit of
Lessor and obtained in connection with this Master Agreement or Lease
Schedule, breaches, fails to continue, contests, or purports to
terminate or to disclaim such guaranty, letter of credit, subordination
or credit agreement or other undertaking; or such guaranty, letter of
credit, subordination agreement or other undertaking becomes
unenforceable while any obligation or any Lease Schedule remains
outstanding; or a guarantor of this Master Agreement or any Lease
Schedule shall die, cease to exist or terminate its independent
operations; or any event or condition set forth in subsections (d),
(e), (f), (g), (h), (i) or (j) of this Section 16.1 shall occur with
respect to any guarantor or other person responsible, in whole or in
part, for payment or performance of this Master Agreement or any Lease
Schedule.
16.2 At the option of Lessor, the occurrence of an Event of Default
with respect to any Lease Schedule shall, without further act or declaration by
Lessor, constitute an Event of Default with respect to any other Lease Schedule
to which Lessor is then a party. If Lessor shall have made an assignment of any
Lease Schedule pursuant to Section 19 below, the assignee of Lessor shall be
deemed to be Lessor and the party to such assigned Lease Schedule or Lease
Schedules for purposes of this Section 16.
16.3 No waiver by Lessor of any Event of Default shall constitute a
waiver of any other Event of Default or of the same Event of Default at any
other time.
17. Remedies.
17.1 Upon the occurrence of an Event of Default, Lessor, at its
sole option, upon its declaration, and to the extent not inconsistent with
applicable law, may exercise any one or more of the following remedies:
<PAGE> 11
(a) Lessor may cancel any or all Lease Schedules, whereupon
all rights of Lessee to the quiet enjoyment and use of the Equipment
shall cease;
(b) Whether or not any or all Lease Schedules are cancelled,
Lessor may cause Lessee, at the sole cost and expense of Lessee, to
cease immediately all use and operation of the Equipment and return any
or all of the Equipment promptly to the possession of Lessor in good
repair and working order, reasonable wear and tear excepted, and
otherwise in the condition required by Section 12.3 hereof. Lessor, at
its sole option and through its employees, agents or contractors, may
peaceably enter upon the premises where the Equipment is located and
take immediate possession of and remove the Equipment, all without
liability to Lessor, its employees, agents or contractors for such
entry. LESSEE HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW,
ANY AND ALL RIGHTS TO NOTICE AND/OR HEARING PRIOR TO THE REPOSSESSION
OR REPLEVIN OF THE EQUIPMENT BY LESSOR, ITS EMPLOYEES, AGENTS OR
CONTRACTORS;
(c) Lessor may proceed by court action to enforce performance
by Lessee of any or all of the Lease Schedules or pursue any other
remedy Lessor may have hereunder, at law, in equity or under any
applicable statute or law including, without limitation, the Uniform
Commercial Code as adopted by The Commonwealth of Massachusetts, and
recover such other actual damages as may be incurred by Lessor;
(d) Lessor may recover from Lessee damages, not as a penalty
but as liquidation for all purposes and without limitation of any other
amounts due from Lessee under any or all of the Lease Schedules, in an
amount equal to the sum of (i) any unpaid Daily Rents and/or Periodic
Rents due and payable for periods prior to the repossession of the
Equipment by Lessor plus any interest due thereon pursuant to Section
15 above, (ii) the present value of all future Periodic Rents required
to be paid over the remaining Initial Term or any Extended Term after
repossession of the Equipment by Lessor, determined by discounting such
future Periodic Rents to the date of payment by Lessee at a rate of
five percent (5%) per annum; and (iii) all costs and expenses incurred
in searching for, taking, removing, storing, repairing, restoring,
refurbishing and leasing or selling such Equipment; and
(e) Lessor may sell, lease or otherwise dispose of any or all
of the Equipment, whether or not in the possession of Lessor, at public
or private sale and, in the case of a private sale, with or without
notice to Lessee, which notice is hereby expressly waived by Lessee, to
the extent permitted by and not inconsistent with applicable law.
Lessor may be the purchaser at any such sale. Lessor may sell, lease or
dispose of the Equipment in such order and manner as Lessor may
determine. Lessor shall then apply against the obligations of Lessee
hereunder the net proceeds of such sale, lease (provided, however, that
the net proceeds of any such lease shall be solely those rentals
applicable to that period of the new lease term which is comparable to
the then remaining term of the Lease Schedule) or other disposition,
after deducting therefrom (i) the present value of the residual value
of the Equipment at the expiration of the Initial Term, which is
anticipated by Lessor and Lessee to be not less than twenty percent
(20%) of the Acquisition Cost, such present value to be determined by
discounting the anticipated residual value to the date of sale, lease
or other disposition at a rate of five percent (5%) per annum, and (ii)
all costs incurred by Lessor in connection with such sale, lease or
other disposition including, but not limited to, costs of
transportation, repossession, storage, refurbishing, advertising or
other fees. Lessee shall remain liable for any deficiency, and any
excess of such proceeds over the total
<PAGE> 12
obligations owed by Lessee shall be retained by Lessor. If any notice
of such sale, lease or other disposition of the Equipment is required
by applicable law, ten (10) days written notice to Lessee shall be
deemed reasonable.
17.2 Upon the occurrence of an Event of Default described in
subsections 16.1(g) and (h), the remedy set forth in subsection 17.1(d) shall be
deemed to have been exercised immediately and automatically without any act or
declaration of Lessor, and the liquidated damages described therein shall be
immediately due and payable.
17.3 Lessee shall pay all costs and expenses, including but not
limited to reasonable legal fees incurred by Lessor, arising out of or in
connection with any Event of Default under any Lease Schedule. Lessee shall also
be liable for any amounts due and payable to Lessor under any other provision of
any Lease Schedule or this Master Agreement, including but not limited to
amounts due and payable under Section 18 below.
17.4 No failure on the part of Lessor to exercise, and no delay in
exercising, any right or remedy hereunder shall operate as a waiver thereof. No
single or partial exercise of any right or remedy hereunder shall preclude any
other or further exercise thereof or the exercise of any other right or remedy.
Each right and remedy provided hereunder is cumulative and not exclusive of any
other right or remedy including, without limitation, any right or remedy
available to Lessor at law, by statute or in equity.
18. Tax Indemnification.
18.1 Lessee represents and warrants that the Equipment is and will
remain, during the entire Initial Term and any Extended Term, property used in a
trade or business or for the production of income within the meaning of Section
167 of the Internal Revenue Code of 1986, as amended ("Code"). Lessee further
acknowledges and agrees that, pursuant to the Code, Lessor or its affiliated
group, as defined in Section 1504 of the Code ("Affiliated Group"), (i) shall be
entitled to deductions for the recovery of the Acquisition Cost of the Equipment
over the recovery period as set forth in the applicable Lease Schedule, using
the Modified Accelerated Cost Recovery System as provided by Section 168(b)(1)
of the Code ("MACRS Deductions") and (ii) shall not be required to include in
its gross income for Federal income tax purposes any amount derived from the
cost of any alteration, addition, improvement, modification, replacement, or
substitution of the Equipment or from any refund or credit from the manufacturer
or supplier of the Equipment or any foreign source income.
18.2 If as a result of any reason or circumstance whatsoever,
except as specifically set forth in Section 18.3 below, Lessor or its Affiliated
Group shall not be entitled to, shall not be allowed, shall suffer recapture of
or shall lose any MACRS Deductions, or shall be required to include in gross
income such amounts as described in Section 18.1 above, then Lessee shall pay to
Lessor, upon demand, a sum to be computed by Lessor in the following manner:
such sum, after deduction of all Federal, state and local income taxes payable
by Lessor as a result of the receipt of such sum, shall be sufficient to restore
Lessor or its Affiliated Group to substantially the same position, on an
after-tax basis, as it would have been in but for the loss of such MACRS
Deductions or the inclusion of such additional amounts in gross income. In
making its computation, Lessor or its Affiliated Group shall consider, but shall
not be limited to, the following factors: (i) the amounts and timing of any net
loss of tax benefits resulting from any such lack of entitlement to or loss,
recapture, or disallowance of MACRS Deductions or the inclusion of such
additional amounts in gross income, but offset by any tax benefits derived from
any depreciation or other capital recovery deductions or exclusions from income
allowed to Lessor or its Affiliated Group
<PAGE> 13
with respect to the same Equipment, or credits which may be available as a
result of such additional amounts required to be included in the gross income of
Lessor and its Affiliated Group; (ii) penalties, interest or other charges
imposed; (iii) differences in tax years involved; and (iv) the time value of
money at a reasonable rate per annum determined, in good faith, by Lessor. For
purposes of computation only, the amount of indemnification payments hereunder
shall be calculated on the assumption that Lessor and its Affiliated Group have
or will have, in all tax years involved, sufficient taxable income and the tax
liability to realize all tax benefits and incur all losses of tax benefits at
the highest marginal Federal corporate income tax rate in each year. Upon
request, Lessor shall provide Lessee with the methods of computation used in
determining any sum that may be due and payable by Lessee under this Section 18.
Lessor's computation of any sum that may be due and payable by Lessee under this
Section 18 shall be binding and conclusive on the parties hereto in the absence
of manifest error.
18.3 Lessee shall not be obligated to pay any sums required under
this Section 18 in the event that lack of entitlement to, or loss, recapture or
disallowance of any MACRS Deductions or the inclusion of such additional amounts
in gross income results from one or more of the following events: (i) a
disqualifying disposition due to the sale of the Equipment by Lessor when no
Event of Default, as defined in Section 16 above, has occurred, (ii) a failure
of Lessor or its Affiliated Group to timely claim any MACRS Deductions for the
Equipment in its tax return, and/or (iii) the fact that Lessor or its Affiliated
Group does not have, in any taxable year or years, sufficient taxable income or
tax liability to realize the benefit of any MACRS Deductions that are otherwise
allowable to Lessor or its Affiliated Group.
18.4 The representations, obligations and indemnities of Lessee
under this Section 18 shall continue in full force and effect, and shall
survive, notwithstanding the expiration or other termination of this Master
Agreement or any Lease Schedules.
19. Assignment; Sublease.
19.1 LESSOR MAY SELL, ASSIGN OR OTHERWISE TRANSFER ALL OR ANY PART
OF ITS RIGHT, TITLE AND INTEREST IN AND TO THIS MASTER AGREEMENT, THE EQUIPMENT
AND/OR ANY LEASE SCHEDULE TO A THIRD-PARTY ASSIGNEE, SUBJECT TO THE TERMS AND
CONDITIONS OF ANY LEASE SCHEDULE, INCLUDING BUT NOT LIMITED TO, THE RIGHT TO THE
QUIET ENJOYMENT OF THE EQUIPMENT BY LESSEE AS SET FORTH IN SECTION 7.1 ABOVE.
Such assignee shall assume all of the rights and obligations of Lessor under the
applicable Lease Schedule from and after the effective date of such assignment,
and shall relieve Lessor therefrom. Lessee hereby waives and agrees not to
assert against any such assignee any defense, setoff, recoupment, claim or
counterclaim which Lessee has or may at any time hereafter have against Lessor,
or any person, other than such assignee, for any reason whatsoever. In no event,
shall any of the rights or obligations of Lessee change under an assigned Lease
Schedule. In addition, any assignment by Lessor shall not substantially increase
any burden or risk to Lessee. Upon any such assignment, all references to Lessor
herein shall mean such assignee. Notwithstanding any such sale, assignment or
transfer, Lessee's obligations hereunder shall remain absolute and unconditional
including, without limitation, as set forth in Section 7.2 above.
19.2 Lessor may also pledge, mortgage or grant a security interest
in the Equipment and assign any Lease Schedule as collateral. The assignee
thereof shall be entitled to all the rights of Lessor under the Lease Schedule.
If such assignee assumes all of the obligations of Lessor under the Lease
Schedule, Lessor shall be relieved of such obligation, and assignee shall be
deemed to be Lessor. Lessee hereby waives and agrees not to assert against any
such assignee any defense, setoff, recoupment, claim
<PAGE> 14
or counterclaim which Lessee has or may at any time hereafter have against
Lessor, or any person, other than such assignee, for any reason whatsoever. Any
pledge, mortgage or grant of security interest in the Equipment or assignment of
a Lease Schedule shall be subject to the terms and conditions hereof including,
but not limited to, the right to the quiet enjoyment of the Equipment by Lessee
as set forth in Section 7.1 above. Lessee, by reason of such pledge, mortgage,
grant of security interest or collateral assignment, shall not be relieved of
any of its obligations hereunder, which shall remain absolute and unconditional
including, without limitation, as set forth in Section 7.2 above.
19.3 Upon the written request of Lessor, Lessee shall provide
written acknowledgment to any pledgee, mortgagee, lienholder, assignee,
transferee or purchaser of any Lease Schedule of the obligations of Lessee under
the Lease Schedule that is pledged, mortgaged, encumbered, assigned transferred
or purchased.
19.4 LESSEE SHALL NOT SELL, TRANSFER, ASSIGN, SUBLEASE, CONVEY OR
PLEDGE ANY OF ITS INTEREST IN THIS MASTER AGREEMENT ANY LEASE SCHEDULE OR ANY OF
THE EQUIPMENT, WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR. Any such sale,
transfer, assignment, sublease, conveyance or pledge, whether by operation of
law or otherwise, without the prior written consent of Lessor, shall be void.
19.5 Subject to the foregoing, this Master Agreement and each Lease
Schedule inure to the benefit of, and are binding upon, the successors and
permitted assigns of the parties hereto and thereto, as the case may be.
20. Optional Performance By Lessor. If an Event of Default, as
defined in Section 16 above, or an event or condition which with the giving of
notice or lapse of time, or both, would become an Event of Default occurs and is
continuing, Lessor in its sole discretion may pay or perform any obligation of
Lessee under this Master Agreement or any Lease Schedule in whole or in part,
without thereby becoming obligated to pay or to perform the same on any other
occasion or to pay any other obligation of Lessee. Any payment or performance by
Lessor shall not be deemed to cure any Event of Default or any such event or
condition hereunder. Upon such payment or performance by Lessor, Lessee shall
pay forthwith to Lessor, on demand, the amount of such payment or an amount
equal to all costs and expenses of such performance, as well as any delayed
payment charges on such amounts as set forth in Section 15 above.
21. Representations and Warranties of Lessee.
21.1 Lessee represents and warrants that (i) there are no pending
actions or proceedings to which Lessee is a party, and there are no threatened
actions or proceedings of which Lessee has knowledge, before any court,
arbitrator or administrative agency, which, either individually or in the
aggregate, would have a Material Adverse Effect on Lessee; Lessee is not in
default under any obligation for borrowed money, for the deferred purchase price
of property or any lease agreement which, either individually or in the
aggregate, would have a Material Adverse Effect on Lessee; (iii) under the laws
of the state(s) in which the Equipment is to be located, the Equipment consists
solely of personal property and not fixtures; (iv) the financial statements of
Lessee (copies of which have been furnished to Lessor) have been prepared in
accordance with generally accepted accounting principles consistently applied,
and fairly present the financial condition of Lessee and the results of its
operations as of the date of and for the period covered by such statements, and
since the date of such statements there has been no material adverse change in
such conditions or operations; (v) the address of Lessee set forth above is the
chief place of business and chief executive office of Lessee; and Lessee does
not conduct business under
<PAGE> 15
a trade, assumed or fictitious name;(vi) Lessee has reviewed the areas within
its business and operations which could be adversely affected by, and has
developed or is developing a program to address on a timely basis, the "Year
2000 Problem", that is, the risk that computer applications used by Lessee may
be unable to recognize and perform properly date-sensitive functions involving
certain dates prior to and any date on or after December 31, 1999), and have
made related appropriate inquiry of material suppliers and vendors, based on
such review and program, Lessee believes that the "Year 2000 Problem" will not
have a Material Adverse Effect on Lessee; (vii) from time to time, at the
request of Lessor, Lessee shall provide to Lessor such updated information or
documentation as is requested regarding the status of its efforts to address the
Year 2000 Problem. For purposes of this Section 21.1, "Material Adverse Effect"
shall mean (1) a materially adverse effect on the business, condition (financial
or otherwise), operations, performance or properties of Lessee, or (2) a
material impairment of the ability of Lessee to perform its obligations under or
to remain in compliance with the Master Agreement and any Lease Schedule.
21.2 Lessee warrants and agrees that this Master Agreement
and any Lease Schedule and the performance by Lessee of all of its obligations
hereunder and thereunder have been duly authorized and do not and will not
conflict with any provision of the charter or bylaws of Lessee or of any
agreement, indenture, lease or other instrument, or any court, administrative or
other governmental order or decree, to which Lessee is a party or by which
Lessee or any of its property is or may be bound. Lessee warrants and agrees
that this Master Agreement and any Lease Schedule do not and will not require
any governmental authorization, approval, license or consent except, those which
have been duly obtained, and will remain in effect during the entire Initial
Term and any Extended Term.
22. Miscellaneous.
22.1 The section headings are inserted herein for convenience of
reference and are not part of and shall not affect the meaning or interpretation
of this Master Agreement or any Lease Schedule.
22.2 Any provision of the Master Agreement or any Lease Schedule
which is unenforceable in whole or in part in any jurisdiction, or under
particular circumstances, shall, as to such jurisdiction or circumstances, be
ineffective only to the extent of such unenforceability without invalidating any
remaining part or other provision hereof, and shall not be determinative of
enforceability in any other jurisdiction or under any other circumstances. The
validity and interpretation of the Master Agreement and any Lease Schedule and
the rights and obligations of the parties hereto shall be governed in all
respects by the laws of The Commonwealth of Massachusetts without giving effect
to the conflicts of laws provisions thereof. Time is of the essence with respect
to each obligation of the Lessee pursuant to this Master Agreement, any Lease
Schedule and any riders or amendments hereto or thereto.
22.3 Without derogation of any disclaimer or limitation otherwise
set forth in the Master Agreement or any Lease Schedule, any action by Lessee
against Lessor for any default by Lessor under the Master Agreement or any Lease
Schedule, including breach of warranty or indemnity, shall be commenced within
one (1) year after any such cause of action accrues.
22.4 LESSEE (BY ITS ACCEPTANCE HEREOF) AGREES THAT NEITHER IT, NOR
ANY PERMITTED ASSIGNEE OR SUCCESSOR OF LESSEE SHALL (A) SEEK A JURY TRIAL IN ANY
LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER ACTION BASED UPON, OR ARISING
OUT OF, THIS MASTER AGREEMENT, ANY LEASE SCHEDULE, ANY RELATED AGREEMENTS, THE
EQUIPMENT, OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG LESSEE AND
LESSOR AND LESSOR'S SUCCESSORS AND ASSIGNS, OR (B) SEEK TO CONSOLIDATE ANY SUCH
ACTION WITH
<PAGE> 16
ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. LESSEE
HAS READ AND FULLY UNDERSTANDS THE PROVISIONS OF THIS PARAGRAPH, AND THESE
PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. LESSOR HAS NOT AGREED WITH OR
REPRESENTED TO LESSEE THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY
ENFORCED IN ALL INSTANCES. Lessee further agrees that any suit based upon or
arising out of the Master Agreement, any Lease Schedule, any related agreements,
the Equipment, or the dealings or the relationship between or among Lessee and
Lessor and Lessor's successors and assigns may be brought in the courts of The
Commonwealth of Massachusetts or any Federal court sitting therein and consents
to the non-exclusive jurisdiction of such court and to service of process in any
such suit being made upon Lessee by mail in the manner specified in Section 22.6
hereof. Lessee hereby waives any objection that it may now or hereafter have to
the venue of any such suit or any such court, or that such suit was brought in
an inconvenient forum.
22.5 Each Lease Schedule, including the terms of this Master
Agreement expressly incorporated therein, any riders, schedules or amendments,
and other documents now or hereafter attached thereto or executed in connection
therewith, constitutes the entire agreement between Lessor and Lessee regarding
the Equipment and the matters addressed thereby. Lessor and Lessee agree that
neither the Master Agreement nor any Lease Schedule shall be amended, altered or
changed except by a written agreement signed by the parties hereto. LESSEE
ACKNOWLEDGES THAT THERE HAVE BEEN NO REPRESENTATIONS, EXPRESS OR IMPLIED, BY
LESSOR OTHER THAN AS SET FORTH HEREIN, AND LESSEE EXPRESSLY CONFIRMS THAT IT HAS
NOT RELIED UPON ANY REPRESENTATIONS BY LESSOR, EXCEPT THOSE SET FORTH HEREIN, AS
A BASIS FOR ENTERING INTO THIS MASTER AGREEMENT OR ANY LEASE SCHEDULE.
22.6 Any notice required to be given by Lessee or Lessor hereunder
shall be deemed adequately given if sent by registered or certified mail, return
receipt requested, or by overnight courier via a nationally recognized provider
of such services, to the other party at its address stated herein or at such
other place as either party may designate in writing to the other. Such notice
shall be effective upon receipt.
22.7 Lessee agrees to execute and deliver such additional documents
and to perform such further acts as may be reasonably requested by Lessor in
order to carry out and effectuate the purposes of the Master Agreement and any
Lease Schedule. Upon the written request of Lessor, Lessee further agrees to
execute any instrument necessary for the filing or recording of this Master
Agreement or any Lease Schedule or to confirm the ownership of the Equipment by
Lessor, and to reimburse Lessor for costs incurred thereby, or any other costs
reasonably incurred by Lessor either in giving notice of its interest in the
Equipment or determining the existence of any liens or encumbrances on the
Equipment. Lessor is hereby authorized to insert in any Lease Schedule the
serial numbers of the Equipment and other identifying marks or similar
information and to sign, on behalf of Lessee, any Uniform Commercial Code
financing statements relating to the Equipment under the applicable Lease
Schedule.
22.8 Neither the Master Agreement nor any Lease Schedule may be
canceled or terminated except as expressly provided herein.
22.9 Whenever the context of this Master Agreement or any Lease
Schedule requires, the singular includes the plural and the plural includes the
singular. Whenever the word Lessor is used herein, it includes all assignees and
successors in interest of Lessor. If more than one Lessee is named herein, the
liability of each shall be joint and several.
<PAGE> 17
22.10 All agreements, indemnities, representations and warranties of
Lessee and all rights and remedies of Lessor shall survive the expiration or
other termination of this Master Agreement and the applicable Lease Schedule,
whether or not expressly provided herein.
22.11 Any waiver of any power, right, remedy or privilege of Lessor
hereunder shall not be effective unless in writing signed by Lessor.
22.12 This Master Agreement or any Lease Schedule may be executed in
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, Lessor and Lessee, each by its duly authorized
officer or agent, have duly executed and delivered this Master Agreement, which
is intended to take effect as a sealed instrument, as of the day and year first
written above.
Accepted at Boston, Massachusetts
BANCBOSTON LEASING INC.
By: By: /s/ John B. Mullin
--------------------------- ---------------------------
Print Name: Print Name: John B. Mullin
Title: Title: CFO
------------------------ -------------------------
Federal Tax ID Number:
------------------------
<PAGE> 1
Exhibit 10.37
[BANKBOSTON LOGO]
MASTER AGREEMENT
This MASTER AGREEMENT, dated as of the 21st day of January, 1999,
which together with all riders and amendments now or hereafter executed and made
a part hereof (the "Master Agreement"), is made at Boston, Massachusetts by and
between BANCBOSTON LEASING INC. ("Lessor"), a Massachusetts corporation with its
principal place of business at 100 Federal Street, Boston, Massachusetts 02110
and ("Lessee"), a with its principal place of business at 201 California Street,
San Francisco, CA 94111.
IN CONSIDERATION OF the mutual promises and covenants contained herein,
Lessor and Lessee hereby agree as follows:
1. Leasing Property. At the request of Lessee and subject to the
terms and conditions of this Master Agreement, Lessor shall lease to Lessee and
Lessee shall lease from Lessor such personal property ("Equipment") as may be
mutually agreed upon by Lessor and Lessee. The Equipment shall be selected by or
ordered at the request of Lessee, identified in one or more lease schedules
substantially in the form as supplied by Lessor (each a "Lease Schedule") and
accepted by Lessee in one or more certificates of acceptance in the form as
supplied by Lessor (each a "Certificate of Acceptance"). Each Lease Schedule
executed by Lessor and Lessee expressly incorporates by reference the terms and
conditions of this Master Agreement and any riders, schedules or amendments, now
or hereafter executed, applicable to such Lease Schedule and shall constitute a
separate, distinct and independent lease and contractual relationship between
Lessor and Lessee.
2. Certain Definitions.
2.1 The "Acquisition Cost" shall mean the total acquisition cost
of the Equipment paid by Lessor as set forth in the applicable Lease Schedule.
2.2 The "Commencement Date" shall mean the date on which the
Equipment identified in the applicable Lease Schedule is accepted and placed in
service by Lessee as evidenced by a Certificate of Acceptance.
2.3 The "Daily Rent" shall mean the per diem amount set forth in
the applicable Lease Schedule.
2.4 The "Initial Term Start Date" shall mean either (i) the first
day of the month immediately following the month in which the Commencement Date
occurs, or (ii) if the Commencement Date occurs on the first day of the month,
the Commencement Date. For all rental periods other than monthly, the Initial
Term Start Date shall be as set forth on the applicable Lease Schedule.
2.5 The "Payment Date" shall mean the date set forth in the
applicable Lease Schedule.
2.6 The "Periodic Rent" shall mean the amount set forth in the
applicable Lease Schedule.
<PAGE> 2
2.7 The words "herein", "hereof", and "hereunder" shall refer to
this Master Agreement and any Lease Schedule as a whole and not to any
particular section. Other capitalized terms shall have the meanings specified
elsewhere in this Master Agreement or the Lease Schedule.
3. Initial Term of Lease; Payment of Rent.
3.1 This Master Agreement shall be effective from and after the
date of execution hereof. The term of lease for the Equipment shall begin on the
Commencement Date set forth in the applicable Certificate of Acceptance and
shall continue during and until the expiration of the Initial Term as defined
and set forth in the applicable Lease Schedule, measured from the Initial Term
Start Date. The Initial Term may not be canceled or terminated except as set
forth in Sections 10.2 or 17.1 below.
3.2 At the expiration of the Initial Term, Lessor and Lessee may
extend the lease of the Equipment for any period as they may agree upon in
writing ("Extended Term") at the then fair market rental value of the Equipment,
as determined in good faith by Lessor.
3.3 Aggregate Daily Rent shall be due and payable by Lessee on the
Initial Term Start Date in an amount equal to the Daily Rent multiplied by the
actual number of days elapsed from, and including, the Commencement Date to, but
excluding, the Initial Term Start Date. The Periodic Rent shall be due and
payable, without prior notice or demand, on the Payment Date and thereafter on
the first day of each month or other applicable period of the Initial Term or
any Extended Term. All Daily Rents and Periodic Rents shall be paid to Lessor at
its principal place of business in Boston, Massachusetts or other location to
which the Lessor may direct in writing.
4. Acceptance of Equipment; Exclusion of Warranties.
4.1 Lessee shall signify its acceptance of the Equipment
identified in the applicable Lease Schedule by promptly executing and delivering
to Lessor a Certificate of Acceptance. Lessee acknowledges that its execution
and delivery of the Certificate of Acceptance shall conclusively establish, as
between Lessor and Lessee, that the Equipment has been inspected by Lessee, is
in good repair and working order, is of the design, manufacture and capacity
selected by Lessee, and is accepted by Lessee under the applicable Lease
Schedule.
4.2 In the event the Equipment is ordered by Lessor from a
manufacturer or supplier at the request of Lessee, Lessor shall not be required
to pay the Acquisition Cost for such Equipment unless and until the applicable
executed Certificate of Acceptance has been received by Lessor. All expenses
incurred in connection with Lessor's purchase of the Equipment (including
shipment, delivery and installation) shall be the responsibility of Lessee and
shall be either capitalized in the Acquisition Cost or paid upon demand. If
Lessee shall refuse to accept delivery of any item of the Equipment, Lessee will
be assigned all rights and shall assume all obligations as purchaser of such
item of the Equipment. Lessee hereby agrees to indemnify, defend and hold Lessor
harmless from any liability to any manufacturer or supplier of the Equipment (in
each case a "Supplier") or any other manufacturer or supplier arising from the
failure of Lessee to lease any Equipment which is ordered by Lessor at the
request of Lessee or for which Lessor has assumed an obligation to purchase at
the request of Lessee.
4.3 Lessor leases the Equipment to Lessee and Lessee leases the
Equipment from Lessor "AS IS" and "WITH ALL FAULTS". Lessee hereby acknowledges
that (i) Lessor is not a manufacturer, supplier or dealer of such Equipment nor
an agent thereof, and (ii) LESSOR HAS NOT MADE, DOES NOT MAKE, AND HEREBY
DISCLAIMS ANY REPRESENTATION OR WARRANTY
-2-
<PAGE> 3
WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE EQUIPMENT INCLUDING, BUT NOT
LIMITED TO, ITS DESIGN, CAPACITY, CONDITION, MERCHANTABILITY, OR FITNESS FOR USE
OR FOR ANY PARTICULAR PURPOSE. Lessee further acknowledges that Lessor is not
responsible for any repairs, maintenance, service, latent or other defects in
the Equipment or in the operation thereof, or for compliance of any Equipment
with requirements of any laws, ordinances, governmental rules or regulations
including, but not limited to, laws with respect to environmental matters,
patent, trademark, copyright or trade secret infringement, or for any direct,
indirect, incidental, punitive, consequential or other damages arising out of
the use of or inability to use the Equipment. In addition, Lessor makes no
representation and disclaims any warranty that the Equipment is "Year 2000
Compliant," that is, that any computer applications, imbedded microchips or
other systems, if any, which may be contained or included in the Equipment will
be able to recognize, and perform properly, date sensitive functions involving
certain dates prior to, and any date after, December 31, 1999.
4.4 Provided no Event of Default, as defined in Section 16 below,
has occurred and is continuing, Lessor agrees to cooperate with Lessee, at the
sole cost and expense of Lessee, in making any claim against a manufacturer or
supplier of the Equipment arising from a defect in such Equipment or breach of
warranty, express or implied, and/or arising out of the purchase or supply
agreement between Lessor and Supplier. At the request of Lessee, Lessor shall
assign to Lessee, for the Initial Term and any Extended Term, all warranties on
the Equipment available from Supplier to the full extent permitted by the terms
of such warranties and by applicable law.
5. Ownership; Inspection; Maintenance and Use.
5.1 The Equipment shall at all times be the sole and exclusive
property of Lessor. Any Equipment subject to titling and registration laws shall
be titled and registered by Lessee on behalf of and in the name of Lessor, or in
such name as Lessor may direct, at the sole cost and expense of Lessee. Lessee
shall cooperate with and provide Lessor with any information or documents
necessary for titling and registration of the Equipment. Upon the request of
Lessor, Lessee shall execute any documents or instruments which may be necessary
or appropriate to confirm, to record or to give notice of the ownership of the
Equipment by Lessor including, but not limited to, financing statements under
the Uniform Commercial Code. Lessee, at the request of Lessor, shall affix to
the Equipment, in a conspicuous place, any label, plaque or other insignia
supplied by Lessor designating the ownership of the Equipment by Lessor.
5.2 The Equipment shall be located at the address specified in the
applicable Lease Schedule, which must be within the continental United States,
or such other location as Lessor may agree in writing, and may be removed
therefrom to another location within the continental United States only with
prior written notice to Lessor. Lessor, its agents or employees shall have the
right to enter the premises of Lessee, upon reasonable notice and during normal
business hours, for the purpose of inspecting the Equipment and all maintenance
records kept by Lessee with respect to the Equipment.
5.3 Lessee shall pay all costs, expenses, fees and charges
whatsoever incurred in connection with the use and operation of the Equipment.
Lessee shall, at all times and at its own expense, keep the Equipment in good
repair and working order, reasonable wear and tear excepted. Lessee shall also
use the Equipment solely in the conduct of its business, and shall not
permanently discontinue use of the Equipment. Any maintenance contract required
by a manufacturer or supplier for the care and upkeep of the Equipment shall be
entered into by Lessee at its sole cost and expense. Lessee shall permit the use
and operation of the Equipment only by personnel authorized by Lessee and shall
comply with all laws,
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ordinances or governmental rules and regulations and applicable insurance
policies relating to the use and operation of the Equipment.
6. Alterations and Modifications. Lessee may make, or cause to be
made on its behalf, any improvement, modification or addition to the Equipment
with the prior written consent of Lessor, which will not be unreasonably
withheld; provided, however, that such improvement, modification or addition is
readily removable without causing damage to, or impairment of, the functional
effectiveness, remaining economic useful life or fair market value of the
Equipment. Any such improvement, modification or addition which is so readily
removable shall remain the property of Lessee and shall be removed by Lessee
prior to return of the Equipment. To the extent that such improvement,
modification or addition is not so removable, it shall be permitted only with
Lessor's prior written consent, which will be granted at Lessor's sole
discretion, and only if its attachment will not cause damage to, or impairment
of, the functional effectiveness, remaining economic useful life or fair market
value of the Equipment; and such improvement, modification or addition shall
immediately become the property of Lessor and thereupon shall be considered
Equipment for all purposes hereunder. Any modification or addition to the
Equipment which is required by law shall be made by Lessee, at the sole cost and
expense of Lessee, and shall immediately become the property of Lessor and
thereupon shall be considered Equipment for all purposes hereunder. Any
improvement, modification or addition made to the Equipment shall be free of all
liens, claims and encumbrances of third parties.
7. Quiet Enjoyment; No Defense, Setoff or Counterclaims.
7.1 Provided no Event of Default, as defined in Section 16 below,
has occurred and is continuing, Lessee shall have the quiet enjoyment and use of
the Equipment in the ordinary course of its business during the Initial Term or
any Extended Term without interruption by Lessor or any person or entity
claiming through or under Lessor.
7.2 Lessee acknowledges and agrees that ANY DAMAGE TO OR LOSS,
DESTRUCTION, OR UNFITNESS OF, OR DEFECT IN THE EQUIPMENT, OR THE INABILITY OF
LESSEE TO USE THE EQUIPMENT FOR ANY REASON WHATSOEVER, OR ANY OTHER CIRCUMSTANCE
WHATSOEVER SHALL NOT (i) GIVE RISE TO ANY DEFENSE, COUNTERCLAIM, OR RIGHT OF
SETOFF AGAINST LESSOR, OR (ii) PERMIT ANY ABATEMENT OR RECOUPMENT OF, OR
REDUCTION IN DAILY OR PERIODIC RENT, OR (iii) ALLOW LESSEE TO CANCEL, TERMINATE,
MODIFY OR REPUDIATE THE APPLICABLE LEASE SCHEDULE, OR (iv) RELIEVE LESSEE OF, OR
EXCUSE LESSEE FROM, THE PERFORMANCE OF ITS OBLIGATIONS UNDER THE APPLICABLE
LEASE SCHEDULE INCLUDING, BUT NOT LIMITED TO, ITS OBLIGATION TO PAY THE FULL
AMOUNT OF DAILY RENT AND PERIODIC RENT, WHICH OBLIGATIONS ARE ABSOLUTE AND
UNCONDITIONAL. Any claim that Lessee may have which arises from a defect in or
deficiency of the Equipment shall be brought solely against Supplier or any
other manufacturer or supplier of the Equipment and Lessee shall,
notwithstanding any such claim, continue to pay Lessor all amounts due and to
become due under the applicable Lease Schedule.
8. Adverse Claims and Interests.
8.1 Except for any liens, claims, mortgages, pledges, encumbrances
or security interests created by or for the benefit of Lessor, Lessee shall keep
the Equipment at all times, free and clear from all liens, claims, mortgages,
pledges, encumbrances and security interests, other than liens for fees, taxes,
levies, duties or other governmental charges of any kind, liens of mechanics,
materialmen, laborers,
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employees or suppliers and similar liens arising by operation of law incurred by
Lessee in the ordinary course of business for sums that are not yet delinquent
or are being contested in good faith by appropriate proceedings which suspend
the collection thereof provided, however, that such proceedings do not involve
any risk of the sale, forfeiture or loss of the Equipment or any interest
therein, or of the imposition of criminal liability on the part of Lessor or
Lessee, which shall be determined by Lessor in its sole discretion. Lessee shall
keep the Equipment at all times free and clear from all levies, seizures and
attachments, and shall defend Lessor's title in and to the Equipment. Without
limitation of the covenants and obligations of Lessee set forth in the preceding
sentence, Lessee shall immediately notify Lessor in writing of the imposition of
any prohibited lien, claim, levy or attachment on or seizure of the Equipment,
at which time Lessee shall provide Lessor with all relevant information in
connection therewith.
8.2 Lessee agrees that the Equipment shall be and at all times
shall remain personal property. Accordingly, Lessee shall take such steps as may
be necessary to prevent any person, including without limitation Lessee's
landlord and such landlord's mortgagee, from acquiring, having or retaining any
rights in or to the Equipment by reason of its being affixed or attached to, or
otherwise located on, real property including, without limitation, obtaining and
delivering to Lessor waivers of any lien, encumbrance or interest which such
person might have or hereafter obtain or claim with respect to the Equipment
which waivers shall be recorded at the sole cost and expense of Lessee.
9. Indemnities; Payment of Taxes.
9.1 Lessee hereby agrees to indemnify, defend and hold harmless
(on an after-tax basis) Lessor, its agents, employees, successors and assigns
from and against any and all claims, actions, suits, proceedings, costs,
expenses, damages and liabilities whatsoever arising out of or in connection
with the manufacture, ordering, selection, specifications, availability,
delivery, titling, registration, rejection, installation, possession,
maintenance, ownership, use, leasing, operation or return of the Equipment
including, but not limited to, any claim or demand based upon (i) any STRICT OR
ABSOLUTE LIABILITY IN TORT, (ii) any violation of any applicable environmental
or other laws or regulations, or (iii) any infringement or alleged infringement
of any patent, trademark, trade secret, license, copyright or otherwise. All
costs and expenses incurred by Lessor in connection with any of the foregoing
including, but not limited to, reasonable legal fees shall be paid by Lessee on
demand. The indemnification provisions of this Section 9.1 shall not, however,
apply to any claim, cost or expense arising from, or in connection with, any
gross negligence or willful misconduct on the part of Lessor, its agents,
employees, its successors and assigns.
9.2 Lessee hereby agrees to indemnify, defend and hold Lessor
harmless, on an after-tax basis, against all federal, state and local taxes,
assessments, licenses, withholdings, levies, imposts, duties, excise taxes,
registration fees and other governmental fees and charges whatsoever, which are
imposed, assessed or levied on or with respect to the Equipment or its use or
related in any way to a Lease Schedule ("Tax Assessments") except for taxes on
or measured by the net income of Lessor determined substantially in the same
manner as under the Internal Revenue Code of 1986, as amended. Lessee shall file
all returns, reports or other such documents required in connection with the Tax
Assessments and shall provide Lessor with copies thereof. Provided no Event of
Default, as defined in Section 16 below, has occurred and is continuing, Lessee
is also authorized, for and on behalf of Lessor, to file abatements or otherwise
seek a refund or reduction of any Tax Assessments provided that no such filing
shall create any risk of loss of or encumbrance on the Equipment. If, under
local law or custom, Lessee is not authorized to make the filings required by a
taxing authority, Lessee shall notify Lessor in writing, and Lessor shall
thereupon file such returns, reports or documents at Lessee's sole cost and
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expense. Without limiting any of the foregoing, Lessee shall indemnify, defend
and hold Lessor harmless from all penalties, fines, interest payments, claims
and expenses, including but not limited to reasonable legal fees, arising from
any failure of Lessee to comply with the requirements of this Section 9.2.
9.3 The obligations and indemnities of Lessee under this Section 9
for events occurring or arising or taxes accruing during the Initial Term or any
Extended Term shall continue and survive in full force and effect,
notwithstanding the expiration or other termination of this Master Agreement or
any Lease Schedule.
10. Risk of Loss; Loss of Equipment.
10.1 Lessee hereby assumes and shall bear the entire risk of loss
for theft, disappearance, damage, seizure, condemnation, casualty, destruction
or other injury whatsoever to the Equipment from any and every cause whatsoever.
Such risk of loss shall be deemed to have been assumed by Lessee from and after
such risk passes from the Supplier by agreement or pursuant to applicable law.
For purposes of this Section 10 only, Equipment shall include any item or unit
thereof.
10.2 In the event of loss or damage to any item of Equipment which
can be repaired by Lessee, Lessee shall, at its cost and expense, promptly
repair and restore such item of Equipment to the condition required by this
Master Agreement. In the event of any loss, seizure, condemnation, casualty or
destruction of the Equipment or damage to the Equipment which cannot be repaired
by Lessee, Lessee shall immediately notify Lessor in writing. Within thirty (30)
days of such notice, during which time Lessee shall continue to pay Periodic
Rent, Lessee shall, at the option of Lessor, either (i) replace the Equipment
with equipment of the same type and manufacture, and having a value, utility and
remaining economic useful life not less than the Equipment replaced, and in good
repair, condition and working order, and transfer title to such equipment to
Lessor free and clear of all liens, claims and encumbrances, whereupon such
equipment shall be deemed Equipment for all purposes of the Lease Schedule, or
(ii) pay to Lessor an amount equal to the present value of both the aggregate of
the remaining unpaid Periodic Rents and the anticipated residual value of the
Equipment plus any other costs actually incurred by Lessor. Lessor and Lessee
agree that the residual value of the Equipment at the expiration of the Initial
Term is reasonably anticipated to be not less than twenty percent (20%) of the
Acquisition Cost of the Equipment. The present value shall be determined by
discounting the aggregate of the remaining unpaid Periodic Rents and the
anticipated residual value of the Equipment to the date of payment by Lessee at
the rate of five percent (5%) per annum. When and as requested by Lessor, Lessee
shall also pay to Lessor amounts due pursuant to Section 18 below, if any,
arising as a result of the loss, seizure, replacement, condemnation or
destruction of the Equipment. Provided no Event of Default, as defined in
Section 16 below, has occurred and is continuing, any insurance or condemnation
proceeds received by Lessor shall be credited to the obligations of Lessee under
this Section 10.2, and the remainder of such proceeds, if any, shall be paid to
Lessee by Lessor in full compensation for the loss of the leasehold interest in
the Equipment by Lessee.
10.3 Upon any replacement of or payment for the Equipment as
provided in Section 10.2 above, the Lease Schedule shall terminate only with
respect to the Equipment so replaced or paid for, and Lessor shall transfer to
Lessee title only to such Equipment "AS IS, WHERE IS", "WITH ALL FAULTS", and
WITH NO WARRANTIES WHATSOEVER, EITHER EXPRESS OR IMPLIED, INCLUDING WITHOUT
LIMITATION ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR USE OR FOR ANY
PARTICULAR PURPOSE. Lessee shall pay any sales or use taxes due on such
transfer.
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11. Insurance.
11.1 Lessee shall keep the Equipment insured against all risks of
loss or damage from every cause whatsoever occurring during the Initial Term, or
any Extended Term for an amount not less than the higher of the full replacement
value of the Equipment or the aggregate of unpaid Daily Rent and Periodic Rent
for the balance of the Initial Term or the Extended Term. Lessee shall also
carry public liability insurance, both bodily injury and property damage,
covering the Equipment, and Lessee shall be liable for any deductible portions
of all required insurance.
11.2 All insurance required under this Section 11 shall be primary
and shall name Lessor as additional insured and loss payee. Such insurance shall
also be with such insurers and shall be in such form reasonably satisfactory to
Lessor and in such amounts as are satisfactory to Lessor. All applicable
policies shall provide that no act, omission or breach of warranty by Lessee
shall give rise to any defense against payment of the insurance proceeds to
Lessor. Lessee shall pay the premiums for such insurance and, at the request of
Lessor, deliver to Lessor duplicates of such policies or other evidence
satisfactory to Lessor of such insurance coverage. In any event, Lessee shall
provide Lessor with certificates of insurance or such other evidence of
coverage, to include endorsements upon the policies issued by the insurers which
evidence the existence of insurance coverage required by this Section 11, and by
which the insurers agree to give Lessor written notice at least thirty (30) days
prior to the effective date of any expiration, modification, reduction,
termination, refusal to renew or cancellation of any such policies. Lessee shall
cause to be provided to Lessor, not less than fifteen (15) days prior to the
scheduled expiration or lapse of such insurance coverage, evidence satisfactory
to Lessor of renewal or replacement coverage.
11.3 Provided no Event of Default, as defined in Section 16 below,
has occurred and is continuing, the proceeds of insurance required under this
Section 11 and payable as a result of loss or damage to the Equipment shall be
applied as set forth in Section 10.2 above. Upon the occurrence of an Event of
Default as defined in Section 16 below, Lessee hereby irrevocably appoints
Lessor as its attorney-in-fact, which power shall be deemed coupled with an
interest, to make claim for, receive payment of, execute and endorse all
documents, checks or drafts received in payment for loss or damage under any
insurance policies required by this Section 11.
11.4 Notwithstanding anything herein, Lessor shall not be under any
duty to examine any evidence of insurance furnished hereunder, or to ascertain
the existence of any policy or coverage, or to advise Lessee of any failure to
comply with the provisions of this Section 11.
12. Surrender to Lessor.
12.1 Lessee shall advise Lessor in writing at least ninety (90)
days prior to the expiration of the Initial Term or any Extended Term of its
intent to surrender the Equipment. Upon receipt of such notice, Lessor shall be
authorized to demonstrate the Equipment in operation to potential buyers or
lessees during the normal business hours of Lessee, provided that Lessor has
given reasonable notice to Lessee prior to any such visit.
12.2 If Lessee elects to surrender the Equipment or, alternatively,
upon any other termination of the Lease Schedule, Lessee shall immediately
surrender the Equipment to Lessor by assembling and delivering the Equipment to
a place or places, as Lessor may designate, within the continental United
States. The shipment of the Equipment shall be conducted in accordance with the
manufacturer's
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<PAGE> 8
recommendations or, in the absence of such recommendations, in accordance with
generally accepted industry practices for equipment similar to the Equipment.
All costs of deinstalling, preparation for shipment, and shipping shall be borne
by Lessee.
12.3 Upon surrender, the Equipment shall be in good repair, and
working order, in compliance with the manufacturer's recommended tolerances for
operation and performance in all material respects, in the same condition and
appearance as when received (reasonable wear and tear excepted), and with all
engineering and safety changes prescribed by the manufacturer or maintenance
organization incorporated therein. The Equipment shall be complete, with all
parts and pieces and all operating instructions, maintenance documentation,
service manuals and other historical records; shall be capable of being
immediately assembled and operated by a third party for its originally intended
purpose; and shall be in compliance with all applicable laws, regulations and
industry standards, without further repair, replacement of parts, alteration or
improvement. Lessee shall, in a workmanlike manner and without damage to the
Equipment, remove all Lessee-supplied decals, logos, insignias, numbers, and any
similar identifications or markings from the Equipment. In conjunction with its
surrender of the Equipment, Lessee shall provide Lessor with a complete and
reasonably detailed inventory of the Equipment, including model numbers, serial
numbers, and a description of all modifications (if any) made to the Equipment
during the term of the Lease.
12.4 In the event that Lessee fails to comply with the provisions
of this Section 12, the Initial Term or any Extended Term shall be extended on a
day-to-day basis until Lessee shall have complied with such provisions. During
such period, Lessee shall continue paying a per diem rental equal to the Daily
Rent as set forth on the applicable Lease Schedule for each day of such holdover
period until such time as the Equipment shall have been surrendered in
accordance with this Section 12; provided, however, that if Lessor so notifies
Lessee, Lessee shall surrender the Equipment prior to full compliance with this
Section 12 (but not before the expiration of the Initial Term or any Extended
Term). In such case, Lessee shall be liable for (i) the per diem rental set
forth above through the date of actual surrender, plus (ii) any cost or expense
incurred by Lessor in placing the Equipment in the condition required by this
Section 12, both of which amounts shall be deemed additional rent payments due
under the applicable Lease Schedule.
13. Fair Market Value Purchase Option. Lessor hereby grants to
Lessee the option to purchase all, but not less than all, Equipment set forth on
any Lease Schedule at the expiration of the applicable Initial Term or Extended
Term. Lessee shall notify Lessor in writing at least ninety (90) days prior to
the expiration of the Initial Term or any Extended Term of its intent to
exercise its option to purchase the Equipment on the date of such expiration,
which notice shall be final and irrevocable. Any such purchase shall be for cash
in an amount equal to the then fair market value of such Equipment, as
determined in good faith by Lessor (the "Fair Market Value"). This purchase
option may be exercised by Lessee, provided that no Event of Default, as defined
in Section 16 below, has occurred and is continuing. Upon payment of the Fair
Market Value by Lessee to Lessor, Lessor shall transfer title to the Equipment
to Lessee "AS IS, WHERE IS", "WITH ALL FAULTS", and WITH NO WARRANTIES
WHATSOEVER, EITHER EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION ANY
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR USE OR FOR ANY PARTICULAR PURPOSE.
14. Financial Statements. Lessee shall annually, within ninety
(90) days after the close of its fiscal year, furnish to Lessor financial
statements of Lessee, including a balance sheet as of the close of such year and
statements of income and retained earnings for such year, prepared in accordance
with generally accepted accounting principles, consistently applied from year to
year, and certified by
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independent public accountants for Lessee reasonably acceptable to Lessor. If
requested by Lessor, Lessee shall also provide quarterly financial statements of
Lessee, similarly prepared for each of the first three quarters of each fiscal
year, certified (subject to normal year-end audit adjustments) by the chief
financial officer of Lessee and furnished to Lessor within forty-five (45) days
following the end of each quarter, and such other financial information as may
be reasonably requested by Lessor.
15. Delayed Payment Charge. Lessee shall pay to Lessor interest
upon the amount of any Daily Rent, Periodic Rent or other sums not paid by
Lessee when due and owing under the applicable Lease Schedule, from the due date
thereof until paid, at the rate of one and one half percent (1.5%) per month,
but if such rate violates applicable law, then at the maximum rate of interest
allowed by such law.
16. Default.
16.1 The occurrence of any of the following events shall constitute
an event of default ("Event of Default") under all Lease Schedules to which
Lessor is a party:
(a) Lessee fails to pay any Daily Rent or any Periodic Rent
when due, and such failure to pay continues for five (5) consecutive
days following written notice from Lessor; or
(b) Lessee fails to pay any other sum required hereunder, and
such failure continues for a period of ten (10) days following the
giving of written notice by Lessor; or
(c) Lessee fails to maintain the insurance as required by
Section 11 above; or
(d) Lessee violates or fails to perform any other term,
covenant or condition of this Master Agreement or any Lease Schedule or
any other document, agreement or instrument executed pursuant hereto or
in connection herewith, which failure is not cured within thirty (30)
days after the giving of written notice by Lessor; provided, however,
that Lessor need not give any written notice in the event of a default
in the performance of any financial covenants undertaken by Lessee in
connection herewith; or
(e) Lessee ceases to exist or terminates its independent
operations by reason of any discontinuance, dissolution, liquidation,
or sale of substantially all of its assets in one transaction or a
series of related transactions, or otherwise ceases doing business as a
going concern; or
(f) Lessee merges into or with any corporation or other legal
entity, and Lessee is not the surviving corporation or the surviving
legal entity; or
(g) Lessee (i) applies for or consents to the appointment of,
or the taking of possession by, a receiver, custodian, trustee,
liquidator or similar official for itself or for all or a substantial
part of its property, (ii) is generally not paying its debts as such
debts become due, (iii) makes a general assignment for the benefit of
its creditors, (iv) commences a voluntary case under the United States
Bankruptcy Code, as now or hereafter in effect, seeking liquidation,
reorganization or other relief with respect to itself or its debts, (v)
files a petition seeking to take advantage of any other law providing
for the relief of debtors, (vi) takes any action under the laws of its
jurisdiction of incorporation or organization similar to any of the
foregoing, (vii) convenes a meeting of its creditors, or (viii) takes
any corporate action for the purpose of effecting any of the foregoing;
or
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(h) A proceeding or case is commenced, without the application
or consent of Lessee, in any court of competent jurisdiction, seeking
(i) the liquidation, reorganization, dissolution or winding up of
Lessee or composition or readjustment of the debts of Lessee, (ii) the
appointment of a trustee, receiver, custodian, liquidator or similar
official for Lessee or for all or any substantial part of its assets,
or (iii) similar relief with respect to Lessee under any law providing
for the relief of debtors, and such proceeding or case under any of the
foregoing subsections shall continue undismissed, or unstayed and in
effect, for a period of sixty (60) days; or an order for relief is
entered with respect to Lessee in an involuntary case under the United
States Bankruptcy Code, as now or hereafter in effect, or an action
under the laws of the jurisdiction of incorporation or organization of
Lessee, similar to any of the foregoing, is taken with respect to
Lessee without its application or consent and shall continue unstayed
and in effect for period of sixty (60) days; or
(i) Lessee makes any representation or warranty herein or in
any statement or certificate at any time given in writing pursuant to
or in connection with this Master Agreement or any Lease Schedule,
which is false or misleading in any material respect; or
(j) Lessee defaults under any promissory note, credit
agreement, loan agreement, conditional sales contract, guaranty, lease,
indenture, bond, debenture or other material obligation whatsoever, and
a party thereto or a holder thereof is entitled to accelerate the
obligations of Lessee thereunder; or Lessee defaults in meeting any of
its material trade, tax or other current obligations as they mature,
unless such obligations are being contested diligently and in good
faith; or
(k) Any party to any guaranty, letter of credit, subordination
or credit agreement or other undertaking, given for the benefit of
Lessor and obtained in connection with this Master Agreement or Lease
Schedule, breaches, fails to continue, contests, or purports to
terminate or to disclaim such guaranty, letter of credit, subordination
or credit agreement or other undertaking; or such guaranty, letter of
credit, subordination agreement or other undertaking becomes
unenforceable while any obligation or any Lease Schedule remains
outstanding; or a guarantor of this Master Agreement or any Lease
Schedule shall die, cease to exist or terminate its independent
operations; or any event or condition set forth in subsections (d),
(e), (f), (g), (h), (i) or (j) of this Section 16.1 shall occur with
respect to any guarantor or other person responsible, in whole or in
part, for payment or performance of this Master Agreement or any Lease
Schedule.
16.2 At the option of Lessor, the occurrence of an Event of Default
with respect to any Lease Schedule shall, without further act or declaration by
Lessor, constitute an Event of Default with respect to any other Lease Schedule
to which Lessor is then a party. If Lessor shall have made an assignment of any
Lease Schedule pursuant to Section 19 below, the assignee of Lessor shall be
deemed to be Lessor and the party to such assigned Lease Schedule or Lease
Schedules for purposes of this Section 16.
16.3 No waiver by Lessor of any Event of Default shall constitute a
waiver of any other Event of Default or of the same Event of Default at any
other time.
17. Remedies.
17.1 Upon the occurrence of an Event of Default, Lessor, at its
sole option, upon its declaration, and to the extent not inconsistent with
applicable law, may exercise any one or more of the following remedies:
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(a) Lessor may cancel any or all Lease Schedules, whereupon
all rights of Lessee to the quiet enjoyment and use of the Equipment
shall cease;
(b) Whether or not any or all Lease Schedules are cancelled,
Lessor may cause Lessee, at the sole cost and expense of Lessee, to
cease immediately all use and operation of the Equipment and return any
or all of the Equipment promptly to the possession of Lessor in good
repair and working order, reasonable wear and tear excepted, and
otherwise in the condition required by Section 12.3 hereof. Lessor, at
its sole option and through its employees, agents or contractors, may
peaceably enter upon the premises where the Equipment is located and
take immediate possession of and remove the Equipment, all without
liability to Lessor, its employees, agents or contractors for such
entry. LESSEE HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW,
ANY AND ALL RIGHTS TO NOTICE AND/OR HEARING PRIOR TO THE REPOSSESSION
OR REPLEVIN OF THE EQUIPMENT BY LESSOR, ITS EMPLOYEES, AGENTS OR
CONTRACTORS;
(c) Lessor may proceed by court action to enforce performance
by Lessee of any or all of the Lease Schedules or pursue any other
remedy Lessor may have hereunder, at law, in equity or under any
applicable statute or law including, without limitation, the Uniform
Commercial Code as adopted by The Commonwealth of Massachusetts, and
recover such other actual damages as may be incurred by Lessor;
(d) Lessor may recover from Lessee damages, not as a penalty
but as liquidation for all purposes and without limitation of any other
amounts due from Lessee under any or all of the Lease Schedules, in an
amount equal to the sum of (i) any unpaid Daily Rents and/or Periodic
Rents due and payable for periods prior to the repossession of the
Equipment by Lessor plus any interest due thereon pursuant to Section
15 above, (ii) the present value of all future Periodic Rents required
to be paid over the remaining Initial Term or any Extended Term after
repossession of the Equipment by Lessor, determined by discounting such
future Periodic Rents to the date of payment by Lessee at a rate of
five percent (5%) per annum; and (iii) all costs and expenses incurred
in searching for, taking, removing, storing, repairing, restoring,
refurbishing and leasing or selling such Equipment; and
(e) Lessor may sell, lease or otherwise dispose of any or all
of the Equipment, whether or not in the possession of Lessor, at public
or private sale and, in the case of a private sale, with or without
notice to Lessee, which notice is hereby expressly waived by Lessee, to
the extent permitted by and not inconsistent with applicable law.
Lessor may be the purchaser at any such sale. Lessor may sell, lease or
dispose of the Equipment in such order and manner as Lessor may
determine. Lessor shall then apply against the obligations of Lessee
hereunder the net proceeds of such sale, lease (provided, however, that
the net proceeds of any such lease shall be solely those rentals
applicable to that period of the new lease term which is comparable to
the then remaining term of the Lease Schedule) or other disposition,
after deducting therefrom (i) the present value of the residual value
of the Equipment at the expiration of the Initial Term, which is
anticipated by Lessor and Lessee to be not less than twenty percent
(20%) of the Acquisition Cost, such present value to be determined by
discounting the anticipated residual value to the date of sale, lease
or other disposition at a rate of five percent (5%) per annum, and (ii)
all costs incurred by Lessor in connection with such sale, lease or
other disposition including, but not limited to, costs of
transportation, repossession, storage, refurbishing, advertising or
other fees. Lessee shall remain liable for any deficiency, and any
excess of such proceeds over the total
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obligations owed by Lessee shall be retained by Lessor. If any notice
of such sale, lease or other disposition of the Equipment is required
by applicable law, ten (10) days written notice to Lessee shall be
deemed reasonable.
17.2 Upon the occurrence of an Event of Default described in
subsections 16.1(g) and (h), the remedy set forth in subsection 17.1(d) shall be
deemed to have been exercised immediately and automatically without any act or
declaration of Lessor, and the liquidated damages described therein shall be
immediately due and payable.
17.3 Lessee shall pay all costs and expenses, including but not
limited to reasonable legal fees incurred by Lessor, arising out of or in
connection with any Event of Default under any Lease Schedule. Lessee shall also
be liable for any amounts due and payable to Lessor under any other provision of
any Lease Schedule or this Master Agreement, including but not limited to
amounts due and payable under Section 18 below.
17.4 No failure on the part of Lessor to exercise, and no delay in
exercising, any right or remedy hereunder shall operate as a waiver thereof. No
single or partial exercise of any right or remedy hereunder shall preclude any
other or further exercise thereof or the exercise of any other right or remedy.
Each right and remedy provided hereunder is cumulative and not exclusive of any
other right or remedy including, without limitation, any right or remedy
available to Lessor at law, by statute or in equity.
18. Tax Indemnification.
18.1 Lessee represents and warrants that the Equipment is and will
remain, during the entire Initial Term and any Extended Term, property used in a
trade or business or for the production of income within the meaning of Section
167 of the Internal Revenue Code of 1986, as amended ("Code"). Lessee further
acknowledges and agrees that, pursuant to the Code, Lessor or its affiliated
group, as defined in Section 1504 of the Code ("Affiliated Group"), (i) shall be
entitled to deductions for the recovery of the Acquisition Cost of the Equipment
over the recovery period as set forth in the applicable Lease Schedule, using
the Modified Accelerated Cost Recovery System as provided by Section 168(b)(1)
of the Code ("MACRS Deductions") and (ii) shall not be required to include in
its gross income for Federal income tax purposes any amount derived from the
cost of any alteration, addition, improvement, modification, replacement, or
substitution of the Equipment or from any refund or credit from the manufacturer
or supplier of the Equipment or any foreign source income.
18.2 If as a result of any reason or circumstance whatsoever,
except as specifically set forth in Section 18.3 below, Lessor or its Affiliated
Group shall not be entitled to, shall not be allowed, shall suffer recapture of
or shall lose any MACRS Deductions, or shall be required to include in gross
income such amounts as described in Section 18.1 above, then Lessee shall pay to
Lessor, upon demand, a sum to be computed by Lessor in the following manner:
such sum, after deduction of all Federal, state and local income taxes payable
by Lessor as a result of the receipt of such sum, shall be sufficient to restore
Lessor or its Affiliated Group to substantially the same position, on an
after-tax basis, as it would have been in but for the loss of such MACRS
Deductions or the inclusion of such additional amounts in gross income. In
making its computation, Lessor or its Affiliated Group shall consider, but shall
not be limited to, the following factors: (i) the amounts and timing of any net
loss of tax benefits resulting from any such lack of entitlement to or loss,
recapture, or disallowance of MACRS Deductions or the inclusion of such
additional amounts in gross income, but offset by any tax benefits derived from
any depreciation or other capital recovery deductions or exclusions from income
allowed to Lessor or its Affiliated Group
-12-
<PAGE> 13
with respect to the same Equipment, or credits which may be available as a
result of such additional amounts required to be included in the gross income of
Lessor and its Affiliated Group; (ii) penalties, interest or other charges
imposed; (iii) differences in tax years involved; and (iv) the time value of
money at a reasonable rate per annum determined, in good faith, by Lessor. For
purposes of computation only, the amount of indemnification payments hereunder
shall be calculated on the assumption that Lessor and its Affiliated Group have
or will have, in all tax years involved, sufficient taxable income and the tax
liability to realize all tax benefits and incur all losses of tax benefits at
the highest marginal Federal corporate income tax rate in each year. Upon
request, Lessor shall provide Lessee with the methods of computation used in
determining any sum that may be due and payable by Lessee under this Section 18.
Lessor's computation of any sum that may be due and payable by Lessee under this
Section 18 shall be binding and conclusive on the parties hereto in the absence
of manifest error.
18.3 Lessee shall not be obligated to pay any sums required under
this Section 18 in the event that lack of entitlement to, or loss, recapture or
disallowance of any MACRS Deductions or the inclusion of such additional amounts
in gross income results from one or more of the following events: (i) a
disqualifying disposition due to the sale of the Equipment by Lessor when no
Event of Default, as defined in Section 16 above, has occurred, (ii) a failure
of Lessor or its Affiliated Group to timely claim any MACRS Deductions for the
Equipment in its tax return, and/or (iii) the fact that Lessor or its Affiliated
Group does not have, in any taxable year or years, sufficient taxable income or
tax liability to realize the benefit of any MACRS Deductions that are otherwise
allowable to Lessor or its Affiliated Group.
18.4 The representations, obligations and indemnities of Lessee
under this Section 18 shall continue in full force and effect, and shall
survive, notwithstanding the expiration or other termination of this Master
Agreement or any Lease Schedules.
19. Assignment; Sublease.
19.1 LESSOR MAY SELL, ASSIGN OR OTHERWISE TRANSFER ALL OR ANY PART
OF ITS RIGHT, TITLE AND INTEREST IN AND TO THIS MASTER AGREEMENT, THE EQUIPMENT
AND/OR ANY LEASE SCHEDULE TO A THIRD-PARTY ASSIGNEE, SUBJECT TO THE TERMS AND
CONDITIONS OF ANY LEASE SCHEDULE, INCLUDING BUT NOT LIMITED TO, THE RIGHT TO THE
QUIET ENJOYMENT OF THE EQUIPMENT BY LESSEE AS SET FORTH IN SECTION 7.1 ABOVE.
Such assignee shall assume all of the rights and obligations of Lessor under the
applicable Lease Schedule from and after the effective date of such assignment,
and shall relieve Lessor therefrom. Lessee hereby waives and agrees not to
assert against any such assignee any defense, setoff, recoupment, claim or
counterclaim which Lessee has or may at any time hereafter have against Lessor,
or any person, other than such assignee, for any reason whatsoever. In no event,
shall any of the rights or obligations of Lessee change under an assigned Lease
Schedule. In addition, any assignment by Lessor shall not substantially increase
any burden or risk to Lessee. Upon any such assignment, all references to Lessor
herein shall mean such assignee. Notwithstanding any such sale, assignment or
transfer, Lessee's obligations hereunder shall remain absolute and unconditional
including, without limitation, as set forth in Section 7.2 above.
19.2 Lessor may also pledge, mortgage or grant a security interest
in the Equipment and assign any Lease Schedule as collateral. The assignee
thereof shall be entitled to all the rights of Lessor under the Lease Schedule.
If such assignee assumes all of the obligations of Lessor under the Lease
Schedule, Lessor shall be relieved of such obligation, and assignee shall be
deemed to be Lessor. Lessee hereby waives and agrees not to assert against any
such assignee any defense, setoff, recoupment, claim
-13-
<PAGE> 14
or counterclaim which Lessee has or may at any time hereafter have against
Lessor, or any person, other than such assignee, for any reason whatsoever. Any
pledge, mortgage or grant of security interest in the Equipment or assignment of
a Lease Schedule shall be subject to the terms and conditions hereof including,
but not limited to, the right to the quiet enjoyment of the Equipment by Lessee
as set forth in Section 7.1 above. Lessee, by reason of such pledge, mortgage,
grant of security interest or collateral assignment, shall not be relieved of
any of its obligations hereunder, which shall remain absolute and unconditional
including, without limitation, as set forth in Section 7.2 above.
19.3 Upon the written request of Lessor, Lessee shall provide
written acknowledgment to any pledgee, mortgagee, lienholder, assignee,
transferee or purchaser of any Lease Schedule of the obligations of Lessee under
the Lease Schedule that is pledged, mortgaged, encumbered, assigned transferred
or purchased.
19.4 LESSEE SHALL NOT SELL, TRANSFER, ASSIGN, SUBLEASE, CONVEY OR
PLEDGE ANY OF ITS INTEREST IN THIS MASTER AGREEMENT ANY LEASE SCHEDULE OR ANY OF
THE EQUIPMENT, WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR. Any such sale,
transfer, assignment, sublease, conveyance or pledge, whether by operation of
law or otherwise, without the prior written consent of Lessor, shall be void.
19.5 Subject to the foregoing, this Master Agreement and each Lease
Schedule inure to the benefit of, and are binding upon, the successors and
permitted assigns of the parties hereto and thereto, as the case may be.
20. Optional Performance By Lessor. If an Event of Default, as
defined in Section 16 above, or an event or condition which with the giving of
notice or lapse of time, or both, would become an Event of Default occurs and is
continuing, Lessor in its sole discretion may pay or perform any obligation of
Lessee under this Master Agreement or any Lease Schedule in whole or in part,
without thereby becoming obligated to pay or to perform the same on any other
occasion or to pay any other obligation of Lessee. Any payment or performance by
Lessor shall not be deemed to cure any Event of Default or any such event or
condition hereunder. Upon such payment or performance by Lessor, Lessee shall
pay forthwith to Lessor, on demand, the amount of such payment or an amount
equal to all costs and expenses of such performance, as well as any delayed
payment charges on such amounts as set forth in Section 15 above.
21. Representations and Warranties of Lessee.
21.1 Lessee represents and warrants that (i) there are no pending
actions or proceedings to which Lessee is a party, and there are no threatened
actions or proceedings of which Lessee has knowledge, before any court,
arbitrator or administrative agency, which, either individually or in the
aggregate, would have a Material Adverse Effect on Lessee; Lessee is not in
default under any obligation for borrowed money, for the deferred purchase price
of property or any lease agreement which, either individually or in the
aggregate, would have a Material Adverse Effect on Lessee; (iii) under the laws
of the state(s) in which the Equipment is to be located, the Equipment consists
solely of personal property and not fixtures; (iv) the financial statements of
Lessee (copies of which have been furnished to Lessor) have been prepared in
accordance with generally accepted accounting principles consistently applied,
and fairly present the financial condition of Lessee and the results of its
operations as of the date of and for the period covered by such statements, and
since the date of such statements there has been no material adverse change in
such conditions or operations; (v) the address of Lessee set forth above is the
chief place of business and chief executive office of Lessee; and Lessee does
not conduct business under
-14-
<PAGE> 15
a trade, assumed or fictitious name;(vi) Lessee has reviewed the areas within
its business and operations which could be adversely affected by, and has
developed or is developing a program to address on a timely basis, the "Year
2000 Problem", that is, the risk that computer applications used by Lessee may
be unable to recognize and perform properly date-sensitive functions involving
certain dates prior to and any date on or after December 31, 1999), and have
made related appropriate inquiry of material suppliers and vendors, based on
such review and program, Lessee believes that the "Year 2000 Problem" will not
have a Material Adverse Effect on Lessee; (vii) from time to time, at the
request of Lessor, Lessee shall provide to Lessor such updated information or
documentation as is requested regarding the status of its efforts to address the
Year 2000 Problem. For purposes of this Section 21.1, "Material Adverse Effect"
shall mean (1) a materially adverse effect on the business, condition (financial
or otherwise), operations, performance or properties of Lessee, or (2) a
material impairment of the ability of Lessee to perform its obligations under or
to remain in compliance with the Master Agreement and any Lease Schedule.
21.2 Lessee warrants and agrees that this Master Agreement
and any Lease Schedule and the performance by Lessee of all of its obligations
hereunder and thereunder have been duly authorized and do not and will not
conflict with any provision of the charter or bylaws of Lessee or of any
agreement, indenture, lease or other instrument, or any court, administrative or
other governmental order or decree, to which Lessee is a party or by which
Lessee or any of its property is or may be bound. Lessee warrants and agrees
that this Master Agreement and any Lease Schedule do not and will not require
any governmental authorization, approval, license or consent except, those which
have been duly obtained, and will remain in effect during the entire Initial
Term and any Extended Term.
22. Miscellaneous.
22.1 The section headings are inserted herein for convenience of
reference and are not part of and shall not affect the meaning or interpretation
of this Master Agreement or any Lease Schedule.
22.2 Any provision of the Master Agreement or any Lease Schedule
which is unenforceable in whole or in part in any jurisdiction, or under
particular circumstances, shall, as to such jurisdiction or circumstances, be
ineffective only to the extent of such unenforceability without invalidating any
remaining part or other provision hereof, and shall not be determinative of
enforceability in any other jurisdiction or under any other circumstances. The
validity and interpretation of the Master Agreement and any Lease Schedule and
the rights and obligations of the parties hereto shall be governed in all
respects by the laws of The Commonwealth of Massachusetts without giving effect
to the conflicts of laws provisions thereof. Time is of the essence with respect
to each obligation of the Lessee pursuant to this Master Agreement, any Lease
Schedule and any riders or amendments hereto or thereto.
22.3 Without derogation of any disclaimer or limitation otherwise
set forth in the Master Agreement or any Lease Schedule, any action by Lessee
against Lessor for any default by Lessor under the Master Agreement or any Lease
Schedule, including breach of warranty or indemnity, shall be commenced within
one (1) year after any such cause of action accrues.
22.4 LESSEE (BY ITS ACCEPTANCE HEREOF) AGREES THAT NEITHER IT, NOR
ANY PERMITTED ASSIGNEE OR SUCCESSOR OF LESSEE SHALL (A) SEEK A JURY TRIAL IN ANY
LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER ACTION BASED UPON, OR ARISING
OUT OF, THIS MASTER AGREEMENT, ANY LEASE SCHEDULE, ANY RELATED AGREEMENTS, THE
EQUIPMENT, OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG LESSEE AND
LESSOR AND LESSOR'S SUCCESSORS AND ASSIGNS, OR (B) SEEK TO CONSOLIDATE ANY SUCH
ACTION WITH
-15-
<PAGE> 16
ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. LESSEE
HAS READ AND FULLY UNDERSTANDS THE PROVISIONS OF THIS PARAGRAPH, AND THESE
PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. LESSOR HAS NOT AGREED WITH OR
REPRESENTED TO LESSEE THAT THE PROVISIONS OF THIS PARAGRAPH WILL NOT BE FULLY
ENFORCED IN ALL INSTANCES. Lessee further agrees that any suit based upon or
arising out of the Master Agreement, any Lease Schedule, any related agreements,
the Equipment, or the dealings or the relationship between or among Lessee and
Lessor and Lessor's successors and assigns may be brought in the courts of The
Commonwealth of Massachusetts or any Federal court sitting therein and consents
to the non-exclusive jurisdiction of such court and to service of process in any
such suit being made upon Lessee by mail in the manner specified in Section 22.6
hereof. Lessee hereby waives any objection that it may now or hereafter have to
the venue of any such suit or any such court, or that such suit was brought in
an inconvenient forum.
22.5 Each Lease Schedule, including the terms of this Master
Agreement expressly incorporated therein, any riders, schedules or amendments,
and other documents now or hereafter attached thereto or executed in connection
therewith, constitutes the entire agreement between Lessor and Lessee regarding
the Equipment and the matters addressed thereby. Lessor and Lessee agree that
neither the Master Agreement nor any Lease Schedule shall be amended, altered or
changed except by a written agreement signed by the parties hereto. LESSEE
ACKNOWLEDGES THAT THERE HAVE BEEN NO REPRESENTATIONS, EXPRESS OR IMPLIED, BY
LESSOR OTHER THAN AS SET FORTH HEREIN, AND LESSEE EXPRESSLY CONFIRMS THAT IT HAS
NOT RELIED UPON ANY REPRESENTATIONS BY LESSOR, EXCEPT THOSE SET FORTH HEREIN, AS
A BASIS FOR ENTERING INTO THIS MASTER AGREEMENT OR ANY LEASE SCHEDULE.
22.6 Any notice required to be given by Lessee or Lessor hereunder
shall be deemed adequately given if sent by registered or certified mail, return
receipt requested, or by overnight courier via a nationally recognized provider
of such services, to the other party at its address stated herein or at such
other place as either party may designate in writing to the other. Such notice
shall be effective upon receipt.
22.7 Lessee agrees to execute and deliver such additional documents
and to perform such further acts as may be reasonably requested by Lessor in
order to carry out and effectuate the purposes of the Master Agreement and any
Lease Schedule. Upon the written request of Lessor, Lessee further agrees to
execute any instrument necessary for the filing or recording of this Master
Agreement or any Lease Schedule or to confirm the ownership of the Equipment by
Lessor, and to reimburse Lessor for costs incurred thereby, or any other costs
reasonably incurred by Lessor either in giving notice of its interest in the
Equipment or determining the existence of any liens or encumbrances on the
Equipment. Lessor is hereby authorized to insert in any Lease Schedule the
serial numbers of the Equipment and other identifying marks or similar
information and to sign, on behalf of Lessee, any Uniform Commercial Code
financing statements relating to the Equipment under the applicable Lease
Schedule.
22.8 Neither the Master Agreement nor any Lease Schedule may be
canceled or terminated except as expressly provided herein.
22.9 Whenever the context of this Master Agreement or any Lease
Schedule requires, the singular includes the plural and the plural includes the
singular. Whenever the word Lessor is used herein, it includes all assignees and
successors in interest of Lessor. If more than one Lessee is named herein, the
liability of each shall be joint and several.
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<PAGE> 17
22.10 All agreements, indemnities, representations and warranties of
Lessee and all rights and remedies of Lessor shall survive the expiration or
other termination of this Master Agreement and the applicable Lease Schedule,
whether or not expressly provided herein.
22.11 Any waiver of any power, right, remedy or privilege of Lessor
hereunder shall not be effective unless in writing signed by Lessor.
22.12 This Master Agreement or any Lease Schedule may be executed in
one or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, Lessor and Lessee, each by its duly authorized
officer or agent, have duly executed and delivered this Master Agreement, which
is intended to take effect as a sealed instrument, as of the day and year first
written above.
Accepted at Boston, Massachusetts BANCBOSTON LEASING INC.
By: /s/ Jane M. Lee By: /s/ Mary Jane Delaney
---------------------------- ---------------------------
Print Name: Jane M. Lee Print Name: Mary Jane Delaney
Title: Assistant Vice President Title: EVP, General Counsel & Secretary
------------------------- ---------------------------------
Federal Tax ID Number:
----------------------
-17-
<PAGE> 1
Exhibit 10.38
- --------------------------------------------------------------------------------
FIRST AMENDMENT
TO
REVOLVING CREDIT AGREEMENT
- --------------------------------------------------------------------------------
First Amendment dated as of November 15, 1999 to Revolving Credit Agreement
(the "First Amendment"), by and among FREEDOM SECURITIES CORPORATION, a Delaware
corporation (the "Borrower"), BANKBOSTON, N.A. and the other lending
institutions listed on SCHEDULE 1 to the Credit Agreement (as hereinafter
defined) (collectively, the "Existing Banks"), Wells Fargo Bank, National
Association (the "New Bank" and, together with the Existing Banks, the "Banks")
and BankBoston, N.A. in its capacity as administrative and documentation agent
for the Banks (the "Agent"), amending certain provisions of the Revolving Credit
Agreement dated as of August 21, 1998 (as amended and in effect from time to
time, the "Credit Agreement") by and among the Borrower, the Existing Banks, the
Agent and The Bank of New York in its capacity as syndication agent. Terms not
otherwise defined herein which are defined in the Credit Agreement shall have
the same respective meanings herein as therein.
WHEREAS, the New Bank wishes to become a party to the Credit Agreement, and
certain of the Existing Banks wish to assign certain portions of their Revolving
Credit Loans, and Commitments under the Credit Agreement to the New Bank and
certain Existing Banks; and
WHEREAS, the Borrower has requested, and the Banks have agreed upon the
terms and conditions described herein, that the aggregate Commitments of the
Banks to extend credit under the Credit Agreement be increased to $100,000,000
WHEREAS, the Borrower and the Banks have agreed to modify certain other
terms and conditions of the Credit Agreement as specifically set forth in this
First Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
Paragraph 1. AMENDMENT TO SECTION 1 OF THE CREDIT AGREEMENT. Section 1.1 of
the Credit Agreement is hereby amended as follows:
(a) the definition of "Applicable Margin" set forth in the Credit
Agreement is hereby amended by deleting the definition in its
entirety and restating it as follows:
APPLICABLE MARGIN. For each period commencing on an Adjustment Date
through the date immediately preceding the next Adjustment Date (each a
"Rate Adjustment Period"), the Applicable Margin shall be the applicable
margin set forth below with respect to the Borrower's Leverage Ratio, as
determined for the period ending on the fiscal quarter ended immediately
preceding the applicable Rate Adjustment Period.
<PAGE> 2
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
APPLICABLE APPLICABLE APPLICABLE
MARGIN FOR MARGIN FOR MARGIN FOR
LEVERAGE BASE RATE EURODOLLAR FEDERAL FUNDS COMMITMENT
TIER RATIO LOANS RATE LOANS RATE LOANS FEE RATE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Greater than
1 or equal to 0.00% 1.25% 1.25% 0.20%
0.25:1.00
- ------------------------------------------------------------------------------------------------
Less than
2 0.25:1.00 but 0.00% 1.125% 1.125% 0.20%
greater than
or equal to
0.15:1.00
- ------------------------------------------------------------------------------------------------
3 Less than 0.00% 1.00% 1.00% 0.20%
0.15:1.00
- ------------------------------------------------------------------------------------------------
</TABLE>
Notwithstanding the foregoing, (a) for Revolving Credit Loans
outstanding and the Commitment Fee Rate during the period commencing on
November 15, 1999 through the date immediately preceding the first
Adjustment Date to occur after the fiscal quarter ending December 31, 1999,
the Applicable Margin shall be set at Tier 3, and (b) if the Borrower fails
to deliver any Compliance Certificate pursuant to Paragraph 7.4(c) hereof
then, for the period commencing on the next Adjustment Date to occur
subsequent to such failure through the date immediately following the date
on which such Compliance Certificate is delivered, the Applicable Margin
shall be the highest Applicable Margin set forth above.
(b) the definition of "Balance Sheet Date" is hereby amended by deleting
the date "December 31, 1997" which appears in such definition and substituting
in place thereof the date "December 31, 1998";
(c) the definition of "Revolving Credit Loan Maturity Date" is hereby
amended by deleting the date "August 21, 2001" which appears in such definition
and substituting in place thereof the date "November 15, 2003"; and
(d) Section 1.1 of the Credit Agreement is further amended by inserting
the following definition in the appropriate alphabetical order:
CONSOLIDATED TOTAL INTEREST EXPENSE. For any period, the aggregate
amount of interest required to be paid or accrued by the Borrower and its
Subsidiaries during such period on all Funded Debt of the Borrower and its
Subsidiaries outstanding during all or any part of such period, whether
such interest was or is required to be reflected as an item of expense or
capitalized, including payments consisting of interest in respect of any
Capitalized Lease or any Synthetic Lease and including commitment fees,
agency fees, facility fees, balance deficiency fees and similar fees or
expenses in connection with the borrowing of money.
<PAGE> 3
Paragraph 2. AMENDMENT TO SECTION 4 OF THE CREDIT AGREEMENT. Section 4 of
the Credit Agreement is hereby amended as follows:
(a) Section 4.5 of the Credit Agreement is hereby amended by
deleting Paragraph 4.5 in its entirety and restating it as follows:
4.5. INABILITY TO DETERMINE EURODOLLAR RATE; DISCRETIONARY LENDING
FOR FEDERAL FUNDS RATE LOANS.
4.5.1. INABILITY TO DETERMINE EURODOLLAR RATE. In the event, prior to
the commencement of any Interest Period relating to any Eurodollar Rate
Loan, the Agent shall determine that adequate and reasonable methods do not
exist for ascertaining the Eurodollar Rate that would otherwise determine
the rate of interest to be applicable to any Eurodollar Rate Loan during
any Interest Period, the Agent shall forthwith give notice of such
determination (which shall be conclusive and binding on the Borrower and
the Banks) to the Borrower and the Banks. In such event (a) any Loan
Request or Conversion Request with respect to Eurodollar Rate Loans shall
be automatically withdrawn and, unless a Federal Funds Rate Loan is elected
by the Borrower pursuant to Paragraph 2.6, shall be deemed a request for
Base Rate Loans, (b) each Eurodollar Rate Loan will automatically, on the
last day of the then current Interest Period relating thereto, become a
Base Rate Loan, and (c) the obligations of the Banks to make Eurodollar
Rate Loans shall be suspended until the Agent or the Majority Banks
determines that the circumstances giving rise to such suspension no longer
exist, whereupon the Agent, or, as the case may be, the Agent upon the
instruction of the Majority Banks, shall so notify the Borrower and the
Banks.
4.5.2. DISCRETIONARY LENDING. Notwithstanding any other provision
herein, for the period from December 1, 1999 through and including January
15, 2000 (the "Funding Period"), the Banks shall have no obligation to make
or maintain any Federal Funds Rate Loans (including, without limitation, a
conversion of a Revolving Credit Loan of another Type into a Federal Funds
Rate Loan), and any and all such Federal Funds Rate Loans so made shall be
made at the sole and absolute discretion of the Banks. To the extent the
Borrower submits a Loan Request during the Funding Period for a Federal
Funds Rate Loan, unless all the Banks agree to make such Federal Funds Rate
Loan, no such Revolving Credit Loan shall be made, and such Loan Request
shall be automatically withdrawn and, unless a Eurodollar Rate Loan is
elected by the Borrower pursuant to Paragraph 2.6, shall be deemed a
request for Base Rate Loans.
(b) Section 4.7 of the Credit Agreement is hereby amended by inserting at
the end of the text of Paragraph 4.7 the sentence "Each Bank shall allocate such
additional amounts among its customers in good faith and on an equitable basis."
Paragraph 3. AMENDMENT TO SECTION 9 OF THE CREDIT AGREEMENT. Section 9 of
the Credit Agreement is hereby amended as follows:
<PAGE> 4
(a) Section 9.2 of the Credit Agreement is hereby amended by (i) deleting
the amount "$150,000,000" which appears in Paragraph 9.2(a) and substituting in
place thereof the amount "$220,000,000"; and (ii) deleting the date "September
30, 1998" which appears in Paragraph 9.2(a) and substituting in place thereof
the date "September 30, 1999"; and
(b) Section 9 of the Credit Agreement is further amended by inserting
immediately after the end of the text of Paragraph 9.2 the following:
9.3. INTEREST COVERAGE RATIO. The Borrower will not, during any
fiscal quarter, permit the ratio of (a) EBITDA for the period of four (4)
consecutive fiscal quarters of the Borrower ending on the relevant date to
(b) Consolidated Total Interest Expense for such period to be less than
4.00:1.00; PROVIDED, HOWEVER, the parties hereto hereby agree that the
Borrower shall only be required to demonstrate compliance with this
Paragraph 9.3 at such times as any Revolving Credit Loan is outstanding and
on the date on which any Revolving Credit Loan is requested and the
Drawdown Date thereof.
Paragraph 4. AMENDMENT TO SCHEDULE 1 OF THE CREDIT AGREEMENT. SCHEDULE 1 of
the Credit Agreement is hereby amended by deleting such schedule in its entirety
and substituting in place thereof the SCHEDULE 1 attached hereto.
Paragraph 5. ASSIGNMENT AND ACCEPTANCE.
(a) For the purposes of the assignment contemplated herein, the provisions
of Paragraph 19.1 of the Credit Agreement are hereby waived and the parties
hereto hereby consent and agree to such assignment.
(b) Credit Lyonnais (the "Assignor") hereby sells and assigns to each of
BankBoston, N.A., The Bank of New York and Wells Fargo Bank, National
Association (collectively, the "Assignees"), and each Assignee hereby purchases
and assumes from the Assignor, a certain percentage of the Assignor's rights and
obligations under the Credit Agreement as of the effective date hereof,
including, without limitation, such percentage interest in the Assignor's
Commitment as in effect on the effective date, and the outstanding amount of the
Revolving Credit Loans owing to the Assignor on the effective date and the
Revolving Credit Note held by the Assignor (such interest being hereinafter
referred to as the "Assigned Portion") such that, after giving effect to the
assignments contemplated hereby, the Commitment and Commitment Percentage of the
Assignor shall be zero, and the respective Commitments and Commitment
Percentages of each Assignee (after giving effect to the increase in the Total
Commitment contemplated by this First Amendment) shall be as set forth on
SCHEDULE 1 attached hereto, and each Assignee shall have that percentage
interest in all Revolving Credit Loans. Notwithstanding any term or provision of
Paragraph 19 of the Credit Agreement to the contrary, the execution and delivery
hereof by the Assignor, each Assignee, the Agent and the Borrower shall
constitute an Assignment and Acceptance delivered in accordance with the Credit
Agreement and shall be effective in respect of the assignment contemplated
hereby.
<PAGE> 5
(c) the Assignor (i) represents and warrants that as of the date hereof,
its Commitment and Commitment Percentage is sufficient to give effect to this
Assignment and Acceptance; (ii) makes no representation or warranty, express or
implied, and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with the Credit Agreement
or any of the other Loan Documents or the execution, legality, validity,
enforceability, genuineness, sufficiency or value of the Credit Agreement, any
of the other Loan Documents or any other instrument or document furnished
pursuant thereto or the attachment, perfection or priority of any security
interest or mortgage, other than that it is the legal and beneficial owner of
the interest being assigned by it hereunder free and clear of any claim or
encumbrance; (iii) makes no representation or warranty and assumes no
responsibility with respect to the financial condition of the Borrower or any of
its Subsidiaries or any other Person primarily or secondarily liable in respect
of any of the Obligations, or the performance or observance by the Borrower or
any of its Subsidiaries or any other Person primarily or secondarily liable in
respect of any of the Obligations of any of its obligations under the Credit
Agreement or any of the other Loan Documents or any other instrument or document
delivered or executed pursuant thereto; and (iv) requests that in connection
with such assignment as set forth herein the Borrower exchange the Revolving
Credit Note of the Assignor for new Revolving Credit Notes, each dated as of the
effective date hereof payable to the order of each Assignee in the principal
amount of the Commitment set forth opposite each Assignee's name on SCHEDULE 1
to the Credit Agreement as amended hereby and each such new note shall be deemed
to be a "Note" under the Credit Agreement.
(d) each Assignee (i) represents and warrants (as to itself only and not as
to any other Assignee) that it has received a copy of the Credit Agreement and
the other Loan Documents, together with copies of the financial statements
referred to in Paragraph 7.4 of the Credit Agreement and such other documents
and information as it deems appropriate to make its own credit analysis and
decision to enter into this agreement, that it is an Eligible Assignee under the
Credit Agreement and that all acts, conditions and things required to be done
and performed have occurred prior to the execution, delivery and performance of
this assignment, and to render the same the legal, valid and binding obligation
of each such Assignee, enforceable against it in accordance with its terms, have
been done and performed and have occurred in due and strict compliance with all
applicable laws; (ii) agrees that it will, independently and without reliance
upon the Assignor, the Agent or any other Bank and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit decisions in taking or not taking action under the Credit Agreement; and
(iii) appoints and authorizes the Agent to take such action as agent on its
behalf and to exercise such powers under the Credit Agreement and the other Loan
Documents as are delegated to the Agent by the terms thereof, together with such
powers as are reasonably incidental thereto, and agrees that it will perform in
accordance with their terms all of the obligations which by the terms of the
Credit Agreement and the other Loan Documents are required to be performed by it
as a Bank.
(e) Upon the effectiveness of the assignment contemplated hereby, the
Assignor shall return to the Borrower its Note, marked "Cancelled".
(f) Upon the effectiveness of the assignment, the Existing Banks and the
New Bank shall take all necessary actions with respect to outstanding Revolving
Credit Loans to make allocations among such Banks so that each Bank's interest
in the outstanding Revolving Credit
<PAGE> 6
Loans equals its Commitment Percentage after giving effect to the transactions
contemplated hereby.
Paragraph 6. ADDITION OF NEW BANK.
(a) Each of the Agent and the Borrower consent to the addition of the New
Bank as a Bank hereunder such that, after giving effect thereto and as of the
effective date hereof, the New Bank shall be a party to the Credit Agreement and
shall have the rights and obligations of a Bank thereunder.
(b) The New Bank (a) represents and warrants that (i) it is duly and
legally authorized to enter into this Amendment, (ii) the execution, delivery
and performance of this Amendment do not conflict with any provision of law or
of the charter or by-laws of the New Bank, or of any agreement binding on the
New Bank, (iii) all acts, conditions and things required to be done and
performed and to have occurred prior to the execution, delivery and performance
of this First Amendment, and to render the same the legal, valid and binding
obligation of the New Bank, enforceable against it in accordance with its terms,
have been done and performed and have occurred in due and strict compliance with
all applicable laws; (b) confirms that it has received a copy of the Credit
Agreement, together with copies of the most recent financial statements
delivered pursuant to Paragraph 7.4 thereof and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Amendment; (c) agrees that it will, independently
and without reliance upon the Agent or any other Bank and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under the Credit
Agreement; (d) appoints and authorizes the Agent to take such action as agent on
its behalf and to exercise such powers under the Credit Agreement and the other
Loan Documents as are delegated to the Agent by the terms thereof, together with
such powers as are reasonably incidental thereto; and (e) agrees that it will
perform in accordance with their terms all the obligations which by the terms of
the Credit Agreement are required to be performed by it as a Bank.
Paragraph 7. CONDITIONS TO EFFECTIVENESS. This First Amendment shall not
become effective until the Agent receives the following:
(a) a counterpart of this First Amendment, executed by the Borrower, the
Guarantors, the Banks and the Agent;
(b) new Notes payable to each Assignee and the New Bank in the amount set
forth opposite such Bank's name on SCHEDULE 1 hereto;
(c) evidence that all necessary corporate action has been taken on the
part of the Borrower to authorize the transactions contemplated hereby;
(d) compliance with all the terms and provisions of the letter agreement
between the Agent and the Borrower.
<PAGE> 7
Paragraph 8. REPRESENTATIONS AND WARRANTIES. The Borrower hereby repeats,
on and as of the date hereof, each of the representations and warranties made by
it in Paragraph 6 of the Credit Agreement, and such representations and
warranties remain true as of the date hereof (except to the extent of changes
resulting from transactions contemplated or permitted by the Credit Agreement
and the other Loan Documents and changes occurring in the ordinary course of
business that singly or in the aggregate are not materially adverse, and to the
extent that such representations and warranties relate expressly to an earlier
date), PROVIDED, that all references therein to the Credit Agreement shall refer
to such Credit Agreement as amended hereby. In addition, the Borrower hereby
represents and warrants that the execution and delivery by the Borrower of this
First Amendment and the performance by the Borrower of all of its agreements and
obligations under the Credit Agreement as amended hereby are within the
corporate authority of each the Borrower and has been duly authorized by all
necessary corporate action on the part of the Borrower.
Paragraph 9. RATIFICATION, ETC. Except as expressly amended hereby, the
Credit Agreement and all documents, instruments and agreements related thereto,
including, but not limited to the Guaranty, are hereby ratified and confirmed in
all respects and shall continue in full force and effect. The Credit Agreement
and this First Amendment shall be read and construed as a single agreement. All
references in the Credit Agreement or any related agreement or instrument to the
Credit Agreement shall hereafter refer to the Credit Agreement as amended
hereby.
Paragraph 10. NO WAIVER. Nothing contained herein shall constitute a waiver
of, impair or otherwise affect any Obligations, any other obligation of the
Borrower or any rights of the Agent or the Banks consequent thereon.
Paragraph 11. COUNTERPARTS. This First Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but which together
shall constitute one and the same instrument.
Paragraph 12. GOVERNING LAW. THIS FIRST AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
(WITHOUT REFERENCE TO CONFLICT OF LAWS).
<PAGE> 1
Exhibit 10.39
- --------------------------------------------------------------------------------
SECOND AMENDMENT
TO
REVOLVING CREDIT AGREEMENT
- --------------------------------------------------------------------------------
Second Amendment dated as of February 11, 2000 to Revolving Credit
Agreement (the "Second Amendment"), by and among FREEDOM SECURITIES CORPORATION,
a Delaware corporation (the "Borrower"), BANKBOSTON, N.A. and the other lending
institutions listed on SCHEDULE 1 to the Credit Agreement (as hereinafter
defined) (collectively, the "Banks") and BankBoston, N.A. in its capacity as
administrative and documentation agent for the Banks (the "Agent"), amending
certain provisions of the Revolving Credit Agreement dated as of August 21, 1998
(as amended and in effect from time to time, the "Credit Agreement") by and
among the Borrower, the Banks, the Agent and The Bank of New York in its
capacity as syndication agent. Terms not otherwise defined herein which are
defined in the Credit Agreement shall have the same respective meanings herein
as therein.
WHEREAS, the Borrower and the Banks have agreed to modify certain other
terms and conditions of the Credit Agreement as specifically set forth in this
Second Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
Paragraph 1. AMENDMENT TO SECTION 1 OF THE CREDIT AGREEMENT. The definition
of "Applicable Margin" contained in Section 1.1 of the Credit Agreement is
hereby amended by deleting the definition in its entirety and restating it as
follows:
APPLICABLE MARGIN. For each period commencing on an Adjustment Date
through the date immediately preceding the next Adjustment Date (each a
"Rate Adjustment Period"), the Applicable Margin shall be the applicable
margin set forth below with respect to the Borrower's Leverage Ratio, as
determined for the period ending on the fiscal quarter ended immediately
preceding the applicable Rate Adjustment Period.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
APPLICABLE APPLICABLE APPLICABLE
MARGIN FOR MARGIN FOR MARGIN FOR
LEVERAGE BASE RATE EURODOLLAR FEDERAL FUNDS COMMITMENT
TIER RATIO LOANS RATE LOANS RATE LOANS FEE RATE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Greater than
1 or equal to 0.00% 1.45% 1.45% 0.20%
0.35:1.00
- ------------------------------------------------------------------------------------------------
Less than
2 0.35:1.00 but 0.00% 1.25% 1.25% 0.20%
greater than
or equal to
0.25:1.00
- ------------------------------------------------------------------------------------------------
Less than
3 0.25:1.00 but 0.00% 1.125% 1.125% 0.20%
greater than
or equal to
0.15:1.00
- ------------------------------------------------------------------------------------------------
4 Less than 0.00% 1.00% 1.00% 0.20%
0.15:1.00
- ------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
-2-
Notwithstanding the foregoing, (a) for Revolving Credit Loans
outstanding and the Commitment Fee Rate during the period commencing on
November 12, 1999 through the date immediately preceding the first
Adjustment Date to occur after the fiscal quarter ending December 31, 1999,
the Applicable Margin shall be set at Tier 4, and (b) if the Borrower fails
to deliver any Compliance Certificate pursuant to Paragraph 7.4(c) hereof
then, for the period commencing on the next Adjustment Date to occur
subsequent to such failure through the date immediately following the date
on which such Compliance Certificate is delivered, the Applicable Margin
shall be the highest Applicable Margin set forth above.
Paragraph 2. AMENDMENT TO SECTION 9 OF THE CREDIT AGREEMENT. Section 9.1 of
the Credit Agreement is hereby amended by deleting the ratio "0.35:1.00" which
appears in Paragraph 9.1 of the Credit Agreement and substituting in place
thereof the ratio "0.40:1.00".
Paragraph 3. CONDITIONS TO EFFECTIVENESS. This Second Amendment shall not
become effective until the Agent receives the following:
(a) a counterpart of this Second Amendment, executed by the Borrower, the
Guarantors, the Banks and the Agent; and
(b) payment by the Borrower to the Agent of an amendment fee of $25,000 in
cash, which amendment fee shall be for the pro rata accounts of the Banks.
Paragraph 4. REPRESENTATIONS AND WARRANTIES. The Borrower hereby repeats,
on and as of the date hereof, each of the representations and warranties made by
it in Paragraph 6 of the Credit Agreement, and such representations and
warranties remain true as of the date hereof (except to the extent of changes
resulting from transactions contemplated or permitted by the Credit Agreement
and the other Loan Documents and changes occurring in the ordinary course of
business that singly or in the aggregate are not materially adverse, and to the
extent that such representations and warranties relate expressly to an earlier
date), PROVIDED, that all references therein to the Credit Agreement shall refer
to such Credit Agreement as amended hereby. In addition, the Borrower hereby
represents and warrants that the execution and delivery by the
<PAGE> 3
-3-
Borrower of this Second Amendment and the performance by the Borrower of all of
its agreements and obligations under the Credit Agreement as amended hereby are
within the corporate authority of each the Borrower and has been duly authorized
by all necessary corporate action on the part of the Borrower.
Paragraph 5. RATIFICATION, ETC. Except as expressly amended hereby, the
Credit Agreement and all documents, instruments and agreements related thereto,
including, but not limited to the Guaranty, are hereby ratified and confirmed in
all respects and shall continue in full force and effect. The Credit Agreement
and this Second Amendment shall be read and construed as a single agreement. All
references in the Credit Agreement or any related agreement or instrument to the
Credit Agreement shall hereafter refer to the Credit Agreement as amended
hereby.
Paragraph 6. NO WAIVER. Nothing contained herein shall constitute a waiver
of, impair or otherwise affect any Obligations, any other obligation of the
Borrower or any rights of the Agent or the Banks consequent thereon.
Paragraph 7. COUNTERPARTS. This Second Amendment may be executed in one or
more counterparts, each of which shall be deemed an original but which together
shall constitute one and the same instrument.
Paragraph 8. GOVERNING LAW. THIS SECOND AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
(WITHOUT REFERENCE TO CONFLICT OF LAWS).
<PAGE> 4
-4-
IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment
as a document under seal as of the date first above written.
FREEDOM SECURITIES CORPORATION
By:
-----------------------------------
Title:
BANKBOSTON, N.A.
By:
-----------------------------------
Title:
THE BANK OF NEW YORK
By:
-----------------------------------
Name:
Title:
WELLS FARGO BANK, NATIONAL ASSOCIATION
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
<PAGE> 5
-4-
IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment
as a document under seal as of the date first above written.
FREEDOM SECURITIES CORPORATION
By:
-----------------------------------
Title:
BANKBOSTON, N.A.
By:
-----------------------------------
Title: VP
THE BANK OF NEW YORK
By:
-----------------------------------
Name:
Title:
WELLS FARGO BANK, NATIONAL ASSOCIATION
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
<PAGE> 6
-4-
IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment
as a document under seal as of the date first above written.
FREEDOM SECURITIES CORPORATION
By:
-----------------------------------
Title:
BANKBOSTON, N.A.
By:
-----------------------------------
Title:
THE BANK OF NEW YORK
By: /s/ Mark T. Rooers
-----------------------------------
Name: Mark T. Rooers
Title: Vice President
WELLS FARGO BANK, NATIONAL ASSOCIATION
By:
-----------------------------------
Name:
Title:
By:
-----------------------------------
Name:
Title:
<PAGE> 7
-4-
IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment
as a document under seal as of the date first above written.
FREEDOM SECURITIES CORPORATION
By:
-----------------------------------
Title:
BANKBOSTON, N.A.
By:
-----------------------------------
Title:
THE BANK OF NEW YORK
By:
-----------------------------------
Name:
Title:
WELLS FARGO BANK, NATIONAL ASSOCIATION
By: /s/ Edward J. Meyer, Jr.
-----------------------------------
Name: Edward J. Meyer, Jr.
Title: Vice President
By: /s/ Michael J. Giese
-----------------------------------
Name: Michael J. Giese
Title: Assistant Vice President
<PAGE> 8
RATIFICATION OF GUARANTY
Each of the undersigned guarantors hereby acknowledges and consents to the
foregoing Second Amendment as of January __, 2000, and agrees that the Guaranty
dated as of August 21, 1998 from the undersigned Guarantors remain in full force
and effect, and each of the Guarantors confirms and ratifies all of its
obligations thereunder.
FREEDOM CAPITAL
MANAGEMENT CORPORATION
By:
-----------------------------------
Title: Executive Vice President
FREEDOM SECURITIES
HOLDING CORPORATION
By:
-----------------------------------
Title:
THE SUTRO GROUP
By:
-----------------------------------
Title:
SUTRO LEASING CORPORATION
By:
-----------------------------------
Title:
TUCKER ANTHONY HOLDING
CORPORATION
By:
-----------------------------------
Title:
<PAGE> 9
T.A. LEASING CORP.
By:
-----------------------------------
Title:
<PAGE> 1
[FREEDOM SECURITIES CORPORATION LOGO]
Exhibit 10.40
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made as of this 4th day
of January, 2000 is entered into between FREEDOM SECURITIES Corporation, a
Delaware corporation with its principal place of business at One Beacon Street,
Boston, Massachusetts (the "Company"), and Kenneth S. Klipper an individual,
residing at Four Kings Road, Sharon, MA 02067 (the "Executive").
In consideration of the mutual covenants and promises contained herein, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged by the parties hereto, the parties agree as follows:
1. TERM OF EMPLOYMENT. The Company hereby agrees to employ the Executive,
and the Executive hereby agrees to serve the Company, upon the terms set forth
in this Agreement, for the period commencing on the date of this Agreement and
ending on the January 4, 2001 (the "Expiration Date"), unless extended or sooner
terminated in accordance with the provisions of this Agreement.
2. POSITION AND PERFORMANCE.
2.1 OFFICE. The Executive shall serve as Executive Vice President,
Chief Financial Officer of the Company. The Company shall take all action
necessary to cause the Executive to be appointed to the Operating Committee
of the Company as soon as reasonably possible.
2.2 PERFORMANCE. During the term hereof, the Executive shall be
employed by the Company on a full-time basis and shall perform and
discharge (faithfully, diligently and to the best of his ability) his
duties and responsibilities hereunder and shall be accountable to the Chief
Executive Officer of the Company; provided, however, that Executive may
pursue community and charitable activities and hold positions in connection
therewith and such other activities as may be approved by the Chief
Executive Officer of the Company, such approval not to be unreasonably
withheld.
<PAGE> 2
3. COMPENSATION AND BENEFITS.
3.1 SALARY. The Company shall pay the Executive a base salary of not
less than $300,000 per annum rate of pay. In addition, the Employee shall
be entitled to receive bonus compensation in an amount to be determined by
the Chief Executive Officer of the Company, however, the Company agrees to
pay the Employee a monthly bonus payment of $4,167. In no event shall the
cash compensation (salary and bonus) paid to the Executive be less than
$700,000 per annum rate of pay for the term of this Agreement. Base salary
shall be payable in accordance with the payroll practices of the Company.
3.2 STOCK OPTIONS. The Executive shall be granted options to purchase
50,000 shares of the Company's Common Stock at an exercise price equal to
the closing sale price of the Company's Common Stock on the date of the
Company's public announcement of the Executive's employment with the
Company. The options shall not be exercisable prior to January 4, 2003, the
third anniversary of the date of the grant, and thereafter, the options
shall be exercisable in full. The stock options will be subject to the
terms and conditions of the Company's 1998 Long-Term Incentive Plan.
3.3 LOAN. The Company shall advance the Executive a loan in the amount
of $500,000 which shall be forgiven at a rate of one-half per year on the
first and second anniversaries of the loan pursuant to the terms of the
promissory note (attached hereto and incorporated herein). In connection
with and in addition to the forgiveness of the loan, the Company shall pay
the Executive $50,000 on the first and second anniversaries of the loan
provided the loan remains outstanding and the Executive remains employed by
the Company. The payment of $50,000 is in addition to the cash compensation
amount of $700,000 referenced in Section 3.1.
3.3 (a) STOCK. The Company agrees to sell a certain number of shares,
up to a maximum amount of $500,000, of it's Common Stock to the Executive
at a price equal to the closing sale price of the Company's Common Stock on
the date of the Company's public announcement of the Executive's employment
with the Company.
3.4 OTHER FRINGE BENEFITS. The Executive shall be entitled to
participate in all benefit programs (including, without limitation, all
life and disability insurance, health and, accident plans, retirement
plans, stock incentive plans, and retention plans and other
<PAGE> 3
arrangements) that the Company makes available to employees or key
executives of the Company with the Executive's participation to be at a
level consistent with the Executive's position with the Company. The
Executive shall be entitled to three weeks paid vacation per year, to be
taken at such times as he deems appropriate. The Executive shall be
entitled to carry forward unused vacation pay and to cash out any unused
vacation pay upon the termination of the Executive's employment. The
benefits described in this Section 3.4 are hereinafter referred to as the
"Benefits".
3.5 REIMBURSEMENT OF EXPENSES. The Company shall promptly reimburse
the Executive for reasonable travel, entertainment and other expenses
incurred or paid by the Executive in connection with, or related to, the
performance of the Executive's duties, responsibilities or services under
this Agreement upon presentation by the Executive of documentation, expense
statements, vouchers and/or such other supporting information as the
Company may request, provided, however, that the amount available for such
travel, entertainment and other expenses may be fixed in advance by the
Chief Executive Officer of the Company.
4. EMPLOYMENT TERMINATION.
4.1 DATE OF TERMINATION: TERM OF EMPLOYMENT. The term "Date of
Termination" shall mean the earlier of (i) the Expiration Date or (ii) if
the Executive's employment is sooner terminated hereunder, the date on
which such termination is to be effective pursuant to the terms hereof. For
all purposes of this Agreement, references to the "term" of the Executive's
employment hereunder shall mean the period commencing on the date hereof
and ending on the Date of Termination.
4.2 UPON DEATH OR DISABILITY. This Agreement shall terminate on the
date of the death or disability of the Executive. As used in this
Agreement, the term "disability" shall mean the inability of the Executive,
due to a physical or mental disability, for a period of 180 consecutive
days to perform the essential functions of the Executive's position which
are contemplated under this Agreement. A determination of disability shall
be made by a physician satisfactory to both the Executive and the Company,
provided that if the Executive and the Company do not agree on a physician,
the Executive and the Company shall each select a physician and these two
together shall select a third physician, whose determination as to
disability shall be
<PAGE> 4
binding on all parties. The fees and expenses of any and all such
physicians shall be borne by the Company.
4.3 BY THE COMPANY FOR CAUSE. This Agreement may be terminated by the
Company for cause immediately upon written notice by the Company to the
Executive setting forth the basis for such termination with particularity.
For the purposes of this Section 4.3, "cause" for termination shall be
limited to (i) a material failure of the Executive to perform the
Executive's assigned duties for the Company or gross negligence or willful
misconduct of the Executive in the performance of the Executive's assigned
duties for the Company or any breach of any covenant contained in Section 6
or 7 hereof, in each case after notice and a reasonable opportunity to cure
(if such act or failure shall be susceptible to cure) of not less than 30
days, and (ii) the indictment or conviction of the Executive of, or the
entry of a pleading of guilty or nolo contendere by the Executive to, any
felony or any crime involving fraud or deceit.
4.4 AT THE ELECTION OF EITHER PARTY. This Agreement may be terminated
by either the Company or the Executive at any time upon at least 30 days'
prior written notice.
5. EFFECT OF TERMINATION.
5.1 TERMINATION BY THE COMPANY FOR CAUSE OR TERMINATION BY EXECUTIVE
PURSUANT TO SECTION 4.4. In the event that the Executive's employment is
terminated for cause pursuant to Section 4.3 or the Executive shall
terminate this Agreement pursuant to Section 4.4, the Company shall pay to
the Executive his then-current salary through the Date of Termination.
5.2 TERMINATION BY THE COMPANY WITHOUT CAUSE PURSUANT TO SECTION 4.4.
In the event that the Executive's employment is terminated by the Company
pursuant to Section 4.4 within two years of the Employee's employment date,
the Company shall pay to the Executive the amount of $500,000 as severance
in one lump sum within thirty (30) days of the Date of Termination. This
amount is intended to be all inclusive of any compensation owed to the
Executive at the time of termination.
5.3 TERMINATION FOR DEATH OR DISABILITY. If the Executive's employment
is terminated by death or because of disability pursuant to Section 4.2,
the Company shall pay to the estate of the Executive or to the Executive,
as the case may be, salary, bonus and other cash compensation at his
minimum cash compensation per annum
<PAGE> 5
rate of pay set forth in Section 3.1 up to the end of the month in which
the termination of the Executive's employment because of death or
disability occurs.
5.4 SURVIVAL. The provisions of Sections 3.2, 3.3, 5, 6 and 7 shall
survive the termination of this Agreement and remain in full force and
effect.
6. NON-SOLICIT.
(a) During the Non-solicit Period, the Executive will not:
(i) solicit, divert or take away, or attempt to divert or to take
away, the business or patronage of any of the brokerage or investment
banking clients, customers or accounts of the Company or its subsidiaries.
(ii) solicit any officer, senior manager or senior broker who was
an employee of the Company or its subsidiaries at any time during the term
of this Agreement to leave such employment.
(b) For purposes of this Section 6, the term "Non-solicit Period"
shall mean the period commencing on the Date of Termination and (i) ending
twelve months after the date the Executive's employment is terminated by
the Company pursuant to Section 4.4 or (ii) ending twelve months after the
date the Executive terminates his employment pursuant to Section 4.4. This
provision shall not apply to the Executive's termination by the Company
pursuant to Section 4.3.
(c) If any restriction set forth in this Section 6 is found by any
court of competent jurisdiction to be unenforceable because it extends for
too long a period of time or over too great a range of activities or in too
broad a geographic area, it shall be interpreted to extend only over the
maximum period of time, range of activities or geographic area as to which
it may be enforceable.
(d) The restrictions contained in this Section 6 are necessary for the
protection of the business and goodwill of the Company and its affiliates
and are considered by the Executive to be reasonable for such purpose. The
Executive agrees that any breach of this Section 6 could cause the Company
and its affiliates substantial and irrevocable damage and therefore, in the
event of any such breach, in addition to such other remedies which may be
available, the Company and its affiliates shall have the right to seek
specific performance and injunctive relief. The Company agrees that it will
seek specific
<PAGE> 6
performance and injunctive relief on an interim basis and that the merits
of the claim or dispute will be submitted to arbitration pursuant to
Section 15.
7. UNAUTHORIZED DISCLOSURE OF CONFIDENTIAL INFORMATION.
(a) CONFIDENTIALITY. The Executive acknowledges that the Company, its
subsidiaries and its affiliates continually develop Confidential
Information, that the Executive may develop Confidential Information for
the Company or its affiliates and that the Executive may learn of
Confidential Information during the course of his employment. The Executive
will comply with the policies and procedures of the Company for protecting
Confidential Information and, for the term hereof and thereafter, will not
disclose to any person (except as required by any statutory or regulatory
requirement or mandatory court order, subpoena or other legal process, and
except to any person required for the proper performance of his duties and
responsibilities to the Company and its affiliates), or use for his own
benefit or gain or otherwise use in a manner adverse to the interests of
the Company and its affiliates, any Confidential Information obtained by
the Executive incident to his employment or other association with the
Company or any of its affiliates.
(b) RETURN OF DOCUMENTS. All documents, records, tapes and other media
of every kind and description relating to the business, present or
otherwise, of the Company, its subsidiaries or its affiliates and any
copies, in whole or in part, thereof (the "Documents"), whether or not
prepared by the Executive, shall be the sole and exclusive property of the
Company and its affiliates. The Executive shall safeguard all Documents and
shall surrender to the Company at the time his employment terminates, or at
such earlier time or times as the Chief Executive Officer or his designee
may specify, any Documents then in the Executive's possession or control.
(c) ASSIGNMENT OF RIGHTS TO INTELLECTUAL PROPERTY. The Executive shall
promptly and fully disclose all Intellectual Property to the Company. The
Executive hereby assigns to the Company (or as otherwise directed by the
Company) the Executive's full right, title and interest in and to all
Intellectual Property now owned or hereafter acquired. The Executive agrees
to execute any and all applications for domestic and foreign patents,
copyrights or other proprietary rights and to do such other acts (including
without limitation the execution and delivery of instruments of further
assurance or confirmation) requested by the Company to assign the
<PAGE> 7
Intellectual Property to the Company and to permit the Company to enforce
any patents, copyrights or other proprietary rights to the Intellectual
Property. The Executive will not charge the Company for time spent in
complying with these obligations. All copyrightable works that the
Executive creates shall be considered "work made for hire".
(d) DEFINED TERMS. "Confidential Information" as used herein means any
and all information of the Company and its subsidiaries that is not
generally known by others with whom they compete or do business, or with
whom they plan to compete or do business and any and all information, not
publicly known, which, if disclosed, would assist in competition against
the Company and its subsidiaries, or the disclosure of which would
otherwise be adverse to the interests of the Company or any of its
subsidiaries. Confidential Information also includes comparable information
that the Company or any of its subsidiaries have received belonging to
others or which was received by the Company or any of its subsidiaries with
any understanding that it would not be disclosed; provided, however, that
Confidential Information shall not include anything (i) that has been
disclosed to the public (other than in connection with a breach by the
Executive of his obligations hereunder), (ii) that has been obtained by the
Executive from a third party otherwise than in violation of a
confidentiality agreement to which such third party is bound, (iii) that
has otherwise lawfully entered the public domain, or (iv) that has been
obtained by the Executive in a lawful manner prior to his employment with
the Company. "Intellectual Property" as used herein means inventions,
discoveries, developments, methods, processes, compositions, works,
concepts and ideas (whether or not patentable or copyrightable or
constituting trade secrets) relating to the business of the Company, its
subsidiaries and its affiliates conceived, made, created, developed or
reduced to practice by the Executive (whether alone or with others, whether
or not during normal business hours or on or off Company premises) during
the Executive's employment.
8. NOTICES. All notices required or permitted under this Agreement shall
be in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States mail, by registered or certified mail, postage
prepaid, or via a reputable nationwide overnight courier service addressed to
the other party at the address shown above, or at such other address or
addresses as either party shall designate to the other in accordance with this
Section 8.
<PAGE> 8
9. INDEMNITY. The Company hereby agrees, to the maximum extent permitted
from time to time under the law of the State of Delaware, to indemnify the
Executive, and upon request shall advance expenses to the Executive if he shall
become a party or is threatened to be made a party to, any threatened, pending
or completed action, suit, proceeding or claim, whether civil, criminal,
administrative or investigative, by reason of the fact that he is or was or has
agreed to be a director or hold any of such offices, against expenses (including
attorneys' fees and expenses), judgments, fines, penalties and amounts paid in
settlement incurred in connection with investigation, preparation to defend or
defense of such action, suit, proceeding or claim; provided, however, that the
foregoing shall not require the Company to indemnify the Executive against, or
advance expenses to the Executive in connection with, any action, suit,
proceeding or claim resulting from any breach of the Executive's duties
hereunder that would permit the Company to terminate this Agreement for cause.
Such indemnification shall not be exclusive of other indemnification rights
arising under any by-law, agreement, vote of directors or stockholders or
otherwise.
10. PRONOUNS. Whenever the context may require, any pronouns used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular forms of nouns and pronouns shall include the plural, and vice
versa.
11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties and supersedes all prior agreements and understandings,
whether written or oral, relating to the subject matter of this Agreement.
12. AMENDMENT. This Agreement may be amended or modified only by a written
instrument executed by an Executive Vice President of the Company and the
Executive.
13. GOVERNING LAW. This Agreement shall be construed, interpreted and
enforced in accordance with the laws of the Commonwealth of Massachusetts and
without regard to the choice of law principles thereof.
14. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure
to the benefit of both parties and their respective successors and assigns, but
in no event shall this Agreement be assignable by the Company without the prior
written consent of the Executive to any corporation with which or into which the
Company may be merged or which may succeed to its assets or business. The
obligations of the Executive are personal and shall not be assigned by him.
<PAGE> 9
15. REMEDIES. Any claim or controversy arising out of or relating to this
Agreement, or the interpretation thereof, or the employment or termination of
employment of the Executive shall be settled by arbitration under the then
prevailing Constitution and Rules of the New York Stock Exchange, Inc. or the
National Association of Securities Dealers, Inc. as the initial complaint may
elect. Judgment based upon the decision of the arbitrators may be entered in any
court having jurisdiction thereof.
16. MISCELLANEOUS.
16.1 No delay or omission in exercising any right under this Agreement
shall operate as a waiver of that or any other right. A waiver or consent given
on any one occasion shall be effective only in that instance and shall not be
construed as a bar or waiver of any right on any other occasion.
16.2 The captions of the sections of this Agreement are for
convenience of reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.
16.3 In case any provision of this Agreement shall be invalid, illegal
or otherwise unenforceable, the validity, legality and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year set forth above.
FREEDOM SECURITIES CORPORATION
By:
---------------------------------------
Name:
Title:
By: /s/ Kenneth S. Klipper
---------------------------------------
Kenneth S. Klipper
<PAGE> 1
Exhibit 10.41
TACS III INCENTIVE PLAN
LIMITED PARTNERSHIP
LIMITED PARTNERSHIP AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
Page Number
-----------
ARTICLE I General Provisions ......................................... 1
Section 1.01 Definitions ................................................ 1
(a) Agreement ....................................................... 1
(b) Capital Account ................................................. 1
(c) Capital Contribution ............................................ 1
(d) Certificate of Limited Partnership .............................. 1
(e) Code ............................................................ 1
(f) General Partner ................................................. 2
(g) Limited Partner ................................................. 2
(h) Partner ......................................................... 2
(i) Partnership ..................................................... 2
(j) Securities ...................................................... 2
(k) TAH ............................................................. 2
(1) ULPA ............................................................ 2
(m) Voting Control .................................................. 2
Section 1.02 Partnership Name ........................................... 2
Section 1.03 Fiscal Year ................................................ 2
Section 1.04 Nature and Liability of Partners ........................... 2
Section 1.05 Purposes of Partnership .................................... 3
Section 1.06 Powers of Partnership ...................................... 3
Section 1.07 General Partner as Limited Partner ......................... 4
ARTICLE II Management of Partnership .................................. 4
Section 2.01 General .................................................... 4
Section 2.02 Services of General Partner ................................ 4
Section 2.03 Compensation of General Partner ............................ 5
Section 2.04 Restrictions ............................................... 5
Section 2.05 Reliance by Third Parties .................................. 6
Section 2.06 Partner's Transactions ..................................... 6
Section 2.07 Exculpation of Liability ................................... 6
Section 2.08 Indemnification ............................................ 7
ARTICLE III Capital Accounts; Allocations; Distributions ............... 7
Section 3.01 Capital Contributions ...................................... 7
Section 3.02 Capital Accounts ........................................... 9
Section 3.03 Deficit Capital Accounts ................................... 10
Section 3.04 Allocations ................................................ 10
Section 3.05 Distributions to Partners .................................. 11
Section 3.06 No Interest on Capital ..................................... 12
(i)
<PAGE> 3
Page Number
-----------
ARTICLE IV Withdrawal of Limited Partner ............................ 12
Section 4.01 Withdrawal of Limited Partner ............................ 12
Section 4.02 Legal Representatives .................................... 12
Section 4.03 Mandatory Withdrawal ..................................... 13
Section 4.04 Liquidating Share ........................................ 13
Section 4.05 Cessation of Participation ............................... 14
ARTICLE V Transfer of Partnership Interests ........................ 14
Section 5.01 Assignability of Interests ............................... 14
Section 5.02 Substituted Limited Partners ............................. 15
Section 5.03 Obligations of Assignee .................................. 15
ARTICLE VI Duration and Termination of Partnership .................. 15
Section 6.01 Duration ................................................. 15
Section 6.02 Withdrawal of,Limited Partner ............................ 15
Section 6.03 Withdrawal of General Partner ............................ 16
Section 6.04 Liquidation .............................................. 17
Section 6.05 Distribution Upon Termination ............................ 17
ARTICLE VII Reports to Partners ...................................... 18
Section 7.01 Financial Records ........................................ 18
Section 7.02 Annual Reports ........................................... 18
Section 7.03 Inspection ............................................... 18
Section 7.04 Tax Returns .............................................. 18
ARTICLE VIII Valuation ................................................ 19
Section 8.01 Valuation of Partnership Net Worth ....................... 19
Section 8.02 Valuation Date ........................................... 19
Section 8.03 Valuing Securities and Other Assets ...................... 19
ARTICLE IX Miscellaneous ............................................ 20
Section 9.01 Admission of Limited Partners ............................ 20
Section 9.02 Disputed Matters ......................................... 21
Section 9.03 Payments in Kind ......................................... 21
(ii)
<PAGE> 4
Page Number
-----------
Section 9.04 General .................................................. 21
Section 9.05 Notices .................................................. 22
Section 9.06 Execution of Certificate of Limited
Partnership and Other Documents ........................ 22
Section 9.07 Force Majeure ............................................ 22
Section 9.08 Amendments ............................................... 22
Section 9.09 Headings ................................................. 23
Section 9.10 Power of Attorney ........................................ 23
EXHIBIT A ............................................................. 25
(iii)
<PAGE> 5
TACS III
INCENTIVE PLAN LIMITED PARTNERSHIP
LIMITED PARTNERSHIP AGREEMENT
BY THIS LIMITED PARTNERSHIP AGREEMENT made and entered into as of July 1,
1989, Tucker Anthony Holding Corporation, a corporation organized under the laws
of the Commonwealth of Massachusetts, as general partner, and those persons and
entities executing this Agreement or counterparts thereof and listed on Exhibit
A (as it may be amended from time to time) as limited partners, hereby form a
limited partnership pursuant to the laws of the Commonwealth of Massachusetts.
ARTICLE I
GENERAL PROVISIONS
SECTION 1.01. DEFINITIONS. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) AGREEMENT. "Agreement" means this Limited Partnership Agreement as it
may from time to time be amended.
(b) CAPITAL ACCOUNT. "Capital Account" means those separate capital
accounts which are maintained for each Partner as defined in Section 3.02.
(c) CAPITAL CONTRIBUTION. "Capital Contribution" means the total amount of
money paid to the Partnership by each Partner as set forth on the signature page
hereof or counterpart thereof and reflected on Exhibit A hereto.
(d) CERTIFICATE OF LIMITED PARTNERSHIP. The "Certificate of Limited
Partnership" means the certificate of limited partnership for the Partnership
and all amendments thereto required under the laws of the Commonwealth of
Massachusetts to be signed and sworn to by the Partners of the Partnership and
filed for recording in the appropriate public offices within the Commonwealth of
Massachusetts to perfect or maintain the Partnership as a limited partnership
under the laws of the Commonwealth of Massachusetts and/or to effect the
admission, withdrawal or substitution of any Partner of the Partnership.
(e) CODE. "Code" means the Internal Revenue Code of 1986, as amended.
<PAGE> 6
(f) GENERAL PARTNER. "General Partner" means Tucker Anthony Holding
Corporation, a Massachusetts corporation, or any person substituted for or who
succeeds Tucker Anthony Holding Corporation as such general partner pursuant to
the terms of this Agreement.
(g) LIMITED PARTNER. "Limited Partner" means any person who is or shall
become a Limited Partner of the Partnership.
(h) PARTNER. "Partner" means the General Partner or any Limited Partner.
(i) PARTNERSHIP. "Partnership" means TACS III Incentive Plan Limited
Partnership, a Massachusetts limited partnership.
(j) SECURITIES. "Securities" means securities of every kind or description.
(k) TAH. "TAH" means Tucker Anthony Holding Corporation, a Massachusetts
corporation. The subsidiaries of TAH shall include all corporations and
partnerships over which TAH or any of its subsidiaries have Voting Control.
(1) ULPA. "ULPA" means the Massachusetts Uniform Limited Partnership Act,
as amended from time to time.
(m) VOTING CONTROL. "Voting Control" means the right to vote 50% or more of
the securities having the right to elect the directors of a corporation or the
right to designate a majority of the general partners of a partnership.
SECTION 1.02. PARTNERSHIP NAME. The Partnership shall do business under the
name and style of "TACS III Incentive Plan Limited Partnership," or such other
name as the General Partner may designate.
SECTION 1.03. FISCAL YEAR. The fiscal year of the Partnership shall be the
calendar year, or such other fiscal year as the General Partner shall designate.
SECTION 1.04. NATURE AND LIABILITY OF PARTNERS. The General Partner shall
have such liability for the repayment, satisfaction and discharge of the debts,
liabilities and obligations of the Partnership as is provided by the ULPA for a
general partner of a limited partnership. The Limited Partners who execute this
Agreement or are otherwise admitted as Limited Partners shall be liable to the
Partnership for the repayment, satisfaction and discharge of its debts,
liabilities and obligations only (i) to the extent of their respective Capital
Contributions and (ii) to the extent provided in Section 38 of the ULPA.
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<PAGE> 7
The Partners hereby agree among themselves to share in accordance with the
terms of this Agreement all losses, liabilities or expenses suffered or incurred
by virtue of the operation of the Partnership, provided that Limited Partners
shall share such losses, liabilities, and expenses only up to the limit of their
respective Capital Contributions. The General Partner agrees to assume and be
liable for all such losses, liabilities and expenses not covered by the
aggregate Capital Contributions of the Partners.
SECTION 1.05. PURPOSES OF PARTNERSHIP. The purposes of the Partnership are
to make investments in investment partnerships or companies formed for the
purpose of investing in the Securities of publicly and privately held
businesses, in order to provide incentives to registered representatives of
subsidiaries of TAH who are given the opportunity to participate as Limited
Partners in the Partnership. Limited Partnership interests shall be allocated
initially by TAH based on the contributions of such managers to the business of
TAH and its subsidiaries and shall be subject to future vesting, redemption and
other provisions hereof which relate to the continued service of such managers.
SECTION 1.06. POWERS OF PARTNERSHIP. In furtherance of the purposes of the
Partnership set forth in Section 1.05, the Partnership shall have the following
powers:
(a) To purchase or otherwise acquire, hold, and sell or otherwise
dispose of Securities, without regard to whether such Securities are
publicly traded, readily marketable, or otherwise restricted as to transfer
or resale;
(b) Subject to the limitations set forth in paragraph 2.04(c), to
possess, transfer, mortgage, pledge or otherwise deal in, and to exercise
all rights, powers, privileges and other incidents of ownership or
possession with respect to, Securities held or owned by the Partnership,
and to carry Securities in the name of a nominee or. nominees;
(c) Subject to the limitations set forth in paragraph 2.04(c), to
borrow or raise moneys, and to guarantee the obligations of others and to
sell, pledge or otherwise dispose of bonds or other obligations of the
Partnership for its purposes;
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<PAGE> 8
(d) To have and maintain an office within the Commonwealth of
Massachusetts and in connection therewith to rent or acquire office space,
engage personnel and do such other acts and things as may be necessary or
advisable in connection with the maintenance of such office, and on behalf
of and in the name of the Partnership to pay and incur reasonable expenses
and obligations for legal, accounting, consultative and custodial services,
and all other reasonable costs and expenses incident to the operation of
the Partnership;
(e) To form and own one or more corporations, trusts or limited
partnerships, provided that no entity so formed may do directly or
indirectly what the Partnership is prohibited by this Agreement from doing;
and
(f) To enter into, make and perform all such contracts, agreements and
other undertakings as may be necessary or advisable or incident to the
carrying out of the foregoing objects and purposes.
SECTION 1.07. GENERAL PARTNER AS LIMITED PARTNER. The General Partner may
also be a Limited Partner, and in such event its rights, powers, restrictions
and liabilities as a General Partner shall remain unaffected, and in addition,
it shall, in respect of its interest as a Limited Partner, have all of the
rights and powers and be subject to all of the restrictions and liabilities of a
Limited Partner.
ARTICLE II
MANAGEMENT OF PARTNERSHIP
SECTION 2.01. GENERAL. The management, operation and policy determinations
of the Partnership shall be, and hereby are, vested in the General Partner who
shall manage the Partnership's affairs. Except as otherwise expressly provided
herein, the General Partner shall have the power to exercise the powers, rights
and authority granted to the General Partner hereunder on behalf and in the name
of the Partnership.
SECTION 2.02. SERVICES OF GENERAL PARTNER. The General Partner shall (i)
provide investment advice to the Partnership and shall bear the cost of securing
information with respect to prospective investments, (ii) maintain the books and
records of the Partnership, (iii) provide routine bookkeeping and recordkeeping
services and custody of Partnership securities, and (iv) provide office space,
office and executive staff, and office supplies and equipment for the use of the
Partnership. The General Partner shall be required to devote only such time as
is necessary to perform such services and to supervise the
4
<PAGE> 9
activities of the Partnership, and directly or through its parent or
subsidiaries it may engage or invest in other businesses and activities of every
nature, including those competitive with the activities of the Partnership,
without the Partnership or any Partner having any right by virtue of this
Agreement to an interest in such other businesses or activities or any profits
thereof.
SECTION 2.03. COMPENSATION OF GENERAL PARTNER.
(a) NO MANAGEMENT FEE. The General Partner shall not receive any fees
or compensation from the Partnership for its services to the Partnership.
(b) EXPENSES. The General Partner shall be reimbursed from the
Partnership for all reasonable expenditures made on behalf of the
Partnership or incurred incident to the operation of the Partnership,
including, without limitation, all legal, consulting and audit expenses
incurred in the organization of the Partnership, preparing any amendment to
the Partnership Agreement, and performing any other legal and audit
services for the Partnership, interest expenses, and brokerage fees,
commissions and discounts incurred in connection with the purchase or sale
of Securities, and other out-of-pocket expenses incurred in connection with
the making and monitoring of the Partnership investments and the
administration of the Partnership.
SECTION 2.04. RESTRICTIONS. Partners shall be restricted in their
activities as follows:
(a) NO SERVICES BY LIMITED PARTNERS. The Limited Partners shall not
participate in the management of the Partnership and shall not hold
themselves out as General Partners or take any action on behalf of the
Partnership or in any way commit the Partnership to any agreement or
contract and shall have no right or authority to do any of the foregoing.
(b) PARTNERSHIP CREDIT. No Partner shall lend or use the funds or
credit of the Partnership or employ the Partnership's name for any purpose
whatsoever, except that the General Partner may do so for the purposes of
the Partnership or as permitted by paragraph (c) of this Section.
(c) LIMITATION ON BORROWING AND PLEDGING.
(i) If in the reasonable judgment of the General Partner it is
desirable to do so to accomplish the purposes of the Partnership, the
Partnership may borrow money from banks or other recognized financial
5
<PAGE> 10
institutions and secure payment of any such borrowing by hypothecation
or pledge of Partnership properties or otherwise provided that (A) any
such borrowing has an original maturity of less than one year and (B)
the aggregate of all indebtedness of the Partnership for money
borrowed outstanding at any one time does not exceed 5% of the sum of
the Capital Contributions of all Partners.
(ii) The Partnership may guarantee the obligations of others
provided that the amount guaranteed, together with any amount
borrowed, shall at no time exceed the limitation set forth in clause
(i)(B) above.
(iii) Notwithstanding the foregoing, the Partnership may borrow
funds from TAH or its successors or assume obligations of Limited
Partners to TAH or its successors under the terms which the General
Partner deems appropriate in connection with the redemption or
withdrawal under Article IV of the interests of Limited Partners who
have outstanding obligations to TAH under paragraph 3.01(b).
(d) ADDITIONAL RESTRICTIONS. The Partnership shall not make short
sales of Securities not owned by the Partnership.
SECTION 2.05. RELIANCE BY THIRD PARTIES. Notwithstanding any other
provision of this Article II, any third party dealing with the Partnership may
rely conclusively upon the authority, power and right of the General Partner
acting under this Agreement. This Section shall not be deemed to limit the
liabilities and obligations of the General Partner as set forth in this
Agreement.
SECTION 2.06. PARTNER'S TRANSACTIONS. Nothing in this Agreement shall be
construed to prohibit any Partner from buying or selling securities for its own
account, including securities of the same issuers as those held by the
Partnership.
SECTION 2.07. EXCULPATION OF LIABILITY. The General Partner and its
Affiliates (as defined in Section 2.08) shall have no liability to the
Partnership or to any Partner for any loss suffered by the Partnership which
arises out of any action or inaction of the General Partner or its Affiliates if
the General Partner or its Affiliates, in good faith, determined that such
course of conduct was in the best interests of the Partnership and such course
of conduct did not constitute negligence or misconduct of the General Partner or
its Affiliates.
6
<PAGE> 11
SECTION 2.08. INDEMNIFICATION. The General Partner and its Affiliates shall
be indemnified by the Partnership against any losses, judgments, liabilities,
expenses and amounts paid in settlement of any claims sustained by them in
connection with the Partnership, provided that the same were not the result of
negligence or misconduct on the part of the General Partner or its Affiliates.
Notwithstanding the above, the General Partner and its Affiliates shall not
be indemnified by the Partnership for any losses, liabilities or expenses
arising from or out of an alleged violation of federal or state securities laws
unless (1) there has been a successful adjudication on the merits of each count
involving alleged securities law violations; or (2) such claims have been
dismissed with prejudice On the merits by a court of competent jurisdiction or
(3) with respect to a settlement of claims against a particular indemnitee, a
court of competent jurisdiction approves such settlement and finds that
indemnification of the settlement and related costs should be made.
The Partnership shall not incur the cost of the portion of any insurance
which insures any party against any liability as to which such party is herein
prohibited from being indemnified.
For the purposes of Sections 2.07 and 2.08, the term "Affiliates" shall
mean any person performing services on behalf of the Partnership who: (1)
directly or indirectly controls, is controlled by, or is under common control
with the General Partner; or (2) owns or controls 10% or more of the outstanding
voting securities of the General Partner; or (3) is an officer, director,
employee or agent of the General Partner.
The right of indemnification hereby provided shall not be exclusive of or
affect any other rights to which the General Partner or any Affiliate may be
entitled. Nothing contained in this Section 2.08 shall limit any lawful rights
to indemnification existing independently of this Section.
The right of indemnification provided by this Section 2.08 shall not be
construed to increase the liability of Limited Partners as set forth in Section
1.04.
ARTICLE III
CAPITAL ACCOUNTS; ALLOCATIONS; DISTRIBUTIONS
SECTION 3.01. CAPITAL CONTRIBUTIONS.
(a) CONTRIBUTIONS. On or prior to the date of his becoming a Limited
Partner of the Partnership, each Limited
7
<PAGE> 12
Partner shall make the Capital Contribution in cash as set forth next to
his name on Exhibit A. The Capital Contribution of the General Partner
shall at all times be not less than one percent (1%) of the aggregate of
all Capital Contributions of the Partners and the General Partner shall
make any additional Capital Contributions required to maintain such Capital
Contribution of not less than one percent (1%). The aggregate of all
Capital Contributions shall be, and hereby is agreed to be, available to
the Partnership to carry out the purposes and objects of the Partnership.
(b) BORROWING. Limited Partners may be given the opportunity prior to
the due date of any Capital Contribution, to borrow all or any part of such
contribution from TAH upon such terms as may be offered by TAH. Such terms
may include, without limitation, the following:
(i) The principal of the loan may accelerate and be payable
earlier than the date due (i) to the extent of any distributions
payable to a borrower as a Limited Partner under Section 3.05(a)(i),
(ii) upon the termination of the employment of the borrower by TAH and
its subsidiaries, other than a termination occasioned by the death or
disability of the borrower, or (iii) upon the termination of the
borrower's interest in the Partnership.
(ii) The General Partner may have the right to offset loan
obligations due TAH against distributions or other payments due the
borrower as a Limited Partner hereunder and to cause the payment of
such loans to the extent of such distributions or payments.
(c) VESTING. Notwithstanding the foregoing, the interest of each
individual Limited Partner shall be subject to a vesting requirement that
the Limited Partner remain in the employment of subsidiaries of TAH for a
consecutive period of three (3) years after the date of such Limited
Partner's admission to the Partnership. This vesting requirement may be
waived in whole or in part by the General Partner in its discretion and
shall be waived in the event of termination of employment due to normal
retirement under the employer's policies, death or disability. Upon
termination of such employment of an individual Limited Partner for any
reason within three (3) years from the date of his admission to this
Partnership, unless the General Partner otherwise determines in its
discretion:
8
<PAGE> 13
(i) The remaining principal and accrued interest on any loans
owed by the Limited Partner under subparagraph (b) hereof shall be
immediately due and payable;
(ii) The right of the Limited Partner to any distributions of
assets of the Partnership under Section 3.05 shall terminate; and
(iii) The Limited Partner shall be required to withdraw from the
Partnership in accordance with Section 4.03 and his interest shall be
liquidated under Section 4.04 or purchased by the General Partner on
equivalent terms for retransfer to one or more substituted Limited
Partners under Section 5.02 and the proceeds of such liquidation or
purchase shall be applied to payment of the remaining principal and
accrued interest of any loans owed by the Limited Partner under
subparagraph (b) hereof before any payment or distribution thereof is
made to the Limited Partner.
SECTION 3.02. CAPITAL ACCOUNTS. A separate capital account (each, a
"CAPITAL ACCOUNT") shall be established for each Partner initially as of July 1,
1989 and shall be maintained in accordance with the rules of Treasury
Regulations Section 1.704-1(b)(2)(iv), and this Section 3.02 shall be
interpreted and applied in a manner consistent therewith. Whenever the
Partnership would be permitted to adjust the Capital Accounts of the Partners
pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(f) the Partnership
shall so adjust the Capital Accounts of the Partners. In any event,* the
Partnership shall adjust the Capital Accounts of the Partners annually, and upon
the admission of a new Partner or the withdrawal of an existing Partner, to
reflect revaluations of Partnership property in accordance with Article VIII. *
Whenever the Capital Accounts of the Partners are adjusted pursuant to Treasury
Regulations Section 1.704-1(b)(2)(iv)(f) to reflect revaluations of Partnership
property, (i) the Capital Accounts of the Partners shall be adjusted in
accordance with Treasury Regulations Section 1.704-1(b)(2)(iv)(g) for
allocations of depreciation, depletion, amortization and gain or loss, as
computed for book purposes in accordance with Article VIII, with respect to such
property, and (ii) the Partners' distributive shares of depreciation, depletion,
amortization and gain or loss, as computed for tax purposes, with respect to
such property shall be determined so as to take account of the variation between
the adjusted federal income tax basis and book value of suck property in the
same manner as under Code Section 704(c).
9
<PAGE> 14
SECTION 3.03. DEFICIT CAPITAL ACCOUNTS. If upon the liquidation of the
General Partner's interest in the Partnership the General Partner has a deficit
balance in its Capital Account, the General Partner shall contribute to the
Partnership an amount equal to such deficit balance. Any such contribution shall
be made by the General Partner. no later than the end of the taxable year of the
Partnership during which such liquidation occurs (or, if later, within ninety
(90) days after such liquidation). This Section 3.03 is intended to comply with
the requirements of Treasury Regulations Section 1.704-1(b)(2)(ii)(b)(3) and
shall be interpreted and applied in a manner consistent therewith.
SECTION 3.04. ALLOCATIONS.
(a) BOOK ITEMS. Items of income, gain, deduction and loss, as computed
for book purposes (including any such items resulting from any revaluation
of property under Section 3.02), for any fiscal year or portion thereof
shall be allocated among the Partners pro rata in proportion to the Capital
Account balances of the Partners.
(b) TAX ITEMS. Items of income, gain, deduction and loss, as computed
for federal income tax purposes, shall be allocated in the same manner as
under Code Section 704(c).
(c) ALLOCATIONS ON WITHDRAWAL. If a Limited Partner's interest in the
Partnership is liquidated by the Partnership pursuant to Section 4.04 and
the Limited Partner receives less than the amount of the balance in his
Capital Account, then the excess of (i) the balance in his Capital Account
over (ii) the amount distributed by the Partnership shall be allocated
among all the remaining Partners in proportion to their Capital Account
balances. This provision shall be applied so as to maintain equality
between the Capital Accounts of the Partners and the amount of Partnership
capital reflected on the Partnership's balance sheet, as computed for book
purposes, in accordance with Treasury Regulations Section
1.704-1(b)(2)(iv)(g). Further, notwithstanding sections 3.02 and 9.01(b),
if a Limited Partner's interest is purchased by the General Partner
pursuant to Section 3.01(c)(iii) and the purchase price is less than the
balance of the Capital Account of the Limited Partner, then (i) the excess
of (x) the balance in the Limited Partner's Capital Account over (y) the
amount paid by the General Partner shall be allocated among all the
remaining Partners in proportion to their Capital Account balances and (ii)
the General Partner (and any assignee of the General Partner) shall have a
Capital Account balance with respect to the purchased interest in the
Partnership equal to the purchase price paid by the General Partner.
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<PAGE> 15
(d) QUALIFIED INCOME OFFSET. No allocation shall be made pursuant to
Section 3.04(a) to the extent that it shall cause or increase a deficit
balance in any Limited Partner's Capital Account (in excess of such
Partner's obligation, if any, to restore a deficit in his Capital Account)
as of the end of the Partnership taxable year to which such allocation
relates. In making the foregoing determination, a Limited Partner's Capital
Account shall be reduced by the amounts described in Treasury Regulations
Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6). Any Limited Partner who
unexpectedly receives an adjustment, allocation or distribution described
in Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) shall
be allocated items of income and gain in an amount and manner sufficient to
eliminate, to the extent required by the Treasury Regulations, such deficit
balance as quickly as possible. This Section 3.04(d) is intended to comply
with the alternate test for economic effect set forth in Treasury
Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted and
applied in a manner consistent therewith.
(e) GENERAL PARTNER,NONRECOURSE DEBT. If a Partner makes a nonrecourse
loan to the Partnership which is "partner nonrecourse debt" within the
meaning of Temporary Treasury Regulations Section 1.704-1T(b)(4)(iv)(h),
then any item of Partnership loss, deduction or Code Section 705(a)(2)(B)
expenditure that is attributable to such debt shall be allocated to such
Partner and appropriate items of income and gain shall be "charged back" to
such Partner. This Section 3.04(e) is intended to comply with Temporary
Treasury Regulations Section 1.704-1T(b)(4)(iv)(h) and shall be interpreted
and applied in a manner consistent therewith.
(f) CURATIVE ALLOCATIONS. The allocations set forth in Sections
3.04(d) and 3.04(e) (the "Regulatory Allocations") are intended to comply
with the requirements of Treasury Regulations Section 1.704-1(b)(2)(ii)(d)
and Temporary Treasury Regulations Section 1.704-1T(b)(4)(iv)(h),
respectively. Notwithstanding any other provisions of this Section 3.0
(other than the Regulatory Allocations), the Regulatory Allocations shall
be taken into account in allocating other items of income, gain, deduction
and loss among the Partners, pursuant to Sections 3.04(a) and 3.04(c), so
that, to the extent possible, the net amount of such allocations of other
items and the Regulatory Allocation to each Partner shall be equal to the
net amount that would have been allocated to each such Partner if the
Regulatory Allocations had not occurred.
11
<PAGE> 16
SECTION 3.05. DISTRIBUTIONS TO PARTNERS.
(a) DISTRIBUTIONS TO PARTNERS.
(i) It shall be within the sole discretion of the General Partner
as to whether, when and in what amount a distribution of cash or other
assets of the Partnership shall be made. Such distributions (other
than a distribution made in connection with the withdrawal of a
Partner under Article IV) shall be made to all of the Partners in the
ratio that their respective Capital Accounts bear to one another at
the time of the distribution.
(ii) The General Partner may, but shall not be required to, make
annual distributions to each Partner in an amount which the General
Partner estimates is sufficient to pay federal and state income taxes
attributable to allocations under Section 3.04(b). Notwithstanding
Section 3.05(a)(i), any distributions made pursuant to this Section
3.05(a)(ii) shall be made to the Partners in proportion to the excess
of cumulative income and gain over cumulative deductions and losses
allocated to each of the Partners pursuant to Section 3.04(b).
(b) APPLICATION OF DISTRIBUTIONS. To the extent that there is any
amount due from a Limited Partner to TAH under a loan made pursuant to
paragraph 3.01(b), each distribution to a Limited Partner (except a
distribution under subsection(a)(ii) hereof) shall be applied in payment of
such obligation of such Partner.
(c) REPAYMENT OF DISTRIBUTIONS. Partners shall be required to repay
Partnership distributions to the extent provided in the ULPA.
SECTION 3.06. NO INTEREST ON CAPITAL. No Partner shall be entitled to
receive interest from the Partnership on his Capital Account.
ARTICLE IV
WITHDRAWAL OF LIMITED PARTNER
SECTION 4.01. WITHDRAWAL OF LIMITED PARTNER. Except as otherwise provided
in Section 4.03 hereof, no Limited Partner shall be permitted to withdraw from
the Partnership until his interest in the Partnership is vested under paragraph
3.01(c) and then only with the approval of the General Partner, which approval
may be withheld if the General Partner does not
12
<PAGE> 17
believe that such withdrawal is in the best interests of the other Limited
Partners, whether because of the cash position of the Partnership, the
undesirability of liquidating any of the investments of the Partnership, or
otherwise. The following provisions shall govern with respect to any withdrawals
approved by the General Partner:
(a) No such withdrawal shall be made except as of the last day of a
fiscal year of the Partnership;
(b) Partial withdrawals shall not be permitted and a Partner desiring
to withdraw must withdraw his entire interest in the Partnership;
(c) The Partner desiring to withdraw must notify the General Partner
in writing at least sixty (60) days prior to the close of the fiscal year
in which he wishes to effect his withdrawal; and
(d) The General Partner may, if necessary to accommodate a request for
withdrawal by a Limited Partner, attempt to obtain a purchaser of the whole
or a part of such Limited Partner's interest.
SECTION 4.02. LEGAL REPRESENTATIVES. In the event any Limited Partner shall
die or shall be declared incompetent or insane or shall be adjudicated a
bankrupt, the legal representative of such Limited Partner shall upon written
notice to the General Partner of the happening of any of such events become an
assignee of such Limited Partner's interest subject to all of the terms of this
Agreement as then in effect. Such legal representative may not withdraw from the
Partnership except in accordance with Section 4.01. If the General Partner does
not approve withdrawal of the interest of such legal representative, the General
Partner will use its best efforts, without legal obligation, to find another
person, suitable to the General Partner, willing to assume the Partnership
interest of such legal representative.
SECTION 4.03. MANDATORY WITHDRAWAL. Unless the General Partner otherwise
determines, an individual Limited Partner shall be required to withdraw from the
Partnership upon the termination of his employment by TAH or its subsidiaries
prior to the vesting of his interest under paragraph 3.01(c), except for a
termination by reason of normal retirement under the employer's policies, death
or disability, and his Partnership interest shall be liquidated under Section
4.04 or purchased by the General Partner for retransfer to substituted Limited
Partners under Section 3.01(c)(iii).
SECTION 4.04. LIQUIDATING SHARE. In the event any Limited Partner shall
withdraw or be required to withdraw in accordance
13
<PAGE> 18
with the provisions of this Article IV, there shall be paid to such Limited
Partner or his legal representative within 60 days after the last day of the
fiscal year of the Partnership which constitutes the effective date of
withdrawal, an amount equal to such Partner's positive Capital Account balance
as of the effective date of withdrawal; provided, however, that in the event of
a mandatory withdrawal under Section 4.03, such Partner shall be paid an amount
equal to the lesser of (i) his Capital Contribution(s) less distributions paid
to him prior to the withdrawal date, other than distributions paid under Section
3.05(a)(ii), or (ii) his positive Capital Account balance.
SECTION 4.05. CESSATION OF PARTICIPATION. From and after the effective date
of withdrawal of a Partner from the Partnership under this Article IV, no
interest shall be payable on such Partner's interest in the Partnership to the
date of payout.
ARTICLE V
TRANSFER OF PARTNERSHIP INTERESTS
SECTION 5.01. ASSIGNABILITY OF INTERESTS.
(a) Subject to the provisions of Section 4.02 hereof, the interest of
a Limited Partner shall not be assignable without the prior written consent
of the General Partner. No assignment shall be binding upon the Partnership
until the General Partner receives an executed copy of such assignment in
form and substance satisfactory to the General Partner. The assignee of
such interest may become a substituted Limited Partner only upon the terms
and conditions of Sections 5.02 and 9.01.
(b) The interest of the General Partner shall not be assignable;
PROVIDED, HOWEVER, that in no event shall the interest of the General
Partner be reduced below a 1% interest in the Capital Accounts of the
Partners and that such interest may be assigned to a successor to all or
substantially all of the business of the General Partner the Voting
Control of which is held by those persons then holding Voting Control of
the General Partner upon (i) the execution by the General Partner of a
written assignment, the execution by the successor of this Agreement, and
the written assumption by the successor of the obligations of the General
Partner hereunder; and (ii) the receipt by the Partnership of an opinion of
counsel that such assignment and assumption will not result in the
Partnership being classified as an association for Federal income tax
purposes. In the event of such assignment, the successor shall become the
General Partner hereunder, and the
14
<PAGE> 19
predecessor and successor General Partner shall cause the execution of any
necessary papers including, without limitation, an amendment to the
Certificate of Limited Partnership to record the substitution of the
successor as General Partner.
SECTION 5.02. SUBSTITUTED LIMITED PARTNERS. No Limited Partner shall have
the right to substitute an assignee as a Limited Partner in his place. The
General Partner shall have the right, in its discretion, to admit as a
substituted Limited Partner any person, firm or corporation acquiring a
partnership interest by assignment from another Limited Partner or from the
General Partner. The admission of an assignee as a substituted Limited Partner
shall be conditioned upon the assignee's written assumption of all obligations
of the assigning Limited Partner and execution of this Agreement as a Limited
Partner. Upon acceptance of a substituted Limited Partner, the General Partner
shall forthwith amend the Certificate of Limited Partnership and any other
necessary papers to show the substitution of such assignee in place of the
assigning Limited Partner. The General Partner's failure or refusal to admit an
assignee as a substituted Limited Partner shall not affect the right of such
assignee to receive the share of profits or other distribution or compensation
to which its assignor would otherwise be entitled.
SECTION 5.03. OBLIGATIONS OF ASSIGNEE. Any assignee, irrespective of
whether such assignee has accepted and adopted in writing the terms and
provisions of this Agreement, shall be deemed by the acceptance of such
assignment to have agreed to be subject to the terms and provisions of this
Agreement in the same manner as its assignor.
ARTICLE VI
DURATION AND TERMINATION OF PARTNERSHIP
SECTION 6.01. DURATION. Except as provided in Section 6.03, the Partnership
shall continue for a period of twenty (20) years from and after the date hereof,
provided, however, that with the written consent of the General Partner and
Limited Partners representing at least sixty-six and two-thirds percent
(66 2/3%) of the combined Capital Accounts of all the Limited Partners, the
Partnership may be terminated at any time after its first full fiscal year.
SECTION 6.02. WITHDRAWAL OF LIMITED PARTNER. If any Limited Partner shall
withdraw, die, be declared incompetent or insane, or be adjudicated a bankrupt,
such event shall not cause the dissolution or termination of the Partnership,
and the Partnership shall continue until terminated pursuant to Section 6.01 or
Section 6.03.
15
<PAGE> 20
SECTION 6.03. WITHDRAWAL OF GENERAL PARTNER.
(a) The General Partner may withdraw at any time after December 31,
1994 by giving 90 days prior written notice to the other Partners. If
Limited Partners whose Capital Accounts constitute in excess of 66 2/3% of
all Capital Accounts consent in writing executed within such 90-day period
to the continuation of the Partnership and elect a new General Partner, the
Partnership shall not terminate but shall continue in existence as though
no such withdrawal or filing had occurred, except that the new General
Partner shall be substituted for the former General Partner. Any Limited
Partner who does not consent to such continuation shall have the right to
withdraw by giving notice within 90 days after having been notified of the
continuation of the Partnership and shall be paid in the manner set forth
in Section 4.04.
(b) In the event that the Limited Partners shall have determined to
continue the Partnership, the former General Partner (or its
representative, successors or assigns) shall become a Limited Partner of
the Partnership upon the effective date of such continuation to the extent
of its then interest in the Partnership as a General Partner. Thereafter,
except as otherwise provided below, such former General Partner (or its
representative) shall be treated as a Limited Partner for all purposes of
this Agreement, shall have all of the rights and obligations of a Limited
Partner hereunder, including the right to receive allocations and
distributions on the same basis as all other Limited Partners, and shall
not be entitled to receive any further allocations or distributions to
which the General Partner is entitled hereunder. Upon becoming a Limited
Partner, such former General Partner's Capital Account and Capital
Commitment shall initially be the same as they were on the effective date
of such continuation. Once the General Partner ceases to be such for
whatever reason and becomes a Limited Partner hereunder, such former
General Partner will no longer be personally liable with respect to
Partnership liabilities arising out of events and transactions occurring
after his termination as General Partner (i.e., his Capital Account will be
debited for his share, if any, as Limited Partner of the losses and
expenses arising out of such liabilities but he will not be required to
make additional contributions to the Partnership to satisfy such
liabilities). However, a former General Partner will remain personally
liable for all Partnership liabilities arising out of events and
transactions occurring prior to his termination as General Partner (i.e.,
his Capital Account will be debited for his share of losses and expenses
arising out of such liabilities and he will be required to make additional
contributions to the
16
<PAGE> 21
Partnership to the extent of a deficit in his Capital Account due to such
liabilities arising out of events and transactions occurring prior to his
termination).
SECTION 6.04. LIQUIDATION. Upon the termination of the Partnership the
General Partner, or if there be no General Partner, then a person selected by
Limited Partners representing in excess of fifty percent (50%) of the combined
Capital Accounts of all Limited Partners, shall act as the liquidator (or
liquidators) of the Partnership with full power and authority to:
(a) sell, at such prices and upon such terms as the liquidator in its
sole discretion may deem appropriate, any or all of the Securities,
properties and assets of the Partnership, provided that such sales shall
only be made for cash and, when possible, consummated within ninety (90)
days after the date of termination; and provided further that the
liquidator shall not deal directly or indirectly with the Partnership for
its own account without the approval in writing of all of the Limited
Partners; and
(b) within ninety (90) days after the date of termination or as soon
thereafter as possible, effect distribution of the properties and assets of
the Partnership in cash or in kind in the manner set forth in Section 6.05.
SECTION 6.05. DISTRIBUTION UPON TERMINATION. Upon liquidation of the
Partnership, the assets of the Partnership remaining after the payment, or
reasonable provision therefor, of all Partnership liabilities (and the
establishment of reasonable reserves for contingent liabilities) shall be
distributed to the Partners in proportion to and to the extent of the positive
balances of their respective Capital Accounts. This Section 6.05 is intended to
comply with the requirements of Treasury Regulations Section
1.704-1(b)(2)(ii)(b)(2) and shall be interpreted and applied in a manner
consistent therewith.
ARTICLE VII
REPORTS TO PARTNERS
SECTION 7.01. FINANCIAL RECORDS. The General Partner shall keep books of
account in which shall be entered fully and accurately the transactions of the
Partnership and financial records appropriate to the business of the Partnership
17
<PAGE> 22
SECTION 7.02. ANNUAL REPORTS. Within ninety (90) days after the end of each
fiscal year and upon liquidation of the Partnership, the General Partner shall
prepare and mail to each Partner and to each former Partner who withdrew during
the applicable fiscal year or its legal representative, a report stating in
sufficient detail such transactions effected by the Partnership during such
fiscal year as shall enable such Partner or former Partner or the legal
representative of such former Partner to prepare its respective income tax
returns, including:
(a) such Partner's Capital Account balance as of the close of such
fiscal year;
(b) the sum of the Capital Account balances as of such date of all the
Partners;
(c) statement of assets and liabilities of the Partnership;
(d) profit and loss statement;
(e) statement of holdings of Securities of the Partnership;
(f) a description of the nature of each of the Partnership's
investments, the cost thereof and the valuation thereof established
pursuant to Article VIII; and
(g) such other financial information and documents as the General
Partner deems appropriate, as a Limited Partner may reasonably request, or
as is required by this Agreement and any amendments hereto.
SECTION 7.03. INSPECTION. A Limited Partner shall have the right at
reasonable times to inspect the books and records of the Partnership and to
discuss its affairs with the agents of the General Partner.
SECTION 7.04. TAX RETURNS. The General Partner will file all Federal,
state or other income tax returns required of the Partnership and will supply to
each Limited Partner such Partner's Form K-1 submitted with the Partner's
Federal tax return. Upon the request of any Partner, subject to the approval of
the General Partner, the Partnership shall elect, pursuant to Code Section 754,
to adjust the basis of Partnership property as permitted and provided in Code
Sections 734 and 743.
18
<PAGE> 23
ARTICLE VIII
VALUATION
SECTION 8.01. VALUATION OF PARTNERSHIP NET WORTH. In determining the net
worth of the Partnership, the value of any Partnership asset, the Capital
Accounts of the Partners, the value of any distribution, or in determining value
for any other purpose under this Agreement, the provisions of this Article VIII
shall apply.
SECTION 8.02. VALUATION DATE. Valuation shall be determined by the General
Partner as of the close of business on the Market Day preceding the last day of
each fiscal year of the Partnership or as of the close of business on the date
with respect to which valuation is to be taken, or if such day is not a Market
Day, then on the Market Day next preceding such date, as the case may be. A
Market Day shall be a day on which the New York Stock Exchange is open for
regular trading. If a valuation is taken other than in connection with the
annual reports described in Section 7.02, the General Partner shall give notice
of such valuation to the Limited Partners promptly after it is determined.
SECTION 8.03. VALUING SECURITIES AND OTHER ASSETS. The following provisions
shall apply in valuing the assets of the Partnership:
(a) Listed Securities which are not restricted as to saleability or
transferability shall be valued at the closing price as of the Valuation
Date. If any listed Security was not traded on such date, then the mean of
the closing high bid and low asked prices as of the close of business on
such date shall be used.
(b) Unlisted securities which are readily marketable shall be valued
at the mean of the closing bid and asked prices as of the Valuation Date.
(c) Securities, whether listed or unlisted, for which market
quotations are available, but which are restricted as to saleability or
transferability, shall be valued as provided in (a) and (b) above, less a
discount of from ten percent (10%) to twenty-five percent (25%) of the
value thereof as determined in good faith by the General Partner. In
determining the amount of such discount the General Partner shall give
consideration to the nature and length of such restriction and the relative
volatility of the market price of such Security.
(d) Securities for which market quotations are not readily available
and all other assets of the Partnership
19
<PAGE> 24
shall be valued at a fair value as determined in good faith by the General
Partner.
(e) Interests in other partnerships shall be valued by each
partnership at the times and upon the terms provided in its partnership
agreement unless the General Partner of this Partnership otherwise
determines.
(f) Liabilities shall include, in addition to those recorded on the
books of the Partnership, such other accrued or contingent liabilities as
shall be determined in accordance with generally accepted accounting
principles.
(g) In determining the value of the interest of any Partner in the
Partnership, neither the goodwill nor the right to use the firm name or
trade name of the Partnership shall be considered as an asset of the
Partnership.
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. ADMISSION OF LIMITED PARTNERS. Except as provided in this
Section, no new Limited Partner shall be admitted to the Partnership and no
additional contribution of capital by a Limited Partner to the Partnership shall
be accepted.
(a) ADDITIONAL LIMITED PARTNERS. Additional Limited Partners may be
admitted in the discretion of the General Partner as of the first day of
July or the first day of January of any year and the interest of such
additional Limited Partner in the Partnership shall be established by
creating a Capital Account for such additional Limited Partner as of that
day in an amount equal to the contribution made by such additional Limited
Partner to the Partnership.
(b) SUBSTITUTED LIMITED PARTNERS. Substituted Limited Partners may
also be admitted in the discretion of the General Partner by assignment or
transfer of the interest of a Limited Partner or the General Partner in
accordance with Article V or Sections 3.01(c)(iii), 4.01(d) or 4.02, in
which case the substituted Limited Partner will take over the Capital
Account of his assignor or transferor.
(c) PROCEDURE. The admission of a new Limited Partner, whether an
additional Limited Partner or a substituted Limited Partner, shall be
accomplished in accordance with the following procedures: Each Limited
Partner so admitted shall (i) sign a counterpart copy of
20
<PAGE> 25
this Agreement, which shall be accepted by its execution by the General
Partner, as well as any other documents required by the General Partner,
and (ii) make payment of his Capital Commitment, or purchase price in the
case of a substituted Limited Partner, as determined by the General
Partner, and (iii) an amendment to the Partnership's Certificate of Limited
Partnership shall be filed to reflect such addition. Each such new Limited
Partner shall thereafter be entitled to and subject to all the rights and
liabilities of Limited Partners as set forth herein.
SECTION 9.02. DISPUTED MATTERS. Any controversy or dispute arising out of
this Agreement, interpretation of any of the provisions hereof, or the actions
of the General or Limited Partners hereunder shall be submitted to arbitration
before the American Arbitration Association under the rules then obtaining of
said Association, such arbitration to be held in Boston, Massachusetts, and
judgment upon any award thus obtained may be entered in any court having
jurisdiction thereof. In any such arbitration each party to the arbitration
shall bear its own expenses, including expenses of attorneys, financial experts
and other witnesses; and any arbitration fees and expenses of the arbitrators
shall be divided equally between the disputing parties.
SECTION 9.03. PAYMENTS IN KIND. In the event the Partnership is required or
elects to make a payment or other distribution to or on behalf of any Partner or
to the legal representative, liquidator, or receiver of any deceased,
incompetent, insane or bankrupt Partner, the General Partner may (but shall not
be obligated to) make such payment or distribution, either wholly or partially,
in Securities or other property of the Partnership. The amount of any such
payment or distribution shall be deemed to be equal to the value of such
securities or other property, as determined under Article VIII, as of the
effective date of their distribution to or on behalf of the Partner or his legal
representatives and the decisions of the General Partner with respect to in-kind
payments, including decisions with respect to selection, apportionment and
valuation of Securities or other property, shall be conclusive and binding upon
all Partners.
SECTION 9.04. GENERAL. This Agreement: (a) shall be binding on the
executors, administrators, estates, heirs and legal successors of the Partners;
(b) shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts; (c) may be executed in more than one counterpart
as of the day and year first above written; provided, however, that each
separate counterpart shall have been executed by the General Partner; and (d)
contains the entire Agreement among the Partners relating to the subject matter
hereof. The waiver of any of the provisions, terms or conditions contained in
this
21
<PAGE> 26
Agreement shall not be considered as a waiver of any of the other provisions,
terms or conditions hereof.
SECTION 9.05. NOTICES.
(a) TO THE PARTNERS. Any notice to be given hereunder by the
Partnership to any Partner shall be in writing and signed by the General
Partner. Any such notice shall be conclusively deemed to have been given if
either delivered in person to such Partner or mailed by registered or
certified mail to such Partner at his address set forth in Exhibit A. Any
Partner may change his address for notice by written notice to the
Partnership.
(b) TO THE PARTNERSHIP. Any notice to be given hereunder to the
Partnership shall be in writing and signed by the Partner giving notice.
Any such notice shall be conclusively deemed to have been given if
delivered in person or mailed by registered or certified mail, postage
prepaid to the General Partner at its address set forth in Exhibit A, or
such other address as the General Partner may from time to time designate
by notice to all Partners.
SECTION 9.06. EXECUTION OF CERTIFICATE OF LIMITED PARTNERSHIP AND OTHER
DOCUMENTS. The General Partner agrees to prepare and file and the Partners agree
to execute a certificate of limited partnership, any amendments thereto, and
such other instruments, documents and papers as the General Partner deems
necessary or appropriate to carry out the intent of this Agreement, and to take
such other action as the General Partner deems appropriate to maintain the
Partnership's status as a Limited Partnership under the ULPA.
SECTION 9.07. FORCE MAJEURE. Whenever any act or thing is required of the
Partnership hereunder within any specified period of time, the Partnership shall
be entitled to such additional period of time to do such acts or things as shall
equal any period of delay resulting from causes beyond the reasonable control of
the Partnership, including, without limitation, bank holidays, actions of
governmental agencies, closing the New York Stock Exchange at times other than
normal closing dates, and financial crises of a nature materially affecting the
purchase and sale of Securities.
SECTION 9.08. AMENDMENTS. Except as otherwise specifically provided herein,
the terms and provisions of this Agreement may be modified or amended at any
time and from time .to time only with the written consent of (1) the General
Partner and (2) Limited Partners (excluding TAH) representing in excess of fifty
percent (50%) of the combined Capital Accounts of all Limited Partners insofar
as is consistent with the laws governing this Agreement; provided, however,
that
22
<PAGE> 27
without the specific written consent of each Partner adversely affected thereby
no such modification or amendment shall (i) increase the obligation of a Limited
Partner beyond that set forth in Section 1.04, (ii) reduce the Capital Account
of any Partner or its rights to distribution and withdrawal with respect
thereto; or (iii) amend Section 1.05 to permit Partnership activities which
would subject a Limited Partner to Federal or state taxation which such Partner
would not be subject to in the absence of such activity. Without unanimous
consent no amendment or modification may be made (x) which would cause the
Partnership to cease to be a Limited Partnership under applicable state law or
(y) which would, amend this Section 9.08.
SECTION 9.09. HEADINGS. Article, Section, Paragraph and Subparagraph
headings are for convenience of reference only, and are not part of this
Agreement, and shall not be considered in interpreting this Agreement.
SECTION 9.10. POWER OF ATTORNEY. Each Limited Partner does hereby
constitute and appoint John H. Goldsmith, Richard K. Howe and Dennis O'Connor
and each of them, its true and lawful representative, in its name, place and
stead, to make, execute, sign, acknowledge, deliver and file all such
instruments, documents and certificates which may from time to time be required
by the laws of the United States of America, the Commonwealth of Massachusetts,
or any other state in which the Partnership shall determine to do business, or
any political subdivision or agency thereof, to effectuate, implement and
continue the valid and subsisting existence of the Partnership, including,
without limitation, a Certificate of Limited Partnership and amendments thereto
and any such certificate or amendment filed for the purpose of admitting the
undersigned as Limited Partners of the Partnership.
24
<PAGE> 28
IN WITNESS WHEREOF, the General Partner and the Limited Partners have
hereunto set their hands and seals as of the date first set forth above.
GENERAL PARTNER
Tucker Anthony Holding
Corporation
By: ___________________________________
LIMITED PARTNER
_______________________________________
_______________________________________
(Print Name)
S.S.# _________________________________
Allocation Accepted: $_________________
ss:
Then personally appeared before me _________ known to me, and acknowledged
the same to be his free act and deed.
_______________________________________
Notary
<PAGE> 29
EXHIBIT B
TA Holding Corporation Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31
-----------------------------
1988 1989
----------- -----------
<S> <C> <C>
Assets
Cash $ 127,000 $ 238,000
Investments:
Tucker Anthony Incorporated 47,837,000 47,937,000
Freedom Capital Management Corporation 1,000,000
Other 1,486,000 906,000
Deferred Taxes 514,000
Receivable from Employees 3,851,000 2,422,000
Prepaid Expenses 2,583,000 4,665,000
Other Assets 3,886,000 3,806,000
----------- -----------
$60,770,000 $60,488,000
=========== ===========
Liabilities and Stockholder's Equity
Liabilities
Notes Payable to Affiliate $24,341,000 $10,341,000
Accounts Payable and Accrued Expenses 3,636,000 2,310,000
Income Taxes Payable 1,805,000 4,537,000
Intercompany Payable 3,064,000 1,247,000
----------- -----------
Total Liabilities $32,846,000 $18,435,000
Stockholder's Equity
Common Stock $ 1,000 $ 1,000
Paid in Capital 24,500,000 39,000,000
Retained Earnings 3,423,000 3,052,000
----------- -----------
Total Stockholder's Equity $27,924,000 $42,053,000
----------- -----------
Total Liabilities and Stockholder's Equity $60,770,000 $60,488,000
=========== ===========
</TABLE>
<PAGE> 30
EXHIBIT A
GENERAL PARTNER
Capital
Name Address Contribution
- ---- ------- ------------
Tucker Anthony Holding One Beacon Street 1% of total
Corporation Boston, MA 02109 Capital as
General
Partner
LIMITED PARTNERS
Capital
Name Address Contribution
- ---- ------- ------------
$___________
DP-0325/d
1/31/91
<PAGE> 1
Exhibit 10.42
TACS IV INCENTIVE PLAN
LIMITED PARTNERSHIP
LIMITED PARTNERSHIP AGREEMENT
<PAGE> 2
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I General Provisions ............................................. 1
SECTION 1.01. Definitions ................................................ 1
(a) Agreement .................................................... 1
(b) Capital Account .............................................. 1
(c) Capital Contribution ......................................... 1
(d) Certificate of Limited Partnership ........................... 1
(e) Code ......................................................... 1
(f) General Partner .............................................. 1
(g) Limited Partner .............................................. 1
(h) Partner ...................................................... 2
(i) Partnership .................................................. 2
(i) Securities ................................................... 2
(k) TAH .......................................................... 2
(1) ULPA ......................................................... 2
(m) Voting Control ............................................... 2
SECTION 1.02. Partnership Name ..................................... 2
SECTION 1.03. Fiscal Year .......................................... 2
SECTION 1.04. Nature and Liability of Partners ..................... 2
SECTION 1.05. Purposes of Partnership .............................. 2
SECTION 1.06. Powers of Partnership ................................ 3
SECTION 1.07. General Partner as Limited Partner ................... 3
ARTICLE II - Management of Partnership ................................... 4
SECTION 2.01. General .............................................. 4
SECTION 2.02. Services of General Partner .......................... 4
SECTION 2.03. Compensation of General Partner ...................... 4
(a) No Management Fee .......................................... 4
(b) Expenses ................................................... 4
SECTION 2.04. Restrictions ......................................... 4
(a) No Services by Limited Partners ............................ 4
(b) Partnership Credit ......................................... 5
(c) Limitation on Borrowing and Pledging ....................... 5
(d) Additional Restrictions .................................... 5
SECTION 2.05. Reliance by Third Parties ............................. 5
SECTION 2.06. Partner's Transactions ................................ 5
SECTION 2.07. Exculpation of Liability .............................. 5
SECTION 2.08. Indemnification ....................................... 6
ARTICLE III - Capital Accounts; Allocations; Distributions ............... 6
SECTION 3.01. Capital Contributions ................................ 6
(a) Contributions .............................................. 7
(i)
<PAGE> 3
Page
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(b) Borrowing .................................................. 7
(c) Vesting .................................................... 7
SECTION 3.02. Capital Accounts ..................................... 8
SECTION 3.03. Deficit Capital Accounts ............................. 8
SECTION 3.04. Allocations .......................................... 8
(a) Book Items ................................................. 8
(b) Tax Items .................................................. 9
(c) Allocations on Withdrawal .................................. 9
(d) Qualified Income Offset .................................... 9
(e) General Partner Nonrecourse Debt ........................... 9
(f) Curative Allocations ....................................... 10
SECTION 3.05. Distributions to Partners ............................ 10
(a) Distributions to Partners .................................. 10
(b) Application of Distributions ............................... 10
(c) Repayment of Distributions ................................. 10
SECTION 3.06. No Interest on Capital ............................... 11
ARTICLE IV - Withdrawal of Limited Partner .............................. 11
SECTION 4.01. Withdrawal of Limited Partner ........................ 11
SECTION 4.02. Legal Representatives ................................ 11
SECTION 4.03. Mandatory Withdrawal ................................. 11
SECTION 4.04. Liquidating Share .................................... 12
SECTION 4.05. Cessation of Participation ........................... 12
ARTICLE V - Transfer of Partnership Interests ........................... 12
SECTION 5.01. Assignability of Interests ........................... 12
SECTION 5.02. Substituted Limited Partners ......................... 13
SECTION 5.03. Obligations of Assignee .............................. 13
ARTICLE VI - Duration and Termination of Partnership .................... 13
SECTION 6.01. Duration ............................................. 13
SECTION 6.02. Withdrawal of Limited Partner ........................ 13
SECTION 6.03. Withdrawal of General Partner ........................ 13
SECTION 6.04. Liquidation .......................................... 14
SECTION 6.05. Distribution Upon Termination ........................ 15
ARTICLE VII - Reports to Partners ....................................... 15
SECTION 7.01. Financial Records .................................... 15
SECTION 7.02. Annual Reports ....................................... 15
SECTION 7.03. Inspection ........................................... 16
SECTION 7.04. Tax Returns .......................................... 16
ARTICLE VIII - Valuation ................................................ 16
(ii)
<PAGE> 4
Page
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SECTION 8.01. Valuation of Partnership Net Worth ................... 16
SECTION 8.02. Valuation Date ....................................... 16
SECTION 8.03. Valuing Securities and Other Assets .................. 16
ARTICLE IX - Miscellaneous .............................................. 17
SECTION 9.01. Admission of Limited Partners ........................ 17
(a) Additional Limited Partners ................................ 17
(b) Substituted Limited Partners ............................... 17
(c) Procedure .................................................. 17
SECTION 9.02. Disputed Matters ..................................... 18
SECTION 9.03. Payments in Kind ..................................... 18
SECTION 9.04. General .............................................. 18
SECTION 9.05. Notices .............................................. 19
(a) To the Partners ............................................ 19
(b) To the Partnership ......................................... 19
SECTION 9.06. Execution of Certificate of Limited Partnership
and Other Documents .................................. 19
SECTION 9.07. Force Majeure ........................................ 19
SECTION 9.08. Amendments ........................................... 19
SECTION 9.09. Headings ............................................. 20
SECTION 9.10. Power of Attorney .................................... 20
(iii)
<PAGE> 5
TACS IV
INCENTIVE PLAN LIMITED PARTNERSHIP
LIMITED PARTNERSHIP AGREEMENT
BY THIS LIMITED PARTNERSHIP AGREEMENT made and entered into as of March 22,
1995, Tucker Anthony Holding Corporation, a corporation organized under the laws
of the Commonwealth of Massachusetts, as general partner, and those persons and
entities executing this Agreement or counterparts thereof and listed on Exhibit
A (as it may be amended from time to time) as limited partners, hereby form a
limited partnership pursuant to the laws of the Commonwealth of Massachusetts.
ARTICLE I - GENERAL PROVISIONS
SECTION 1.01. DEFINITIONS. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
(a) AGREEMENT. "Agreement" means this Limited Partnership Agreement as it
may from time to time be amended.
(b) CAPITAL ACCOUNT. "Capital Account" means those separate capital
accounts which are maintained for each Partner as defined in Section 3.02.
(c) CAPITAL CONTRIBUTION. "Capital Contribution" means the total amount of
money paid to the Partnership by each Partner as set forth on the signature page
hereof or counterpart thereof and reflected on Exhibit A hereto.
(d) CERTIFICATE OF LIMITED PARTNERSHIP. The "Certificate of Limited
Partnership" means the certificate of limited partnership for the Partnership
and all amendments thereto required under the laws of the Commonwealth of
Massachusetts to be signed and sworn to by the Partners of the Partnership and
filed for recording in the appropriate public offices within the Commonwealth of
Massachusetts to perfect or maintain the Partnership as a limited partnership
under the laws of the Commonwealth of Massachusetts and/or to effect the
admission, withdrawal or substitution of any Partner of the Partnership.
(e) CODE. "Code" means the Internal Revenue Code, as amended.
(f) GENERAL PARTNER. "General Partner" means Tucker Anthony Holding
Corporation, a Massachusetts corporation, or any person substituted for or who
succeeds Tucker Anthony Holding Corporation as such general partner pursuant to
the terms of this Agreement.
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(g) LIMITED PARTNER. "Limited Partner" means any person who is or shall
become a Limited Partner of the Partnership.
(h) PARTNER. "Partner" means the General Partner or any Limited Partner.
(i) PARTNERSHIP. "Partnership" means TACS IV Incentive Plan Limited
Partnership, a Massachusetts limited partnership.
(j) SECURITIES. "Securities" means securities of every kind or description.
(k) TAH. "TAH" means Tucker Anthony Holding Corporation, a Massachusetts
corporation. The affiliates of TAH shall include all corporations and
partnerships (i) over which TAH or any of its affiliates has Voting Control,
(ii) which, directly or indirectly, have Voting Control over TAH, and (iii)
which are under Voting Control of any corporation or partnership described in
the immediately preceding clause (ii).
(i) ULPA. "ULPA" means the Massachusetts Uniform Limited Partnership Act,
as amended from time to time.
(m) VOTING CONTROL. "Voting Control" means the right to vote 50% or more of
the securities having the right to elect the directors of a corporation or the
right to designate a majority of the general partners of a partnership.
SECTION 1.02. PARTNERSHIP NAME. The Partnership shall do business under the
name and style of "TACS IV Incentive Plan Limited Partnership," or such other
name as the General Partner may designate.
SECTION 1.03. FISCAL YEAR. The fiscal year of the Partnership shall be the
calendar year, or such other fiscal year as the General Partner shall designate
or the Code shall require.
SECTION 1.04. NATURE AND LIABILITY OF PARTNER. The General Partner shall
have such liability for the repayment, satisfaction and discharge of the debts,
liabilities and obligations of the Partnership as is provided by the ULPA for a
general partner of a limited partnership. The Limited Partners who execute this
Agreement or are otherwise admitted as Limited Partners shall be liable to the
Partnership for the repayment, satisfaction and discharge of its debts,
liabilities and obligations only (i) to the extent of their respective Capital
Contributions and (ii) to the extent provided in Section 38 of the ULPA.
The Partners hereby agree among themselves to share in accordance with the
terms of this Agreement all losses, liabilities or expenses suffered or incurred
by virtue of the operation of the Partnership, provided that Limited Partners
shall share such losses, liabilities, and expenses only up to the limit of their
respective Capital Contributions.
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The General Partner agrees to assume and be liable for all such losses,
liabilities and expenses not covered by the aggregate Capital Contributions of
the Partners.
SECTION 1.05. PURPOSES OF PARTNERSHIP. The purposes of the Partnership are
to make investments in the Securities of publicly and privately held companies
and partnerships, in order to provide incentives to investment executives of TAH
or its affiliates who are given the opportunity to participate as Limited
Partners in the Partnership. Limited Partnership interests shall be allocated
initially by TAH based on the contributions of such executives to the business
of TAH and its affiliates and shall be subject to future vesting, redemption and
other provisions hereof which relate to the continued service of such
executives.
SECTION 1.06. POWERS OF PARTNERSHIP. In furtherance of the purposes of the
Partnership set forth in Section 1.05, the Partnership shall have the following
powers:
(a) To purchase or otherwise acquire, hold, and sell or otherwise
dispose of Securities, without regard to whether such Securities are
publicly traded, readily marketable, or otherwise restricted as to transfer
or resale;
(b) Subject to the limitations set forth in paragraph 2.04(c), to
possess, transfer, mortgage, pledge or otherwise deal in, and to exercise
all rights, powers, privileges and other incidents of ownership or
possession with respect to, Securities held or owned by the Partnership,
and to carry Securities in the name of a nominee or nominees;
(c) Subject to the limitations set forth in paragraph 2.04(c), to
borrow or raise moneys, and to guarantee the obligations of others and to
sell, pledge or otherwise dispose of bonds or other obligations of the
Partnership for its purposes;
(d) To have and maintain an office within the Commonwealth of
Massachusetts and in connection therewith to rent or acquire office space,
engage personnel and do such other acts and things as may be necessary or
advisable in connection with the maintenance of such office, and on behalf
of and in the name of the Partnership to pay and incur reasonable expenses
and obligations for legal, accounting, consultative and custodial services,
and all other reasonable costs and expenses incident to the operation of
the Partnership;
(e) To form and own one or more corporations, trusts or limited
partnerships, provided that no entity so formed may do directly or
indirectly what the Partnership is prohibited by this Agreement from doing;
and
(f) To enter into, make and perform all such contracts, agreements and
other undertakings as may be necessary or advisable or incident to the
carrying out of the foregoing objects and purposes.
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SECTION 1.07. GENERAL PARTNER AS LIMITED PARTNER. The General Partner may
also be a Limited Partner, and in such event its rights, powers, restrictions
and liabilities as a General Partner shall remain unaffected, and in addition,
it shall, in respect of its interest as a Limited Partner, have all of the
rights and powers and be subject to all of the restrictions and liabilities of a
Limited Partner.
ARTICLE II - MANAGEMENT OF PARTNERSHIP
SECTION 2.01. GENERAL. The management, operation and policy determinations
of the Partnership shall be, and hereby are, vested in the General Partner who
shall manage the Partnership's affairs. Except as otherwise expressly provided
herein, the General Partner shall have the power to exercise the powers, rights
and authority granted to the General Partner hereunder on behalf and in the name
of the Partnership.
SECTION 2.02. SERVICES OF GENERAL PARTNER. The General Partner shall (i)
provide investment advice to the Partnership and shall bear the cost of securing
information with respect to prospective investments, (ii) maintain the books and
records of the Partnership, (iii) provide routine bookkeeping and recordkeeping
services and custody of Partnership securities, and (iv) provide office space,
office and executive staff, and office supplies and equipment for the use of the
Partnership. The General Partner shall be required to devote only such time as
is necessary to perform such services and to supervise the activities of the
Partnership, and directly or through its parent or affiliates it may engage or
invest in other businesses and activities of every nature, including those
competitive with the activities of the Partnership, without the Partnership or
any Partner having any right by virtue of this Agreement to an interest in such
other businesses or activities or any profits thereof.
SECTION 2.03. COMPENSATION OF GENERAL PARTNER.
(a) NO MANAGEMENT FEE. The General Partner shall not receive any fees
or compensation from the Partnership for its services to the Partnership.
(b) EXPENSES. The General Partner shall be reimbursed from the
Partnership for all reasonable expenditures made on behalf of the
Partnership or incurred incident to the operation of the Partnership,
including, without limitation, all legal, consulting and audit expenses
incurred in the organization of the Partnership, preparing any amendment to
the Partnership Agreement, and performing any other legal and audit
services for the Partnership, interest expenses, and brokerage fees,
commissions and discounts incurred in connection with the purchase or sale
of Securities, and other out-of-pocket expenses incurred in connection with
the making and monitoring of the Partnership investments and the
administration of the Partnership.
4
<PAGE> 9
SECTION 2.04. RESTRICTIONS. Partners shall be restricted in their
activities as follows:
(a) NO SERVICES BY LIMITED PARTNERS. The Limited Partners shall not
participate in the management of the Partnership and shall not hold
themselves out as General Partners or take any action on behalf of the
Partnership or in any way commit the Partnership to any agreement or
contract and shall have no right or authority to do any of the foregoing.
(b) PARTNERSHIP CREDIT. No Partner shall lend or use the funds or
credit of the Partnership or employ the Partnership's name for any purpose
whatsoever, except that the General Partner may do so for the purposes of
the Partnership or as permitted by paragraph (c) of this Section.
(c) LIMITATION ON BORROWING AND PLEDGING.
(i) If in the reasonable judgment of the General Partner it is
desirable to do so to accomplish the purposes of the Partnership, the
Partnership may borrow money from banks or other recognized financial
institutions and secure payment of any such borrowing by hypothecation
or pledge of Partnership properties or otherwise provided that (A) any
such borrowing has an original maturity of less than one year and (B)
the aggregate of all indebtedness of the Partnership for money
borrowed outstanding at any one time does not exceed 5% of the sum of
the Capital Contributions of all Partners.
(ii) The Partnership may guarantee the obligations of others
provided that the amount guaranteed, together with any amount
borrowed, shall at no time exceed the limitation set forth in clause
(i)(B) above.
(iii) Notwithstanding the foregoing, the Partnership may borrow
funds from TAH or its successors or assume obligations of Limited
Partners to TAH or its successors under the terms which the General
Partner deems appropriate in connection with the redemption or
withdrawal under Article IV of the interests of Limited Partners who
have outstanding obligations to TAH under paragraph 3.01(b).
(d) ADDITIONAL RESTRICTIONS. The Partnership shall not make short
sales of Securities not owned by the Partnership.
SECTION 2.05. RELIANCE BY THIRD PARTIES. Notwithstanding any other
provision of this Article II, any third party dealing with the Partnership may
rely conclusively upon the authority, power and right of the General Partner
acting under this Agreement. This Section shall not be deemed to limit the
liabilities and obligations of the General Partner as set forth in this
Agreement.
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SECTION 2.06. PARTNER'S TRANSACTIONS. Nothing in this Agreement shall be
construed to prohibit any Partner from buying or selling securities for such
Partner's own account, including securities of the same issuers as those held by
the Partnership.
SECTION 2.07. EXCULPATION OF LIABILITY. The General Partner and its
Affiliates (as defined in Section 2.08) shall have no liability to the
Partnership or to any Partner for any loss suffered by the Partnership which
arises out of any action or inaction of the General Partner or its Affiliates if
the General Partner or its Affiliates, in good faith, determined that such
course of conduct was in the best interests of the Partnership and such course
of conduct did not constitute negligence or misconduct of the General Partner or
its Affiliates.
SECTION 2.08. INDEMNIFICATION. The General Partner and its Affiliates shall
be indemnified by the Partnership against any losses, judgments, liabilities,
expenses and amounts paid in settlement of any claims sustained by them in
connection with the Partnership, provided that the same were not the result of
gross negligence or willful misconduct on the part of the General Partner or its
Affiliates.
Notwithstanding the above, the General Partner and its Affiliates shall not
be indemnified by the Partnership for any losses, liabilities or expenses
arising from or out of an alleged violation of federal or state securities laws
unless (1) there has been a successful adjudication on the merits of each count
involving alleged securities law violations; or (2) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction or
(3) with respect to a settlement of claims against a particular indemnitee, a
court of competent jurisdiction approves such settlement and finds that
indemnification of the settlement and related costs should be made.
The Partnership shall not incur the cost of the portion of any insurance
which insures any party against any liability as to which such party is herein
prohibited from being indemnified.
For the purposes of Sections 2.07 and 2.08, the term "Affiliates" shall
mean any person performing services on behalf of the Partnership who: (1)
directly or indirectly controls, is controlled by, or is under common control
with the General Partner; or (2) owns or controls 10% or more of the
outstanding voting securities of the General Partner; or (3) is an officer,
director, employee or agent of the General Partner or of any of the persons
identified in the preceding clauses (1) or (2).
The right of indemnification hereby provided shall not be exclusive of or
affect any other rights to which the General Partner or any Affiliate may be
entitled. Nothing contained in this Section 2.08 shall limit any lawful rights
to indemnification existing independently of this Section.
The right of indemnification provided by this Section 2.08 shall not be
construed to increase the liability of Limited Partners as set forth in
Section 1.04.
6
<PAGE> 11
ARTICLE III - CAPITAL ACCOUNTS; ALLOCATIONS; DISTRIBUTIONS
SECTION 3.01. CAPITAL CONTRIBUTIONS.
(a) CONTRIBUTIONS. On or prior to the date of becoming a Limited Partner of
the Partnership, each Limited Partner shall make the Capital Contribution in
cash as set forth next to his/her name on Exhibit A. The Capital Contribution of
the General Partner shall at all times be not less than one percent (1%) of the
aggregate of all Capital Contributions of the Partners and the General Partner
shall make any additional Capital Contributions required to maintain such
Capital Contribution of not less than one percent (1%). The aggregate of all
Capital Contributions shall be, and hereby is agreed to be, available to the
Partnership to carry out the purposes and objects of the Partnership.
(b) BORROWING. Limited Partners may be given the opportunity prior to the
due date of any Capital Contribution, to borrow all or any part of such
contribution from TAH upon such terms as may be offered by TAH. Such terms may
include, without limitation, the following:
(i) The principal of the loan may accelerate and be payable earlier
than the date due (i) to the extent of any distributions payable to a
borrower as a Limited Partner under Section 3.05(a)(i), (ii) upon the
termination of the employment of the borrower by TAH and its affiliates,
other than a termination occasioned by the death or disability of the
borrower, or (iii) upon the termination of the borrower's interest in the
Partnership.
(ii) The General Partner may have the right to offset loan obligations
due TAH against distributions or other payments due the borrower as a
Limited Partner hereunder and to cause the payment of such loans to the
extent of such distributions or payments.
(c) VESTING. Notwithstanding the foregoing, the interest of each individual
Limited Partner shall be subject to a vesting requirement that the Limited
Partner remain in the employment of TAH or any of its affiliates for a
consecutive period of three (3) years after the date of such Limited Partner's
admission to the Partnership. This vesting requirement may be waived in whole or
in part by the General Partner in its discretion and shall be waived in the
event of termination of employment due to normal retirement under the employer's
policies, death or disability. Upon termination of such employment of an
individual Limited Partner for any reason within three (3) years from the date
of such Limited Partner's admission to this Partnership, unless the General
Partner otherwise determines in its discretion:
7
<PAGE> 12
(i) The remaining principal and accrued interest on any loans
owed by the Limited Partner under subparagraph (b) hereof shall be
immediately due and payable;
(ii) The right of the Limited Partner to any distributions of
assets of the Partnership under Section 3.05 shall terminate; and
(iii) The Limited Partner shall be required to withdraw from the
Partnership in accordance with Section 4.03 and such Limited Partner's
interest shall be liquidated under Section 4.04 or purchased by the
General Partner on equivalent terms for retransfer to one or more
substituted Limited Partners under Section 5.02 and the proceeds of
such liquidation or purchase shall be applied to payment of the
remaining principal and accrued interest of any loans owed by the
Limited Partner under subparagraph (b) hereof before any payment or
distribution thereof is made to the Limited Partner.
SECTION 3.02. CAPITAL ACCOUNTS. A separate capital account (each, a
"CAPITAL ACCOUNT") shall be established for each Partner and shall be maintained
in accordance with the rules of Treasury Regulations Section 1.704-1(b)(2)(iv),
and this Section 3.02 shall be interpreted and applied in a manner consistent
therewith. Whenever the Partnership would be permitted to adjust the Capital
Accounts of the Partners pursuant to Treasury Regulations Section
1.704-1(b)(2)(iv)(f) Partnership shall so adjust the Capital Accounts of the
Partners. In any event, the Partnership shall adjust the Capital Accounts of the
Partners annually, and upon the admission of a new Partner or the withdrawal of
an existing Partner, to reflect revaluations of Partnership property in
accordance with Article VIII. Whenever the Capital Accounts of the Partners are
adjusted pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(f) to
reflect revaluations of Partnership property, (i) the Capital Accounts of the
Partners shall be adjusted in accordance with Treasury Regulations Section
1.704-1(b)(2)(iv)(g) for allocations of depreciation, depletion, amortization
and gain or loss, as computed for book purposes in accordance with Article VIII,
with respect to such property, and (ii) the Partners' distributive shares of
depreciation, depletion, amortization and gain or loss, as computed for tax
purposes, with respect to such property shall be determined so as to take
account of the variation between the adjusted federal income tax basis and book
value of such property in the same manner as under Code Section 704(c).
SECTION 3.03. DEFICIT CAPITAL ACCOUNTS. If upon the liquidation of the
General Partner's interest in the Partnership the General Partner has a deficit
balance in its Capital Account, the General Partner shall contribute to the
Partnership an amount equal to such deficit balance. Any such contribution shall
be made by the General Partner no later than the end of the taxable year of the
Partnership during which such liquidation occurs (or, if later, within ninety
(90) days after such liquidation). This Section 3.03 is intended to comply with
the requirements of Treasury Regulations
8
<PAGE> 13
Section 1.04-1(b)(2)(ii)(b)(3) and shall be interpreted and applied in a manner
consistent therewith.
SECTION 3.04. ALLOCATIONS.
(a) BOOK ITEMS. Items of income, gain, deduction and loss, as computed
for book purposes (including any such items resulting from any revaluation
of property under Section 3.02) for any fiscal year or portion thereof
shall be allocated among the Partners pro rata in proportion to the Capital
Account balances of the Partners.
(b) TAX ITEMS. Items of income, gain, deduction and loss, as computed
for federal income tax purposes, shall be allocated in the same manner as
under Code Section 704(c).
(c) ALLOCATIONS ON WITHDRAWAL. If a Limited Partner's interest in the
Partnership is liquidated by the Partnership pursuant to Section 4.04 and
the Limited Partner receives less than the amount of the balance in his/her
Capital Account, then the excess of (i) the balance in his/her Capital
Account over (ii) the amount distributed by the Partnership shall be
allocated among all the remaining Partners in proportion to their Capital
Account balances. This provision shall be applied so as to maintain
equality between the Capital Accounts of the Partners and the amount of
Partnership capital reflected on the Partnership's balance sheet, as
computed for book purposes, in accordance with Treasury Regulations Section
1.704-1(b)(2)(iv)(q). Further, notwithstanding sections 3.02 and 9.01(b),
if a Limited Partner's interest is purchased by the General Partner
pursuant to Section 3.01(c)(iii) and the purchase price is less than the
balance of the Capital Account of the Limited Partner, then (i) the excess
of (x) the balance in. the Limited Partner's Capital Account over (y) the
amount paid by the General Partner shall be allocated among all the
remaining Partners in proportion to their Capital Account balances and (ii)
the General Partner (and any assignee of the General Partner) shall have a
Capital Account balance with respect to the purchased interest in the
Partnership equal to the purchase price paid by the General Partner.
(d) QUALIFIED INCOME OFFSET. No allocation shall be made pursuant to
Section 3.04(a) to the extent that it shall cause or increase a deficit
balance in any Limited Partner's Capital Account (in excess of such
Partner's obligation, if any, to restore a deficit in his/her Capital
Account) as of the end of the Partnership taxable year to which such
allocation relates. In making the foregoing determination, a Limited
Partner's Capital Account shall be reduced by the amounts described in
Treasury Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6). Any
Limited Partner who unexpectedly receives an adjustment, allocation or
distribution described in Treasury Regulations Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6) shall be allocated items of income and
gain in an amount and manner
9
<PAGE> 14
sufficient to eliminate, to the extent required by the Treasury
Regulations, such deficit balance as quickly as possible. This Section
3.04(d) is intended to comply with the alternate test for economic effect
set forth in Treasury Regulations Section 1.704-1(b)(2)(ii)(d) and shall be
interpreted and applied in a manner consistent therewith.
(e) GENERAL PARTNER NONREC0URSE DEBT. If a Partner makes a nonrecourse
loan to the Partnership which is "partner nonrecourse debt" within the
meaning of Treasury Regulations Section 1.704-2(b)(4), then any item of
Partnership loss, deduction or Code Section 705(a)(2)(B) expenditure that
is attributable to such debt shall be allocated to such Partner and
appropriate items of income and gain shall be "charged back" to such
Partner. This Section 3.04(e) is intended to comply with Treasury
Regulations Section 1.704-2(i) and shall be interpreted and applied in a
manner consistent herewith.
(f) CURATIVE ALLOCATIONS. The allocations set forth in Sections
3.04(d) and 3.04(e) (the "Regulatory Allocations") are intended to comply
with the requirements of Treasury Regulations Section 1.704-1(b)(2)(ii)(d)
and Treasury Regulations Section 1.704-(2)(i), respectively.
Notwithstanding any other provisions of this Section 3.04 (other than the
Regulatory Allocations), the Regulatory Allocations shall be taken into
account in allocating other items of income, gain, deduction and loss among
the Partners, pursuant to Sections 3.04(a) and 3.04(c), so that, to the
extent possible, the net amount of such allocations of other items and the
Regulatory Allocations to each Partner shall be equal to the net amount
that would have been allocated to each such Partner if the Regulatory
Allocations had not occurred.
SECTION 3.05. DISTRIBUTIONS TO PARTNERS.
(a) DISTRIBUTIONS TO PARTNERS.
(i) It shall be within the sole discretion of the General Partner
as to whether, when and in what amount a distribution of cash or other
assets of the Partnership shall be made. Such distributions (other
than a distribution made in connection with the withdrawal of a
Partner under Article IV) shall be made to all of the Partners in the
ratio that their respective Capital Accounts bear to one another at
the time of the distribution.
(ii) The General Partner may, but shall not be required to, make
annual distributions to each Partner in an amount which the General
Partner estimates is sufficient to pay federal and state income taxes
attributable to allocations under Section 3.04(b). Notwithstanding
Section 3.05(a)(i), any distributions made pursuant to this Section
3.05(a)(ii) shall be made to the Partners in proportion to the excess
10
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of cumulative income and gain over cumulative deductions and losses
allocated to each of the Partners pursuant to Section 3.04(b).
(b) APPLICATION OF DISTRIBUTIONS. To the extent that there is any
amount due from a Limited Partner to TAH under a loan made pursuant to
paragraph 3.01(b), each distribution to a Limited Partner (except a
distribution under subsection(a)(ii) hereof) shall be applied in payment of
such obligation of such Partner.
(c) REPAYMENT OF DISTRIBUTIONS. Partners shall be required to repay
Partnership distributions to the extent provided in the ULPA.
SECTION 3.06. NO INTEREST ON CAPITAL. No Partner shall be entitled to
receive interest from the Partnership on his/her Capital Account.
ARTICLE IV - WITHDRAWAL OF LIMITED PARTNER
SECTION 4.01. WITHDRAWAL OF LIMITED PARTNER. Except as otherwise provided
in Section 4.03 hereof, no Limited Partner shall be permitted to withdraw from
the Partnership until his interest in the Partnership is vested under paragraph
3.01(c) and then only with the approval of the General Partner, which approval
may be withheld if the General Partner does not believe that such withdrawal is
in the best interests of the other Limited Partners, whether because of the cash
position of the Partnership, the undesirability of liquidating any of the
investments of the Partnership, or otherwise. The following provisions shall
govern with respect to any withdrawals approved by the General Partner:
(a) No such withdrawal shall be made except as of the last day of a
fiscal year of the Partnership;
(b) Partial withdrawals shall not be permitted and a Partner desiring
to withdraw must withdraw his/her entire interest in the Partnership;
(c) The Partner desiring to withdraw must notify the General Partner
in writing at least sixty (60) days prior to the close of the fiscal year
in which such Partner wishes to effect his/her withdrawal; and
(d) The General Partner may, if necessary to accommodate a request for
withdrawal by a Limited Partner, attempt to obtain a purchaser of the whole
or a part of such Limited Partner's interest.
SECTION 4.02. LEGAL REPRESENTATIVES. In the event any Limited Partner shall
die or shall be declared incompetent or insane or shall be adjudicated a
bankrupt, the legal representative of such Limited Partner shall upon written
notice to the General
11
<PAGE> 16
Partner of the happening of any of such events become an assignee of such
Limited Partner's interest subject to all of the terms of this Agreement as then
in effect. Such legal representative may not withdraw from the Partnership
except in accordance with Section 4.01. If the General Partner does not approve
withdrawal of the interest of such legal representative, the General Partner
will use its best efforts, without legal obligation, to find another person,
suitable to the General Partner, willing to assume the Partnership interest of
such legal representative.
SECTION 4.03. MANDATORY WITHDRAWAL. Unless the General Partner otherwise
determines, an individual Limited Partner shall be required to withdraw from the
Partnership upon the termination of his/her employment by TAH and its affiliates
prior to the vesting of his/her interest under paragraph 3.01(c), except for a
termination by reason of normal retirement under the employer's policies, death
or disability, and such Limited Partner's Partnership interest shall be
liquidated under Section 4.04 or purchased by the General Partner for retransfer
to substituted Limited Partners under Section 3.01(c)(iii).
SECTION 4.04. LIQUIDATING SHARE. In the event any Limited Partner shall
withdraw or be required to withdraw in accordance with the provisions of this
Article IV, there shall be paid to such Limited Partner or his/her legal
representative within 60 days after the last day of the fiscal year of the
Partnership which constitutes the effective date of withdrawal, an amount equal
to such Partner's positive Capital Account balance as of the effective date of
withdrawal; provided, however, that in the event of a mandatory withdrawal under
Section 4.03, such Partner shall be paid an amount equal to the lesser of (i)
his/her Capital Contribution(s) less distributions paid to such Partner prior to
the withdrawal date, other than distributions paid under Section 3.05(a)(ii), or
(ii) his/her positive Capital Account balance.
SECTION 4.05. CESSATION OF PARTICIPATION. From and after the effective date
of withdrawal of a Partner from the Partnership under this Article IV, no
interest shall be payable on such Partner's interest in the Partnership to the
date of payout.
ARTICLE V - TRANSFER OF PARTNERSHIP INTERESTS
SECTION 5.01. ASSIGNABILITY OF INTERESTS.
(a) Subject to the provisions of Section 4.02 hereof, the interest of
a Limited Partner shall not be assignable without the prior written consent
of the General Partner. No assignment shall be binding upon the Partnership
until the General Partner receives an executed copy of such assignment in
form and substance satisfactory to the General Partner. The assignee of
such interest may become a substituted Limited Partner only upon the terms
and conditions of Sections 5.02 and 9.01.
12
<PAGE> 17
(b) The interest of the General Partner shall not be assignable;
PROVIDED, HOWEVER, that in no event shall the interest of the General
Partner be reduced below a 1% interest in the Capital Accounts of the
Partners and that such interest may be assigned to a successor to all or
substantially all of the business of the General Partner the Voting Control
of which is held by those persons then holding Voting Control of the
General Partner upon (i) the execution by the General Partner of a written
assignment, the execution by the successor of this Agreement, and the
written assumption by the successor of the obligations of the General
Partner hereunder; and (ii) the receipt by the Partnership of an opinion of
counsel that such assignment and assumption will not result in the
Partnership being classified as an association for Federal income tax
purposes. In the event of such assignment, the successor shall become the
General Partner hereunder, and the predecessor and successor General
Partner shall cause the execution of any necessary papers including,
without limitation, an amendment to the Certificate of Limited Partnership
to record the substitution of the successor as General Partner.
SECTION 5.02. SUBSTITUTED LIMITED PARTNERS. No Limited Partner shall have
the right to substitute an assignee as a Limited Partner in his/her place. The
General Partner shall have the right, in its discretion, to admit as a
substituted Limited Partner any person, firm or corporation acquiring a
partnership interest by assignment from another Limited Partner or from the
General Partner. The admission of an assignee as a substituted Limited Partner
shall be conditioned upon the assignee's written assumption of all obligations
of the assigning Limited Partner and execution of this Agreement as a Limited
Partner. Upon acceptance of a substituted Limited Partner, the General Partner
shall forthwith amend the Certificate of Limited Partnership and any other
necessary papers to show the substitution of such assignee in place of the
assigning Limited Partner. The General Partner's failure or refusal to admit an
assignee as a substituted Limited Partner shall not affect the right of such
assignee to receive the share of profits or other distribution or compensation
to which its assignor would otherwise be entitled.
SECTION 5.03. OBLIGATIONS OF ASSIGNEE. Any assignee, irrespective of
whether such assignee has accepted and adopted in writing the terms and
provisions of this Agreement, shall be deemed by the acceptance of such
assignment to have agreed to be subject to the terms and provisions of this
Agreement in the same manner as its assignor.
ARTICLE VI - DURATION AND TERMINATION OF PARTNERSHIP
SECTION 6.01. DURATION. Except as provided in Section 6.03, the Partnership
shall continue for a period of twenty (20) years from and after the date hereof,
provided, however, that with the written consent of the General Partner and
Limited Partners representing at least sixty-six and two-thirds percent
(66 2/3%) of the combined Capital
13
<PAGE> 18
Accounts of all the Limited Partners, the Partnership may be terminated at any
time after its first full fiscal year.
SECTION 6.02. WITHDRAWAL OF LIMITED PARTNER. If any Limited Partner shall
withdraw, die, be declared incompetent or insane, or be adjudicated a bankrupt,
such event shall not cause the dissolution or termination of the Partnership,
and the Partnership shall continue until terminated pursuant to Section 6.01 or
Section 6.03.
SECTION 6.03. WITHDRAWAL OF GENERAL PARTNER.
(a) The General Partner may withdraw at any time after March 22, 2000
by giving 90 days prior written notice to the other Partners. If Limited
Partners whose Capital Accounts constitute in excess of 66 2/3% of all
Capital Accounts consent in writing executed within such 90-day period to
the continuation of the Partnership and elect a new General Partner, the
Partnership shall not terminate but shall continue in existence as though
no such withdrawal or filing had occurred, except that the new General
Partner shall be substituted for the former General Partner. Any Limited
Partner who does not consent to such continuation shall have the right to
withdraw by giving notice within 90 days after having been notified of the
continuation of the Partnership and shall be paid in the manner set forth
in Section 4.04.
(b) In the event that the Limited Partners shall have determined to
continue the Partnership, the former General Partner (or its
representative, successors or assigns) shall become a Limited Partner of
the Partnership upon the effective date of such continuation to the extent
of its then interest in the Partnership as a General Partner. Thereafter,
except as otherwise provided below, such former General Partner (or its
representative) shall be treated as a Limited Partner for all purposes of
this Agreement, shall have all of the rights and obligations of a Limited
Partner hereunder, including the right to receive allocations and
distributions on the same basis as all other Limited Partners, and shall
not be entitled to receive any further allocations or distributions to
which the General Partner is entitled hereunder. Upon becoming a Limited
Partner, such former General Partner's Capital Account and Capital
Commitment shall initially be the same as they were on the effective date
of such continuation. Once the General Partner ceases to be such for
whatever reason and becomes a Limited Partner hereunder, such former
General Partner will no longer be personally liable with respect to
Partnership liabilities arising out of events and transactions occurring
after its termination as General Partner (i.e., its Capital Account will be
debited for its share, if any, as Limited Partner of the losses and
expenses arising out of such liabilities but it will not be required to
make additional contributions to the Partnership to satisfy such
liabilities). However, a former General Partner will remain personally
liable for all Partnership liabilities arising out of events and
transactions occurring prior to such former General Partner's termination
as General Partner (i.e., its Capital Account will be debited its share of
losses and
14
<PAGE> 19
expenses arising out of such liabilities and it will be required to make
additional contributions to the Partnership to the extent of a deficit in
its Capital Account due to such liabilities arising out of events and
transactions occurring prior to its termination).
SECTION 6.04. LIQUIDATION. Upon the termination of the Partnership the
General Partner, or if there be no General Partner, then a person selected by
Limited Partners representing in excess of fifty percent (50%) of the combined
Capital Accounts of all Limited Partners, shall act as the liquidator (or
liquidators) of the Partnership with full power and authority to:
(a) sell, at such prices and upon such terms as the liquidator in its
sole discretion may deem appropriate, any or all of the Securities,
properties and assets of the Partnership, provided that such sales shall
only be made for cash and, when possible, consummated within ninety (90)
days after the date of termination; and provided further that the
liquidator shall not deal directly or indirectly with the Partnership for
its own account without the approval in writing of all of the Limited
Partners; and
(b) within ninety (90) days after the date of termination or as soon
thereafter as possible, effect distribution of the properties and assets of
the Partnership in cash or in kind in the manner set forth in Section 6.05.
SECTION 6.05. DISTRIBUTION UPON TERMINATION. Upon liquidation of the
Partnership, the assets of the Partnership remaining after the payment, or
reasonable provision therefor, of all Partnership liabilities (and the
establishment of reasonable reserves for contingent liabilities) shall be
distributed to the Partners in proportion to and to the extent of the positive
balances of their respective Capital Accounts. This Section 6.05 is intended to
comply with the requirements of Treasury Regulations Section
1.704-1(b)(2)(ii)(b)(2) and shall be interpreted and applied in a manner
consistent therewith.
ARTICLE VII - REPORTS TO PARTNERS
SECTION 7.01. FINANCIAL RECORDS. The General Partner shall keep books of
account in which shall be entered fully and accurately the transactions of the
Partnership and financial records appropriate to the business of the
Partnership.
SECTION 7.02. ANNUAL REPORTS. Within one hundred twenty (120) days after
the end of each fiscal year and upon liquidation of the Partnership, the General
Partner shall prepare and mail to each Partner and to each former Partner who
withdrew during the applicable fiscal year or its legal representative, a report
stating in sufficient detail such transactions effected by the Partnership
during such fiscal year as shall enable such
15
<PAGE> 20
Partner or former Partner or the legal representative of such former Partner to
prepare its respective income tax returns, including:
(a) such Partner's Capital Account balance as of the close of such
fiscal year;
(b) the sum of the Capital Account balances as of such date of all the
Partners;
(c) statement of assets and liabilities of the Partnership;
(d) profit and loss statement;
(e) statement of holdings of Securities of the Partnership;
(f) a description of the nature of each of the Partnership's
investments, the cost thereof and the valuation thereof established
pursuant to Article VIII; and
(g) such other financial information and documents as the General
Partner deems appropriate, as a Limited Partner may reasonably request, or
as is required by this Agreement and any amendments hereto.
SECTION 7.03. INSPECTION. A Limited Partner shall have the right at
reasonable times to inspect the books and records of the Partnership and to
discuss its affairs with the agents of the General Partner.
SECTION 7.04. TAX RETURNS. The General Partner will file all Federal, state
or other income tax returns required of the Partnership and will supply to each
Limited Partner such Partner's Form K-1 submitted with the Partner's Federal
tax return. Upon the request of any Partner, subject to the approval of the
General Partner, the Partnership shall elect, pursuant to Code Section 754, to
adjust the basis of Partnership property as permitted and provided in Code
Sections 734 and 743.
ARTICLE VIII - VALUATION
SECTION 8.01. VALUATION OF PARTNERSHIP NET WORTH. In determining the net
worth of the Partnership, the value of any Partnership asset, the Capital
Accounts of the Partners, the value of any distribution, or in determining value
for any other purpose under this Agreement, the provisions of this Article VIII
shall apply.
SECTION 8.02. VALUATION DATE. Valuation shall be determined by the
General Partner as of the close of business on the Market Day preceding the last
day of each fiscal year of the Partnership or as of the close of business on the
date with respect to
16
<PAGE> 21
which valuation is to be taken, or if such day is not a Market Day, then on the
Market Day next preceding such date, as the case may be. A Market Day shall be a
day on which the New York Stock Exchange is open for regular trading. If a
valuation is taken other than in connection with the annual reports described in
Section 7.02, the General Partner shall give notice of such valuation to the
Limited Partners promptly after it is determined.
SECTION 8.03. VALUING SECURITIES AND OTHER ASSETS. The following provisions
shall apply in valuing the assets of the Partnership:
(a) Listed Securities which are not restricted as to saleability or
transferability shall be valued at the closing price as of the Valuation
Date. If any listed Security was not traded on such date, then the mean of
the closing high bid and low asked prices as of the close of business on
such date shall be used.
(b) Unlisted securities which are readily marketable shall be valued
at the mean of the closing bid and asked prices as of the Valuation Date.
(c) Securities, whether listed or unlisted, for which market
quotations are available, but which are restricted as to saleability or
transferability, shall be valued as provided in (a) and (b) above, less a
discount of from ten percent (10%) to twenty-five percent (25%) of the
value thereof as determined in good faith by the General Partner. In
determining the amount of such discount the General Partner shall give
consideration to the nature and length of such restriction and the relative
volatility of the market price of such Security.
(d) Securities for which market quotations are not readily available
and all other assets of the Partnership shall be valued at a fair value as
determined in good faith by the General Partner.
(e) Interests in other partnerships shall be valued by each
partnership at the times and upon the terms provided in its partnership
agreement unless the General Partner of this Partnership otherwise
determines.
(f) Liabilities shall include, in addition to those recorded on the
books of the Partnership, such other accrued or contingent liabilities as
shall be determined in accordance with generally accepted accounting
principles.
(g) In determining the value of the interest of any Partner in the
Partnership, neither the goodwill nor the right to use the firm name or
trade name of the Partnership shall be considered as an asset of the
Partnership.
ARTICLE IX - MISCELLANEOUS
17
<PAGE> 22
SECTION 9.01. ADMISSION OF LIMITED PARTNERS. Except as provided in this
Section, no new Limited Partner shall be admitted to the Partnership and no
additional contribution of capital by a Limited Partner to the Partnership shall
be accepted.
(a) ADDITIONAL LIMITED PARTNERS. Additional Limited Partners may be
admitted in the discretion of the General Partner as of the first day of
July or the first day of January of any year and the interest of such
additional Limited Partner in the Partnership shall be established by
creating a Capital Account for such additional Limited Partner as of that
day in an amount equal to the contribution made by such additional Limited
Partner to the Partnership.
(b) SUBSTITUTED LIMITED PARTNERS. Substituted Limited Partners may
also be admitted in the discretion of the General Partner by assignment or
transfer of the interest of a Limited Partner or the General Partner in
accordance with Article V or Sections 3.01(c)(iii), 4.01(d) or 4.02, in
which case the substituted Limited Partner will take over the Capital
Account of his assignor or transferor.
(c) PROCEDURE. The admission of a new Limited Partner, whether an
additional Limited Partner or a substituted Limited Partner, shall be
accomplished in accordance with the following procedures: Each Limited
Partner so admitted shall (i) sign a counterpart copy of this Agreement,
which shall be accepted by its execution by the General Partner, as well as
any other documents required by the General Partner, and (ii) make
payment of his/her Capital Commitment, or purchase price in the case of a
substituted Limited Partner, as determined by the General Partner, and
(iii) an amendment to the Partnership's Certificate of Limited Partnership
shall be filed to reflect such addition. Each such new Limited Partner
shall thereafter be entitled to and subject to all the rights and
liabilities of Limited Partners as set forth herein.
SECTION 9.02. DISPUTED MATTERS. Any controversy or dispute out of this
Agreement, interpretation of any of the provisions hereof, or the actions of the
General or Limited Partners hereunder shall be submitted to arbitration before
the National Association of Securities Dealers, Inc. ("NASD") under the rules
then obtaining of the NASD. If the NASD refuses to accept jurisdiction of the
matter, then the dispute shall be submitted to arbitration before the American
Arbitration Association under the rules then obtaining of said Association. Any
such arbitration shall be held in Boston, Massachusetts, and judgment upon any
award thus obtained may be entered in any court having jurisdiction thereof. In
any such arbitration each party to the arbitration shall bear its own expenses,
including expenses of attorneys, financial experts and other witnesses; and any
arbitration fees and expenses of the arbitrators shall be divided equally
between the disputing parties.
SECTION 9.03. PAYMENTS IN KIND. In the event the Partnership is required or
elects to make a payment or other distribution to or on behalf of any Partner or
to the legal representative, liquidator, or receiver of any deceased,
incompetent, insane or
18
<PAGE> 23
bankrupt Partner, the General Partner may (but shall not be obligated to) make
such payment or distribution, either wholly or partially, in Securities or other
property of the Partnership. The amount of any such payment or distribution
shall be deemed to be equal to the value of such securities or other property,
as determined under Article VIII, as of the effective date of their distribution
to or on behalf of the Partner or the Partner's legal representatives and the
decisions of the General Partner with respect to in-kind payments, including
decisions with respect to selection, apportionment and valuation of Securities
or other property, shall be conclusive and binding upon all Partners.
SECTION 9.04. GENERAL. This Agreement: (a) shall be binding on the
executors, administrators, estates, heirs and legal successors of the Partners;
(b) shall be governed by and construed in accordance with the laws of the
Commonwealth of Massachusetts; (c) may be executed in more than one counterpart
as of the day and year first above written; provided, however, that each
separate counterpart shall have been executed by the General Partner; and (d)
contains the entire Agreement among the Partners relating to the subject matter
hereof. The waiver of any of the provisions, terms or conditions contained in
this Agreement shall not be considered as a waiver of any of the other
provisions, terms or conditions hereof.
SECTION 9.05. NOTICES.
(a) TO THE PARTNERS. Any notice to be given hereunder by the
Partnership to any Partner shall be in writing and signed by the General
Partner. Any such notice shall be conclusively deemed to have been given if
either delivered in person to such Partner or mailed by registered or
certified mail to such Partner at such Partner's address set forth in
Exhibit A. Any Partner may change their address for notice by written
notice to the Partnership.
(b) TO THE PARTNERSHIP. Any notice to be given hereunder to the
Partnership shall be in writing and signed by the Partner giving notice.
Any such notice shall be conclusively deemed to have been given if
delivered in person or mailed by registered or certified mail, postage
prepaid to the General Partner at its address set forth in Exhibit A, or
such other address as the General Partner may from time to time designate
by notice to all Partners.
SECTION 9.06. EXECUTION OF CERTIFICATE OF LIMITED PARTNERSHIP AND OTHER
DOCUMENTS. The General Partner agrees to prepare and file and the Partners agree
to execute a certificate of limited partnership, any amendments thereto, and
such other instruments, documents and papers as the General Partner deems
necessary or appropriate to carry out the intent of this Agreement, and to take
such other action as the General Partner deems appropriate to maintain the
Partnership's status as a Limited Partnership under the ULPA.
19
<PAGE> 24
SECTION 9.07. FORCE MAJEURE. Whenever any act or thing is required of the
Partnership hereunder within any specified period of time, the Partnership shall
be entitled to such additional period of time to do such acts or things as shall
equal any period of delay resulting from causes beyond the reasonable control of
the Partnership, including, without limitation, bank holidays, actions of
governmental agencies, closing the New York Stock Exchange at times other than
normal closing dates, and financial crises of a nature materially affecting the
purchase and sale of Securities.
SECTION 9.08. AMENDMENTS. Except as otherwise specifically provided herein,
the terms and provisions of this Agreement may be modified or amended at any
time and from time to time only with the written consent of (1) the General
Partner and (2) Limited Partners (excluding TAH) representing in excess of fifty
percent (50%) of the combined Capital Accounts of all Limited Partners insofar
as is consistent with the laws governing this Agreement; provided, however, that
without the specific written consent of each Partner adversely affected thereby
no such modification or amendment shall (i) increase the obligation of a Limited
Partner beyond that set forth in Section 1.04, (ii) reduce the Capital Account
of any Partner or its rights to distribution and withdrawal with respect
thereto; or (iii) amend Section 1.05 to permit Partnership activities which
would subject a Limited Partner to Federal or state taxation which such Partner
would not be subject to in the absence of such activity. Without unanimous
consent no amendment or modification may be made (x) which would cause the
Partnership to cease to be a Limited Partnership under applicable state law or
(y) which would amend this Section 9.08.
SECTION 9.09. HEADINGS. Article, Section, Paragraph and Subparagraph
headings are for convenience of reference only, and are not part of this
Agreement, and shall not be considered in interpreting this Agreement.
SECTION 9.10. POWER OF ATTORNEY. Each Limited Partner does hereby
constitute and appoint John H. Goldsmith, Kevin J. McKay and Dennis O'Connor and
each of them, its true and lawful representative, in its name, place and stead,
to make, execute, sign, acknowledge, deliver and file all such instruments,
documents and certificates which may from time to time be required by the laws
of the United States of America, the Commonwealth of Massachusetts, or any other
state in which the Partnership shall determine to do business, or any political
subdivision or agency thereof, to effectuate, implement and continue the valid
and subsisting existence of the Partnership, including, without limitation, a
Certificate of Limited Partnership and amendments thereto and any such
certificate or amendment filed for the purpose of admitting the undersigned as
Limited Partners of the Partnership.
20
<PAGE> 25
IN WITNESS WHEREOF, the General Partner and the Limited Partners have
hereunto set their hands and seals as of the date first set forth above.
GENERAL PARTNER
---------------
Tucker Anthony Holding Corporation
By: _________________________________
LIMITED PARTNER
---------------
_____________________________________
_____________________________________
(Print Name)
S.S.#________________________________
Allocation Accepted: $
===============
STATE OF )
) ss.
COUNTY OF )
Then personally appeared before me _____________, known to me, and
acknowledged the same to be his/her free act and deed.
_____________________________________
Notary
21
<PAGE> 26
EXHIBIT A
---------
GENERAL PARTNER
Capital
Name Address Contribution
- ---- ------- ------------
Tucker Anthony Holding One Beacon Street 1% of total
Corporation Boston, MA 02109 Capital as
General
Partner
LIMITED PARTNERS
Capital
Name Address Contribution
- ---- ------- ------------
$_______
<PAGE> 1
Exhibit 10.43
OPERATING AGREEMENT
FOR
SUTRO INVESTMENT PARTNERS V, LLC,
A DELAWARE LIMITED LIABILITY COMPANY
THE SECURITY WHICH IS THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN
REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), IN RELIANCE UPON THE EXEMPTION FROM
REGISTRATION PROVIDED BY RULE 506 PROMULGATED UNDER THE ACT, AND THIS SECURITY
HAS NOT BEEN REGISTERED OR QUALIFIED UNDER THE STATE SECURITIES LAWS OF ANY
RELEVANT JURISDICTION IN WHICH THIS SECURITY HAS BEEN OFFERED AND SOLD PURSUANT
TO AN APPLICABLE EXEMPTION THEREFROM. IT IS UNLAWFUL TO CONSUMMATE A SALE OR
TRANSFER OF THIS SECURITY WITHOUT PROVIDING THE MANAGERS WITH AN OPINION OF
COUNSEL TO THE EFFECT THAT A PROPOSED TRANSFER OR SALE THIS SECURITY (i) DOES
NOT AFFECT THE ORIGINAL ISSUANCE AND SALE OF SECURITIES IN THE COMPANY PURSUANT
TO THE EXEMPTIONS FROM REGISTRATION PROVIDED BY RULE 506 UNDER THE ACT AND
PURSUANT TO ANY APPLICABLE STATE EXEMPTION FROM REGISTRATION AND QUALIFICATION
RELIED UPON BY THE MANAGER AND (ii) IS IN COMPLIANCE WITH ALL APPLICABLE STATE
OR FEDERAL SECURITIES LAWS.
THE SALE, TRANSFER OR OTHER DISPOSITION OF THE SECURITY WHICH IS THE
SUBJECT OF THIS AGREEMENT OR ANY INTEREST THEREIN IS SUBJECT TO CERTAIN
RESTRICTIONS SET FORTH IN ARTICLE VII OF THIS AGREEMENT.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I - DEFINITIONS................................................................................... 1
1.1 "Act"................................................................................... 1
1.2 "Affiliate"............................................................................. 1
1.3 "Agreement"............................................................................. 1
1.4 "Articles".............................................................................. 1
1.5 "Assignee".............................................................................. 1
1.6 "Bankruptcy"............................................................................ 1
1.7 "Capital Account"....................................................................... 2
1.8 "Capital Contribution".................................................................. 3
1.9 "Code".................................................................................. 3
1.10 "Company"............................................................................... 3
1.11 "Company Minimum Gain".................................................................. 3
1.12 "Depreciation".......................................................................... 3
1.13 "Determination Date".................................................................... 3
1.14 "Dissolution Event"..................................................................... 3
1.15 "Economic Interest"..................................................................... 3
1.16 "Fiscal Period"......................................................................... 4
1.17 "Fiscal Year"........................................................................... 4
1.18 "Gross Asset Value"..................................................................... 4
1.19 "Interest".............................................................................. 5
1.20 "Majority Interest"..................................................................... 5
1.21 "Manager"............................................................................... 5
1.22 Reserved................................................................................ 5
1.23 "Member"................................................................................ 5
1.24 "Membership Interest"................................................................... 6
1.25 "Nonmanager Member"..................................................................... 6
1.26 "Percentage Interest"................................................................... 6
1.27 "Person"................................................................................ 6
1.28 "Profits" and "Losses".................................................................. 6
1.29 "Regulations"........................................................................... 7
1.30 "Remaining Members"..................................................................... 7
1.31 "Sutro"................................................................................. 7
1.32 "Tax Matters Partner"................................................................... 7
1.33 "Targeted Investment"................................................................... 7
ARTICLE II - ORGANIZATIONAL MATTERS....................................................................... 7
2.1 Formation............................................................................... 7
2.2 Name.................................................................................... 7
2.3 Term.................................................................................... 7
2.4 Office and Agent........................................................................ 7
A. Principal Office............................................................... 7
B. Registered Office.............................................................. 8
C. Other Jurisdictions............................................................ 8
</TABLE>
2
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
2.5 Purpose and Business of the Company..................................................... 8
ARTICLE III - CAPITAL CONTRIBUTIONS....................................................................... 8
3.1 Capital Contributions of the Manager.................................................... 8
3.2 Capital Contributions of Nonmanager Members............................................. 8
3.3 Timing; Other Contributions............................................................. 8
3.4 Failure to Make Contributions........................................................... 8
3.5 No Interest............................................................................. 10
ARTICLE IV - MEMBERS...................................................................................... 10
4.1 Limitations on Liability of Members..................................................... 10
4.2 Liability of Members to the Company..................................................... 10
A. Liability of Members to the Company............................................ 10
B. Member as Trustee for the Company.............................................. 10
C. Waiver of Liability of Member.................................................. 10
4.3 Admission of Additional Members......................................................... 11
4.4 Withdrawals............................................................................. 11
4.5 Transactions With The Company........................................................... 11
4.6 Remuneration To Members................................................................. 11
4.7 Members Are Not Agents.................................................................. 11
4.8 Voting Rights........................................................................... 11
4.9 Meetings of Members..................................................................... 11
A. Date, Time and Place of Meetings of Members; Secretary......................... 11
B. Power to Call Meetings......................................................... 11
C. Notice of Meeting.............................................................. 11
D. Manner of Giving Notice; Affidavit of Notice................................... 12
E. Validity of Action............................................................. 12
F. Quorum......................................................................... 12
G. Adjourned Meeting; Notice...................................................... 12
H. Waiver of Notice or Consent.................................................... 13
I. Action by Written Consent without a Meeting.................................... 13
J. Telephonic Participation by Member at Meetings................................. 13
K. Record Date.................................................................... 14
L. Proxies........................................................................ 14
4.10 Certificate of Membership Interest...................................................... 14
ARTICLE V - MANAGEMENT AND CONTROL OF THE COMPANY......................................................... 15
5.1 Management of the Company by Manager.................................................... 15
5.2 Resignation and Removal of Manager...................................................... 15
5.3 Powers of Managers...................................................................... 15
A. Powers of Managers............................................................. 15
B. Limitations on Power of Managers............................................... 15
5.4 Performance of Duties; Liability of Manager............................................. 16
</TABLE>
3
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
5.5 Payments to Managers.................................................................... 17
5.6 Limited Liability....................................................................... 17
5.7 Membership Interests of Manager......................................................... 17
ARTICLE VI - ALLOCATIONS OF PROFITS AND LOSSES; DISTRIBUTIONS............................................. 17
6.1 Capital Accounts........................................................................ 17
6.2 Allocations............................................................................. 18
A. Profits and Losses............................................................. 18
B. Recapture...................................................................... 18
6.3 Special Capital Account Allocations..................................................... 18
A. Section 704 Allocations........................................................ 18
B. Tax Allocations................................................................ 18
C. Other Allocation Rules......................................................... 19
D. Provisional Allocation......................................................... 19
6.4 Withdrawals from Capital Accounts....................................................... 20
6.5 Distributions........................................................................... 20
6.6 Form of Distribution.................................................................... 20
6.7 Restriction on Distribution............................................................. 20
A. Limitation..................................................................... 20
B. Liability for Return........................................................... 20
C. Limitation on Liability........................................................ 21
6.8 Returned Distributions.................................................................. 21
6.9 Obligations of Members to Report Allocations............................................ 21
ARTICLE VII - TRANSFER AND ASSIGNMENT OF INTERESTS........................................................ 21
7.1 Transfer and Assignment of Interests.................................................... 21
7.2 Further Restrictions on Transfer of Interests........................................... 21
7.3 Substitution of Members................................................................. 22
7.4 Permitted Transfers..................................................................... 22
7.5 Effective Date of Permitted Transfers................................................... 22
7.6 Rights of Legal Representatives......................................................... 22
7.7 No Effect to Transfers in Violation of Agreement........................................ 22
ARTICLE VIII - CONSEQUENCES OF DISSOLUTION EVENTS......................................................... 23
ARTICLE IX - ACCOUNTING, RECORDS, REPORTING BY MEMBERS.................................................... 23
9.1 Books and Records....................................................................... 23
9.2 Delivery to Members and Inspection...................................................... 24
A. Delivery of Information........................................................ 24
B. Inspection and Copying......................................................... 24
C. Right to Request............................................................... 24
D. Copies of Amendments........................................................... 24
9.3 Annual Statements....................................................................... 24
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A. Delivery of Statements......................................................... 24
B. Tax Information................................................................ 24
9.4 Company Accounts........................................................................ 25
9.5 Accounting Decisions and Reliance on Others............................................. 25
9.6 Tax Matters for the Company Handled by Manager and Tax Matters Partner.................. 25
ARTICLE X - DISSOLUTION AND WINDING UP.................................................................... 25
10.1 Dissolution............................................................................. 25
10.2 Certificate of Dissolution.............................................................. 25
10.3 Winding Up.............................................................................. 26
10.4 Distributions in Kind................................................................... 26
10.5 Order of Payment Upon Dissolution....................................................... 26
10.6 Limitations on Payments Made in Dissolution............................................. 26
10.7 Certificate of Cancellation............................................................. 26
ARTICLE XI - INDEMNIFICATION.............................................................................. 26
11.1 Indemnification......................................................................... 26
11.2 Successors and Assigns; Limitations..................................................... 27
ARTICLE XII - COMPETING ACTIVITIES........................................................................ 27
ARTICLE XIII - MISCELLANEOUS.............................................................................. 28
13.1 Counsel to the Company.................................................................. 28
13.2 Complete Agreement...................................................................... 28
13.3 Binding Effect.......................................................................... 29
13.4 Parties in Interest..................................................................... 29
13.5 Pronouns; Statutory References.......................................................... 29
13.6 Headings................................................................................ 29
13.7 Interpretation.......................................................................... 29
13.8 References to this Agreement............................................................ 29
13.9 Jurisdiction; Arbitration............................................................... 29
13.10 Exhibits................................................................................ 30
13.11 Severability............................................................................ 30
13.12 Additional Documents and Acts........................................................... 30
13.13 Notices................................................................................. 30
13.14 Amendments.............................................................................. 30
13.15 Reliance on Authority of Person Signing Agreement....................................... 31
13.16 No Interest in Company Property; Waiver of Action for Partition......................... 31
13.17 Multiple Counterparts................................................................... 31
13.18 Attorney Fees........................................................................... 31
13.19 Remedies Cumulative..................................................................... 31
13.20 Power of Attorney....................................................................... 31
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OPERATING AGREEMENT
FOR
SUTRO INVESTMENT PARTNERS V, LLC
A DELAWARE LIMITED LIABILITY COMPANY
This Operating Agreement is made as of March 19, 1998, by and among THE
SUTRO GROUP, a Nevada corporation, and those persons who, themselves or by
attorney-in-fact, have executed this Agreement and been admitted as Members in
accordance with the provisions hereof. The parties by this Agreement set forth
the operating agreement for the limited liability company being organized by
them under the laws of the State of Delaware upon the terms and subject to the
conditions of this Agreement.
ARTICLE I
DEFINITIONS
When used in this Agreement, the following terms shall have the
meanings set forth below (all terms used in this Agreement that are not defined
in this Article I shall have the meanings set forth elsewhere in this
Agreement):
I.1 "ACT" shall mean the Delaware Limited Liability Company Act,
as the same may be amended from time to time.
I.2 "AFFILIATE" of a Member or Manager shall mean any Person,
directly or indirectly, through one or more intermediaries, controlling,
controlled by, or under common control with a Member or Manager, as applicable.
The term "control," as used in the immediately preceding sentence, shall mean
with respect to a corporation or limited liability company the right to
exercise, directly or indirectly, more than fifty percent (50%) of the voting
rights attributable to the controlled corporation or limited liability company,
and, with respect to any individual, partnership, trust, other entity or
association, the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of the controlled entity.
I.3 "AGREEMENT" shall mean this Operating Agreement, as
originally executed and as amended from time to time.
I.4 "ARTICLES" shall mean the Certificate of Formation for the
Company originally filed with the Delaware Secretary of State and as amended
from time to time.
I.5 "ASSIGNEE" shall mean the owner of an Economic Interest who
has not been admitted as a substitute Member in accordance with Article VII.
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I.6 "BANKRUPTCY" shall mean: (a) the filing of an application by
a Manager for, or his or her consent to, the appointment of a trustee, receiver,
or custodian of his or her other assets; (b) the entry of an order for relief
with respect to a Manager in proceedings under the United States Bankruptcy
Code, as amended or superseded from time to time; (c) the making by a Manager of
a general assignment for the benefit of creditors; (d) the entry of an order,
judgement, or decree by any court of competent jurisdiction appointing a
trustee, receiver, or custodian of the assets of a Manager unless the
proceedings and the person appointed are dismissed within ninety (90) days; or
(e) the failure by a Manager generally to pay his or her debts as the debts
become due within the meaning of Section 303(h)(1) of the United States
Bankruptcy Code, as determined by the Bankruptcy Court, or the admission in
writing of his or her inability to pay his or her debts as they become due.
I.7 "CAPITAL ACCOUNT" shall mean with respect to any Member the
individual Capital Account that shall be established and maintained for each
Member and for each Capital Contribution of each Member in accordance with the
following provisions:
(a) To each Capital Account of a Member there shall be
credited such Member's related Capital Contribution, such Member's share of
Profit with respect thereto, any items in the nature of income or gain that are
specifically allocated thereto pursuant to this Agreement and the amount of any
Company liabilities that are personally assumed by such Member or that are
secured by any Company property distributed to such Member with respect thereto;
(b) To each Capital Account of a Member, there shall be
debited the amount of cash and the Gross Asset Value of any Company property
distributed to such Member pursuant to any provision of this Agreement with
respect thereto, such Member's share of Loss with respect thereto, any items in
the nature of expenses or loss that are specifically allocated thereto pursuant
to this Agreement and the amount of any liabilities of such Member that are
assumed by the Company or that are secured by any property contributed by such
Member to the Company with respect thereto;
(c) In determining the amount of any liability, there
shall be taken into account Code Section 752(c) and any other applicable
provisions of the Code and Regulations;
(d) If any interest in the Company is transferred in
accordance with this Agreement, the transferee shall succeed to the Capital
Accounts of the transferor to the extent that they relate to the transferred
interest.
(e) If the Gross Asset Values of Company assets are
adjusted pursuant to this Agreement, the respective Capital Accounts of all
Members shall be adjusted simultaneously to reflect the aggregate net adjustment
as if the Company were to have recognized gain or loss equal to the amount of
such aggregate net adjustment.
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(f) The foregoing provisions and other provisions of this
Agreement relating to the maintenance of Capital Accounts are intended to comply
with Regulations Section 1.704-1(b), and shall be interpreted and applied in a
manner consistent therewith. If the Manager determines that it is prudent to
modify the manner in which the Capital Accounts, or any debits or credits
thereto, are computed in order to comply with Regulations Section 1.704-1(b),
the Manager may make such modification if it is not likely to have a material
adverse effect on amounts distributable to any Member pursuant hereto on the
dissolution of the Company. The Manager shall adjust the amounts debited or
credited to Capital Accounts with respect to any property contributed to the
Company or distributed to a Member and any liabilities secured by such
contributed or distributed property or assumed by the Company or Member in
connection with such contribution or distribution if the Manager determines that
such adjustments are necessary or appropriate under Regulations Section
1.704-1(b)(2)(iv). The Manager shall also make any appropriate modifications if
unanticipated events might cause this Agreement not to comply with Regulations
Section 1.704-1(b), and the Manager shall make all elections provided for under
such Regulations.
I.8 "CAPITAL CONTRIBUTION" of a Member shall mean the total amount
of cash and the initial Gross Asset Value of property contributed to the capital
of the Company by such Member.
I.9 "CODE" shall mean the Internal Revenue Code of 1986, as
amended from time to time, the provisions of succeeding law, and to the extent
applicable, the Regulations.
I.10 "COMPANY" shall mean Sutro Investment Partners V, LLC, a
Delaware limited liability company.
I.11 "COMPANY MINIMUM GAIN" shall have the meaning ascribed to the
term "Partnership Minimum Gain" in the Regulations Section 1.704-2(d).
I.12 "DEPRECIATION" shall mean, for each Fiscal Year or other
Fiscal Period, an amount equal to the depreciation, amortization or other cost
recovery deduction allowable with respect to an asset for such Year or other
Period, except that if the Gross Asset Value of an asset differs from its
adjusted basis for Federal income tax purposes at the beginning of such Year or
other Period, Depreciation shall be an amount which bears the same ratio to such
beginning Gross Asset Value as the Federal income tax depreciation, amortization
or other cost recovery deduction for such Year or other Period bears to such
beginning adjusted tax basis.
I.13 "DETERMINATION DATE" shall mean the date as of which the value
or amount of Company assets and/or liabilities is to be determined.
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I.14 "DISSOLUTION EVENT" shall mean with respect to any Manager,
one or more of the following: the death, insanity, withdrawal, resignation,
retirement, removal, expulsion, Bankruptcy or dissolution of any such Manager.
I.15 "ECONOMIC INTEREST" shall mean the right to receive
distributions of the Company's assets and allocations of Profit and Loss and
similar items from the Company pursuant to this Agreement and the Act, but shall
not include any other rights of a Member, including, without limitation, the
right to vote or participate in the management of the Company, or except as
provided in the Act, any right to information concerning the business and
affairs of the Company.
I.16 "FISCAL PERIOD" shall mean each period commencing (i) on the
first day of each calendar year, (ii) on the date of any Capital Contribution,
and (iii) on each date next following the date of any withdrawal from a Capital
Account, and the prior Fiscal Period, if any, shall terminate on the day
immediately preceding the day on which a new Fiscal Period commences.
I.17 "FISCAL YEAR" shall mean the period from January 1 through the
succeeding December 31 or, if earlier, the date of dissolution and termination
of the Company.
I.18 "GROSS ASSET VALUE" shall mean, with respect to any asset, the
asset's adjusted basis for Federal income tax purposes, except as follows:
(a) The initial Gross Asset Value of any asset
contributed by a Member to the Company shall be the gross fair market value of
such asset, determined as provided in Paragraph 1.18(f) below;
(b) The Gross Asset Value of all Company assets shall be
adjusted to equal their respective gross fair market values, determined as
provided in Paragraph 1.18(f) below, as of the following times: (i) on the
acquisition of an additional interest in the Company by any new or existing
Member in exchange for more than a DE MINIMIS Capital Contribution; (ii) on the
distribution by the Company to a Member of more than a DE MINIMIS amount of
Company property, unless all Members receive simultaneous distributions of
undivided interests in the distributed property in proportion to their
respective Percentage Interests; (iii) on the last day of each Fiscal Period;
and (iv) on a liquidation within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g);
(c) The Gross Asset Value of any Company property
distributed to any Member shall be the gross fair market value of such Company
property, determined as provided in Paragraph 1.18(f) below;
(d) The Gross Asset Value of any Company property shall
be increased (or decreased) to reflect any adjustments to the adjusted basis of
such Company property pursuant to Code Section 734(b) or 743(b), but only to the
extent that such
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adjustments are taken into account in determining Capital Accounts pursuant to
Regulations Section 1.704-1(b)(2)(iv)(m); provided that Gross Asset Values shall
not be so adjusted to the extent that the Manager determines that an adjustment
pursuant to Paragraph 1.18(b) is necessary or appropriate in connection with a
transaction that would otherwise result in an adjustment pursuant to this
Paragraph 1.18(d); and
(e) If the Gross Asset Value of an asset has been
determined or adjusted pursuant hereto, such Gross Asset Value shall thereafter
be adjusted by the Depreciation taken into account with respect to such asset
for purposes of computing Profit and Loss, and Capital Accounts shall be
adjusted in accordance with Regulations Section 1.704-1(b)(2)(iv)(g) and the
Members' distributive shares of depreciation, depletion, amortization, gains and
net loss for tax purposes with respect to such property shall be determined to
take account of the variation between the adjusted tax basis and the Gross Asset
Value of such property in the same manner as under Code Section 704(c).
(f) Whenever the "value,""fair value" or "fair market
value" of Company property is to be determined, such "value" shall be
determined, and the assets and liabilities of the Company shall be valued, on
the following basis:
(i) Marketable securities listed on national
securities exchanges or reported in the National Market System will be valued at
the last sale price on the stock exchange or market on which the security is
traded on the Determination Date or, if the security is traded on more than one
stock exchange or market on the Determination Date, at the last sale price on
the exchange or market on which such securities are principally traded on that
Date; in the absence of a sale on such Date, such securities will be valued at
the average of the closing high bid and low ask prices on such exchange or
market on the Determination Date.
(ii) Marketable securities not so traded will be
valued at the last bid prices, reported by NASDAQ in the case of securities
quoted on NASDAQ, or by the National Quotations Bureau, Inc. in the case of any
other such securities.
(iii) Short term money market instruments and
bank deposits will be valued at cost plus reported interest to date.
(iv) All other assets and liabilities of the
Company will be valued at the fair value thereof as determined in good faith by
the Manager. In addition, and notwithstanding (i) and (ii) above, valuations of
portfolio securities which are restricted as to saleableness or transferability
will be effected as provided in (i) and (ii), above, less a discount of from ten
percent (10%) to twenty-five percent (25%) of the value thereof as determined in
good faith by the Manager based on the volatility of the security involved and
the nature and length of the restriction. In addition, interests in other
partnerships or companies such as the Company shall be valued by such
partnership or company at the
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times and upon the terms and conditions provided in the partnership or operating
agreement thereof, unless otherwise determined by the Manager.
(v) If the Determination Date is not a business
day, values as of the close of business on the last business day preceding such
Date may be used. All determinations of values will, except as provided above,
be accomplished by the Manager, whose determination thereof shall be conclusive
and binding.
I.19 "INTEREST" shall mean any membership interest in the
Company.
I.20 "MAJORITY INTEREST" shall mean those Members who hold
two-thirds of the Percentage Interests which all Members hold.
I.21 "MANAGER" shall mean and refer to Sutro, as well as to any
other person that succeeds any such person as a manager of the Company.
I.22 Reserved.
I.23 "MEMBER" shall mean each Person who is an initial signatory
to this Agreement or has been admitted to the Company as a Member in accordance
with the Articles or this Agreement (including an Assignee who has become a
Member in accordance with Article VII), and (a) has not ceased to be a Member
for other reason, and the term includes each Manager who is a Member.
I.24 "MEMBERSHIP INTEREST" shall mean a Member's entire interest
in the Company including the Member's Economic Interest, any right to vote, and
the right to receive information concerning the business and affairs of the
Company.
I.25 "NONMANAGER MEMBER" shall mean any Member that is not also a
Manager.
I.26 "PERCENTAGE INTEREST" shall mean for each Member or Economic
Interest Owner as of a given date, the ratio of such Member's Capital Account to
the Capital Accounts of all Members as of such date.
I.27 "PERSON" shall mean an individual, partnership, limited
partnership, limited liability company, corporation, trust, estate, association
or any other entity.
I.28 "PROFITS" and "LOSSES" shall mean, for each Fiscal Year or
Fiscal Period, an amount equal to the Company's taxable income or loss for such
Fiscal Year or Fiscal Period, determined in accordance with Code Section 703(a)
(for this purpose, all items of income, gain, loss or deduction required to be
stated separately pursuant to Code Section 703(a)(1) shall be included in
taxable income or loss), with the following adjustments:
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(a) Any income of the Company that is exempt from
Federal income tax and not otherwise taken into account in computing Profit or
Loss pursuant to this Section 1.28 shall be added to such taxable income or
loss;
(b) Any expenditures of the Company described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken
into account in computing Profit and Loss pursuant to this Section 1.28 shall be
subtracted from such taxable income or loss;
(c) If the Gross Asset Value of any company asset is
adjusted pursuant to Paragraphs 1.18(b) or 1.18(d), the amount of such
adjustment shall be taken into account as gain or loss from the disposition of
such asset for purposes of computing Profit and Loss;
(d) Gain or loss resulting from any disposition of
Company property with respect to which gain or loss is recognized for Federal
income tax purposes shall be computed by reference to the Gross Asset Value of
the Company property disposed of, notwithstanding that the adjusted tax basis of
such property differs from its Gross Asset Value;
(e) In lieu of the depreciation, amortization and other
cost recovery deductions taken into account in computing such taxable income or
loss, there shall be taken into account Depreciation for such Fiscal Year or
Fiscal Period, computed in accordance with Section 1.12; and
(f) Notwithstanding any other provision of this Section
1.28, any items that are specially allocated pursuant to Paragraphs 6.3A, 6.3B
or 6.3D shall not be taken into account in computing Profit and Loss.
I.29 "REGULATIONS" shall, unless the context clearly indicates
otherwise, mean the regulations in force as final or temporary that have been
issued by the U.S. Department of Treasury pursuant to its authority under the
Code, and any successor regulations.
I.30 "REMAINING MEMBERS" shall have the meaning ascribed to it in
Article VIII.
I.31 "SUTRO" shall mean The Sutro Group, a Nevada corporation.
I.32 "TAX MATTERS PARTNER" (as defined in Code Section 6231) shall
be The Sutro Group or its successor as designated pursuant to Section 9.6.
I.33 "TARGETED INVESTMENT" means Fountain View, Inc., a Delaware
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corporation.
ARTICLE II
ORGANIZATIONAL MATTERS
II.1 FORMATION. The Members have formed a Delaware limited
liability company under the laws of the State of Delaware by filing the Articles
with the Delaware Secretary of State and entering into this Agreement. The
rights and liabilities of the Members shall be determined pursuant to the Act
and this Agreement. To the extent that 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, this Agreement shall, to the extent permitted by
the Act, control.
II.2 NAME. The name of the Company shall be Sutro Investment
Partners V, LLC." The business of the Company may be conducted under that name
or, upon compliance with applicable laws, any other name that the Manager deem
appropriate or advisable. The Manager shall file any fictitious name
certificates and similar filings, and any amendments thereto, that the Manager
considers appropriate or advisable.
II.3 TERM. The term of this Agreement commenced on the filing of
the Articles and shall continue until terminated as hereinafter provided.
II.4 OFFICE AND AGENT.
A. PRINCIPAL OFFICE. The principal office of the Company
shall be located at 3773 Howard Hughes Parkway, Suite 190 South, Las Vegas,
Nevada, 89109, unless and until the Manager shall determine otherwise, and the
Manager may determine to establish such additional offices to be located at such
place or places inside or outside the State of Delaware as the Manager may
designate from time to time.
B. REGISTERED OFFICE. The Registered Office of the
Company in the State of Delaware is located at 1013 Centre Road, in the City of
Wilmington, County of New Castle. The registered agent of the Company for
service of process at such address is Paracorp Incorporated.
C. OTHER JURISDICTIONS. The Company shall file or record
such documents and take such other actions under the laws of any jurisdiction
outside the State of Delaware as are necessary or desirable to permit the
Company to do business in any such jurisdiction as is selected by the Manager
and to promote the limitation of liability for the Members in any such
jurisdiction.
II.5 PURPOSE AND BUSINESS OF THE COMPANY. The Company was formed to
acquire, own, hold for investment and otherwise dispose of securities, including
to invest
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in the Targeted Investment, and to do any and all acts and things necessary,
appropriate, proper, advisable, incidental to, or convenient for the furtherance
and accomplishment of such business, objectives, and purpose, but subject to the
provisions of Paragraph 5.3B hereof.
ARTICLE III
CAPITAL CONTRIBUTIONS
III.1 CAPITAL CONTRIBUTIONS OF THE MANAGER. The Manager shall be
required to contribute to the capital of the Company the amount set forth for it
as of the date hereof on Exhibit A, and the Manager shall be admitted as a
Member in respect of any Capital Contribution which it makes.
III.2 CAPITAL CONTRIBUTIONS OF NONMANAGER MEMBERS. Each other Member
shall contribute to the capital of the Company the amount set forth for it on
Exhibit A hereto.
III.3 TIMING; OTHER CONTRIBUTIONS. The Capital Contributions called
for by Sections 3.1 and 3.2 hereof shall be made pro rata by each Member so as
to permit the Company to meet its obligations to the Targeted Investment on a
timely basis, and the Members shall also make pro rata such additional Capital
Contributions as shall enable the Company to meet such additional obligations,
if any, which might arise in respect of capital contributions to the Targeted
Investment. No person shall be permitted to make any Capital Contribution except
as permitted pursuant to the provisions of this Agreement.
III.4 FAILURE TO MAKE CONTRIBUTIONS. If a Member does not timely
contribute capital when required, that Member shall be in default under this
Agreement. In such event, the Manager shall sent the defaulting Member written
notice of such default, giving him or her fourteen (14) days from the date such
notice is given to contribute the entire amount of his or her required Capital
Contribution (if the defaulting Member did not make a required contribution of
property or services, the Company may instead require the defaulting Member to
contribute cash equal to that portion of the fair market value of the
contribution that has not been made). If the defaulting Member does not
contribute his or her required capital to the Company within said fourteen
(14)-day period, the Manager or those non-defaulting Members who hold a Majority
Interest if the defaulting Member is the Manager may elect any one or more of
the following remedies:
(a) The non-defaulting Members may advance funds to the
Company to cover those amounts which the defaulting Member fails to contribute.
Amounts which a non-defaulting Member so advances on behalf of the defaulting
Member shall become a loan due and owing from the defaulting Member to such
non-defaulting Member and bear interest at the rate of ten percent (10%) per
annum, payable monthly. All cash contributions otherwise distributable to the
defaulting member under this
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Agreement shall instead be paid to the non-defaulting Members making such
advances until such advances and interest thereon are paid in full. In any
event, any such advances shall be evidenced by a promissory note and be due and
payable by the defaulting Member one (1) year from the date that such advance
was made. Any amounts repaid shall first be applied to interest and thereafter
to principal. Effective upon a Member becoming a defaulting Member, each member
grants to the non-defaulting Members who advance funds under this Paragraph
3.4(a) a security interest in his or her Economic Interest to secure his or her
obligation to repay such advances and agrees to execute and deliver a promissory
note as described herein together with a security agreement and such UCC-1
financing statements and assignments of certificates of membership (or other
documents of transfer) as such non-defaulting Members may reasonably request.
(b) The Percentage Interests shall be adjusted, in which
event each member's Percentage Interest shall be a fraction, the numerator of
which represents the aggregate amount of such Member's Capital Contributions and
the denominator of which represents the sum of all Members' Capital
Contributions.
(c) The defaulting Members shall have no right to
receive any distributions from the Company until the non-defaulting members have
first received distributions in an amount equal to the additional capital
contributed by each non-defaulting Member to the Company plus a cumulative,
non-compounded return thereon at the rate of ten percent (10%) per annum.
(d) The defaulting Member shall lose his or her voting
and approval rights under the Act, the Articles and this Agreement.
(e) The defaulting Member shall lose his or her ability
(whether as a Member or a Manager) to participate in the management and
operations of the Company.
(f) The Company may obtain a money judgement against the
defaulting Member.
Each Member acknowledges and agrees that (i) a default by any Member in
making a required Capital Contribution will result in the Company and the
non-defaulting Members incurring certain costs and other damages in an amount
that would be extremely difficult or impractical to ascertain and (ii) the
remedies described in this Section 3.4 bear a reasonable relationship to the
damages which the Members estimate may be suffered by the Company and the
non-defaulting Members by reason of the failure of a defaulting Member to make
any required Capital Contribution and the election of any or all of the above
described remedies is not unreasonable under the circumstances existing as of
the date hereof.
The election of the Manager or non-defaulting Members, as applicable,
to pursue
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any remedy provided in this Section 3.4 shall not be a waiver or limitation of
the right to pursue an additional or different remedy available hereunder or of
law or equity with respect to any subsequent default.
III.5 NO INTEREST. No Member shall be entitled to receive any
interest on his or her Capital Contributions.
ARTICLE IV
MEMBERS
IV.1 LIMITATIONS ON LIABILITY OF MEMBERS. The debts, obligations
and liabilities of the Company, whether arising in contract, tort or otherwise,
shall be solely the debts, obligations and liabilities of the Company, and no
Member of the Company shall be obligated personally for any such debt,
obligation or liability of the Company solely by reason of being a Member or by
reason of such Member's acts or omissions in connection with the conduct of the
business of the Company.
IV.2 LIABILITY OF MEMBERS TO THE COMPANY.
A. LIABILITY OF MEMBERS TO THE COMPANY. A Member is
liable to the Company: (i) for the difference between his or its contribution to
capital as actually made and that is stated in the Articles, this Agreement or
other document executed by the Member as having been made by the Member; and
(ii) for any unpaid Capital Contribution which he or it agreed in the Articles,
this Agreement or other document executed by the Member to make in the future at
the time and on the conditions stated in the Articles, Agreement or other
document evidencing such agreement. No Member shall be excused from an
obligation to the Company to perform any promise to contribute money, property
or to perform services because of death, disability, dissolution or any other
reason.
B. MEMBER AS TRUSTEE FOR THE COMPANY. A Member holds as
trustee for the Company (i) specific property stated in the Articles, Agreement
or other document executed by the Member as contributed by such Member, but
which was not contributed or which has been wrongfully or erroneously returned;
and (ii) money or other property wrongfully paid or conveyed to such Member on
account of his or its Capital Contribution.
C. WAIVER OF LIABILITY OF MEMBER. The liabilities of a
Member as set out in this Section 4.2 can be waived or compromised only by the
consent of all Members; but a waiver or compromise shall only affect the right
of a creditor of the Company to the extent permitted by applicable law.
IV.3 ADMISSION OF ADDITIONAL MEMBERS. The Manager may admit to the
Company additional Members, from time to time, only as expressly provided in
this
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Agreement, including pursuant Article VII hereof, and the Members shall not be
permitted to admit new Members, except as otherwise expressly provided in this
Agreement.
IV.4 WITHDRAWALS OR RESIGNATIONS. No Member may withdraw or resign
from the Company, except as otherwise provided in this Agreement.
IV.5 TRANSACTIONS WITH THE COMPANY. Subject to any limitations set
forth in this Agreement and with the prior approval of the Manager, a Member may
lend money to and transact other business with the Company. Subject to other
applicable law, such Member has the same rights and obligations with respect
thereto as a Person who is not a Member.
IV.6 REMUNERATION TO MEMBERS. Except as otherwise specifically
provided in this Agreement, no Member is entitled to remuneration for acting in
the Company business.
IV.7 MEMBERS ARE NOT AGENTS.Pursuant to Section 5.1, 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 Articles and except as expressly required by the Act. No
Member, acting solely in the capacity of a Member, is an agent of the Company
nor does any Member, unless expressly and duly authorized in writing to do so by
the Manager, have any power or authority to bind or act on behalf of the Company
in any way, to pledge its credit, to execute any instrument on its behalf or to
render it liable for any purpose.
IV.8 VOTING RIGHTS. Except as expressly provided in this Agreement
or the Articles, Members shall have no voting, approval or consent rights.
IV.9 MEETINGS OF MEMBERS.
A. DATE, TIME AND PLACE OF MEETINGS OF MEMBERS;
SECRETARY. Meetings of Members may be held at such date, time and place within
or without the State of Delaware as the Manager may fix from time to time. No
annual or regular meetings of Members are required. At any Members' meeting, the
Manager shall appoint a person to preside at the meeting and a person to act as
secretary of the meeting. The secretary of the meeting shall prepare minutes of
the meeting which shall be placed in the minute books of the Company.
B. POWER TO CALL MEETINGS. Meetings of the Members may
be called by the Manager, or upon written demand of Members holding more than
ten percent (10%) of the Percentage Interests, for the purpose of addressing any
matters on which the Members may vote.
C. NOTICE OF MEETING. Written notice of a meeting of
Members shall
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be sent or otherwise given to each Member not less than ten (10) nor more than
sixty (60) days before the date of the meeting. The notice shall specify the
place, date and hour of the meeting and the general nature of the business to be
transacted. No other business may be transacted at this meeting. Upon written
request to the Manager by any person entitled to call a meeting of Members, the
Manager shall immediately cause notice to be given to the Members entitled to
vote that a meeting will be held at a time requested by the person calling the
meeting, not less than ten (10) days nor more than sixty (60) days after the
receipt of the request. If the notice is not given within twenty (20) days after
the receipt of the request, the person entitled to call the meeting may give the
notice.
D. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice
of any meeting of Members shall be given either personally or by first-class
mail or telegraphic or other written communication, charges prepaid, addressed
to the Member at the address of that Member appearing on the books of the
Company or given by the Member to the Company for the purpose of notice. If no
such address appears on the Company's books or is given, notice shall be deemed
to have been given if sent to that Member by first-class mail or telegraphic or
other written communication to the Company's principal executive office, or if
published at least once in a newspaper of general circulation in the county
where that office is located. Notice shall be deemed to have been given at the
time when delivered personally or deposited in the mail or sent by telegram or
other means of written communication.
If any notice addressed to a Member at the address of
that Member appearing on the books of the Company is returned to the Company by
the United States Postal Service marked to indicate that the United States
Postal Service is unable to deliver the notice to the Member at that address,
all future notices or reports shall be deemed to have been duly given without
further mailing if these shall be available to the Member on written demand of
the Member at the principal executive office of the Company for a period of one
year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving
any notice of any meeting shall be executed by the Manager giving the notice,
and shall be filed and maintained in the minute book of the Company.
E. VALIDITY OF ACTION. Any action approved at a meeting,
other than by unanimous approval of those entitled to vote, shall be valid only
if the general nature of the proposal so approved was stated in the notice of
meeting or in any written waiver of notice.
F. QUORUM. The presence in person or by proxy of a
Majority Interest shall constitute a quorum at a meeting of Members.
G. ADJOURNED MEETING; NOTICE. Any Members' meeting,
whether or
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not a quorum is present, may be adjourned from time to time by the vote of the
majority of the Membership Interests represented at that meeting, either in
person or by proxy, but in the absence of a quorum, no other business may be
transacted at that meeting. When any meeting of Members is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place are announced at a meeting at which the adjournment is taken, unless a new
record date for the adjourned meeting is subsequently fixed, or unless the
adjournment is for more than forty-five (45) days from the date set for the
original meeting, in which case the Manager shall set a new record date. At any
adjourned meeting the Company may transact any business which might have been
transacted at the original meeting.
H. WAIVER OF NOTICE OR CONSENT. The actions taken at any
meeting of Members however called and noticed, and wherever held, have the same
validity as if taken at a meeting duly held after regular call and notice, if a
quorum is present either in person or by proxy, and if, either before or after
the meeting, each of the Members entitled to vote, who was not present in person
or by proxy, signs a written waiver of notice or consents to the holding of the
meeting or approves the minutes of the meeting. All such waivers, consents or
approvals shall be filed with the Company records or made a part of the minutes
of the meeting.
Attendance of a person at a meeting shall constitute
a waiver of notice of that meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened, and except that attendance at a meeting is
not a waiver of any right to object to the consideration of matters not included
in the notice of the meeting if that objection is expressly made at the meeting.
Neither the business to be transacted nor the purpose of any meeting of Members
need be specified in any written waiver of notice except as provided in
Paragraph 4.10E.
I. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action that may be taken at a meeting of Members may be taken without a meeting,
if a consent in writing setting forth the action so taken, is signed and
delivered to the Company within sixty (60) days of the record date for that
action by Members having not less than the minimum number of votes that would be
necessary to authorize or take that action at a meeting at which all Members
entitled to vote on that action at a meeting were present and voted. All such
consents shall be filed with the Manager or the secretary, if any, of the
Company and shall be maintained in the Company records. Any Member giving a
written consent, or the Member's proxy holders, may revoke the consent by a
writing received by the Manager or secretary, if any, of the Company before
written consents of the number of votes required to authorize the proposed
action have been filed.
Unless the consents of all Members entitled to vote
have been solicited in writing, (i) notice of any Member approval of an
amendment to the Articles or this Agreement, a dissolution of the Company, or a
merger of the Company, without a
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meeting by less than unanimous written consent, shall be given at least ten (10)
days before the consummation of the action authorized by such approval, and (ii)
prompt notice shall be given of the taking of any other action approved by
Members without a meeting by less than unanimous written consent, to those
Members entitled to vote who have not consented in writing.
J. TELEPHONIC PARTICIPATION BY MEMBER AT MEETINGS.
Members may participate in any Members' meeting through the use of any means of
conference telephones or similar communications equipment as long as all Members
participating can hear one another. A Member so participating is deemed to be
present in person at the meeting.
K. RECORD DATE. In order that the Company may determine
the Members of record entitled to notices of any meeting or to vote, or entitled
to receive any distribution or to exercise any rights in respect of any
distribution or to exercise any rights in respect of any other lawful action,
the Manager, or Members representing more than ten percent (10%) of the
Percentage Interests may fix, in advance, a record date, that is not more than
sixty (60) days nor less than ten (10) days prior to the date of the meeting and
not more than sixty (60) days prior to any other action. If no record date is
fixed:
(i) The record date for determining Members
entitled to notice of or to vote at a meeting of Members shall be at the close
of business on the business day next preceding the day on which notice is given
or, if notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held.
(ii) The record date for determining Members
entitled to give consent to Company action in writing without a meeting shall be
the day on which the first written consent is given.
(iii) The record date for determining Members for
any other purpose shall be at the close of business on the day on which the
Manager adopts the resolution relating thereto, or the sixtieth (60th) day prior
to the date of the other action, whichever is later.
(iv) The determination of Members of record
entitled to notice of or to vote at a meeting of Members shall apply to any
adjournment of the meeting unless the Manager or the Members who called the
meeting fix a new record date for the adjourned meeting, but the Manager or the
Members who called the meeting shall fix a new record date if the meeting is
adjourned for more than forty-five (45) days from the date set for the original
meeting.
L. PROXIES. Every Member entitled to vote on any matter
shall have the right to do so either in person or by one or more agents
authorized by a written proxy
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signed by the person and filed with the Manager or secretary, if any, of the
Company. A proxy shall be deemed signed if the Member's name is placed on the
proxy (whether by manual signature, typewriting, telegraphic transmission,
electronic transmission or otherwise) by the Member or the Member's attorney in
fact. A validly executed proxy which does not state that it is irrevocable shall
continue in full force and effect unless (i) revoked by the person executing it,
before the vote pursuant to that proxy, by a writing delivered to the Company
stating that the proxy is revoked, or by a subsequent proxy executed by, or
attendance at the meeting and voting in person by, the person executing the
proxy; or (ii) written notice of the death or incapacity of the maker of that
proxy is received by the Company before the vote pursuant to that proxy is
counted.
IV.10 CERTIFICATE OF MEMBERSHIP INTEREST. Unless the Manager
otherwise elects, a Membership Interest shall not be represented by a
certificate of membership.
ARTICLE V
MANAGEMENT AND CONTROL OF THE COMPANY
V.1 MANAGEMENT OF THE COMPANY BY MANAGER. The business, property
and affairs of the Company shall be managed exclusively by the Manager. Except
for situations in which the approval of the Members is expressly required by the
Articles or this Agreement, the Manager shall have full, complete and exclusive
authority, power, and discretion to manage and control the business, property
and affairs of the Company, to make all decisions regarding those matters and to
perform any and all other acts or activities customary or incident to the
management of the Company's business, property and affairs. A Manager need not
be a Member.
V.2 RESIGNATION AND REMOVAL OF MANAGER. No Manager may resign as
Manager at any time without the consent of a Majority Interest of the Members
other than the departing Manager. A Manager may be removed at any time, with
Cause (but may not be removed without Cause), by the unanimous vote of all of
the Members (other than the Member who is to be removed as Manager) at a meeting
called expressly for that purpose, or by the written consent of all of the
Members (other than the Member who is to be removed as Manager). Removal as
Manager shall not affect the Manager's rights as a Member or constitute a
withdrawal of a Manager as a Member. For purpose of this Section 5.2, "Cause"
shall mean fraud, gross negligence, willful misconduct, embezzlement or a breach
of such Manager's obligations under this Agreement.
V.3 POWERS OF MANAGERS.
A. POWERS OF MANAGERS. Without limiting the generality
of Section 5.1, but subject to Paragraph 5.3B and to the express limitations set
forth elsewhere in this Agreement, the Manager shall have all necessary powers
to manage and carry out the purposes, business, property, and affairs of the
Company.
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B. LIMITATIONS ON POWER OF MANAGERS. Notwithstanding any
other provisions of this Agreement, the Manager shall not have authority
hereunder to cause the Company to engage in the following transactions without
first obtaining the affirmative vote or written consent of all of the Members
and of the Manager, except that the matters specified in (v) and (xiii) shall
just require the vote of a Majority Interest and the concurrence of the Manager.
(i) The sale, exchange or other disposition of
all, or substantially all, of the Company's assets occurring as part of a single
transaction or plan or as part of related transactions or plans, except in the
ordinary course of business or in the orderly liquidation and winding up of the
business of the Company upon its duly authorized dissolution;
(ii) The merger of the Company with another
limited liability company or limited partnership or corporation, general
partnership or other Person;
(iii) The establishment of different classes of
Members;
(iv) An alteration of the primary purpose or
business of the Company as set forth in Section 2.5;
(v) Transactions between the Company and the
Manager or one or more of the Manager's Affiliates, or transactions in which the
Manager or one or more of the Manager's Affiliates, has a material financial
interest shall require the affirmative vote or written consent of a Majority
Interest (not including the Manager, if a Member);
(vi) Any act which would make it impossible to
carry on the ordinary business of the Company;
(vii) Borrowing, except that if it is in the
Manager's reasonable judgement desirable to do so to accomplish the purposes of
the Company, the Company may borrow money from banks or other recognized
financial institutions and secure payment of any such borrowing by hypothecation
or pledge of Company properties or otherwise, provided that (i) any such
borrowing has an original maturity of less than one (1) year and (ii) the
aggregate of all indebtedness of the Company for money borrowed and outstanding
at any one time does not exceed five percent (5%) of the sum of all Capital
Contributions, and provided that the Manager may only cause the Company to
guaranty the obligations of others if the amount guaranteed, together with any
amount borrowed, does not at any time exceed the aforesaid limitation as to
borrowing upon the authority of the Manager;
(viii) The underwriting or participation (except as
an investor) in the marketing of securities of any other company;
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(ix) The buying or selling of commodities, other
than stock index futures;
(x) The buying or selling of real estate;
(xi) Investing the Company's assets directly in
the securities of any issuer other than the Targeted Investment;
(xii) Purchasing securities issued by the Manager
or any affiliate thereof.
(xiii) Engaging in any other transaction described
in this Agreement as requiring the vote, consent, or approval of the Members.
V.4 PERFORMANCE OF DUTIES; LIABILITY OF MANAGER. 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, reckless or intentional misconduct,
or a knowing violation of law by the Manager. The Manager shall perform its
managerial duties in good faith, in a manner they reasonably believe to be in
the best interests of the Company and its Members, and with such care, including
reasonable inquiry, as an ordinarily prudent person in a like position would use
under similar circumstances. The Manager who so performs the duties of Manager
shall not have any liability by reason of being or having been a Manager of the
Company. Notwithstanding the foregoing, it is understood and agreed that the
Federal securities laws impose liabilities under certain circumstances on
persons who act in good faith, and, therefore, nothing herein shall in any way
be deemed to constitute a waiver or limitation of any rights which a Member may
have under any Federal securities laws
In performing its duties, the Manager shall be entitled to
rely on information, opinions, reports, or statements, including financial
statements and other financial data, of the following persons or groups unless
they have knowledge concerning the matter in question that would cause such
reliance to be unwarranted and provided that the Manager acts in good faith and
after reasonable inquiry when the need therefor is indicated by the
circumstances:
(i) One or more employees or other agents of the
Company whom the Manager reasonably believe to be reliable and competent in the
matters presented; or
(ii) Any attorney, independent accountant, or
other person as to matters which the Manager reasonably believes to be within
such person's professional or expert competence.
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V.5 PAYMENTS TO MANAGERS. Except as expressly provided in this
Agreement, no Manager or Affiliate of a Manager is entitled to remuneration for
services rendered or goods provided to the Company. The Manager shall not be
entitled to any management fee or other compensation; provided, however, that
the Company shall reimburse the Manager for all expenses incurred by the Manager
in conducting the Company's business, and all direct disbursements made and
obligations incurred on behalf of the Company, including the Company's trading,
custodial, borrowing, legal, accounting, documentation, reporting and auditing
expenses.
V.6 LIMITED LIABILITY. No person who is a Manager of the Company
shall be personally liable under any judgement of a court, or in any other
manner, for any debt, obligation, or liability of the Company, whether that
liability or obligation arises in contract, tort, or otherwise, solely by reason
of being a Manager.
V.7 MEMBERSHIP INTERESTS OF MANAGER. Except as otherwise provided
in this Agreement, Membership Interests held by the Manager as a Member shall
entitle the Manager to all the rights of a Member, including without limitation
the economic, voting, information and inspection rights of a Member.
ARTICLE VI
ALLOCATIONS OF PROFITS AND LOSSES; DISTRIBUTIONS
VI.1 CAPITAL ACCOUNTS. Individual Capital Accounts shall be
maintained in accordance with Section 1.7.
VI.2 ALLOCATIONS. Profits and Losses shall be allocated to the
Members for each period described as follows:
A. PROFITS AND LOSSES. Profits and Losses for each
Fiscal Period shall be allocated to the Members in proportion to their
respective Percentage Interests as of the first day of such Fiscal Period.
B. RECAPTURE. Anything herein to the contrary
notwithstanding, any recapture under applicable tax laws shall be allocated to
the Members in the same proportions as the item generating the recapture shall
have been allocated.
VI.3 SPECIAL CAPITAL ACCOUNT ALLOCATIONS. Notwithstanding the
allocation provisions of Section 6.2, the following special allocations shall be
made in allocating Profits and Losses:
A. SECTION 704 ALLOCATIONS. Any special allocations
necessary to comply with the requirements set forth in Section 704 of the Code
and the
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corresponding Regulations, including the qualified income offset and minimum
gain chargeback provisions contained therein, shall be made.
B. TAX ALLOCATIONS.
(i) Subject to clause 6.3B(ii) below, in each
Fiscal Year, items of income, deduction, gain, loss or credit that are
recognized for income tax purposes shall be allocated among the Members in such
manner as to reflect equitably amounts credited to or debited against the
Capital Account of each member, whether in such Fiscal Year or in prior Fiscal
Years. To this end, the Company shall establish and maintain records that shall
show the extent to which the Capital Account of each member shall, as of the
last day of each Fiscal Year, be comprised of amounts that have not been
reflected in the taxable income of such Member. To the extent deemed by the
Manager to be feasible and equitable, taxable income and gains in each Fiscal
Year shall be allocated among the Members who have enjoyed the related credits,
and items of deduction, loss and credit in each Fiscal Year shall be allocated
among the Members who have borne the burden of the related debits.
(ii) Notwithstanding any of the foregoing
provisions to the contrary, if a Member withdraws capital during a Fiscal Year,
allocations of taxable income and loss may, in the exclusive discretion of the
Manager, be made as follows:
(a) Taxable income may be allocated
first, to each Member who shall have withdrawn all or part of such Member's
Capital Account in that Fiscal Year, to the extent that such withdrawal exceeds
such member's adjusted tax basis in such Member's interest in the Company
immediately prior to such withdrawal. If more than one Capital Account shall
have been so withdrawn in full or in part, such allocations, if made, shall be
made to the extent of and in proportion to such differences;
(b) Taxable loss may first be allocated
to each member who shall have withdrawn all of such Member's Capital Account in
that Fiscal Year, to the extent that such Member's adjusted tax basis in such
Member's interest in the Company exceeds that Capital Account immediately prior
to such withdrawal. If more than one Capital Account has been so withdrawn, such
allocations of taxable loss, if made, shall be made to the extent of and in
proportion to such differences; and
(c) Thereafter, taxable income and loss
shall be allocated as provided in clause 6.3B(i) above.
The Manager, in its exclusive discretion, may cause the Company to make the
election to adjust the basis of the Company property under Code Section 754. In
any year in which the Code Section 754 election is in effect, this clause
6.3B(ii) shall be null and void.
(iii) Any elections or other decisions relating to
such allocations
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shall be made by the Manager in any manner that reasonably reflects the purpose
and intention of this Agreement. Allocations pursuant to this Paragraph 6.3B are
solely for purposes of Federal, state and local taxes and shall not affect, or
in any way be taken into account in computing, any Capital Account or share of
Profits, Losses or other items of any Member, or distributions to any Member,
pursuant to any provision of this Agreement.
C. OTHER ALLOCATION RULES.
(i) Generally, all Profits and Losses shall be
allocated among the Members as provided in Section 6.2 and this Section 6.3. If
Members are admitted to the Company on different dates during any Fiscal Year,
the Profits or Losses allocated among the Members for each such Fiscal Year
shall be allocated in proportion to their respective Capital Accounts from time
to time during such Fiscal Year in accordance with Code Section 706, using any
convention permitted by law and selected by the Manager.
(ii) For purposes of determining the Profits,
Losses or any other items allocable to any period, Profits, Losses and any such
other items shall be determined on a daily, monthly or other basis, as
determined by the Manager using any permissible method under Code Section 706
and the Regulations thereunder.
(iii) Notwithstanding any of the foregoing
provisions to the contrary, if taxable gain to be allocated includes income
resulting from the sale or disposition of Company property or property of a
limited partnership or joint venture in which the Company owns an interest that
is treated as ordinary income, such gain so treated as ordinary income shall be
allocated to and reported by each Member in proportion to allocations to that
Member of the items that gave rise to such ordinary income, and the Company
shall keep records of such allocations. In the event of the subsequent admission
of any new Member, any item that would constitute "unrealized receivables" under
Code Section 751 and the Regulations thereunder shall not be shared by the newly
admitted Members, but rather shall remain allocated to existing Members.
D. PROVISIONAL ALLOCATION. If any amount claimed by the
Company to constitute a deductible expense in any Fiscal Year is treated by any
Federal, state or local taxing authority as a payment made to a Member in such
Member's capacity as a member of the Company for income tax purposes, with
regard to such authority, items of income and gain of the Company for such
Fiscal Year shall first be allocated to such member to the extent of such
payment.
VI.4 WITHDRAWALS FROM CAPITAL ACCOUNTS. No Member shall, except as
provided in Section 6.5 below, have the right to withdraw any amount from its
Capital Account without the consent of both the Manager and a Majority Interest
of the Members other than the withdrawing Member.
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VI.5 DISTRIBUTIONS. From time to time, as the Manager in its sole
and absolute discretion shall determine, the Manager may distribute cash or
other property to the Members in proportion to their respective Capital
Accounts; with it being understood, however, that the Manager shall have the
absolute right to cause the Company to retain, invest and reinvest any and all
cash or other assets, including the proceeds from sale or other disposition of
Company investments, that no such discretionary distributions shall be required
and that the Manager does not intend generally, if ever, to make such
distributions (although the Manager may, but shall not be required to, make
annual distributions to each Member in an amount which the Manager estimates
would enable the Members to pay Federal and state taxes generated by Company
allocations).
VI.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 money. Except as otherwise
expressly provided herein, Company distributions and redemptions may be made in
cash or in kind, in the discretion of the Manager, and the decision to effect
distributions in kind or in cash may be made independently of the tax
consequences of that decision on the Member receiving the distribution.
Distributions may be made to some Members in kind, notwithstanding that others
are simultaneously receiving cash.
VI.7 RESTRICTION ON DISTRIBUTIONS.
A. LIMITATION. No Distribution shall be made if, after
giving effect to the Distribution, all liabilities of the Company, other than
liabilities to Members on account of their Membership Interests and liabilities
for which the recourse of creditors is limited to specified property of the
Company, exceed the fair value of the assets of the Company, except that the
fair value of property that is subject to a liability for which the recourse of
creditors is limited shall be included in the assets of the Company only to the
extent that the fair value of that property exceeds that liability.
B. LIABILITY FOR RETURN. A Member who receives a
distribution in violation of Paragraph 6.7A and who knew at the time of the
distribution that the distribution violated Paragraph 6.7A shall be liable to
the Company for the amount of the distribution. A Member who receives a
distribution in violation of Paragraph 6.7A and who did not know at the time of
the distribution that the distribution violated Paragraph 6.7A shall not be
liable for the amount of the distribution. Subject to Paragraph 6.7C, this
Paragraph 6.7B shall not affect any obligation or liability of a Member under
this Agreement or applicable law for the amount of a distribution.
C. LIMITATION ON LIABILITY. A Member who receives a
distribution from the Company shall have no liability for the amount of the
distribution after the expiration of three (3) years from the date of the
distribution unless an action to recover the distribution from such Member is
commenced prior to the expiration of the said 3-year period and an adjudication
of liability against such Member is made in the said action.
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VI.8 RETURNED DISTRIBUTIONS. The amount of any distribution
returned to the Company by a Member or Economic Interest owner or paid by a
Member or Economic Interest owner 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 or Economic Interest owner.
VI.9 OBLIGATIONS OF MEMBERS TO REPORT ALLOCATIONS. The Members are
aware of the income tax consequences of the allocations made by this Article VI
and hereby agree to be bound by the provisions of this Article VI in reporting
their shares of Company income and loss for income tax purposes.
ARTICLE VII
TRANSFER AND ASSIGNMENT OF INTERESTS
VII.1 TRANSFER AND ASSIGNMENT OF INTERESTS. No Member shall be
entitled to transfer, assign, convey, sell, encumber or in any way alienate all
or any part of his or her Membership Interest (collectively, "transfer") except
with the prior written consent of the Manager, which consent may be given or
withheld, conditioned or delayed, as the Manager may determine in their sole and
absolute discretion. Transfers in violation of this Article VII shall only be
effective to the extent set forth in Section 7.7. After the consummation of 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.
VII.2 FURTHER RESTRICTIONS ON TRANSFER OF INTERESTS. In addition to
other restrictions found in this Agreement, no Member shall transfer, assign,
convey, sell, encumber or in any way alienate all or any part of his or her
Membership Interest: (i) without compliance with all Federal and state
securities law, (ii) if it would cause the Partnership to fail to qualify for
the exemption from the definition of "investment company" provided by Section
3(c)(1) of the Investment Company Act of 1940, as amended, or involve the resale
of Interests in increments or in a fashion which would cause the Company to lose
the safe harbor which is provided by Paragraph A of Revenue Notice 88-75 from
the definition of "publicly traded partnership" contained in Section 7704 of the
Code (and the Company shall not list the Interests on an established securities
market), or (iii) if the Membership Interest to be transferred, when added to
the total of all other Membership Interests transferred in the preceding twelve
(12) consecutive months prior thereto, would cause the tax termination of the
Company under Code Section 708(b)(1)(B).
VII.3 SUBSTITUTION OF MEMBERS. An Assignee of a Membership Interest
shall have the right to become a substitute Member only if (i) the requirements
of Sections 7.1
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and 7.2 relating to consent of the Manager and securities and tax requirements
hereof are met, (ii) the Assignee executes an instrument satisfactory to the
Manager accepting and adopting the terms and provisions of this Agreement, and
(iii) the Assignee pays any reasonable expenses in connection with his or her
admission as a new Member. The admission of an Assignee as a substitute Member
shall not result in the release of the Member who assigned the Membership
Interest from any liability that such Member may have to the Company.
VII.4 PERMITTED TRANSFERS. The Economic Interest of any Member may
be transferred subject to compliance with Sections 7.2 and 7.3, but without the
prior written consent of the Manager as required by Section 7.1, by the Member
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.
VII.5 EFFECTIVE DATE OF PERMITTED TRANSFERS. Any permitted transfer
of all or any portion of a Membership Interest or an Economic Interest shall be
effective as of the date provided in Section 6.3 following the date upon which
the requirements of Sections 7.1, 7.2 and 7.3 have been met. Any transferee of a
Membership Interest shall take subject to the restrictions on transfer imposed
by this Agreement.
VII.6 RIGHTS OF LEGAL REPRESENTATIVES. If a Member who is an
individual dies or is adjudged by a court of competent jurisdiction to be
incompetent to manage the Member's person or property, the Member's executor,
administrator, guardian, conservator, or other legal representative may exercise
all of the Member's rights for the purpose of settling the Member's estate or
administering the Member's property, including any power the Member has under
the Articles or this Agreement to give an assignee the right to become a Member.
If a Member is a corporation, trust, or other entity and is dissolved or
terminated, the powers of that Member may be exercised by his or her legal
representative or successor.
VII.7 NO EFFECT TO TRANSFERS IN VIOLATION OF AGREEMENT. Upon any
transfer of a Membership Interest in violation of this Article VII, 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. Such transferee shall only be entitled to become an Assignee and
thereafter shall only receive the share of one or more of the Company's Profits,
Losses and distributions of the Company's assets to which the transferor of such
Economic Interest would otherwise be entitled. Notwithstanding the immediately
preceding sentences, if, in the determination of the Manager, a transfer in
violation of this Article VII would cause the tax termination of the Company
under Code Section 708(b)(1)(B), the transfer shall be null and void and the
purported transferee shall not become either a Member or an Assignee.
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<PAGE> 31
ARTICLE VIII
CONSEQUENCES OF DISSOLUTION EVENTS
Upon the occurrence of a Dissolution Event as to the Manager, the
Company shall dissolve unless the remaining Members ("Remaining Members")
holding a majority of the Percentage Interests which all Remaining Members hold,
consent within ninety (90) days of the Dissolution Event to the continuation of
the business of the Company and to the election of a new Manager.
ARTICLE IX
ACCOUNTING, RECORDS, REPORTING BY MEMBERS
IX.1 BOOKS AND RECORDS. The books and records of the Company shall
be kept, and the financial position and the results of its operations recorded,
in accordance with the accounting methods followed for Federal income tax
purposes. The books and records of the Company shall reflect all the Company
transactions and shall be appropriate and adequate for the Company's business.
The Company shall maintain at its principal office in all of the following:
(a) A current list of the full name and last known
business or residence address of each Member and Assignee set forth in
alphabetical order, together with the Capital Contributions, Capital Account and
Percentage Interest of each Member and Assignee;
(b) A current list of the full name and business or
residence address of each Manager;
(c) A copy of the Articles and any and all amendments
thereto together with executed copies of any powers of attorney pursuant to
which the Articles or any amendments thereto have been executed;
(d) Copies of the Company's Federal, state, and local
income tax or information returns and reports, if any, for the six (6) most
recent taxable years;
(e) A copy of this Agreement and any and all amendments
thereto together with executed copies of any powers of attorney pursuant to
which this Agreement or any amendments thereto have been executed;
(f) Copies of the financial statements of the Company,
if any, for the six (6) most recent Fiscal Years; and
(g) The Company's books and records as they relate to the
internal
25
<PAGE> 32
affairs of the Company for at least the current and past four (4) Fiscal Years.
IX.2 DELIVERY TO MEMBERS AND INSPECTION.
A. DELIVERY OF INFORMATION. Upon the request of any
Member or Assignee for purposes reasonably related to the interest of that
Person as a Member or Assignee, the Manager shall promptly deliver to the
requesting Member or Assignee, at the expense of the Company, a copy of the
information required to be maintained under Paragraphs 9.1(a), (b) and (d), and
a copy of this Agreement.
B. INSPECTION AND COPYING. Each Member, Manager and
Assignee has the right, upon reasonable request for purposes reasonably related
to the interest of the Person as Member, Manager or Assignee, to:
(i) inspect and copy during normal business
hours any of the Company records described in Paragraphs 9.1(a) through 9.1(g);
and
(ii) obtain from the Manager, promptly after
their becoming available, a copy of the Company's Federal, state, and local
income tax or information returns for each Fiscal Year.
C. RIGHT TO REQUEST. Any request, inspection or copying
by a Member or Assignee under this Section 9.2 may be made by that Person or
that Person's agent or attorney.
D. COPIES OF AMENDMENTS. The Manager shall promptly
furnish to a Member a copy of any amendment to the Articles or this Agreement
executed by the Manager pursuant to a power of attorney from the Member.
IX.3 ANNUAL STATEMENTS.
A. DELIVERY OF STATEMENTS. Within one-hundred and fifty
(150) days after the end of each Fiscal Year, the Manager shall prepare, and
each Member shall be furnished with, an Annual Report of the Company which shall
contain the following:
(i) a balance sheet as of the end of the Fiscal
Year and statements of income and expense, Members' equity, changes in financial
position and cash flow for the Year then ended, all of which shall be audited by
and accompanied by an audit report thereon of a certified public accountant or
by the certificate of the Manager stating that such financial statements were
prepared without audit from the Company's books and records;
(ii) a report of the activities of the Company
during the Fiscal Year then ended; and
26
<PAGE> 33
(iii) a list of the Company's holdings and their
values.
B. TAX INFORMATION. The Manager shall cause to be
prepared at least annually, at Company expense, information necessary for the
preparation of the Members' and Assignees' Federal and state income tax returns.
The Manager shall send or cause to be sent to each Member or Assignee within one
hundred and twenty (120) days after the end of each taxable year such
information as is necessary to complete Federal and state income tax or
information returns.
IX.4 COMPANY ACCOUNTS. The Manager shall maintain the funds and
property of the Company with such Persons as the Manager may select.
IX.5 ACCOUNTING DECISIONS AND RELIANCE ON OTHERS. All decisions as
to accounting matters, except as otherwise specifically set forth herein, shall
be made by the Manager. The Manager may rely upon the advice of their
accountants as to whether such decisions are in accordance with accounting
methods followed for Federal income tax purposes.
IX.6 TAX MATTERS FOR THE COMPANY HANDLED BY MANAGER AND TAX MATTERS
PARTNER. The Manager shall from time to time cause the Company to make such tax
elections as they deem to be in the best interests of the Company and the
Members. The Tax Matters Partner shall represent the Company (at the Company's
expense) in connection with all examinations of the Company's affairs by tax
authorities, including resulting judicial and administrative proceedings, and
shall expend the Company funds for professional services and costs associated
therewith. The Tax Matters Partner shall oversee the Company tax affairs in the
overall best interests of the Company. If for any reason the Tax Matters Partner
can no longer serve in that capacity or ceases to be a Member or Manager, as the
case may be, the Manager may designate another to be Tax Matters Partner.
ARTICLE X
DISSOLUTION AND WINDING UP
X.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) The entry of a decree of judicial dissolution;
(b) The vote of a Majority Interest (which may include
the Manager) and the concurrence of the Manager; or
(c) The occurrence of a Dissolution Event as to the last
remaining
27
<PAGE> 34
Manager and the failure of the Remaining Members and to consent in accordance
with Article VIII to continue the business of the Company within ninety (90)
days after the occurrence of such event.
X.2 CERTIFICATE OF DISSOLUTION. As soon as possible following the
occurrence of any of the events specified in Section 10.1, the Manager who has
not wrongfully dissolved the Company or, if none, the Members, shall execute a
Certificate of Dissolution in such form as shall be prescribed by the California
Secretary of State and file the Certificate as required by the Act.
X.3 WINDING UP. Upon the occurrence of any event specified in
Section 10.1, 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 who has not wrongfully dissolved the
Company or, if none, the Members, shall be responsible for overseeing the
winding up and liquidation of Company, shall take full account of the
liabilities of Company and assets, shall either cause its assets to be sold or
distributed, and if sold shall cause the proceeds therefrom, to the extent
sufficient therefor, to be applied and distributed as provided in Section 10.5.
The Persons winding up the affairs of the Company shall give written notice of
the commencement of winding up by mail to all known creditors and claimants
whose addresses appear on the records of the Company. The Manager or Members
winding up the affairs of the Company shall not be entitled to any compensation
for such services.
X.4 DISTRIBUTIONS IN KIND. Any non-cash asset distributed to one
or more Members shall first be valued to determine the Profit or Loss that would
have resulted if such asset were sold for such value, such Profit or Loss shall
then be allocated pursuant to Article VI, 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 value of such interest (net of any liability
secured by such asset that such Member assumes or takes subject to).
X.5 ORDER OF PAYMENT UPON DISSOLUTION. After determining that all
known debts and liabilities of the Company, including, without limitation, debts
and liabilities to Members who are creditors of the Company, have been paid or
adequately provided for, the remaining assets shall be distributed to the
Members in accordance with their positive Capital Account balances, after taking
into account allocations for the Company's taxable year during which liquidation
occurs. Such liquidating distributions shall be made by the end of the Company's
taxable year in which the Company is liquidated, or, if later, within ninety
(90) days after the date of such liquidation.
X.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 the Company for the return of his or
her positive Capital Account balance and shall have no recourse for his or her
Capital Contribution and/or share of
28
<PAGE> 35
Profits (upon dissolution or otherwise) against the Manager or any other Member.
X.7 CERTIFICATE OF CANCELLATION. The Managers or Members who filed
the Certificate of Dissolution shall cause to be filed in the office of, and on
a form prescribed by, the California Secretary of State, a Certificate of
Cancellation of the Articles upon the completion of the winding up of the
affairs of the Company.
ARTICLE XI
INDEMNIFICATION
XI.1 INDEMNIFICATION. Provided that (i) the person to be
indemnified was acting in good faith within what he reasonably believed to be
the scope of his employment or authority and for a purpose which he reasonably
believed to be in the furtherance of the purpose and best interests of the
Company or the Members, and (ii) the action or failure to act in which respect
of which indemnification is sought does not constitute negligence, willful
misconduct or violation of applicable law, the Manager and its Affiliates shall
be indemnified and held harmless by the Company from and against any and all
losses, liabilities, damages and expenses arising form claims, demands,
investigations, actions, suits or proceedings, whether civil, criminal or
administrative, in which it may be involved, as a party or otherwise, by reason
of its status as a Manager or Affiliate thereof, as the case may be, or any acts
or omissions by it, or the business or its or his management of the affairs of
the Company, whether or not it continues to be such at the time any such loss,
liability, damage or expense is paid or incurred. The rights of indemnification
provided in this Article XI are in addition to any rights to which the Manager
may otherwise be entitled by contract or as a matter of law and shall extend to
its successors and assigns and apply to the fullest extent permitted under the
Act, the Employee Retirement Income Security Act of 1974, as amended, the
Federal securities laws or any other applicable statute. In particular, and
without limitation of the foregoing, the Manager shall be entitled to
indemnification by the Company against reasonable expenses (as incurred),
including attorneys' fees actually and necessarily incurred, by the Manager in
connection with the defense of any action to which the Manager may be a party,
and as to which it shall be entitled to indemnification hereunder, including any
derivative or similar action elating to the right of the Company to procure a
judgement in its favor.
XI.2 SUCCESSORS AND ASSIGNS; LIMITATIONS. This Article XI shall
inure to the benefit of the Manager, its shareholders, partners, employees and
agents, the employees and agents of the Company, including Affiliates of the
Manager, and their respective heirs, executors, administrators, successors and
assigns.
29
<PAGE> 36
ARTICLE XII
COMPETING ACTIVITIES
The Manager need not devote all of its business time to the affairs of
the Company, but shall devote only so much of its time and attention as it shall
deem necessary and advisable. Each of the parties hereto acknowledges and agrees
that any of the Members may engage in or possess an interest in other business
ventures of any nature and description independently or with others, and neither
the Company nor the Members shall have any right by virtue of this Agreement in
or to such independent ventures or to the income or profits derived therefrom.
No Member shall be accountable to the Company for any investment or business
opportunity which a Member hereafter becomes aware of by reason of the affairs
of the Company. The Members and each of them hereby waive any and all rights
which they or any of them have now or may have in the future by reason of the
doctrine of partnership or corporate opportunity in connection with the affairs
of the Company. The fact that any Member, or any Affiliate of any Member, or a
member of his or her family, is employed by, or is directly or indirectly
interested in or connected with, any person, firm or corporation employed or
engaged by the Company to render or perform a service, or from whom the Company
may make any purchase, or to whom the Company may make any sale, or from or to
whom the Company may obtain or make any loan or enter into any lease or other
arrangement, shall not prohibit the Company from engaging in any transaction
with such person, firm or corporation, or create any additional duty of legal
justification by such Member or such person, firm or corporation beyond that of
an unrelated party, and neither the Company nor any other Member shall have any
right in or to any revenues or profits derived from such transaction by such
Member, Affiliate, person, firm or corporation. Neither the Company nor any
Member shall have any right in or to any such independent venture or investment
or the revenues or profits derived therefrom. The above references to Members
include the Manager, whether or not a Member. Anything herein to the contrary
notwithstanding, however, the Manager shall not acquire securities from or sell
securities to the Company without the prior consent of all of the Members.
30
<PAGE> 37
ARTICLE XIII
MISCELLANEOUS
XIII.1 COUNSEL TO THE COMPANY. Counsel to the Company may also be
counsel to the Manager or any Affiliate of the Manager. The Manager may execute
on behalf of the Company and the Members any consent to the representation of
the Company that counsel may request pursuant to the California Rules of
Professional Conduct or similar rules in any other jurisdiction ("Rules"). The
Company has initially selected Buchalter, Nemer, Fields & Younger, a
Professional Corporation ("Company Counsel") as legal counsel to the Company.
Each Member acknowledges that Company Counsel does not represent any Nonmanager
Member in the absence of a clear and explicit written agreement to such effect
between the Nonmanager Member and Company Counsel, and that in the absence of
any such agreement Company Counsel shall owe no duties directly to a Nonmanager
Member. Notwithstanding any adversity that may develop, in the event any dispute
or controversy arises between any Members and the Company, or between any
Members or the Company, on the one hand, and a Manager (or Affiliate of a
Manager) that Company Counsel represents, on the other hand, then each Member
agrees that Company Counsel may represent either the Company or such Manager (or
his or her Affiliate), or both, in any such dispute or controversy to the extent
permitted by the Rules, and each Member hereby consents to such representation.
Each Member further acknowledges that: (a) Company Counsel has represented the
interests of the Manager and/or its Affiliates in connection with the formation
of the Company and the preparation and negotiation of this Agreement and (b)
while communications with Company Counsel concerning the formation of the
Company, its Members and Manager may be confidential with respect to third
parties, no Member has any expectation that such communications are confidential
with respect to the Manager or any of its Affiliates.
XIII.2 COMPLETE AGREEMENT. This Agreement and the Articles constitute
the complete and exclusive statement of agreement among the Members and the
Manager with respect to the subject matter herein and therein and replace and
supersede all prior written and oral agreements or statements by and among the
Members and the Manager or any of them. No representation, statement, condition
or warranty not contained in this Agreement or the Articles will be binding on
the Members or the Manager or have any force or effect whatsoever. To the extent
that any provision of the Articles conflict with any provision of this
Agreement, the Articles shall control.
XIII.3 BINDING EFFECT. Subject to the provisions of this Agreement
relating to transferability, this Agreement will be binding upon and inure to
the benefit of the Members, and their respective successors and assigns.
XIII.4 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
31
<PAGE> 38
any Persons other than the Members and Manager and their respective successors
and assigns nor shall anything in this Agreement relieve or discharge the
obligation or liability of any third person to any party to this Agreement, nor
shall any provision give any third person any right of subrogation or action
over or against any party to this Agreement.
XIII.5 PRONOUNS; STATUTORY REFERENCES. All pronouns and all
variations thereof shall be deemed to refer to the masculine, feminine, or
neuter, singular or plural, as the context in which they are used may require.
Any reference to the Code, the Regulations, the Act or other statutes or laws
will include all amendments, modifications, or replacements of the specific
sections and provisions concerned.
XIII.6 HEADINGS. All headings herein are inserted only for
convenience and ease of reference and are not to be considered in the
construction or interpretation of any provision of this Agreement.
XIII.7 INTERPRETATION. In the event any claim is made by any Member
relating to any conflict, omission or ambiguity in this Agreement, no
presumption or burden of proof or persuasion shall be implied by virtue of the
fact that this Agreement was prepared by or at the request of a particular
Member or his or her counsel.
XIII.8 REFERENCES TO THIS AGREEMENT. Numbered or lettered articles,
sections and subsections herein contained refer to articles, sections and
subsections of this Agreement unless otherwise expressly stated.
XIII.9 JURISDICTION; ARBITRATION. Each Member hereby consents to the
exclusive jurisdiction of the state and Federal courts sitting in the States of
California or Nevada in any action on a claim arising out of, under or in
connection with this Agreement or the transactions contemplated by this
Agreement. Each Member further agrees that personal jurisdiction over him or her
may be effected by service of process by registered or certified mail addressed
as provided in Section 13.13 of this Agreement, and that when so made shall be
as if served upon him or her personally within the States of California or
Nevada. Except as otherwise provided in this Agreement, any controversy between
the parties arising out of this Agreement shall be submitted to the National
Association of Securities Dealers, Inc. ("NASD"), or to the New York Stock
Exchange, Inc. ("NYSE") if the NASD refuses to accept jurisdiction. Any such
arbitration shall take place in San Francisco, California. The costs of the
arbitration, including any NASD or NYSE administration fee, the arbitrator's
fee, and costs for the use of facilities during the hearings, shall be borne
equally by the parties to the arbitration. Attorneys' fees may be awarded to the
prevailing or most prevailing party at the discretion of the arbitrator. The
arbitrator shall not have any power to alter, amend, modify or change any of the
terms of this Agreement nor to grant any remedy which is either prohibited by
the terms of this Agreement, or not available in a court of law. Each of the
parties reserves the right to file with a court of competent jurisdiction an
application for temporary or preliminary injunctive relief, writ of attachment,
writ of possession, temporary protective order
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<PAGE> 39
and/or appointment of a receiver on the grounds that the arbitration award to
which the applicant may be entitled may be rendered ineffectual in the absence
of such relief. Judgement upon the award rendered by the arbitrator may be
entered in any Court having jurisdiction thereof.
XIII.10 EXHIBITS. All Exhibits attached to this Agreement are
incorporated and shall be treated as if set forth herein.
XIII.11 SEVERABILITY. If any provision of this Agreement or the
application of such provision to any person or circumstance shall be held
invalid, the remainder of this Agreement or the application of such provision to
persons or circumstances other than those to which it is held invalid shall not
be affected thereby.
XIII.12 ADDITIONAL DOCUMENTS AND ACTS. Each Member agrees to execute
and deliver such additional documents and instruments and to perform such
additional acts as may be necessary or appropriate to effectuate, carry out and
perform all of the terms, provisions, and conditions of this Agreement and the
transactions contemplated hereby.
XIII.13 NOTICES. Any notice to be given or to be served upon the
Company or any party hereto in connection with this Agreement must be in writing
(which may include facsimile) and will be deemed to have been given and received
when delivered to the address specified by the party to receive the notice. Such
notices will be given to a Member or Manager at the address specified in Exhibit
A hereto. Any party may, at any time by giving five (5) days' prior written
notice to the other parties, designate any other address in substitution of the
foregoing address to which such notice will be given.
XIII.14 AMENDMENTS. This Agreement may be amended only upon the
written consent thereto of the Manager and a Majority Interest of the Nonmanager
Members, except that the Manager may amend this Agreement without the consent of
or notice to any of the Members to (a) cure any ambiguity, correct or supplement
any provision in the Agreement which may be inconsistent with any other
provision in this Agreement, or make any other provisions with respect to
matters or questions arising under the Agreement which will not be inconsistent
with the intent of the Agreement; (b) delete or add any provision of the
Agreement required to be so deleted or added by the Securities and Exchange
Commission or by a state securities law administrator or similar such official,
which addition or deletion is deemed by such agency or official to be for the
benefit or protection of the Members; (c) reflect the withdrawal, expulsion,
addition or substitution of Members; (d) reflect the proposal, promulgation or
amendment of Regulations under Code Section 704, if, in the opinion of the
Manager, the amendment does not have a material adverse effect on the Members;
(e) elect for the Company to be bound by any successor statute to the Act if, in
the opinion of the Manager, the amendment does not have a material adverse
effect on the Members; (f) conform the Agreement to changes in the Act or
interpretations thereof which, in the discretion of the Manager, it believes
appropriate, necessary or desirable, if, in its reasonable opinion,
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<PAGE> 40
such amendment does not have a materially adverse effect on the Members or the
Company; (g) change the name of the Company; and (h) make any change which, in
the discretion of the Manager, is advisable to qualify or to continue the
qualification of the Company as a limited liability company or that is necessary
or advisable, in the discretion of the Manager, so that the Company will not be
treated as an association taxable as a corporation for Federal income tax
purposes. Any amendments made pursuant to this Section 13.14 may by its terms be
made effective as of the date of this Agreement.
XIII.15 RELIANCE ON AUTHORITY OF PERSON SIGNING AGREEMENT. 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 entity 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 entity.
XIII.16 NO INTEREST IN COMPANY PROPERTY; WAIVER OF ACTION FOR
PARTITION. No Member or Assignee has any interest in specific property of the
Company. Without limiting the foregoing, each Member and Assignee irrevocably
waives during the term of the Company any right that he or she may have to
maintain any action for partition with respect to the property of the Company.
XIII.17 MULTIPLE COUNTERPARTS. This Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which shall constitute one and the same instrument.
XIII.18 ATTORNEY FEES. In the event that any dispute hereunder should
result in litigation, the prevailing party in such dispute shall be entitled to
recover from the other party all reasonable fees, costs and expenses of
enforcing any right of the prevailing party, including without limitation,
reasonable attorneys' fees and expenses, all of which shall be deemed to have
accrued upon the commencement of such action and shall be paid whether or not
such action is prosecuted to judgement. Any judgement or order entered in such
action shall contain a specific provision providing for the recovery of attorney
fees and costs incurred in enforcing such judgement and an award of
pre-judgement interest from the date of the breach at the maximum rate of
interest allowed by law. For the purposes of this Section: (a) attorney fees
shall include, without limitation, fees incurred in the following: (1)
post-judgement motions; (2) contempt proceedings; (3) garnishment, levy, and
debtor and third party examinations; (4) discovery; and (5) bankruptcy
litigation and (b) prevailing party shall mean the party who is determined in
the proceeding to have prevailed or who prevails by dismissal, default or
otherwise.
XIII.19 REMEDIES CUMULATIVE. The remedies under this Agreement are
cumulative and shall not exclude any other remedies to which any person may be
lawfully entitled.
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XIII.20 POWER OF ATTORNEY. Each Member does hereby constitute and
appoint the Manager its true and lawful representative, in its name, place and
stead, to make, execute, sign, acknowledge, deliver and file all such
instruments, documents and certificates which may from time to time be required
by the laws of the United States of America, the States of California, Nevada
and Delaware, or any other state in which the Company shall determine to do
business, or any political subdivision or agency thereof, to effectuate,
implement and continue the valid and subsisting existence of the Company,
including, without limitations the Certificate and amendments thereto.
IN WITNESS WHEREOF, this Operating Agreement has been executed on the
date first above written, with each person signing below as a Trustee of a trust
warranting and representing that such person has the authority to sign and act
alone without the signature of any other person.
MANAGER
THE SUTRO GROUP
a Nevada corporation
By:
--------------------------------------
John F. Luikart, President
NONMANAGER MEMBERS
John F. and Lorry A. Luikart Revocable Trust
U/D/T dated January 23, 1997
-----------------------------------------
John F. Luikart, Trustee
Bertelsen Family Trust
U/D/T dated December 2, 1988
-----------------------------------------
Thomas E. Bertelsen, Jr., Trustee
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<PAGE> 42
Tom and Nancy Juda Living Trust
U/D/T dated May 3, 1995
-----------------------------------------
Tom Juda, Trustee
Vermut-Weinberger Living Trust
U/D/T dated March 22, 1993
-----------------------------------------
Thomas Weinberger, Trustee
-----------------------------------------
Donald J. Willfong
Lind Family Trust
U/D/T dated September 7, 1990
-----------------------------------------
Robert R. Lind, Trustee
-----------------------------------------
Mark A. Tunney
-----------------------------------------
Mark Rice
-----------------------------------------
John W. Eisele
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<PAGE> 43
-----------------------------------------
Anna Halloran
-----------------------------------------
Michael D. Brown
-----------------------------------------
Brian Kosar
-----------------------------------------
D. Larry Smith
-----------------------------------------
Douglas J. Burke
-----------------------------------------
Joseph A. Boystak
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<PAGE> 44
EXHIBIT A
CAPITAL CONTRIBUTION OF MEMBERS AND ADDRESSES OF MEMBERS
AND MANAGER AS OF
------------------------
<TABLE>
<CAPTION>
- -------------------------------- ----------------------------------- ------------------ ----------------------
Member's Name Member's Capital Member's
Address Contribution Percentage Interest
- -------------------------------- ----------------------------------- ------------------ ----------------------
<S> <C> <C> <C>
John F. and Lorry A. Luikart 2545 Union $ 80,000 4.0
Revocable Trust U/D/T 1/23/97 San Francisco, CA 94123
- -------------------------------- ----------------------------------- ------------------ ----------------------
Bertelsen Family Trust U/D/T P.O. Box 397 $ 80,000 4.0
12/2/88 Ross, CA 94957
- -------------------------------- ----------------------------------- ------------------ ----------------------
Tom and Nancy Juda Living 410 S. Lucerne $ 80,000 4.0
Trust U/D/T 5/3/95 Los Angeles, CA 90020
- -------------------------------- ----------------------------------- ------------------ ----------------------
Vermut-Weinberger Living Trust $ 80,000 4.0
U/D/T 3/22/93
- -------------------------------- ----------------------------------- ------------------ ----------------------
The Sutro Group See below $1,000,000 50.0
- -------------------------------- ----------------------------------- ------------------ ----------------------
Donald J. WillFong 2711 Bella Vista $ 80,000 4.0
Montecito, CA 93108
- -------------------------------- ----------------------------------- ------------------ ----------------------
Lind Family Trust 525 Berkshire Ave. $ 50,000 2.5
U/D/T 9/7/90 La Canada, CA 91011
- -------------------------------- ----------------------------------- ------------------ ----------------------
Mark A. Tunney 11150 Santa Monica Blvd., 15th $ 50,000 2.5
Floor
Los Angeles, CA 90025
- -------------------------------- ----------------------------------- ------------------ ----------------------
Mark Rice 830 So. Windsor $ 50,000 2.5
Los Angeles, CA 90005
- -------------------------------- ----------------------------------- ------------------ ----------------------
John W. Eisele 33 Bay Way $ 80,000 4.0
San Rafael, CA 94901
- -------------------------------- ----------------------------------- ------------------ ----------------------
Anna Halloran 1133 25th St., #12 $ 50,000 2.5
Santa Monica, CA 90403
- -------------------------------- ----------------------------------- ------------------ ----------------------
Michael D. Brown 577 Peruqua Way $ 50,000 2.5
Los Angeles, CA 90077
- -------------------------------- ----------------------------------- ------------------ ----------------------
Brian Kosar 201 California Street $ 50,000 2.5
San Francisco, CA 94111
</TABLE>
A-1
<PAGE> 45
<TABLE>
<CAPTION>
- -------------------------------- ----------------------------------- ------------------ ----------------------
Member's Name Member's Capital Member's
Address Contribution Percentage Interest
- -------------------------------- ----------------------------------- ------------------ ----------------------
<S> <C> <C> <C>
D. Larry Smith 75 Mountain Peak Road $ 80,000 4.0
Chappaqua, NY 10514
- -------------------------------- ----------------------------------- ------------------ ----------------------
Douglas J. Burke 11150 Santa Monica $ 50,000 2.5
Blvd., 15th Floor
Los Angeles, CA 90025
- -------------------------------- ----------------------------------- ------------------ ----------------------
Joseph A. Boystak 125 Ketch Mall $ 90,000 4.5
Marina del Rey, CA 90292
- -------------------------------- ----------------------------------- ------------------ ----------------------
$ 2,000,000 100.000%
================= ========
- -------------------------------- ----------------------------------- ------------------ ----------------------
- ---------------------------------- ---------------------------- ----------------- ----------------------------
Manager's Name Manager's Address
- ---------------------------------- ---------------------------------------------- ----------------------------
The Sutro Group 3773 Howard Hughes Parkway
Suite 190 South
Las Vegas, NV 89109
- ---------------------------------- ---------------------------------------------- ----------------------------
- ---------------------------------- ---------------------------- ----------------- ----------------------------
</TABLE>
A-2
<PAGE> 1
Exhibit 10.44
GENERAL PARTNERSHIP AGREEMENT
THIS GENERAL PARTNERSHIP AGREEMENT (this "Agreement") is effective by
and between the persons who become partners hereto from time to time by
executing a General Partner Execution Page substantially in the form of Exhibit
A hereto (collectively, the "Partners" and individually, a "Partner").
W I T N E S S E T H:
WHEREAS, the Partners are forming a general partnership (the
"Partnership") in, and in accordance with the laws of, the state of Wisconsin
for the purpose of investing from time to time in debt and equity securities
pursuant to the terms and conditions set forth herein; and
WHEREAS, the Partners have joined the Partnership to allow
them to combine their resources; to make investments of sufficient size so that
the Partnership's economic bargaining power enables it to negotiate the terms
upon which investments will be made and to exercise significant influence over
decisions by all investors in connection with such investments; to pool the
available expertise of the Partners; and to increase the liquidity of the
Partners with respect to the interests in the Partnership's investments by
providing for the transfer thereof on the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the
terms and conditions contained herein, the Partners hereby agree as follows:
1. DEFINED TERMS. For purposes of this Agreement, capitalized
terms shall have the meanings assigned to them in Exhibit B hereto.
2. FORMATION OF PARTNERSHIP. The Partnership and its
operations shall commence as of the date of this Agreement.
3. NAME. The name of the Partnership shall be "CGRM
INVESTMENT PARTNERSHIP."
4. TERM. The term of the Partnership shall continue at will
until the Partnership is terminated pursuant to the provisions hereof.
5. PURPOSE. The purpose of the Partnership shall be to provide
for the investment of funds by the buying and selling of securities of every
kind and description.
<PAGE> 2
6. TITLE TO PARTNERSHIP PROPERTY. All property owned by the
Partnership shall be owned by the Partnership as an entity, and no partner,
individually, shall have any ownership of such property. The Partnership may
hold any of its assets in its own name, in the name of a Pool, or in the name of
its nominee, which nominee may be one or more individuals, partnerships, trusts
or other entities.
7. POOLS, UNITS AND CONTRIBUTIONS OF CAPITAL.
7.1. INVESTMENT POOLS. The Investment Committee shall
establish one or more separate Pools for the Partnership's assets, based upon
such criteria as are established by it in its sole discretion. The assets and
liabilities of each Pool shall be segregated from those of any other Pool and be
separately managed by the Investment Committee, and the income, gains,
deductions and losses from each Pool shall be separately determined and
accounted for according to the terms of this Agreement.
7.2. PARTNERSHIP UNITS. The interests of the Partners in the
Pools shall be divided into Units of One Thousand Dollars ($1,000) each
representing ownership of interests in the capital and assets of the given Pool.
There shall be no fractional Units.
7.3. ADDITIONAL CONTRIBUTIONS TO CAPITAL. Upon the acquisition
of a Security pursuant to ARTICLE 18 below, the Investment Committee shall
assign the Security to a Pool, whether previously existing or newly created, and
issue Units in such Pool to each Partner who made an Additional Contribution to
Capital with respect to such Security based on the amount so contributed.
7.4. INTEREST ON CAPITAL. No interest shall be paid on any
capital contribution to the Partnership.
7.5. FISCAL PERIOD; CAPITAL CONTRIBUTION DATES. Additional
Contributions to Capital shall be permitted in accordance with ARTICLE 18 below.
A Fiscal Period for a Pool shall begin on each day on which capital
contributions are permitted with respect to such Pool and shall end on the day
prior to the next day on which capital contributions are permitted and on the
end of each fiscal year.
8. CURRENT INCOME CHARACTERIZATION AND ACCOUNTS.
8.1. CHARACTERIZATION OF CURRENT INCOME. The Accrued Current
Income and Cash Current Income of the Partnership with respect to each Pool
shall be divided by Income Type as shall be
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<PAGE> 3
determined from time to time by the Investment Committee. The Partnership shall
account for all Current Income separately by Income Type on the books of the
Partnership for each Pool and as specifically provided in this Agreement.
8.2. CURRENT INCOME ACCOUNTS.
(a) ESTABLISHMENT BY INCOME TYPE. A separate Income
Account shall be maintained for each Partner participating in the
given Pool for each Income Type earned by such Pool for each Fiscal
Period in which he or she held Units of such Pool.
(b) ADJUSTMENTS. The Income Accounts of a Partner
shall be adjusted at the end of each Fiscal Period as follows:
(i) ACCRUED CURRENT INCOME. There shall be
credited the share of the Accrued Current Income for the
Fiscal Period of each Income Type allocable to such Partner in
accordance with SUBSECTION 10.1(A) below.
(ii) CASH CURRENT INCOME. There shall be debited
the amount of Cash Current Income for the Fiscal Period of
each Income Type distributed to such Partner with respect to
the Fiscal Period in accordance with SUBSECTION 10.1(B) below.
(iii) IN-KIND DISTRIBUTIONS. There shall be
debited the amount, by Income Type, of Accrued Current Income
payable, if any, with respect to Securities distributed in
kind to the Partner with respect to such Fiscal Period
pursuant to SECTION 20.4 below.
9. UNREALIZED GAIN AND UNREALIZED LOSS ACCOUNTS.
9.1. UNREALIZED GAIN ACCOUNT.
(a) ESTABLISHMENT. A separate Unrealized Gain Account
shall be maintained for each Partner with respect to each Pool in
which he or she participates.
(b) ADJUSTMENTS. Each Unrealized Gain Account of a
Partner shall be adjusted at the end of each Fiscal Period as
follows:
(i) UG ADJUSTMENT. There shall be credited an
amount equal to the UG Adjustment for the Fiscal
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<PAGE> 4
Period for the given Pool multiplied by the Partner's Unit
Percentage for such Pool in such Fiscal Period.
(ii) REALIZED GAIN. There shall be debited the
amount of Realized Gain, if any, allocated to the Partner for
such Pool pursuant to SECTION 10.4 below.
(iii) REALIZED LOSS. There shall be credited an
amount equal to the Realized Loss, if any, allocated to the
Partner for such Pool pursuant to SECTION 10.4 below.
(iv) UNREALIZED APPRECIATION. There shall be
debited the amount of Unrealized Appreciation on any Gain
Securities distributed in kind to the Partner from such Pool
with respect to such Fiscal Period pursuant to ARTICLE 20
below.
(v) ALLOCATIONS AWAY. There shall be debited an
amount equal to Realized Gain, if any, allocated away from the
Partner pursuant to SUBSECTION 10.4(C) below in connection
with a sale of Units in the Pool by another Partner in the
Fiscal Period.
9.2.UNREALIZED LOSS ACCOUNT.
(a) ESTABLISHMENT. A separate Unrealized Loss Account
shall be maintained for each Partner with respect to each Pool in
which he or she participates.
(b) ADJUSTMENTS. Each Unrealized Loss Account of a
Partner shall be adjusted at the end of each Fiscal Period as
follows:
(i) UL ADJUSTMENT. There shall be credited an
amount equal to the UL Adjustment for the Fiscal Period for
the given Pool multiplied by the Partner's Unit Percentage
for such Pool in such Fiscal Period.
(ii) REALIZED LOSS. There shall be debited the
amount of Realized Loss, if any, allocated to the Partner
for such Pool pursuant to SECTION 10.4 below.
(iii) REALIZED GAIN. There shall be credited an
amount equal to the Realized Gain, if any, allocated to the
Partner for such Pool pursuant to SECTION 10.4 below.
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<PAGE> 5
(iv) UNREALIZED DEPRECIATION. There shall be debited
the amount of Unrealized Depreciation on any Loss Securities
distributed in kind to the Partner from such Pool with respect
to such Fiscal Period pursuant to ARTICLE 20 below.
(v) ALLOCATIONS AWAY. There shall be debited an
amount equal to Realized Loss, if any, allocated away from the
Partner pursuant to SUBSECTION 10.4(C) below in connection
with a sale of Units in the Pool by another Partner in the
Fiscal Period.
9.3. TIMING. Whenever this Agreement makes reference to a
Partner's balance in his or her Unrealized Gain Account (or Unrealized Loss
Account) "as of the end of a Fiscal Period," such balance shall be determined
after adjustments for the Fiscal Period as provided in PARAGRAPHS 9.1(B)(I) and
9.2(B)(I), but before adjustments for the Fiscal Period as provided in
PARAGRAPHS 9.1(B)(II), (III), (IV), AND (V) and 9.2(B)(II), (III), (IV), AND
(V), respectively.
10. ALLOCATIONS AND DISTRIBUTIONS. All items of income,
deduction, loss and gain shall be allocated and all distributions of cash (other
than pursuant to a dissolution of the Partnership) shall be made to the Partners
in accordance with the following provisions:
10.1. CURRENT INCOME.
(a) ALLOCATIONS FOR ACCOUNT PURPOSES. The Accrued
Current Income of the Partnership for each Pool in each Fiscal
Period shall be allocated for account maintenance purposes by Income
Type among the Partners in proportion to their respective Unit
Percentages in such Pool for such Fiscal Period.
(b) CASH DISTRIBUTIONS. An amount of cash equal to the
Cash Current Income of the Partnership received during each Fiscal
Period from each Pool shall be distributed to the Partners
participating in such Pool as follows:
(i) POSITIVE INCOME ACCOUNTS. First, by Income Type
to those Partners with positive balances in Income Accounts of
the respective Income Types from such Pool with respect to
prior Fiscal Periods in the chronological order thereof, for
each such Fiscal Period in proportion to and to the extent of
such positive balances for that Period.
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<PAGE> 6
(ii) PRO RATA. Second, the excess, if any, by Income
Type to the Partners in proportion to their respective Unit
Percentages in such Pool.
(c) DISTRIBUTIONS TO SELLING PARTNERS. There shall be no
special distributions to Selling Partners with respect to their
Income Accounts. In the event a Partner sells all of his Units in a
Pool or withdraws entirely from the Partnership and has a remaining
balance in his or her Income Account for such Pool as of the end of
the Fiscal Period of Sale, such Partner shall be considered to have
retained an income interest in the Partnership and be entitled to
distributions of Cash Current Income received and, in the case of
write-downs, allocations of Accrued Current Income adjustments made
in subsequent Fiscal Periods by Income Type pursuant to SUBSECTIONS
10.1(A) AND (B) above until the balance in each of his or her Income
Accounts by Income Type, as adjusted in accordance with SUBSECTION
8.2(B) above, has been reduced to zero.
(d) ALLOCATIONS FOR TAX PURPOSES. For tax purposes,
taxable and nontaxable Current Income of the Partnership shall be
allocated by Income Type among the Partners in accordance with the
amounts of Cash Current Income that is distributed to the Partners
with respect to a Fiscal Period.
10.2. EXPENSES.
(a) INVESTMENT MANAGEMENT EXPENSE. Investment Management
Expenses shall be deemed to have been incurred in the Fiscal Period
to which they would be chargeable under the accrual method of
accounting for purposes of charging the Partners therefor. All
Investment Management Expenses for a Pool in a Fiscal Period shall
be allocated and charged to the Partners in proportion to their Unit
Percentages in such Pool for the Fiscal Period. Investment
Management Expenses paid by the Partnership shall be treated as
distributions to the Partners, in each case to the extent of such
expenses charged to him.
(b) TRANSACTION COSTS. Transaction Costs shall be treated
as increases or decreases, as the case may be, in the acquisition
costs or proceeds from disposition of Securities.
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<PAGE> 7
10.3. DISTRIBUTIONS OF GAIN AND LOSS. Distributions of
proceeds of any sale, exchange or other disposition of Securities shall be made
pursuant to SECTION 20.4 below.
10.4. ALLOCATIONS OF GAIN AND LOSS.
(a) GENERAL ALLOCATIONS. Subject to the special
allocation provisions of SUBSECTIONS 10.4(B) AND (C) below, the
Realized Gain or Realized Loss or both, if any, from each Pool for
each Fiscal Period shall be allocated pursuant to this SUBSECTION
10.4(A).
(i) REALIZED GAINS. Realized Gains shall be
allocated to those Partners participating in such Pool who had
positive balances in their Unrealized Gain Accounts for such
Pool as of the end of such Fiscal Period to the extent of and
in proportion to such positive balances.
(ii) REALIZED LOSSES. Realized Losses shall be
allocated to those Partners participating in such Pool who had
negative balances in their Unrealized Loss Accounts for such
Pool as of the end of such Fiscal Period to the extent of and
in proportion to such negative balances.
(b) INITIAL PRIORITY ALLOCATION OF GAINS AND LOSSES TO
SELLING PARTNERS. Notwithstanding SUBSECTION 10.4(A), in the event
one or more Partners has a balance in a Redemption UGA or Redemption
ULA as of the end of the Fiscal Period (including Partners electing
to sell all or a portion of their Units in a Pool as of the last day
of such Fiscal Period), there shall be an Initial Priority
Allocation of the Partnership's Realized Gain and Realized Loss from
such Pool for such Fiscal Period, to be made in the following
manner:
(i) REALIZED GAIN. Realized Gain from such Pool
shall be allocated:
(A) first to any Partner who sold all of his
or her Units in a Pool in any preceding Fiscal Period
and carried over a positive balance in such Partner's
Redemption UGA or Redemption ULA to the current Fiscal
Period;
(B) next to any Partner who sells all or a
portion of his or her Units in a Pool as of the end of
the current Fiscal Period and would
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<PAGE> 8
otherwise carry over a positive balance in such
Partner's Redemption UGA or Redemption ULA; and
(C) the remainder among all Partners
participating in such Pool in the manner set forth in
SUBSECTION 10.4(A) above after adjusting the Selling
Partner's Unit Percentage in such Pool and Unrealized
Gain Account to reflect such sales and the allocations
pursuant to this PARAGRAPH 10.4(B)(I).
(ii) REALIZED LOSS. Realized Loss from such Pool
shall be allocated:
(A) first to any Partner who sold all of his
or her Units in a Pool in any preceding Fiscal Period
and carried over a negative balance in such Partner's
Redemption ULA or Redemption UGA to the current Fiscal
Period;
(B) next to any Partner who sells all or a
portion of his or her Units in a Pool as of the end of
the current Fiscal Period and would otherwise carry over
a negative balance in such Partner's Redemption ULA or
Redemption UGA; and
(C) the remainder among all Partners
participating in such Pool in the manner set forth in
SUBSECTION 10.4(A) above after adjusting the Selling
Partner's Unit Percentage in such Pool and Unrealized
Loss Account to reflect such sales and the allocations
pursuant to this PARAGRAPH 10.4(B)(II).
(c) SECONDARY PRIORITY ALLOCATIONS. In the event that any
Partner who sold all of his or her Units in a Pool in a preceding
Fiscal Period carried over a balance other than zero to the current
Fiscal Period in either his or her Redemption UGA or Redemption ULA
and such balance or balances were not reduced to zero as of the end
of the current Fiscal Period by the Initial Priority Allocations
made pursuant to SUBSECTION 10.4(B) above, there shall be Secondary
Priority Allocations of the Realized Gain or Realized Loss or both
of the Partnership from prior Fiscal Periods in the same fiscal year
in the manner and to the extent set forth in this SUBSECTION
10.4(C).
(i) SAME CHARACTER. If there is a balance remaining
in either such Partner's Redemption UGA or
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<PAGE> 9
Redemption ULA, there shall be a special allocation of
Realized Gain and Realized Loss, as the case may be, with
respect to Fiscal Periods prior to the Fiscal Period of Sale
during the same fiscal year of the sale as follows:
(A) An amount of Realized Gain shall be
allocated to such Selling Partner and away from the
Continuing Partners up to an amount sufficient to offset
any positive balance in such Partner's Redemption UGA or
Redemption ULA after such allocation; and
(B) An amount of Realized Loss shall be
allocated to such Selling Partner and away from the
Continuing Partners up to an amount sufficient to offset
any negative balance in such Partner's Redemption ULA or
Redemption UGA after such allocation.
(ii) OPPOSITE CHARACTER. In the event that there
shall still remain a balance in either the Redemption UGA or
Redemption ULA of any such Selling Partner after the special
allocation pursuant to PARAGRAPH 10.4(C)(I) above, there shall
be an additional allocation of Realized Gain and Realized
Loss, as the case may be, as follows:
(A) If there remains a positive balance in
such Partner's Redemption UGA or Redemption ULA, there
shall be a special allocation of Realized Loss with
respect to Fiscal Periods during the same fiscal year of
the sale (and not previously specially allocated
pursuant to PARAGRAPH 10.4(C)(1) above) away from the
Selling Partner and to the Continuing Partners (in
proportion to their respective Unrealized Loss Account
balances), up to an amount sufficient to offset such
positive balance in such Partner's Redemption UGA or
Redemption ULA; and
(B) If there remains a negative balance in
such Partner's Redemption ULA or Redemption UGA, there
shall be a special allocation of Realized Gain with
respect to Fiscal Periods during the same fiscal year of
the sale (and not previously specially allocated
pursuant to PARAGRAPH 10.4(C) II) above) away from the
Selling Partner and to the Continuing Partners (in
proportion to
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<PAGE> 10
their respective balances), up to an amount equal to
offset such negative balance in such Partner's
Redemption ULA or Redemption UGA.
10.5. ORDERING OF PRIORITY ALLOCATIONS.
(a) CONTINUING PARTNERS. The Realized Gain or Realized
Loss or both to be specially allocated to a Selling Partner or
Partners pursuant to SUBSECTION 10.4(C) above shall be allocated
away from the Continuing Partners in the given Pool in proportion to
the aggregate Realized Gains or Realized Losses, as the case may be,
allocated to the Continuing Partners from the Pool with respect to
prior Fiscal Periods within such fiscal year before any adjustments
pursuant to SUBSECTION 10.4(C) above with respect to the current
Fiscal Period.
(b) SELLING PARTNERS. If there is more than one Partner
to whom a Priority Allocation is being made under any given
Paragraph of SUBSECTIONS 10.4(B) OR (C) above, the Priority
Allocation shall be made in proportion to and to the extent of the
respective balances being offset in the Redemption UGAs and
Redemption ULAs as a result thereof.
(c) PRIOR SALES. Priority Allocations being made under
any given Paragraph of SUBSECTION 10.4(B) OR (C) above shall be made
first with respect to the earliest Fiscal Period to which such
Allocation is being made and sequentially thereafter to subsequent
Fiscal Periods. In the event that a Partner elects to sell all of
his or her Units in a Pool and there has been a sale of all of
another Partner's Units in such Pool in prior Fiscal Periods, the
Priority Allocations, if any, required under SUBSECTIONS 10.4(B) OR
(C) above for the subsequent Selling Partner shall not affect, and
shall be made after giving effect to, the Priority Allocations made
with respect to such prior Selling Partner.
(d) SHORT-TERM AND LONG-TERM ALLOCATIONS. Realized Gains
and Realized Losses shall be characterized as either short-term or
long-term at the time of recognition and shall be accounted for as
such on the books of the Partnership. Except as provided below,
whenever an allocation of Realized Gain and Realized Loss is made
under this Agreement, such allocation shall consist of short-term
and long-term gains or losses, as the case may be, in the same
proportion as the total short-term and long-term gains and losses of
the given Pool for such Fiscal Period, as the case may be, bear to
the total Realized Gain and Realized Loss of
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<PAGE> 11
such Pool for the Fiscal Period. If within a fiscal year a Partner
or Partners shall withdraw from a Pool or if a Partner or Partners
shall sell Units in a Pool on dates other than the last day of the
fiscal year, the Investment Committee shall make adjustments in the
proportions of Realized Gains and Realized Losses allocated to the
Partners that consist of short-term and long-term gains and losses
as shall equitably take into account such interim year events, and
the determination thereof by the Investment Committee shall be final
and conclusive as to all of the Partners.
(e) CURATIVE ALLOCATIONS. The allocations set forth in
this ARTICLE 10 are intended to comply in substance with the
requirements of Section 1.704-1(b) of the Regulations by providing
for the allocation of tax attributes in accordance with the actual
economic substance of each Partner's investment. Accordingly,
notwithstanding anything in this ARTICLE 10 to the contrary, the
Investment Committee, in consultation with the Partnership's
accountants and attorneys, may make any special allocation of
income, gain, loss or deduction for tax purposes deemed necessary to
make the allocations provided herein for any fiscal year comply with
the Regulations promulgated under Section 704 of the Code. To the
extent any such special allocation differs from the allocation that
would otherwise have been made under this ARTICLE 10, it shall be
taken into account in computing subsequent allocations of income,
gain, loss or deduction among the Partners so that, to the extent
possible, the net amount of allocations of such items to the
Partners shall be equal to the net amount that would have been
allocated to each Partner if such special allocation had not
occurred.
11. DISTRIBUTIONS AND EXPENSES.
11.1 DISTRIBUTIONS. Distributions shall be made at the time
and in the manner determined by the Investment Committee in accordance with this
Agreement.
11.2. EXPENSES.
(a) TRANSACTION COSTS. Transaction Costs shall be treated
as increases or decreases, as the case may be, in the acquisition
costs or proceeds from dispositions of Securities.
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<PAGE> 12
(b) OTHER EXPENSES. All other expenses of the Partnership
shall be allocated between the Pools in proportion to their relative
values, or upon such other reasonable method as is determined by the
Investment Committee.
12. FISCAL YEAR. The fiscal year of the Partnership shall be
the calendar year.
13. BOOKS AND RECORDS. Full and accurate books of the
Partnership shall be maintained at the Partnership's principal place of
business, showing all receipts and expenditures, assets and liabilities, profits
and losses, and all other records necessary for recording the Partnership's
business and affairs, including those sufficient to record the allocations and
distributions provided herein. Such books and records shall be open to the
inspection and examination by all Partners in person or by their duly authorized
representatives at reasonable times.
14. REPORTS. Each Partner who was a member of the Partnership
during each fiscal year shall, within ninety (90) days of the end of such fiscal
year, be furnished with a copy of the financial statements of the Partnership,
along with a statement of such Partner's share of the Partnership's profits or
losses, and deductible items, for such fiscal year, in sufficient detail to
allow such Partner to prepare his or her state and federal income tax returns in
accordance with the laws, rules and regulations then prevailing.
15. METHOD OF ACCOUNTING. The Partnership's books and accounts
shall be maintained in accordance with the cash method of accounting for
financial and income tax reporting purposes. The Partnership's method of
accounting may be modified from time to time in the discretion of the Investment
Committee in reliance upon advice of the Partnership's custodian of assets,
counsel, accountants or any of the foregoing.
16. VALUATION OF SECURITIES. The value of Securities held by
each Pool shall be determined by the Investment Committee as of the first day of
each Fiscal Period of the Pool within thirty (30) days thereof. Notice of such
valuation shall be provided to each Partner within fifteen (15) days of such
determination.
17. SECTION 754 ELECTION. The Partnership shall not file an
election in accordance with Section 754 of the Code to adjust the basis of
Partnership property in the case of a distribution of property within the
meaning of Section 734 of the Code, and in the case of a transfer of a
Partnership interest,
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within the meaning of Section 743 of the Code, without the consent of all
Partners.
18. MANAGEMENT OF THE PARTNERSHIP.
18.1. INVESTMENT COMMITTEE. The overall management and
control of the business and affairs of the Partnership shall be vested solely in
the Investment Committee.
(a) MEMBERS. The Investment Committee shall consist of
four (4) members, each of whom must be an Active Partner.
(b) ELECTION. The members of the Investment Committee
shall be elected by the affirmative vote of Partners whose interests
in the Partnership as of the Valuation Date immediately preceding
such vote represent more than fifty percent (50%) of all interests
in the Partnership.
(c) TERM. Each member of the Investment Committee shall
serve until the earlier of the following: (i) his or her successor
is duly elected; (ii) he or she resigns or ceases to be an Active
Partner; or (iii) he or she is removed by the affirmative vote of
Partners whose interests in the Partnership as of the Valuation Date
immediately preceding such vote represent more than fifty percent
(50%) of all interests in the Partnership.
18.2. AUTHORITY OF THE INVESTMENT COMMITTEE. In managing the
business and affairs of the Partnership, each member of the Investment
Committee, acting in the manner described in SECTION 18.3 below, shall have all
the rights, powers and duties of a general partner as provided in the Wisconsin
Partnership Act, including, but not limited to, the right to invest Partnership
funds, sell Partnership Securities, and execute any deed or instrument in
pursuance of any of the foregoing. No other Partner shall have implied,
apparent, or actual authority to act on behalf of the Partnership except as
expressly, affirmatively, and actually authorized pursuant to this ARTICLE 18.
18.3. PARTNERSHIP ACTIONS. All actions of the Partnership
shall be taken pursuant to this SECTION 18.3.
(a) PARTNER CONSENT. Any action that may be taken by the
Partnership under this Agreement may be taken by the consent of a
number of Partners whose aggregate capital accounts at the time of
the consent represent eighty percent (80%) by value of the aggregate
capital of the
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Partnership. Unless a Partner affirmatively dissents in writing
within twenty-four (24) hours of notice of an action taken by the
Investment Committee, he or she will be conclusively presumed to
have consented to such action.
(b) MAJORITY CONSENT. Except as specifically provided to
the contrary in SECTIONS 18.4 AND 18.5 below, actions of the
Investment Committee shall be taken with the approval of a majority
by number of its members. Notwithstanding the foregoing, the
Investment Committee may, in its sole discretion, delegate authority
to any of its members to act unilaterally with respect to managerial
tasks of the Partnership, including maintaining the various Partner
accounts and acting as the tax matters partner for the Partnership
as defined in Section 6231(a)(7) of the Code.
(b) AUTHORITY TO ACT. Each member of the Investment
Committee shall have the authority to unilaterally perform actions
on behalf of the Partnership that are approved by the Investment
Committee pursuant to SUBSECTION (A), above. Any person dealing with
the Partnership or the Investment Committee may rely upon a
certificate signed by any member of the Investment Committee as to:
(i) PARTNERS. The identity of the Partners and the
members of the Investment Committee;
(ii) POWER. The existence or non-existence of any
fact or facts that constitute a condition precedent to acts by
the Partnership, the Investment Committee or the Partners, or
any other matter germane to the affairs of the Partnership;
(iii) AUTHORIZATION. The persons who are authorized
to execute and deliver any instrument or document on behalf of
the Partnership; or
(iv) FACTS. Any act or failure to act by the
Investment Committee or the Partners or as to any other matter
whatsoever involving the Partnership, the Investment Committee
or any Partner.
18.4. ACQUISITION OF SECURITIES. Approval, pursuant to
SUBSECTION 18.3(A) above, of the acquisition of Securities shall be given in the
manner provided in this SECTION 18.4.
(a) DETERMINATION OF SUITABILITY. The Investment
Committee shall review such Securities as it deems appropriate in
its sole discretion to determine the suitability of
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such Securities as potential investment opportunities for the
Partnership. In making such determination with respect to each such
Security, the Investment Committee and the members thereof shall:
(i) CONTACT. Be the exclusive contact as between the
Partnership and the person or persons offering or presenting
the Security as a potential investment unless the Investment
Committee has specially appointed another person to so act;
(ii) POTENTIAL. Consider the potential for capital
appreciation or income or both presented by the Security;
(iii) RISK. Evaluate the potential liabilities or
losses presented by any credit or other obligations associated
with the Security or by the Security itself;
(iv) SUITABILITY. Assess the Security's suitability
in terms of the Partnership's investment policies as
established from time to time;
(v) ETHICS. Ascertain whether investment in the
Security is inconsistent with the professional
responsibilities and interests of the Partners; and
(vi) OTHER CONSIDERATIONS. Review the Security with
respect to any other matter deemed relevant by the Investment
Committee.
(b) EFFECT OF SUITABILITY DETERMINATION. A determination
by the Investment Committee of the suitability of a Security as an
investment for the Partnership shall be conclusive and binding;
provided, however, that the Investment Committee may, of its own
accord, reevaluate any Security previously rejected by it. If the
Investment Committee determines:
(i) UNSUITABLE. That a Security is not a suitable
investment, the Partnership shall not invest any of its
capital in or with respect to such Security; or
(ii) SUITABLE. That a Security is a suitable
investment, it shall establish the maximum investment amount
for the Partnership and the Partners with respect to such
Security and notify the Partners of
15
<PAGE> 16
such results in the manner provided in SUBSECTION (C) below.
(c) NOTICE OF SUITABILITY. The notice given to each
Partner of each suitable Security (the "Notice of Suitability")
shall include the following:
(i) DESCRIPTION. A description of the Security being
considered, including, when appropriate, the offering
memorandum or similar document received by the Investment
Committee.
(ii) PARTNERSHIP'S INVESTMENT. The maximum
investment that the Partnership will be allowed to make with
respect to such Security;
(iii) PARTNER'S INVESTMENT. As to each Partner, the
maximum participation that such Partner will be allowed with
respect to such Security;
(iv) PROCEDURE. The time period within which the
receiving Partner must respond to the Investment Committee
pursuant to SUBSECTION (D) below.
(d) PARTNER RESPONSE. Each Partner shall, within the
time period specified in the Notice of Suitability:
(i) INTEREST OF PARTNER. Advise the Investment
Committee of whether such Partner is in favor of or opposes an
investment by the Partnership in such Security; and
(ii) LEVEL OF PARTICIPATION. If in favor of an
investment in such Security, provide the Investment Committee
with a non-binding estimate of the amount such Partner would
be willing to contribute with respect to such Security, not to
exceed the maximum participation for such Partner provided in
the Notice of Suitability.
(e) INVESTMENT DETERMINATION. After receipt of the
Partner responses to a Notice of Suitability, the Investment
Committee shall make a determination by majority vote of whether
there is sufficient Partner interest in investing in the Security,
which determination shall be binding and conclusive; provided,
however, that the Investment Committee may, of its own accord,
reevaluate any
16
<PAGE> 17
Security previously rejected by it. If the Investment Committee
determines:
(i) INSUFFICIENT PARTNER INTEREST. That there is
not sufficient Partner interest in making such investment, it
shall so inform the Partners, and the Partnership shall not
invest any of its capital in or with respect to such Security;
or
(ii) SUFFICIENT PARTNER INTEREST. That there is
sufficient Partner interest in making such investment, it
shall calculate the investment proposed to be made by the
Partnership in the Security and provide to the Partners who
responded in favor of investing in such Security a notice in
the form provided in SUBSECTION (F) below.
(f) NOTICE OF INVESTMENT. The notice given to each
Partner of the proposed investment by the Partnership in a Security
(the "Notice of Investment") shall include the following:
(i) CONTRIBUTION. The amount of the Additional
Contribution to Capital to be made by such Partner with
respect to such Security, not to exceed the amount estimated
by the Partner as the amount he or she would be willing to
contribute in response to the Notice of Intent, and the terms
and conditions of the Contribution; and
(ii) PARTICIPATION. The anticipated level of
participation of the Partner with respect to such Security
upon such Additional Contribution to Capital.
(g) APPROVAL OF INVESTMENT. Any Partner receiving a
Notice of Intent must respond in the manner provided therein to
participate in the proposed investment in the Security, including
the timely payment of the Additional Contribution to Capital. Upon
the receipt of the Additional Contributions to Capital of such
Partners, the Investment Committee shall determine whether
sufficient capital contributions have been made to meet the intended
investment level anticipated by the Investment Committee. If the
Investment Committee determines:
(i) DISAPPROVAL. That there has not been a
sufficient Additional Contributions to Capital to make the
proposed investment, it shall determine whether or not to
resubmit consideration of the Security to the
17
<PAGE> 18
Partners who have made Additional Contributions to Capital
with respect thereto in a manner similar to that provided in
SUBSECTION (F) above. If it determines not to so resubmit or
that the Security cannot or should not otherwise be acquired,
the Partnership shall not invest any of its capital in or with
respect to such Security and the Additional Contributions to
Capital shall be returned to the respective Partners who made
them; or
(ii) APPROVAL. That there has been sufficient
Additional Contributions to Capital to make the proposed
investment and, by the unanimous consent of its members, that
the Security should be acquired, it shall approve and
authorize the acquisition of such Security pursuant to
SUBSECTION 18.3(B) above.
18.5. DISPOSITION OF SECURITIES. The disposition of Securities
shall be approved pursuant to SUBSECTION 18.3(A) above in the manner provided in
this SECTION 18.5.
(a) EVALUATION OF PROPOSED DISPOSITION. The Investment
Committee shall evaluate Securities held by the Partnership at the
times and in the manner it deems appropriate in its sole discretion.
If the Investment Committee proposes to dispose of a Security, it
shall provide notice to the Partners of the proposed disposition,
the material terms thereof and the manner in which each Partner may
provide to the Investment Committee comments with respect to the
proposed disposition.
(b) APPROVAL OF DISPOSITION. The Investment Committee
shall determine in its sole discretion whether to dispose of a
Security taking into consideration the factors listed in SUBSECTION
18.4(A) above, and the comments, if any, of the Partners with
respect to the proposed disposition. If it determines by the
unanimous consent of its members that the Security should be
disposed of, it shall approve and authorize the disposition of such
Security pursuant to SUBSECTION 18.3(B) above.
(c) DISTRIBUTION OF PROCEEDS. Proceeds from the
disposition of a Security shall be distributed in accordance with
SECTION 20.4 BELOW.
18.6. SERVICES OF INVESTMENT COMMITTEES. During the existence
of the Partnership, the Investment Committee shall devote such time and effort
to the Partnership business as may be necessary to promote adequately the
interests of the Partnership
18
<PAGE> 19
and the mutual interests of the Partners; however, it is specifically understood
and agreed that the members of the Investment Committee shall not be required to
devote their full-time attention to Partnership business.
18.7. LIABILITY OF MEMBERS OF THE INVESTMENT COMMITTEE;
INDEMNIFICATION. No member of the Investment Committee shall be liable,
responsible or accountable in damages or otherwise to the Partnership or the
Partners for any act or omission performed or omitted in good faith on behalf of
the Partnership and in a manner believed by the member to be within the scope of
the authority granted by this Agreement and in the best interests of the
Partnership if he or she shall not have been guilty of gross negligence or
willful misconduct with respect to such acts or omissions. Each member of the
Investment Committee shall be indemnified by the Partnership for any act
performed by him or her within the scope of the authority conferred upon him or
her by this Agreement; provided, however, such indemnity shall be payable only
if the member acted in good faith and in a manner he or she believed to be in,
or not opposed to, the best interests of the Partnership and the Partners. Any
indemnity under this SECTION 18.7 shall be paid from, and only to the extent of,
Partnership assets, and the Partners shall not have any personal liability on
account thereof.
19. ADMISSION OF NEW PARTNERS.
19.1. ADMISSION. Additional Partners may be admitted to the
Partnership by the Investment Committee on such terms and conditions as it shall
determine. The admission of any new Partners shall be subject to the condition
that each such new Partner shall execute a General Partner Execution Page
pursuant to which he or she agrees to be bound by the terms and provisions
hereof.
19.2. CAPITAL CONTRIBUTIONS OF NEW PARTNERS. Each new Partner
shall have no economic interest in or to the assets of the Partnership unless
and until he or she makes an Additional Contribution to Capital pursuant to
SECTION 18.4 above, and then only as and to the extent represented by the Units
received pursuant to SECTION 7.3 above.
19.3. CONTINUATION OF PARTNERSHIP. Admission of a new
Partner shall not be cause for dissolution of the Partnership.
20. NATURE OF PARTNERS' INTERESTS.
20.1. PARTNER'S OWNERSHIP OF PARTNERSHIP PROPERTY. Each
Partner shall have and own during a Fiscal Period an
19
<PAGE> 20
undivided interest in each Pool in which he or she has invested, equal to his or
her Unit Percentage therein for such Fiscal Period. No Partner shall have an
interest in and to specific Securities held by the Partnership, nor may any
Partner compel the distribution of any Security or an interest therein in kind.
20.2. ASSIGNABILITY OF INTERESTS. Interests in the
Partnership are not assignable and any attempted or purported sale, exchange,
assignment, or other transfer shall be void.
20.3. ASSIGNABILITY OF UNITS. A Partner may not sell, assign,
exchange, distribute, or otherwise transfer all or any portion of his or her
Units to any person, except to another Partner effective on the last day of a
Fiscal Period with the consent of the Investment Committee or to the
Partnership, pursuant to SECTION 20.4 below. Any other attempted assignment or
substitution shall be void. Any such sale by a Partner of all of his or her
Units shall not effect a transfer or assignment of his or her Partnership
Interest.
20.4. PROCEDURE FOR SALE OR REDEMPTION. Except as provided in
ARTICLE 22 below, Units shall be sold or redeemed by the Partnership only
pursuant to this SECTION 20.4.
(a) SALE OF UNITS. Any Partner desiring to sell all or a
portion of his Units to another Partner must give at least sixty
(60) days' prior notice of the proposed sale and the material terms
thereof to the Investment Committee. The Investment Committee shall
promptly notify all Partners proposing to buy or sell Units of a
Pool of the material terms of such proposed transfers to attempt to
establish uniformity in the valuation thereof. The Investment
Committee shall reasonably determine whether to allow any such
proposed sale to proceed, taking into consideration the effect of
the proposed sale price on the allocation of Unrealized Gains and
Unrealized Losses, and inform the affected Partners of its decision
at least fifteen (15) days prior to the proposed sale date.
(b) LIQUIDATION OF POOL. Upon the liquidation of all or
part of the Securities in a given Pool, the Partnership shall
purchase from each Partner holding Units in such Pool a number of
Units in such Pool bearing the same ratio to the number of such
Units as the liquidated Securities bore to the total value of the
Pool. The purchase price for such Units shall be the Net Asset Value
per Unit. There shall be no purchase of fractional Units. The
purchase price shall be paid as promptly as is reasonably possible
following the purchase date.
20
<PAGE> 21
(c) COMPLETE REDEMPTION OF PARTNER. A Partner may
withdraw from the Partnership only with the consent of the
Investment Committee, subject at all times to applicable securities
laws and any other restrictions on the transactions described in
this Subsection.
(i) VALUATION. The price at which the Selling
Partner's Units will be redeemed, if any, shall be determined
by the mutual agreement of the Selling Partner and the
Investment Committee. If such parties are unable to reach such
agreement, the Selling Partner shall cease to be an Active
Partner and the Selling Partner's sole remedy shall be to
remain a Partner until the Pools in which he participates have
been liquidated and he has received his purchase price
pursuant to SUBSECTION (B) above.
(ii) REDEMPTION DISTRIBUTION. Upon a Partner's
withdrawal, the Partnership shall, to the extent reasonably
practicable, distribute to the Partner cash or property or
both, as determined by the Investment Committee in its sole
discretion, having an aggregate value equal to the aggregate
value of the Units held by the withdrawing Partner. Such
distributions shall be given the effect described in ARTICLE
10 above relating to allocations of income, gain, deduction
and loss.
(iii) INCOMPLETE DISTRIBUTION. To the extent the
Partnership cannot with reasonable practicality make such a
distribution, the withdrawing Partner shall retain an economic
interest in the Partnership until he or she has received full
value for his or her Units. Such withdrawing Partner shall
cease to be considered an Active Partner as of the effective
day of his or her withdrawal.
(d) RETAINED INTEREST. Notwithstanding the provisions of
SUBSECTIONS (B) AND (C) above, a Selling Partner shall, for purposes
of ARTICLE 10 above, be considered to be participating in any Pool
with respect to which he or she has sold or redeemed all of his or
her Units until the balance in each of his or her capital accounts
for such Pool, as adjusted in accordance with SECTION 9 above, has
been reduced to zero to the extent provided therein and shall also
be subject to the provisions of SUBSECTION 10.1(C) above as provided
therein.
21
<PAGE> 22
(e) HARDSHIP SALES. Notwithstanding the foregoing
provisions of this SECTION 20.4, the Investment Committee may allow
sales or purchases of Units in cases of hardship on the terms and
conditions determined by it in its sole discretion.
20.5. AUTHORITY OF PARTNERS. Except as provided in ARTICLE 18
above with respect to Partners who are members of the Investment Committee, no
Partner shall have any authority to act for or on behalf of the Partnership.
21. ABSOLUTE RESTRICTIONS ON TRANSFER. No transfer,
assignment or issuance of Units or any interest in the Partnership may be made
if, in the opinion of counsel for the Partnership, such transfer or assignment
would create a default under any material contract or agreement to which the
Partnership is a party, may result in the Partnership's being treated as an
association for federal income tax purposes, or would violate any applicable
federal or state securities laws.
22. DISSOLUTION AND TERMINATION.
22.1. EVENTS OF DISSOLUTION. The Partnership shall be
dissolved upon the withdrawal, termination, dissolution or bankruptcy of a
Partner unless, within the time specified in this Agreement, the remaining
Partners elect to continue the business of the Partnership and elect a successor
member to the Investment Committee, if necessary, pursuant to the terms and
conditions of this Agreement. Dissolution of the Partnership shall be effective
on the day on which the event occurs giving rise to the dissolution, but the
Partnership shall not terminate until the assets of the Partnership shall have
been distributed as provided herein. Notwithstanding the dissolution of the
Partnership, prior to the termination of the Partnership as aforesaid, the
business of the Partnership and the affairs of the Partners, as such, shall
continue to be governed by this Agreement. Upon dissolution, the Investment
Committee or, if there be none, a liquidator appointed by Partners representing
a majority by value of all of the Units in the Partnership shall liquidate the
assets of the Partnership, apply and distribute the proceeds thereof as
contemplated by this Agreement and cause the termination of the Partnership.
22.2. CONTINUATION OF THE PARTNERSHIP. Notwithstanding the
occurrence of an event specified in SECTION 22.1 above, the Partnership shall
not be dissolved and its business and affairs shall not be discontinued if the
remaining Partners elect to continue the Partnership and the Partnership
business. If the
22
<PAGE> 23
Partners do not elect to continue the business, the Partnership shall be
dissolved and terminated.
22.3. WINDING UP OF THE PARTNERSHIP. After payment from each
Pool of liabilities owing to its creditors, the Investment Committee or
liquidator shall set up such reserves for each Pool as he or she deems
reasonably necessary for any contingent or unforeseen liabilities or obligations
of such Pools. Said reserves may be paid over by the Investment Committee or
liquidator to a bank, to be held in escrow for the purpose of paying any such
contingent or unforeseen liabilities or obligations and, at the expiration of
such period as the Investment Committee or liquidator may deem advisable, such
reserves shall be distributed to the Partners or their assigns in the manner set
forth in SECTION 22.4 below.
22.4. DISTRIBUTIONS UPON LIQUIDATION.
(a) CASH DISTRIBUTION. After paying liabilities and
providing for reserves in the manner described in SECTION 22.3,
above, the Investment Committee or liquidator shall cause the
remaining net assets of each Pool to be liquidated or distributed to
the Partners holding Units in such Pool in proportion to their
respective capital accounts with respect to such Pools. In the event
that any part of such net assets consist of notes or accounts
receivable or other non-cash assets, the Investment Committee or
liquidator shall take whatever steps he or she deems appropriate to
convert such assets into cash or into any other form which would
facilitate the distribution thereof.
(b) IN-KIND DISTRIBUTION. If any assets of a pool are to
be distributed in kind, undivided interests as tenants in common in
such assets shall be distributed to the Partners holding Units in
such Pool in proportion to the capital accounts maintained with
respect to such Pool.
(c) NO RECOURSE. Each holder of Units shall look solely
to the assets of the given Pool for all distributions from the
Partnership and the return of his or her Capital Contribution
thereto and shall have no recourse (upon dissolution or otherwise)
against any other Pool, the Investment Committee, any Partner, or
any of their affiliates.
23. MISCELLANEOUS.
23.1. SUCCESSORS AND ASSIGNS. Subject to the restrictions on
transfer set forth herein, this Agreement, and each and
23
<PAGE> 24
every provision hereto, shall be binding upon and shall inure to the benefit of
the Partners, their respective successors and assigns, and each and every
successor-in-interest to any Partner, whether such successor acquires such
interest by way of gift, purchase, foreclosure, or by any other method, shall
hold such interest subject to all of the terms and provisions of this Agreement.
23.2. POWER OF ATTORNEY. A Partner, by the execution of this
Agreement or any counterpart thereof, does hereby irrevocably constitute and
appoint the separate members of the Investment Committee and any person or
entity who becomes a substitute or additional member of the Investment
Committee, in each case with full power of substitution, his or her true and
lawful agent and attorney-in-fact, with full power and authority in his or her
name, place and stead, to make, execute, acknowledge, swear to, deliver, file
and record such documents and instruments as may be necessary or appropriate to
carry out the provisions of this Agreement, including, but not limited to, such
amendments to this Agreement, as amended from time to time, as are necessary to
effectuate the provisions of this Agreement, to admit a substituted or
additional Partner to the Partnership pursuant to ARTICLE 19 above, or to carry
out the purpose of this Agreement or comply with applicable law. The foregoing
power of attorney, being coupled with an interest, is hereby declared to be
irrevocable, and shall survive the death, dissolution or incapacity of any
Partner.
23.3. ENTIRE AGREEMENT. This Agreement constitutes the full
and complete agreement of the parties hereto with respect to the subject matter
hereof.
23.4. ARBITRATION.
(a) GENERAL DISPUTES. Any dispute arising with respect
to this Agreement, or the making or validity thereof, or its
interpretation, or any breach thereof, shall be determined and
settled by arbitration in the city of Milwaukee, Wisconsin, pursuant
to the rules then obtaining of the American Arbitration Association,
which shall be the sole and exclusive remedy for such disputes
except as otherwise provided herein. Any award rendered shall be
final and conclusive upon the parties and a judgment thereon may be
entered in any court having jurisdiction.
(b) VALUATION DISPUTES. Notwithstanding the foregoing and
except as specifically provided to the contrary herein, disputes as
to valuation shall be resolved by the mutual agreement of the
Partner or Partners disputing
24
<PAGE> 25
the given valuation on the one hand and the Investment Committee on
the other hand. In the absence of such agreement as to valuation,
Partners to which such valuation is relevant are prohibited from
engaging in any transaction to which such valuation was so relevant.
23.4. APPLICABLE LAW. This Agreement and the rights and
obligations of the parties hereunder shall be governed by and interpreted,
construed and enforced in accordance with the laws of the State of Wisconsin.
23.5. COUNTERPARTS. This Agreement may be executed in
counterparts, all of which shall constitute but one and the same Agreement. Any
General Partner Execution Page, as executed from time to time, is an integral
part of this Agreement and is incorporated herein by this reference.
IN WITNESS WHEREOF each Partner has executed this Agreement as
of the date of his or her respective Execution Page.
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<PAGE> 26
EXHIBIT A
GENERAL PARTNER EXECUTION PAGE
The undersigned, desiring to become a Partner of CGRM Investment
Partnership hereby agrees to all of the terms of the Partnership Agreement of
CGRM Investment Partnership and agrees to be bound by the terms and provisions
thereof, including specifically the power of attorney granted therein.
Executed by the undersigned as a Partner of CGRM Investment
Partnership.
Partner:
-----------------------------------
(Signature of Partner)
-----------------------------------
(Name of Partner - Print)
-----------------------------------
(Street Address)
-----------------------------------
(City) (State) (Zip Code)
-----------------------------------
(Taxpayer Identification or Social
Security Number)
<PAGE> 27
EXHIBIT B
DEFINITIONS
For the purposes of the General Partnership Agreement of CGRM
Investment Partnership with respect to each separate Pool for any Fiscal Period,
the following terms shall have the meanings so provided:
"Active Partner" means any Partner other than a Partner who
has sold or redeemed all of his or her Units and is considered a
Partner solely for the purpose of eliminating remaining balances in his
or her accounts, or a Partner that has requested redemption, but could
not reach agreement with the Investment Committee as to valuation.
"Accrued Current Income" means the Current Income earned
during the Fiscal Period by the Partnership as determined under the
accrual method of accounting employing generally accepted accounting
principles to the extent possible.
"Additional Contribution to Capital" means any contribution
made to the capital of the Partnership pursuant to SECTION 18.4.
"Cash Current Income" means the Current Income received during
such Fiscal Period by the Partnership as determined on the cash
receipts and disbursements method of accounting as defined in Section
1.451-1(a) of the Regulations.
"Code" means the Internal Revenue Code of 1986, as amended.
"Continuing Partners" shall mean the Partners who have not had
all of their Units in a Pool purchased or redeemed as of the end of the
current Fiscal Period for purposes of making the Secondary Priority
Allocations as set forth in SUBSECTION 10.4(C).
"Current Income" means the aggregate gross income from all
sources other than proceeds from the sale, exchange or other
disposition of Securities.
"Current Income Account" means the account maintained pursuant
to SECTION 8.1 for the purpose of allocating Current Income to the
Partners.
"Fiscal Period" means, with respect to any given Pool, any
period within a fiscal year of the Partnership beginning on January 1
of each year and on the day on which Additional
<PAGE> 28
Capital Contributions may be made pursuant to SECTION 18.4, and ending
on the day immediately preceding the first day of the next Fiscal
Period.
"Fiscal Period of Sale" means a Fiscal Period as of the last
day of which a Partner sells all or a portion of his or her Units or
the Partnership redeems all or a portion of a Partner's Units in
accordance with ARTICLE 20.
"Gain Security" means any Security that has a market value
greater than the Partnership's Tax Basis in such Security as of the end
of a Fiscal Period.
"Gain Securities Appreciation" means the positive number
determined as of the end of a Fiscal Period for a given Pool as the
difference between (1) the aggregate fair market value of all Gain
Securities that are held by that Pool at the end of the Fiscal Period
and that are either still held in the next Fiscal Period or distributed
in kind to a Partner or Partners as of the end of the Fiscal Period,
and (2) the Partnership's aggregate Tax Basis in such Gain Securities.
"Income Type" means the separate categories of Current Income
with respect to which any given Partner is or may be subjected to a tax
treatment that is different than that imposed on other categories of
Current Income, such as dividends, interest, U.S. Government interest,
state and local government interest, and so forth, as determined by the
Investment Committee pursuant to SECTION 8.1.
"Investment Committee" means the committee elected pursuant to
SECTION 18.1 to manage the affairs of the Partnership.
"Investment Management Expenses" means all expenses, fees and
costs for investment management, consulting or advisory services (other
than Transaction Costs directly incurred by the Partnership), and all
other costs and expenses relating to the Partnership or the Partners'
investment therein.
"Loss Security" means any Security that has a market value
less than the Partnership's Tax Basis in such Security as of the end of
a Fiscal Period.
"Loss Securities Depreciation" means the negative number
determined as of the end of a Fiscal Period for a given Pool as the
difference between (1) the aggregate fair
2
<PAGE> 29
market value of all Loss Securities that are held by that Pool at the
end of the Fiscal Period and that are either still held in the next
Fiscal Period or distributed in kind to a Partner or Partners as of the
end of the Fiscal Period, and (2) the Partnership's aggregate Tax Basis
in such Loss Securities.
"Net Asset Value" means the amount of cash, aggregate fair
market value of Securities and aggregate fair market value of any other
assets held by the Pool being valued as of the end of the Fiscal
Period, decreased by the amount of undistributed Cash Current Income
received by such Pool in such Fiscal Period and in any prior Fiscal
Period and decreased by the amount of aggregate liabilities of such
Pool.
"Net Asset Value per Unit" as of the end of a Fiscal Period
shall mean the Net Asset Value of a Pool's assets divided by the number
of Units in such Pool outstanding as of the end of such Fiscal Period,
including any Units being sold or redeemed as of such day.
"Partner" means each person who executes this Agreement as a
partner pursuant to a General Partner Execution Page.
"Partnership" means the general partnership formed pursuant to
and continued under the terms of this Agreement.
"Pool" means the separate investment pools established by the
Investment Committee pursuant to SECTION 7.1.
"Priority Allocation" means any allocation under SUBSECTION
10.4(B) OR (C) of Realized Gain and Realized Loss from a Pool,
respectively, to the extent of the Redemption UGA and Redemption ULA,
respectively, of Partners selling or redeeming all or a portion of
their Units in such Pool.
"Realized Gain" means the aggregate gains from the sale,
exchange, or other disposition of a Pool's property realized under the
principles of the Code by the Partnership during the Fiscal Period,
whether considered short-term or long-term capital gains and without
offset for or netting with any Realized Losses.
"Realized Loss" means the aggregate losses from the sale,
exchange, or other disposition of a Pool's property realized under the
principles of the Code by the Partnership during the Fiscal Period,
whether considered short-term
3
<PAGE> 30
or long-term capital losses and without offset for or netting with
Realized Gains.
"Redemption UGA" means the account established for any Partner
selling Units with respect to each given Fiscal Period of Sale, the
balance of which account shall be equal to the balance (if any and
whether positive or negative) in the Unrealized Gain Account for that
Partner as of the end of the Fiscal Period of Sale multiplied by a
ratio, the numerator of which is the number of Units in such Pool being
sold from that Partner and the denominator of which is the number of
Units owned by that Partner in such Pool prior to such sale.
"Redemption ULA" means the account established for any Partner
selling Units with respect to each given Fiscal Period of Sale, the
balance of which account shall be equal to the balance (if any and
whether positive or negative) in the Unrealized Loss Account for that
Partner as of the end of the Fiscal Period of Sale multiplied by a
ratio, the numerator of which is the number of Units in such Pool being
sold from that Partner and the denominator of which is the number of
Units owned by that Partner in such Pool prior to such sale.
"Regulations" means the Treasury Regulations promulgated under
and pursuant to the Code.
"Secondary Priority Allocation" means the allocation of
Realized Gains and Realized Losses made pursuant to SUBSECTION 10.4(C)
to eliminate any remaining Redemption UGA or Redemption ULA, as the
case may be.
"Security" means real estate and personal property in whatever
form or nature; business enterprises, corporations, partnerships and
other business entities or any interest in the foregoing; cash, cash
equivalents, mutual funds, and other investments; common or capital
stocks, shares in investment trusts, funds or companies, preferred
stocks, shares of beneficial interests, debt, bonds, notes, debentures,
puts, calls, option contacts, warrants and rights to purchase
securities, financial and stock index options and futures; trust
receipts, commercial paper, obligations or other evidences of
indebtedness issued by corporations, trusts, associations, domestic or
foreign, or issued and guaranteed by the United States of America or
any agency or instrumentality thereof, by any foreign country, by any
state of the United States or by any political subdivision or agency or
any state or foreign country, or "when-issued"
4
<PAGE> 31
contracts for any such type of securities; certificates of deposit,
demand or time deposits, bills, acceptances, repurchase agreements,
limited partnership interests and other obligations; causes in action,
instruments or evidence of indebtedness commonly referred to as
securities, whether readily marketable or not.
"Selling Partner" means any Partner selling Units in a Pool
(to the Partnership or to another Partner) or redeeming his or her
Partnership Interest.
"Tax Basis" means the adjusted basis of the Partnership in a
Security as determined under the principles of the Code.
"Transaction Costs" means all commissions, transfer taxes and
all other expenses properly chargeable on a transaction basis to sales,
exchanges, purchases, redemptions or other acquisitions or dispositions
of Securities.
"UG Adjustment" means an amount determined for each Pool in
each Fiscal Period that is equal to the difference between (i) the sum
of Gain Securities Appreciation of such Pool determined as of the end
of such Fiscal Period plus the Realized Gain of such Pool for the
Fiscal Period, and (ii) Gain Securities Appreciation of such Pool
determined as of the end of the prior Fiscal Period less the Unrealized
Appreciation on any Gain Securities distributed in kind to a Partner
from such Pool as of the end of such prior Fiscal Period. The amount so
determined may be positive or negative.
"UL Adjustment" means an amount determined for each Pool in
each Fiscal Period that is equal to the difference between (i) the sum
of Loss Securities Depreciation of such Pool determined as of the end
of such Fiscal Period plus the Realized Loss of such Pool for the
Fiscal Period, and (ii) Loss Securities Depreciation of such Pool
determined as of the end of the prior Fiscal Period less the Unrealized
Depreciation on any Loss Securities distributed in kind to a Partner
from such Pool as of the end of such prior Fiscal Period. The amount so
determined may be negative or positive.
"Unit" means the interest of a Partner in a given Pool as
provided in SECTION 7.2.
"Unit Percentage" means that percentage that is determined for
each Partner in each Pool for each Fiscal
5
<PAGE> 32
Period by dividing the number of Units owned by a Partner in that Pool
as of the beginning of such Fiscal Period, including any new Units
issued pursuant to SECTION 7.2 as of the first day of such Fiscal
Period, divided by the total number of Units in such Pool outstanding
as of the beginning of such Fiscal Period, including all new Units
issued pursuant to SECTION 7.2 as of the first day of such Fiscal
Period.
"Unrealized Appreciation" means, with respect to any Gain
Security, the excess of the fair value of the Gain Security determined
as of the end of the business day immediately preceding the event
requiring calculation of Unrealized Appreciation over the Tax Basis of
the Partnership in the Gain Security. The amount so determined will
always be a positive number.
"Unrealized Depreciation" means, with respect to any Loss
Security, the difference between the fair value of the Loss Security
determined as of the end of the business day immediately preceding the
event requiring calculation of Unrealized Depreciation and the Tax
Basis of the Partnership in the Loss Security. The amount so determined
will always be a negative number.
"Unrealized Gain Account" means the account maintained
pursuant to SECTION 9.1 for the purpose of allocating gains to the
Partners.
"Unrealized Loss Account" means the account maintained
pursuant to SECTION 9.2 for the purpose of allocating losses to the
Partners.
<PAGE> 33
EXHIBIT A
GENERAL PARTNER EXECUTION PAGE
The undersigned, desiring to become a Partner of CGRM Investment
Partnership hereby agrees to all of the terms of the Partnership Agreement of
CGRM Investment Partnership and agrees to be bound by the terms and provisions
thereof, including specifically the power of attorney granted therein.
Executed by the undersigned as a Partner of CGRM Investment
Partnership.
Partner:
-----------------------------------
(Signature of Partner)
-----------------------------------
(Name of Partner - Print)
-----------------------------------
(Street Address)
-----------------------------------
(City) (State) (Zip Code)
-----------------------------------
(Taxpayer Identification or Social
Security Number)
<PAGE> 1
Exhibit 21
Subsidiaries of the Registrant
Freedom Securities Holding Corporation - Massachusetts
Freedom Capital Management Corporation - Massachusetts
Freedom Distributors Corporation - Massachusetts
Freedom Trust Company - New Hampshire
The Sutro Group - Nevada
Sutro and Co. Incorporated - Nevada
Sutro Real Estate Corporation - California
Sutro Equipment Leasing Corporation - California
Sutro Investment Partners, Inc. - California
Sutro Leasing Corporation - California
Tucker Anthony Holding Corporation - Massachusetts
TADCO Alpha, Inc. - New York
TADCO Bravo, Inc. - New York
T.A. of Delaware, Inc. - Delaware
Tucker Anthony Leasing Corporation - Massachusetts
Tucker Anthony Realty Corporation - Massachusetts
Tucker Anthony Incorporated - Massachusetts
Gabriele, Hueglin & Cashman, Inc. - New York
GH&C Advertising Agency, Inc. - New York
Tucker Anthony Insurance Agency, Inc. - Massachusetts
Tucker Anthony Insurance Agency of Maine, Inc. - Maine
Tucker Anthony Agency of N.Y., Inc. - New York
Tucker Anthony Insurance Agency of N.H., Inc. - New Hampshire
Freedom Resource Development, Inc. - Delaware
Freedom Services Corporation - Massachusetts
Freedom Specialist, Inc. - Delaware
Cleary Gull Investment Management Services, Inc. - Delaware
Hill Thompson Group, Ltd. - Delaware
Hill, Thompson, Magid & Co., Inc. - New York
Net Securities Corp. - New York
<PAGE> 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference into the Company's
previously filed Registration Statements on Form S-8 (File Nos. 333-49205,
333-64779 and 333-69273) and on Form S-3 (File Nos. 333-78249 and 333-96289) of
our report dated January 24, 2000, with respect to the consolidated financial
statements as of December 31, 1999 and the year then ended included in the
Freedom Securities Corporation Annual Report on Form 10-K for the year ended
December 31, 1999.
/s/ ERNST & YOUNG, LLP
New York, New York
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> BD
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 24,647
<RECEIVABLES> 103,568
<SECURITIES-RESALE> 41,250
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 414,245
<PP&E> 24,644
<TOTAL-ASSETS> 818,003
<SHORT-TERM> 0
<PAYABLES> 239,475
<REPOS-SOLD> 10,983
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 234,026
<LONG-TERM> 61,303
0
0
<COMMON> 218
<OTHER-SE> 271,998
<TOTAL-LIABILITY-AND-EQUITY> 818,003
<TRADING-REVENUE> 146,638
<INTEREST-DIVIDENDS> 66,228
<COMMISSIONS> 228,198
<INVESTMENT-BANKING-REVENUES> 72,852
<FEE-REVENUE> 67,106
<INTEREST-EXPENSE> 38,145
<COMPENSATION> 362,239
<INCOME-PRETAX> 47,985
<INCOME-PRE-EXTRAORDINARY> 29,117
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,117
<EPS-BASIC> 1.45
<EPS-DILUTED> 1.39
</TABLE>
