-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KZeDG8tS5AOdIa22btPyBLcbOI/oHaEfLqMcWnpLEGaQ57gOPgbDE999iFl2rmSr wPCM/ji/O0RRO6XYo9zrfA== 0000857615-98-000001.txt : 19980326 0000857615-98-000001.hdr.sgml : 19980326 ACCESSION NUMBER: 0000857615-98-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: REDWOOD EQUIPMENT LEASING INCOME FUND LP CENTRAL INDEX KEY: 0000857615 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 521650971 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-32125 FILM NUMBER: 98573069 BUSINESS ADDRESS: STREET 1: 225 E REDWOOD ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4107274083 MAIL ADDRESS: STREET 1: 225 E REDWOOD ST CITY: BALTIMORE STATE: MD ZIP: 21202 10-K 1 REDWOOD EQUIPMENT 12/31/97 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) { X } ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR { } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 33-32125 Redwood Equipment Leasing Income Fund L.P. (Exact Name of Registrant as Specified in its Charter) Delaware 52-1650971 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 225 East Redwood Street, Baltimore, Maryland 21202 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (410) 727-4083 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None Securities registered pursuant to section 12(g) of the Act: Assignee Units of Limited Partnership Interests (Title of class) 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 As of December 31, 1997, there were 401,180 Units of Assignee Limited Partnership Interests held by non-affiliates of the Registrant. Because there is not an established public trading market for the Units, the aggregate market value of the Units held by non-affiliates of the Registrant cannot be calculated. Documents Incorporated by Reference The Annual Report for 1997 is incorporated by reference. REDWOOD EQUIPMENT LEASING INCOME FUND L.P.
INDEX Page(s) Part I. Item 1. Business 3-4 Item 2. Properties 4 Item 3. Legal Proceedings 4 Item 4. Submission of Matters to a Vote of Security Holders 4 Part II. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 5 Item 6. Selected Financial Data 5 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 6-7 Item 8. Financial Statements and Supplementary Data 7 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 8 Part III. Item 10. Directors and Executive Officers of the Registrant 8 Item 11. Executive Compensation 9 Item 12. Security Ownership of Certain Beneficial Owners and Management 9 Item 13. Certain Relationships and Related Transactions 9 Part IV. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 9 Signatures 10
-2- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. PART I Item 1. Business Redwood Equipment Leasing Income Fund L. P. (the "Partnership") is a Delaware limited partnership formed in October 1989. The Partnership acquired a portfolio of equipment (the "Equipment") for lease to third parties. At the end of each lease, the Partnership expects to either sell the Equipment or re-lease the Equipment to the same or different lessees. The General Partner of the Partnership is Redwood Leasing, Inc., a Maryland corporation. First Union Commercial Corporation, successor to Signet Leasing and Financial Corporation ("Signet") was the management agent and was entitled to an equipment and lease management fee equal to 1.5% of gross lease rental payments as well as a fee for services provided in acquiring and disposing of leased assets through February 1998. Beginning in March 1998, Chesapeake Industrial Leasing Co., Inc. ("Chesapeake") became the management agent and is entitled to an equipment and management fee of $50 per month per lease schedule plus a $500 start up fee. The Partnership presently has approximately $2,086,000 (original cost) of equipment under leases, representing six different lessee companies as detailed below. A minimum of 80,000 units of assignee limited partnership interests (the "Units") and an increased maximum of 3,000,000 Units were registered under the Securities and Exchange Act of 1933, as amended. Throughout 1990, investors holding 401,180 Units, or $10,029,500 of gross offering proceeds, were recognized on the books of the Partnership. The offering proceeds, net of offering related fees, were invested in a money market account, pending disbursement for additional equipment lease acquisitions, working capital requirements or return of capital to investors. The principal investment objectives of the Partnership are: o to acquire a diversified portfolio of Equipment; o to generate quarterly distributions of cash to the investors; o to reinvest undistributed cash in addition Equipment; and o to realize residual values upon the ultimate sale of the Equipment. The General Partner will make all decisions regarding the acquisition, financing, refinancing, leasing, re-leasing and sales of Equipment based, in part, upon the recommendations and advice of Signet or Chesapeake. Potential Equipment investments will be evaluated primarily on the basis of: o the extent to which the investment satisfies the Partnership's investment objectives, with special emphasis on the economic return to the Partnership, o the creditworthiness of the lessee o the type of Equipment to be purchased and leased. In 1997, four lease schedules from two lessees expired and another lessee purchased a portion of its equipment prior to the end of its lease. The Partnership sold the equipment from two lease schedules for $88,500 to a lessee and recorded a net gain from the sale of leased equipment of $29,556. In the other transactions, the Partnership sold the equipment under lease for $253,883 and recorded a net gain from the sale of leased equipment of $17,885. The proceeds from these sales were received in January 1998. In 1997, the Partnership ended the Investment Period and began the Liquidation Phase (period during which the Partnership's existing lease portfolio matures). The Partnership made a liquidating distribution (net of reserves of approximately $136,000) totaling $2,431,636 in March 1997. Future quarterly distributions will be dependent on funds generated from operations, principal payments and proceeds from lease sales. -3- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. Item 1. Business (continued) At December 31, 1997 the Partnership has equipment subject to the leases summarized below:
Remaining Original 1998 Lease Lease Term Lessee Company Equipment Cost Payments (Months) Equipment Type Bennett Mineral Company, Inc. $ 96,868 $ 21,665 17 Automatic baler Coca-Cola Bottling Co. 613,453 105,051 18 Tractors, trailers Consolidated and forklifts Cordula, Inc. 125,000 35,100 29 Restaurant equipment EA Engineering Science 620,750 112,974* 5-20 Computer equipment and Technology, Inc. and office furniture Heilig-Meyers Company 557,904 96,289 7-12 Forklifts Mangione Enterprises 72,276 17,669 16 Golf course maintenance equipment ------------- ------------- $2,086,251 $ 388,748 ======== ========
* Annual lease payments reflect the amount due for 1998. This amount will be reduced as each of the three lease schedules terminate. Item 2. Properties None. Item 3. Legal Proceedings None. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to the security holders for a vote during the last quarter of the fiscal year covered by this report. -4- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters An established public trading market for the Units does not exist and the Partnership does not anticipate that a public market will develop. Transfer of Units by an investor may be accommodated under certain terms and conditions. The Partnership Agreement imposes certain limitations on the transfer of Units and may restrict, delay or prohibit a transfer primarily if: o the transfer of Units would result in 50% or more of all Units having been transferred by assignment or other within a 12-month period o the transfer of Units would cause the Partnership to be treated as a "publicly traded partnership" under Section 7704 and 469K of the Internal Revenue Code o the transfer of Units would cause the Partnership to terminate for federal income tax purposes An investor desiring to sell his Units will be required to comply with the minimum purchase and retention requirements and investor suitability standards imposed by applicable federal or state securities laws and the minimum purchase and retention requirements imposed by the Partnership. The Partnership will require that such standards by met before the General Partner consents to any transfer of Units. In addition, a transfer will not be registered if, immediately thereafter, any transferor not transferring all of his Units, or any transferee, would hold fewer than 200 Units (80 if IRA) or any transferor or transferee would hold a number of Units that is not evenly divisible by four. As of December 31, 1997, there were 378 holders of assignee units of limited partnership interests of the registrant, owning an aggregate of 401,220 units. The Partnership made cash distributions totaling $3,244,116 in 1997, $818,816 in 1996, 1995 and 1994, and $1,023,521 in 1993. Item 6. Selected Financial Data Revenues and net earnings information below is for the years ended December 31:
1997 1996 1995 1994 1993 Direct finance lease revenue $ 122,354 $ 183,177 $ 213,254 $ 226,904 $ 283,797 Interest income 37,756 133,270 149,421 120,975 93,849 Net gain from sale of leased equipment and marketable securities 47,441 36,091 155,569 21,725 131,009 Net earnings 104,185 246,844 404,589 237,604 274,824 Net earnings per Unit .26 .60 .99 .58 .67 Total assets 1,270,331 4,447,393 4,998,916 5,422,827 6,002,579 Partners' capital 1,235,769 4,375,700 4,947,672 5,361,899 5,943,111 Cash distributions paid per unit 8.00 2.00 2.00 2.00 2.50
The above selected financial data should be read in conjunction with the financial statements and accompanying notes incorporated by reference in this report. -5- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources At December 31, 1997, the Partnership had a working capital position that included cash and cash equivalents of $258,532 and accounts payable and accrued expenses of $16,765. The Partnership invests its cash balances in a money market account. The Partnership is reserving $136,130 as working capital reserves, but has the discretion to increase or decrease reserves as deemed necessary. The working capital reserves are sufficient to satisfy the Partnership's liquidity requirements. Cash and cash equivalents decreased $2,513,939 during 1997. This decrease represented the combined effect of $38,005 provided by operating activities, $603,672 received in principal payments on direct finance leases, $88,500 received for termination of direct finance leases, and $3,244,116 distributed to partners. During 1996, funds generated from operations and principal received on direct finance leases totaled $280,629 and $710,824, respectively. The sale of leased equipment generated cash proceeds of $99,137. Distributions to partners totaled $818,816. During 1995, funds generated from operations and principal received on direct finance leases totaled $262,101 and $692,800, respectively. The sale of leased equipment generated cash proceeds of $263,334. Acquisition of direct finance leases during the year utilized $543,914 and distributions to partners totaled $818,816. The Partnership makes quarterly distributions from funds generated from operations, principal payments on direct finance leases and proceeds from lease terminations and equipment sales. During 1997 the Partnership made annual distributions totaling $3,244,116. During 1996 and 1995 the Partnership made annual distributions totaling $818,816, an annualized rate of 8% on invested capital. During 1997, the Partnership made no equipment lease acquisitions. As noted in prior reports, the Partnership has entered the Liquidation Phase during which the remaining funds (net of reserves) were distributed to investors. In February 1998, the Partnership distributed $122,401, representing a return of capital of $.30 per Unit. Future quarterly distributions will be dependent on funds generated from operations, principal payments and proceeds from lease sales. Results of Operations Direct finance lease revenue in 1997 was 33% lower than in 1996, which was 14% lower than in 1995. These decreases in direct finance lease revenue were the result of scheduled lease terminations and an expected decline in the portion of lease payment recognized as revenue (versus return of principal) for existing leases. Interest income in 1997 was 72% lower than in 1996, due primarily to lower cash balances after the return of capital distribution made in March 1997. Interest income in 1996 was 11% lower than in 1995, due primarily to lower interest rates in 1996. During the first quarter of 1997, the Partnership learned that one of its lessees was in default under the terms of its lease. However, pursuant to the Security Agreement and Assignment of Lease, all rental payments due from this lessee have been guaranteed by the lease originator. The guarantee obligations have been honored by the lease originator and accordingly, the Partnership has timely received all rental payments due under the lease. In 1997, four lease schedules from two lessees expired and another lessee purchased a portion of its equipment prior to the end of its lease. The Partnership sold the equipment from two lease schedules for $88,500 to a lessee and recorded a net gain from the sale of leased equipment of $29,556. In the other transactions, the Partnership sold the equipment under lease for $253,883 and recorded a net gain from the sale of leased equipment of $17,885. The proceeds from these sales were received in January 1998. The Partnership currently has $22,556 in reserves which is deemed sufficient for any future potential losses. -6- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) Results of Operations (continued) During 1996, the Partnership recognized a $6,575 gain from the sale of leased equipment resulting from the sale of equipment on one of the EA Engineering lease schedules. The Partnership also recorded as a net gain $29,516 from the sale of equipment originally leased to Financial News Network ("FNN"). Pursuant to the Partnership's rights as a Class 2 Equipment Lessor under the Chapter 11 Plan of Reorganization for FNN, the Partnership had received a share in a contingent revenue stream. This is the final settlement of its claims against FNN, and (because the Partnership had previously written off all receivables relating to the FNN transaction) the full amount received in 1996 was recorded as a net gain. During 1995, the Partnership recognized a net gain of $155,569 on the sale of leased equipment. Four of the Partnership's lease schedules with EA Engineering expired in 1995. The Partnership sold all of the equipment under these lease schedules to EA Engineering and recorded a gain on the sales in 1995 of $38,035. The Partnership also recorded as a net gain $117,534 from the sale of equipment originally leased to FNN. Pursuant to the Partnership's rights as a Class 2 Equipment Lessor under the Chapter 11 Plan of Reorganization for FNN, the Partnership had received a share in a contingent revenue stream. In 1995, the Partnership received $117,534 in settlement of its claims against FNN, and (because the Partnership had previously written off all receivables relating to the FNN transaction) recorded the full amount received as a net gain in 1995. Finally, in 1995 the Partnership sold the medical equipment leased to American Health Services for $43,572 less than the original recorded residual value for the equipment; however, because the Partnership had in prior years recorded reserves against the residual value of this equipment, the Partnership reduced its existing reserves for the residual value loss accordingly and no additional gain or loss was recorded on this sale. Total expenses decreased by $2,328 during 1997 as compared to 1996 due to reductions in professional fees and amortization costs. Total expenses during 1996 decreased by $7,961 as compared to 1995 due to reductions in administrative expenses, management fees and amortization costs. Year 2000 Management has initiated an enterprise-wide program to prepare the Partnership's computer systems and applications for the year 2000. The Partnership expects to incur internal staff costs as well as consulting and other expenses related to infrastructure and facilities enhancements necessary to prepare the systems for the year 2000. A significant proportion of these costs are not likely to be incremental costs to the Partnership, but rather will represent the redeployment of existing information technology resources. Item 8. Financial Statements and Supplementary Data Index to Financial Statements and Financial Statement Schedules: Page(s) Annual Report Independent Auditors' Report 2 Balance Sheets 3 Statements of Operations 4 Statements of Partners' Capital 5 Statements of Cash Flows 6 Notes to Financial Statements 7-11 All financial statement schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto. -7- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. 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 General Partner of the Partnership is Redwood Leasing, Inc. The Partnership's principal executive offices are located at 225 East Redwood Street, Baltimore, Maryland 21202, telephone (410) 727-4083. The General Partner had primary responsibility for the structure of the Offering and the Partnership. The General Partner is responsible for overseeing the performance of those who contract with the Partnership, as well as making decisions with respect to the financing, sale and liquidation of the Partnership's assets. It also provides all reports to and communications with Investors and others, all distributions and allocations to Investors, the administration of the Partnership's business and all filings with the Securities and Exchange Commission and other federal or state regulatory authorities. The Partnership Agreement provides for the removal of a General Partner and the election of Successor or Additional General Partner by Investors holding a majority in interest of the Units. The directors and principal officers of the General Partner are as follows: John M. Prugh, age 49, has been a Director and President of the General Partner since 1989, and of Alex. Brown Realty, Inc. and Armata Financial Corp. since 1984. Mr. Prugh graduated from Gettysburg College in 1970, and was designated a Certified Property Manager by the Institute of Real Estate Management in 1979. He has worked in property management for H. G. Smithy Co., in Washington, D.C., and Dreyfuss Bros., Inc. in Bethesda, Maryland. Since 1977, Mr. Prugh has been involved in managing, administering, developing and selling real estate investment projects sponsored by Alex. Brown Realty, Inc. and its subsidiaries. Peter E. Bancroft, age 45, has been a Director and Vice President of the General Partner since 1989 and Senior Vice President of Alex. Brown Realty, Inc. and Armata Financial Corp. since 1983. Mr. Bancroft graduated from Amherst College in 1974, attended the University of Edinburgh, and received a J.D. degree from the University of Virginia School of Law in 1979. Prior to joining Alex. Brown Realty, Inc. in 1983, Mr. Bancroft held legal positions with Venable, Baetjer and Howard and T. Rowe Price Associates, Inc. Terry F. Hall, age 51, has been the Secretary of the General Partner and a Vice President and Secretary of, and Legal Counsel for, Alex. Brown Realty, Inc. since 1989. Mr. Hall graduated from the University of Nebraska- Lincoln in 1968, and received a J.D. degree from the University of Pennsylvania Law School in 1973. Prior to joining Alex. Brown Realty, Inc. in 1986, Mr. Hall was a Partner at the law firm of Venable, Baetjer and Howard from 1981 to 1986 and an associate at the same firm from 1973 to 1981. Timothy M. Gisriel, age 41, has been the Treasurer of the General Partner and of Alex. Brown Realty, Inc. and Armata Financial Corp. since 1990. He was the Controller of Alex. Brown Realty, Inc. and Armata Financial Corp. from 1984 through 1990. Mr. Gisriel graduated from Loyola College in 1978 and received a Masters of Business Administration degree from the Robert G. Merrick School of Business, University of Baltimore in 1993. Prior to joining Alex. Brown Realty, Inc. in 1984, Mr. Gisriel was an audit supervisor in the Baltimore office of Coopers & Lybrand. He is a Maryland Certified Public Accountant. There is no family relationship among the officers and directors of the General Partner. -8- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. Item 11. Executive Compensation The officers and directors of the General Partner received no compensation from the Partnership. The General Partner is entitled to receive a share of cash distributions and a share of profits and losses as described in the Limited Partnership Agreement, Article IV. (See Note 6, "Partners' Capital" in Item 8. Financial Statements, herein.) For a discussion of compensation and fees to which the General Partner is entitled, see Item 13, Certain Relationships and Related Transactions, herein. Item 12. Security Ownership of Certain Beneficial Owners and Management No person is known to the Partnership to own beneficially more than 5% of the outstanding assignee units of limited partnership interest of the Partnership. The Assignor Limited Partner, Redwood Leasing Holding Company, Inc., an affiliate of the General Partner, holds 40 Units representing a beneficial interest in limited partnership interests in the Partnership. The Units held by the Assignor Limited Partner have all rights attributable to such Units under the Limited Partnership Agreement except that these Units of assignee limited partnership interests are nonvoting. The General Partner has a 2% interest in the Partnership as the General Partner, but holds no Units. At December 31, 1997, MNC Leasing, a division of MNC Credit Corp held 18,724 Units (an approximate 4.7% investment in the Partnership). There are no arrangements, known to the Partnership, the operation of which may, at a subsequent date, result in a change of control of the registrant. Item 13. Certain Relationships and Related Transactions The General Partner and its affiliates have and are permitted to engage in transactions with the Partnership. For a summary of fees paid during 1997, 1996 and 1995 to the General Partner and its affiliates, see Note 3, "Related Party Transactions", in Item 8, Financial Statements, herein. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements: See Index to Financial Statement and Supplementary Data in Item 8 on page 7, herein. 2. Financial Statement Schedules: None. 3. Exhibits: (3, 4)Limited Partnership Agreement on pages 1 through 43 of Exhibit A to the Partnership's Registration Statement on Form S-1 (File No. 33-32125) incorporated herein by reference. (13) Annual Report for 1997. (b) Reports on Form 8-K: None. -9- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REDWOOD EQUIPMENT LEASING INCOME FUND L.P. DATE: 3/25/98 BY: /s/ John M. Prugh John M. Prugh President and Director Redwood Leasing, Inc. General Partner Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following in the capacities and on the dates indicated. DATE: 3/25/98 BY: /s/ John M. Prugh John M. Prugh President and Director Redwood Leasing, Inc. General Partner DATE: 3/25/98 BY: /s/ Peter E. Bancroft Peter E. Bancroft Vice President and Director Redwood Leasing, Inc. General Partner DATE: 3/25/98 BY: /s/ Terry F. Hall Terry F. Hall Secretary Redwood Leasing, Inc. General Partner DATE: 3/25/98 BY: /s/ Timothy M. Gisriel Timothy M. Gisriel Treasurer Redwood Leasing, Inc. General Partner -10- EX-13 2 ANNUAL REPORT REDWOOD EQUIPMENT LEASING INCOME FUND L.P. 1997 ANNUAL REPORT March 15, 1998 Dear Investor: This annual report for Redwood Equipment Leasing Income Fund L.P. contains financial results for the years ended December 31, 1997, 1996 and 1995. The Partnership began revenue producing operations as of April 1, 1990. To date, the Partnership has acquired equipment subject to leases totaling $11,964,830. CASH DISTRIBUTIONS The Partnership made a cash distribution on February 9, 1998 to Unitholders of $.30 per Unit, representing a 5% annualized distribution rate on original capital. Distributions during 1997 totaled $8.00 per Unit, representing a 32% distribution rate on original capital. Since inception, the Partnership has made total distributions of $9,624,938 to Unitholders, representing 95.96% of gross offering proceeds. OPERATIONS During 1997, direct finance lease revenue declined approximately 33% as compared to 1996. This decrease resulted from scheduled lease terminations and an expected decline in the portion of the lease payment recognized as revenue (versus a return of principal) for existing leases. The Partnership recognized a net gain of $47,441 on the sale of leased equipment during the year. ACQUISITIONS During 1997, the Partnership made no equipment lease acquisitions. The Partnership was not able to identify new lease transactions which it deemed acceptable from a risk and credit standpoint. OUTLOOK The Partnership was organized in October 1989 with an expected Investment Period of five to seven years during which the Partnership has been committed to investment in new equipment leases. Offering proceeds of $10,029,500 were raised and the Partnership began operations on April 1, 1990. The Partnership reached the end of the Investment Period in 1997, entered the Liquidation Phase (period during which the Partnership's existing lease portfolio matures), and is now distributing the remaining funds (net of reserves of approximately $136,000) to investors. Future quarterly dividends will be dependent on funds generated from operations, principal payments and proceeds from lease sales. Very truly yours, /s/ John M. Prugh John M. Prugh, President Redwood Leasing, Inc. General Partner -1- INDEPENDENT AUDITORS' REPORT The Partners Redwood Equipment Leasing Income Fund L.P.: We have audited the accompanying balance sheets of Redwood Equipment Leasing Income Fund L.P. (the "Partnership") as of December 31, 1997 and 1996 and the related statements of operations, partners' capital and cash flows for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 financial position of Redwood Equipment Leasing Income Fund L.P. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Baltimore, Maryland January 23, 1998 -2- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. Balance Sheets
December 31, 1997 1996 Assets Cash and cash equivalents $ 258,532 $2,772,471 Lease payments receivable 289,845 33,098 Deposit -- 10,000 Investment in direct finance leases, net (Note 4) 721,954 1,631,824 Total assets $1,270,331 $4,447,393 Liabilities and Partners' Capital Accounts payable and accrued expenses $ 16,765 $ 18,656 Amounts due to affiliates 9,859 12,403 Advance rentals 7,938 40,634 Total liabilities 34,562 71,693 Partners' Capital (Note 6) General Partner (118,752) (85,305) Assignor Limited Partner: Assignment of limited partnership interests - $25 stated value per unit, 401,180 units outstanding 1,354,060 4,460,235 Limited partnership interests - $25 stated value per unit, 40 units outstanding 261 570 Special Limited Partners 200 200 Total partners' capital 1,235,769 4,375,700 Total liabilities and partners' capital $1,270,331 $4,447,393
See accompanying notes to financial statements -3- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. Statements of Operations For the years ended December 31,
1997 1996 1995 Revenues Direct finance lease revenue $122,354 $183,177 $213,254 Interest income 37,756 133,270 149,421 Net gain from sale of leased equipment (Note 4) 47,441 36,091 155,569 207,551 352,538 518,244 Expenses Administrative expenses including amounts to related party 62,990 62,348 65,552 Management fees to advisor (Note 3) 14,950 13,034 16,754 Professional fees 14,170 16,450 16,208 Amortization of acquisition and organization costs 11,256 13,862 15,141 103,366 105,694 113,655 Net earnings $104,185 $246,844 $404,589 Net earnings per unit of assignee limited partnership interest - basic (Note 6) $ 0.26 $ 0.60 $ 0.99
See accompanying notes to financial statements -4- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. Statements of Partners' Capital For the years ended December 31,
Assignor Limited Partner Assignment of Limited Limited Special Partnership Partnership Limited General Interests Interests Partners Partner Total Balance at December 31, 1994 $ 5,426,614 $ 667 $ 200 $ (65,582) $ 5,361,899 Net earnings 396,458 39 8,092 404,589 Distributions to partners (802,360) (80) (16,376) (818,816) Balance at December 31, 1995 5,020,712 626 200 (73,866) 4,947,672 Net earnings 241,883 24 4,937 246,844 Distributions to partners (802,360) (80) (16,376) (818,816) Balance at December 31, 1996 4,460,235 570 200 (85,305) 4,375,700 Net earnings 103,133 10 1,042 104,185 Distributions to partners (3,209,308) (319) (34,489) (3,244,116) Balance at December 31, 1997 $ 1,354,060 $ 261 $ 200 $ (118,752) $ 1,235,769
See accompanying notes to financial statements -5- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. Statements of Cash Flows For the years ended December 31,
1997 1996 1995 Cash flows from operating activities Net earnings $ 104,185 $ 246,844 $ 404,589 Adjustments to reconcile net earnings to net cash provided by operating activities Amortization of acquisition and organization costs 11,256 13,862 15,141 Net gain from sale of leased equipment (47,441) (36,091) (155,569) Changes in assets and liabilities (Increase) decrease in lease payments receivable (2,864) 35,565 7,624 Decrease in deposit 10,000 -- -- Increase (decrease) in accounts payable and accrued expenses (1,891) 1,843 (7,161) Increase (decrease) in amounts due to affiliates (2,544) (3,507) 2,769 Increase (decrease) in advance rentals (32,696) 22,113 (5,292) Net cash provided by operating activities 38,005 280,629 262,101 Cash flows from investing activities Acquisition of direct finance leases -- -- (543,914) Principal received on direct finance leases 603,672 710,824 692,800 Termination of direct finance leases 88,500 99,137 263,334 Net cash provided by (used in) investing activities 692,172 809,961 412,220 Cash flows from financing activities- distributions to partners (3,244,116) (818,816) (818,816) Net increase (decrease) in cash and cash equivalents (2,513,939) 271,774 (144,495) Cash and cash equivalents Beginning of period 2,772,471 2,500,697 2,645,192 End of period $ 258,532 $2,772,471 $2,500,697
See accompanying notes to financial statements -6- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. Notes to Financial Statements December 31, 1997 (1) Organization Redwood Equipment Leasing Income Fund L.P. (the "Partnership") is a Delaware limited partnership formed in October 1989 to engage in the business of owning and leasing equipment. The Partnership offered assignee units of limited partnership interests (the "Units") to investors (the "Investors"). The General Partner is Redwood Leasing, Inc., a Maryland corporation and an affiliate of Armata Financial Corp. ("Armata"), the Partnership's selling agent. The assignor limited partner is Redwood Leasing Holding Company, Inc., an affiliate of the General Partner. The special limited partners are Maryland National Leasing Services Corporation ("MNLSC") and Realty Associates Limited Partnership, another affiliate of the General Partner. The Partnership's management agent is First Union Commercial Corporation, successor to Signet Leasing and Financial Corporation ("Signet"). (2) Summary of Significant Accounting Policies The accompanying financial statements have been prepared on the accrual basis of accounting. The Partnership reports its operating results for income tax purposes on the accrual basis. No provision for income tax is made because any liability for income taxes is that of the individual partners and not that of the Partnership. Costs associated with the marketing of the Units to the public were offset against the related partners' capital. Costs associated with the organization of the Partnership were capitalized and were amortized on a straight-line basis over a period of five years, ending in 1995. The Partnership considers all short-term investments with original maturities of three months or less as cash equivalents. Cash and cash equivalents consist entirely of cash, money market accounts and other liquid short term investments and are stated at cost, which approximates market value at December 31, 1997 and 1996. For direct finance leases, the excess rental receivables, including estimated residual values, over the cost of the equipment are deferred and credited to earnings on a contractual basis that approximates a level yield on the net investment over the base lease terms. The Partnership records the estimated residual value of leased equipment at the inception of a lease, based upon management's evaluation of the market value of such equipment at the expiration of the base lease term. The Partnership and Signet review the fair value of the receivable and residual value components of all current leases and make appropriate adjustments where deemed necessary. Acquisition costs incurred in obtaining the leases are capitalized and amortized over the lease terms. -7- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. Notes to Financial Statements (continued) (2) Summary of Significant Accounting Policies (continued) Management of the Partnership has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses to prepare these financial statements in conformity with generally accepted accounting principals. Actual results could differ from those estimates. The fair value of financial instruments is determined by reference to various market data and other valuation considerations. The fair value of financial instruments approximate their recorded value. (3) Related Party Transactions The General Partner earned an asset management fee of $19,250 in 1997 and $24,564 in 1996 and 1995 and received or was due reimbursement of $29,710 $28,154, and $37,508 for certain costs incurred relating to administrative services for the Partnership for the years ended December 31, 1997, 1996 and 1995, respectively. As the management agent, Signet is entitled to an equipment and lease management fee equal to 1.5% of gross lease rental payments as well as a fee for services provided in acquiring and disposing of leased assets. For the years ended December 31, 1997, 1996 and 1995, Signet earned $14,950, $13,034, and $16,754 in equipment lease and management fees, respectively. In addition, Signet earned $8,159 in lease acquisition fees during 1995. Commencing in 1994, the Partnership also began acquiring lease transactions from Chesapeake Industrial Leasing Co., Inc. (Chesapeake). Under the terms of the Partnership's agreement, Chesapeake earned $2,669 during 1995 for providing new leases to the Partnership. (4) Leases Investment in direct finance leases with initial terms ranging from 34 to 82 months, at December 31, 1997 and 1996, includes the following:
1997 1996 Lease payments receivable $ 541,715 $ 1,259,277 Estimated residual values 262,916 542,237 Acquisition fees, net 7,260 18,516 Unearned income (67,381) (165,650) Reserve for residual value loss (22,556) (22,556) $ 721,954 $ 1,631,824
-8- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. Notes to Financial Statements (continued) (4) Leases (continued) In 1995, the Partnership acquired three new investments in equipment under direct finance leases, including acquisition fees, two from Signet for $416,245 and one from Chesapeake for $127,669. The terms of the leases range from 36 to 56 months with total monthly payments of $10,519 due in advance. The equipment under lease consists of computer equipment, office furniture and restaurant equipment. In 1997, four lease schedules from two lessees expired and another lessee purchased a portion of its equipment prior to the end of its lease. The Partnership sold the equipment from two lease schedules for $88,500 to a lessee and recorded a net gain from the sale of leased equipment of $29,556. In the other transactions, the Partnership sold the equipment under lease for $253,883 and recorded a net gain from the sale of leased equipment of $17,885. The proceeds from these sales were received in January 1998. During 1996, one lease expired and another lessee purchased a portion of its equipment prior to the end of its lease. The Partnership received $69,621 and recorded a gain of $6,575 from these transactions. During 1995, five lease schedules from two lessees expired. In the first transaction, the Partnership sold the equipment to a lessee for $30,000 and used $43,752 of its existing reserves. No additional gain or loss was recorded on this sale. In the remaining transactions, the Partnership sold the equipment from four lease schedules to the lessee for $148,800 and recorded a gain of $38,035. Sale proceeds of $33,000 from the final transaction was received by the Partnership during the first quarter of 1996. In May 1996 and June 1995, pursuant to the Chapter 11 Plan of Reorganization for Financial News Network (FNN), the Partnership received and recorded $29,516 and $117,534, respectively, as a net gain from sale of leased equipment from Data Broadcasting Corporation (successor to FNN) as final settlement of the Partnership's Class 2 claim against FNN. The Partnership had written off all receivables relating to this transaction in 1990. Revenues from lessees which individually provided more than 10% of the revenues accounted for approximately 85% of the direct finance lease revenues for the year ended December 31, 1997 (four lessees). At December 31, 1997, amounts from these lessees comprised of 84% of the investment in direct finance lease balance and 100% of the lease payments receivable balance. All current leases in the Partnership's portfolio are classified as direct finance leases. -9- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. Notes to Financial Statements (continued) (4) Leases (continued) Lease payments for future years are as follows: 1998 $ 388,748 1999 138,342 2000 14,625 Total $ 541,715 (5) Earnings for Federal Income Tax Purposes The Partnership's earnings for federal income tax purposes for each of the years in the three-year period ended December 31, 1997 differ from the net earnings for financial reporting purposes due to differences in accounting for leases, the use of accelerated depreciation for tax purposes and the timing of investment loss deductions. A reconciliation of net earnings for financial reporting purposes to earnings for income tax purposes is as follows:
1997 1996 1995 Net earnings for financial reporting purposes $ 104,185 $ 246,844 $ 404,589 Excess lease revenue in converting direct finance leases to operating leases 532,363 658,494 657,890 Excess lease revenue (losses) from lease terminations 136,070 37,811 (14,928) Tax depreciation on direct finance leases converted to operating leases (274,108) (515,724) (852,146) Acquisition fee amortization relating to direct finance leases converted to operating leases -- -- (374) Advance rentals (5,292) 21,868 (5,291) Reserve for investment loss not currently deductible for tax purposes -- -- (2,530) Earnings for income tax purposes $ 493,218 $ 449,293 $ 187,210
(6) Partners' Capital The Partnership Agreement provides, among other provisions, for the following: (a) The Partnership consists of the General Partner, the assignee limited partners, the assignor limited partner and special limited partners. -10- REDWOOD EQUIPMENT LEASING INCOME FUND L.P. Notes to Financial Statements (continued) (6) Partners' Capital (continued) (b) Distributions to the Partners relating to operations of the Partnership are based on distributable cash, as defined in the Partnership Agreement. Assignee limited partners received 98% of net cash flow and the General Partner received 2%. Beginning in 1997 the Partnership entered into the liquidation phase at which time the assignee limited partners receive 99% of net cash flow and liquidating proceeds and the General Partner receives 1%. Net earnings per Unit disclosed on the Statements of Operations is based upon 401,180 Units. (c) Net proceeds of sale or financing of the leases will be distributed as follows: o 99% to assignee limited partners and 1% to the General Partner until each assignee limited partner has recovered his original capital contribution in full and received a cumulative, compounded daily annual return of 12% of his adjusted capital balance to the extent that such return has not been provided from distributable cash and net disposition proceeds. o To the General Partner until the General Partner has received an amount equal to its original capital contribution. o Any remainder will be distributed 90% to the assignee limited partners, 1% to the General Partner and 9% to the special limited partners. (d) The assignee limited partners may elect to become substitute limited partners, as defined in the Partnership Agreement. Assignee limited partners who elect to become substitute limited partners will receive one limited partnership interest for each Unit they convert and will not be able to reexchange their limited partnership interest for Units. (e) Restrictions exist regarding transferability or disposition of partnership interests. (7) Distributions to Investors Distributions of cash to investors during 1997 totaled $3,244,116 of which 98.9% was allocated to assignee limited partnership unitholders. During 1996 and 1995 distributions of cash totaled $818,816 in each year, of which 98% was allocated to assignee limited partnership unit holders. These distributions were derived from net cash provided by operating activities, principal payments on direct finance leases and certain other investing activities. (8) Subsequent Event (unaudited) In February 1998 the Partnership made a cash distribution totaling $122,401 of which 99% was allocated to assignee limited partners. This distribution was derived from net cash provided by operating activities plus cash available from certain investing activities. Holders of assignee limited partnership interests received cash distributions of $.30 per $25 Unit. -11- Directors and Executive Officers Redwood Leasing, Inc. General Partner John M. Prugh President and Director Peter E. Bancroft Vice President and Director Terry F. Hall Secretary Timothy M. Gisriel Treasurer Form 10-K A copy of the Partnership's Annual Report on Form 10-K for 1997 as filed with the Securities and Exchange Com mission is available to partners without charge on request by writing to: Investor Relations Redwood Leasing, Inc. 225 East Redwood Street Baltimore, Maryland 21202 Auditors KPMG Peat Marwick LLP 111 South Calvert Street Baltimore, Maryland 21202 Legal Counsel Piper & Marbury 1100 Charles Center South 36 South Charles Street Baltimore, Maryland 21201 Further Information
Please submit changes in name, address, For further information or questions investment representative and distribution regarding your investment, please call instructions to Investor Relations at the Denise Shaduk, Investment Coordinator, at the above address at (410) 727-4083.
-12- EX-4 3 PARTNERSHIP AGREEMENT EXHIBIT A REDWOOD EQUIPMENT LEASING INCOME FUND L.P. AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
TABLE OF CONTENTS Page Preliminary Statement ................................................................. A-3 Article I - Defined Terms ......................................................... A-3 Article II- Name; Purpose; Term and Certificate ................................. A-9 Section 2.1 Name; Continuation .............................................. A-9 Section 2.2 Place of Registered Office ..................................... A-9 Section 2.3 Purpose .......................................................... A-10 Section 2.4 Term ............................................................. A-10 Section 2.5 Recording of Certificate ........................................ A-10 Article III - Partners; Capital ................................................... A-10 Section 3.1 General Partner; Assignor Limited Partner; ABR Special Limited Partner.. A-10 Section 3.2 Investors ........................................................A-10 Section 3.3 MNC Special Limited Partner ................................... A-11 Section 3.4 Partnership Capital ............................................ A-12 Section 3.5 Liability of Partners and Investors ........................... A-12 Article IV - Allocations, Distributions and Applicable Rules ................ A-12 Section 4.1 Allocation of Profit or Loss .................................. A-12 Section 4.2 Distribution of Net Disposition Proceeds ..................... A-14 Section 4.3 Distribution of Distributable Cash ........................... A-14 Section 4.4 Liquidation or Dissolution .................................... A-15 Section 4.5 General and Special Rules ..................................... A-15 Article V - Rights, Powers and Duties of the General Part ................ .A-17 Section 5.1 Management and Control of the Partnership; Tax Matters Partner ....... A-17 Section 5.2 Authority of General Partner ................................. A-18 Section 5.3 Authority of Investors ....................................... A-21 Section 5.4 Restrictions on Authority .................................... A-21 Section 5.5 Authority of Partners and Affiliated Persons to Deal with Partnership. A-23 Section 5.6 Duties and Obligations of the General Partner .............. A-24 Section 5.7 Compensation of General Partner ............................ A-26 Section 5.8 Other Businesses of Partners ................................. A-26 Liability of General Partner and Affiliates to Limited Partners or Section 5.9 Investors ................................................ A-26 Section 5.10 Indemnification .............................................. A-26 Article VI - Transferability of a General Partner's Interest ................ A-27 Removal, Voluntary Retirement or Withdrawal of a General Partner; Section 6.1 Transfer of Interests .................................... A-27 Section 6.2 Election and Admission of Successor or Additional General Partners . A-27 Section 6.3 Events of Withdrawal of a General Partner .............................. A-28 Section 6.4 Liability of a Withdrawn General Partner ............................. A-28 Section 6.5 Valuation of Partnership Interest of General Partner ................... A-28 Article VIII - Assignment of Assignee Units to Investors; Transferability of Limited Partner Interests and Units .............................................. A-29 Section 7.1 Assignment of the Assignee Units to Investors ................... A-29 Section 7.2 Transferability of Units .................................... A-30 Death, Bankruptcy or Adjudication of Incompetence of an Investor or a Section 7.3 Limited Partner ......................................... A-31 A-1 Section 7.4 Effective Date ...................................................... A-31 Section 7.5 Substitute Limited Partners ...................................... A-31 Section 7.6 Retirement or Withdrawal of an Investor ........................ A-31 Article VIII - Dissolution, Liquidation and Termination of the Partnership ............ A-32 Section 8.1 Events Causing Dissolution .................................... A-32 Section 8.2 Liquidation .................................................. A-32 Section 8.3 Capital Contribution Upon Dissolution ...................... A-33 Article IX - Certain Payments to the General Partner and Affiliates ............. A-33 Reimbursement of Certain Costs and Expenses of the General Partner and Section 9.1 their Affiliates ......................................... A-33 Section 9.2 Fees and Other Payments .................................... A-34 Article X - Books and Records; Bank Accounts; Reports ......................... A-35 Books and Records .............................................................. A-35 Bank Accounts .................................................................. A-35 Reports ........................................................................ A-36 Federal Tax Elections ......................................................... A-37 Article XI - Meetings of Investors ... ....................................... A-38 Calling Meetings ............................................................... A-38 Notice; Procedure ............................................................. A-38 Right to Vote ................................................................. A-38 Proxies; Rules ................................................................ A-38 Article XII - General Provisions .............................................. A-39 Section 12.1 Appointment of General Partner as Attorney-in-Fact ............. A-39 Waiver of Partition ........................................................... A-39 Notification .................................................................. A-39 Word Meanings .................................................................. A-39 Binding Provisions ............................................................ A-39 Applicable Law ................................................................. A-39 Counterparts .................................................................. A-40 Section Separability of Provisions ............................................. A-40 Section Paragraph Titles ...................................................... A-40 Section Entire Agreement ...................................................... A-40 Section 12.11 Amendments .................................................... A-40 Signatures ........................................................................ A-42 Schedule A ........................................................................ A-43
A-2 REDWOOD EQUIPMENT LEASING INCOME FUND L.P. AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, dated as of October 19, 1989, is by and among Redwood Leasing, Inc., a Maryland corporation, as General Partner, Redwood Leasing Holding Company, Inc., a Maryland corporation, as the Assignor Limited Partner, Maryland National Leasing Services Corporation, a Maryland corporation, as the MNC Special Limited Partner and Realty Associates 1988 Limited Partnership, a Maryland limited partnership, as the ABR Special Limited Partner. Preliminary Statement Redwood Equipment Leasing Income Fund L.P. (the "Partnership") was formed by the General Partner, the Assignor Limited Partner, the MNC Special Limited Partner and the ABR Special Limited Partner as a Delaware limited partnership upon the recording of a certificate of limited partnership with the Secretary of State of the State of Delaware on October l9, 1989 and the execution of an Agreement of Limited Partnership on November l7, 1989, effective as of even date herewith. The parties hereto desire to amend and restate in its entirety the Agreement of Limited Partnership. NOW, THEREFORE, in consideration of the mutual promises made herein, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE I DEFINED TERMS The defined terms used in this Agreement shall, unless the context otherwise expressly requires, have the meanings specified in this Article I. "ABR Special Limited Partner" means Realty Associates 1988 Limited Partnership, a Maryland limited partnership and an Affiliate of the General Partner. "Accountants" means such firm of independent certified public accountants as shall be engaged from time to time by the General Partner on behalf of the Partnership. "Acquisition Expenses" means expenses of the Partnership, including, but not limited to, legal fees and expenses, travel and communications expenses, costs of appraisals, accounting fees and expenses, and miscellaneous expenses related to selection and acquisition of Equipment, whether or not acquired. "Acquisition Fees" means the total of all fees and commissions paid by any party on behalf of the Partnership in connection with the selection or purchase of any Equipment by the Partnership, including, without limitation, Equipment purchased through a reinvestment of the proceeds of Sale of its Equipment or any funds generated from its operations pursuant to Section 5.2B. Included in the computation of such fees or commissions shall be any commission, selection fee, financing fee, non-recurring management fee or any fee of a similar nature, however designated. "Act" means the Delaware Revised Uniform Limited Partnership Act (6 DEL.C.ss. 17-101 et. seq.) as amended or modified from time to time. "Additional General Partner" means any Person who is admitted as an Additional General Partner of the Partnership,under the provisions of Article VI, after the date of this Agreement. "Additional Equipment" means all Equipment acquired by the Partnership, other than the Specified Equipment. "Adjusted Capital Balance" of a Partner or an Investor means the Capital Contribution of the Partner or the Assignor Limited Partner made on behalf of an Investor, less all prior distributions of A-3 Distributable Cash and Net Disposition Proceeds made to the Partner or Investor and the predecessor holders of such Units, other than distributions made in satisfaction of such Partner's or Investor's Cumulative Return at the time of reference thereto. "Affiliate" means (i) any Person directly or indirectly controlling, controlled by or under common control with another Person (ii) any Person owning or controlling 10% or more of the outstanding voting securities of such other Person (iii) any officer, director or partner of such Person, and (iv) if such other Person is an officer, director or partner, any company for which such Person acts in any such capacity. "Agreement" means this Amended and Restated Agreement of Limited Partnership as originally executed and as amended from time to time, as the context requires. Words such as "herein", "hereafter," "hereof," "hereto," "hereby"and "hereunder," when used with reference to this Agreement, refer to this Agreement as a whole unless the context otherwise requires. "Assigned Limited Partnership Interest" means a Partnership Interest which is credited to the Assignor Limited Partner on the books and records of the Partnership in respect of a purchase of one Unit by an Investor. Each Assigned Limited Partnership Interest represents a contribution to the capital of the Partnership equal to $25, regardless of any reduction in Selling Commissions. "Assignee Units" means the ownership interests of an Investor in the Partnership at any particular time, including the right of such Investor to any and all benefits to which an Investor may be entitled as provided in this Agreement. The ownership interests of the Investors in the Partnership are sometimes referred to herein as "Units". "Assignor Limited Partner" means Redwood Leasing Holding Company, Inc. which will (i) own any Assigned Limited Partnership Interests issued pursuant to Sections 3.2 and 7.1 hereof, and (ii) transfer and assign to those Persons who acquire Units all of its rights and interest in Assigned Limited Partnership Interests in accordance with Sections 3.2 and 7.1 hereof. "Capital Account" means (i) the separate account maintained and adjusted on the books and records of the Partnership for each Partner and (ii) the separate subaccount of the Capital Account of the Assignor Limited Partner maintained and adjusted for each Investor. Each Partner's and Inves- tor's Capital Account is credited with his Capital Contributions and his distributive share of Profit (or item thereof). Each Partner's or Investor's Capital Account is debited with the cash and the fair market value of any property distributed to him (net of liabilities assumed by such Partner or Investor and liabilities to which such distributed property is subject), and his distributive share of Loss (and deduction (or item thereof)). Each Partner's and Investor's Capital Account shall also be adjusted pursuant to Section 4.5 hereof and as required by the Income Tax Regulations promulgated under Section 704 of the Code. Any questions concerning a Partner's or Investor's Capital Account shall be resolved by the General Partner in its reasonably exercised discretion, applying principles consistent with this Agreement and the regulations promulgated under Section 704 of the Code in order to assure that all allocations herein will have substantial economic effect or will otherwise be respected for income tax purposes. For purposes of this Agreement, a Partner or Investor who has more than one Partnership Interest or Unit, as the case may be, shall have a single Capital Account that reflects all of his Partnership Interests and Units, regardless of the class of Interests owned (e.g., general or limited) and regardless of the time or manner in which the Partnership Interests and Units were acquired. "Capital Contribution" means the total amount of cash and the fair market value of any other assets contributed to the Partnership by a Partner (net of liabilities assumed by the Partnership and liabilities to which any such contributed assets are subject) and, with respect to an Investor, the Capital Contribution of the Assignor Limited Partner made on behalf of such Investor (without regard to any reduction of Selling Commissions) reduced by the amount of any uninvested funds returned to the Investor or Partner pursuant to Section 5.6F. Any reference in this Agreement to the Capital Contribution of a then-Partner or Investor shall include a Capital Contribution previously made by any prior Partner or Investor with respect to the Interest or Unit of such then-Partner or then-Investor, except to the extent that all or a portion of the Interest or Unit of any prior Partner or A-4 Investor shall have been terminated and the portion so terminated not transferred to a successor Partner or Investor. "Certificate" means the Certificate of Limited Partnership establishing the Partnership, as filed with the office of the Secretary of State of the State of Delaware on October l9, 1989, as it may be amended from time to time in accordance with the terms of this Agreement and the Act. "Code"means the Internal Revenue Code of l986, as amended (or any corresponding provision of succeeding law). "Competitive Equipment Sales Commission" means the brokerage fee which would be paid to unaffiliated persons for services rendered in connection with the purchase or sale of Equipment which is reasonable, customary and competitive in light of the size, type and location of the Equipment. "Controlling Person" of the General Partner or Affiliate thereof means any person who (a) performs functions for the General Partner or Affiliate similar to those of (i) a Chairman or member of the Board of Directors, (ii) executive management, such as a President, or a Vice- President, Secretary or Treasurer, or (iii) senior management; or (b) holds a 5% or more equity interest in the General Partner or Affiliate, or has the power to direct or cause the direction of the General Partner, or Affiliate, whether through the ownership of voting securities, by contract or otherwise. "Cumulative Return" means an amount equal to a 12% cumulative annual return, compounded daily, on an Investor's Adjusted Capital Balance, less any Distributable Cash and any Net Disposition Proceeds distributed to such Investor in respect of the Cumulative Return pursuant to Sections 4.2A(i), 4.3A(i) and 4.3D. Calculation of the Cumulative Return shall commence as of the earlier of (i) the final closing for the sale of Units or (ii) March 31, 1990. "Distributable Cash" means, with respect to any fiscal period, the excess, if any, of (i) all cash funds derived from the operations of the Partnership during such period, including the yield from the Interim Investments and excess cash reserves deemed distributable by the General Partner pursuant to Section 5.6G hereof but excluding receipts from the sale, exchange or other disposition of Equipment (including insurance proceeds or lease indemnity payments arising from the loss or destruction of Equipment), Warrants and Warrant Stock, or other Partnership property, over (ii) all cash disbursed in the operations of the Partnership during such period, including cash used to pay, or establish reasonable reserves for, operating expenses, fees (including Equipment and Lease Management Fees and Equipment Re-leasing Fees), commissions, debt service and loan repayments, contingencies and anticipated obligations, except to the extent any such payment is made out of reserves set aside for such purpose. Distributable Cash shall not include amounts distributed or to be distributed under Section 4.2 hereof. "Due Diligence Expense Reimbursement Fee" means the fee equal to 1.0% of the Gross Proceeds of the Offering allowed to the Selling Agent, which may be reallowed to Soliciting Dealers, for advisory services, due diligence activities and the reimbursement of expenses. "Entity" means any general partnership, limited partnership, corporation, joint venture, trust, estate, business trust, cooperative, association or other legal form of organization. "Equipment" means any equipment and related tangible personal property and any interest therein, whether held directly or indirectly through a nominee, trust or otherwise. "Equipment and Lease Management Fee" means the fee payable to the Manager in accordance with the terms of the Management Agreement and Section 9.2A(vi) hereof for its services in managing the leasing, financing and refinancing of the Equipment. "Equipment Re-Leasing Fee" means the fee payable to the Manager in accordance with the terms of the Management Agreement and Section 9.2A(vii) hereof for its services in releasing Equipment to a Person other than the original lessee or its Affiliates. A-5 "Escrow Agent" means Mercantile-Safe Deposit & Trust Company, or such other escrow agent chosen by the General Partner to hold funds from Persons who have subscribed to become Investors pending the assignment of Assignee Units to them. "Front-End Fees" means fees and expenses paid by any Person for any services rendered during the organization or acquisition phase of the Partnership, including the Offering and Organization Expense Fee, the Due Diligence Expense Reimbursement Fee, the Selling Commissions, the Acquisition Expenses, the Acquisition Fees, the Leasing Fees and any other similar fees. Notwithstanding the foregoing, Front-End Fees shall not include any Acquisition Fees or Acquisition Expenses paid by a manufacturer of Equipment to any of its employees unless such Persons are Affiliates of the Manager or the General Partner. "Full Payout Lease" means a lease of Equipment under which the non-cancellable rental payments during the initial term of the lease, on a net present value basis, are at least sufficient to recover the contract purchase price paid by the Partnership in connection with the purchase of the Equipment plus all Acquisition Fees applicable thereto. "General Partner" means Redwood Leasing, Inc. and any other Person designated as a General Partner in the Schedule and any Person who becomes a Successor or Additional General Partner as provided herein, in each such Person's capacity as a General Partner of the Partnership. "Gross Proceeds of the Offering" means the aggregate of the proceeds from the sale of Units in the Offering, which amount is equal to the total of all Capital Contributions of the Investors. "Interest" or "Partnership Interest" means the entire ownership interest (which may be segmented into and/or expressed as a percentage of various rights and/or liabilities) of a Partner in the Partnership at any particular time, including the right of such Partner to any and all benefits to which a Partner may be entitled as provided in the Agreement and in the Act, together with the obligations of such Partner to comply with all the terms and provisions of this Agreement and of the Act. "Interim Investments" means the short-term investments made with the Net Proceeds of the Offering until such Net Proceeds of the Offering are disbursed for acquisition of Equipment. "Investment in Equipment" means the amount of Capital Contributions actually paid or allocated to the purchase, manufacture or renovation of Equipment (including the purchase of equipment, working capital reserves allocable thereto (except that working capital reserves in excess of 3% shall not be included), and other cash payments such as interest and taxes) but excluding Front-End Fees. "Investor" means (i) any Person who holds an Assignee Unit and is reflected as an Investor on the books and records of the Partnership, (ii) any Investor who has been admitted to the Partnership as a Substitute Limited Partner pursuant to Section 7.5 hereof and (iii) except where otherwise specifically provided to the contrary, the MNC Special Limited Partner. The term "Investor" shall not include the ABR Special Limited Partner. "Leasing Fees" means the total of all fees and commissions paid by any Person in connection with the initial lease of Equipment. "Limited Partner" means any Person who is designated as a Limited Partner on the books and records of the Partnership at the time of reference thereto, in each such Person's capacity as a Limited Partner of the Partnership. "Limited Partnership Interest" means the ownership interest of the Assignor Limited Partner and all other Limited Partners in the Partnership. "Limited Partnership Interest Percentage" in respect of any Investor means the percentage obtained by converting to a percentage the fraction having the number of Assignee Units owned by such Investor as its numerator and having the number of Assignee Units owned by all Investors at the time of reference thereto as its denominator. A-6 "Majority Vote of the Investors" shall mean the affirmative vote of Investors owning more than 50% of the outstanding Units or the consent of Investors owning more than 50% of the outstanding Units, as the case may be. "Manager" means MNC Leasing, a division of MNC Credit Corp, which is an indirect subsidiary of MNC Financial, Inc., a Maryland corporation, or any successor employed by the Partnership to manage the leasing, financing, refinancing, re-leasing and selling of the Equipment in accordance with Section 5.2A(xix). "Management Agreement"means the agreement between the Manager and the Partnership under which the Manager shall manage the leasing, financing, refinancing, re-leasing and selling of the Equipment. "Minimum Gain" means with respect to each non-recourse liability of the Partnership and subject to certain adjustments pursuant to Income Tax Reg. ss.1.704-lT(b)(4)(iv)(c), the amount of gain (of whatever character), if any, that would be realized by the Partnership, if the Partnership disposed of (in a taxable transaction) any of the assets subject to such liability in full satisfaction of the liability. For this purpose, only the portion of the assets' adjusted basis allocated to non-recourse liabilities of the Partnership shall be taken into account. "Minimum Offering Amount" means the amount of $2,000,000 in Gross Proceeds of the Offering. "MNC Special Limited Partner" means Maryland National Leasing Services Corporation, an Affiliate of the Manager. "Net Disposition Proceeds" means the cash proceeds realized by the Partnership from the sale, exchange or other disposition of Equipment (including insurance proceeds or lease indemnity payments arising from the loss or destruction of Equipment) or other Partnership property, including Warrants and Warrant Stock, less all related Partnership liabilities and expenses relating to the transaction, including but not limited to, fees or commissions paid to any unaffiliated Persons and, subject to Sections 5.2A(viii) and 9.2A(viii), fees or commissions paid to the Manager or its Affiliates. "Net Lease" means a lease under which the lessee assumes responsibility for, and bears the cost of, all expenses of operation of the Equipment (including insurance, repairs, maintenance and service costs and sales, use, property or similar taxes associated with the Equipment) and bears the risk of physical loss of the Equipment. "Net Lease Provisions" means contractual arrangements under which the lessee assumes responsibility for, and bears the cost of, insurance, taxes, maintenance, repair and operation of the leased asset and where the non-cancellable rental payments under the lease are absolutely net to the lessor. "Net Proceeds of the Offering" means the Gross Proceeds of the Offering less the Selling Commis- sions, the Due Diligence Expense Reimbursement Fee, and the Offering and Organization Expense Fee. "Notification" means a writing, containing the information required by this Agreement to be communicated to any Person, sent or delivered to such Person in accordance with the provisions of Section 12.3 of this Agreement. "Offering" means the offering and sale of Units for a minimum of $2,000,000 and a maximum of $25,000,000 (which may be increased at the discretion of the General Partner to $75,000,000), as more fully described in the Prospectus. "Offering and Organization Expense Fee" means the non-accountable fee paid to the General Partner equal to 5.65% of the Gross Proceeds of the Offering, payable in accordance with Section 9.2A(ii) hereof, for services rendered and costs incurred in connection with the organization of the Partnership and the offering of Units. "Operating Lease" means a lease of Equipment under which the non-cancellable rental payments during the initial term of the lease, on a net present value basis, are not sufficient to recover the A-7 contract purchase price paid by the Partnership in connection with the purchase of the Equipment plus all Acquisition Fees applicable thereto. "Partner" means any General Partner or Limited Partner. "Partnership" means the limited partnership formed in accordance with this Agreement by the parties hereto, as said limited partnership may from time to time be constituted. "Payout" means the date on which each Investor has received from distributions of Distributable Cash and Net Disposition Proceeds a return of his Adjusted Capital Balance and payment of his Cumulative Return. "Person" means any individual or Entity. "Profit" or "Loss" means, for each fiscal year or other period, an amount equal to the Partner- ship's taxable income or loss for such year or period, with the following adjustments: (i) any income of the Partnership that is exempt from federal income tax shall be added to such taxable income or loss; (ii) any income or deduction which is separately allocated pursuant to Article IV shall be excluded from such taxable income or loss; and (iii) any expenditures of the Partnership described in Section 705(a)p(2)(B) of the Code, or treated as Section 705(a)(2)(B) of the Code expenditures pursuant to Income Tax Reg. ss.1.704-1(b)(2)(iv)(i) other than syndication expenses described in Section 4.5L, shall be subtracted from such taxable income or loss. Except as otherwise provided herein, each item of income, gain, loss, deduction, preference or recapture entering into the computation of Profit or Loss hereunder shall be allocated to each Partner in the same proportion as Profit and Loss are allocated. "Profit from Operations" or "Loss from Operations" means Profit or Loss of the Partnership, as applicable, from any source other than a Sale. "Prospectus" means the Partnership's Prospectus contained in the Registration Statement filed on Form S-1 with the Securities and Exchange Commission for the registration of the Units under the Securities Act of 1933, in the final form in which it is filed with the Securities and Exchange Commission and as thereafter supplemented pursuant to Rule 424 under the Securities Act of 1933. Any reference herein to "date of the Prospectus" shall be deemed to refer to the date of the Prospectus in the form filed pursuant to Rule 424(b) of the Securities Act of 1933. "Sale" means any sales or exchanges or other dispositions of Equipment, condemnations, recoveries of damage awards and insurance proceeds (other than business or rental interruption insurance proceeds). "Schedule" means Schedule A annexed hereto as amended from time to time and as so amended at the time of reference thereto. "Selling Agent" means Alex. Brown Realty Securities, Inc., an Affiliate of the General Partner, which will offer the Units on a best efforts basis pursuant to the Selling Agent Agreement. "Selling Agent Agreement" means that certain agreement to be entered into by the Partnership Alex. Brown Realty Securities, Inc., and the General Partner, pursuant to which Alex. Brown Realty Securities, Inc. will offer and sell the Units on a best efforts basis. "Selling Commissions" means the maximum total (or any portion thereof) of 7% of the Gross Proceeds of the Offering paid to the Selling Agent or Soliciting Dealers for their efforts in offering the Units. The 7% maximum Selling Commissions will be reduced for volume purchases and purchases by the MMC Special Limited Partner and certain Affiliates of the Manager as specified in the Prospectus. "Specified Equipment" means the Equipment described in the Prospectus and in a schedule to be affixed to this Agreement by amendment or any Equipment purchased in substitution of such Equipment. "Sponsor" means any Person directly or indirectly instrumental in organizing, wholly or in part, the Partnership or who will manage or participate in the management of the Partnership, and any A-8 Affiliate of such Person, but does not include (a) any Person whose only relationship with the Partnership or the General Partner is that of an independent property manager if such person's only compensation from the Partnership is in the form of fees for the performance of property management services, or (b) wholly-independent third parties such as attorneys, accountants and broker-dealers whose only compensation from the Partnership is for professional services rendered in connection with the Offering or the operations of the Partnership. Sponsors of the Partnership include the General Partner and the Manager. "Subordinated Disposition Fee" means the fee payable to the Manager upon the Sale of any item of Equipment in an amount equal to the lesser of one-half of the Competitive Equipment Sales Commission, or 3% of the contract sales price received by the Partnership in connection with the Sale of the Equipment. "Substitute Limited Partner" means any Investor who has elected to convert from an Investor to a Limited Partner pursuant to Section 7.5 of this Agreement. "Successor General Partner" means any Person who is admitted as a Successor General Partner to the Partnership under the provisions of Article VI after the date of this Agreement. "Tax Matters Partner" means the General Partner designated in Section 5.1C as the tax matters partner, as defined in Section 6231(a)(7) of the Code. "Termination Date of the Offering" means the date upon which the Offering terminates, which, if not extended at the election of the General Partner, will be on or before the date one (1) year from the date of the Prospectus. "Unit" means (i) an Assignee Unit representing the assignment by the Assignor Limited Partner of one Assigned Limited Partnership Interest, (ii) the Partnership Interest attributable to one Unit of any Investor who has become a Substitute Limited Partner pursuant to Section 7.5 hereof and (iii) the Partnership Interest attributable to one Unit purchased by the MNC Special Limited Partner pursuant to Section 3.3 hereof. "Warrants" means an option, warrant or right to acquire, by purchase, conversion or exchange, an equity security of a lessee of Equipment, obtained by the Partnership in connection with the execution of a lease of Equipment to such lessee. "Warrant Stock" means the shares of common stock, preferred stock or other equity security of a lessee of the Partnership upon exercise, conversion or exchange of a Warrant. "Working Capital Reserves" means the portion of the Gross Proceeds of the Offering set aside as working capital reserves pursuant to Section 5.6G. ARTICLE II NAME; PURPOSE; TERM AND CERTIFICATE Section 2.1 Name; Continuation T'he Partners hereby agree to continue the limited partnership known as "Redwood Equipment Leasing Income Fund L.P." Such name shall be used at all times in connection with the Partnership's business and affairs; provided, however, that the Partnership may use trade names in its business operations. The Partnership shall be governed by the Act. Section 2.2 Place of Registered Office The address of the registered office in the State of Delaware of the Partnership is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801; the name of the registered agent for service of process on the Partnership in the State of Delaware at that address is The Corporation Trust Company. The Partnership's principal place of business is 225 East Redwood Street, 4th Floor, Baltimore, Maryland 21202 or such other place(s) as the General Partner may hereafter determine. A-9 Notification of any change in the location of the principal office shall be given to the Partners and Investors on or before the date of any such change. Section 2.3 Purpose The purpose of the Partnership is to engage in the business of acquiring, owning, leasing and selling a diversified portfolio of Equipment including but not limited to aircraft, construction and manufacturing equipment, high technology and testing equipment, production and material handling equipment, transportation equipment, medical and biotechnology equipment, laboratory and testing equipment, telecommunications and computer equipment, restaurant equipment and furniture and fixtures and otherwise deal with the Equipment and Partnership property including Warrants and Warrant Stock owned or acquired in connection therewith. The Partnership may own Equipment directly or indirectly through joint ventures or general partnerships, subject to the provisions contained herein. The Partnership may do any and all things necessary, convenient or incidental to the achievement of the foregoing. Section 2.4 Term The Partnership shall continue until December 31, 2019, unless the Partnership is sooner dissolved in accordance with the provisions of this Agreement. Section 2.5 Recording of Certificate The General Partner shall take all necessary action to maintain the Partnership in good standing as a limited partnership under the Act, including, without limitation, the filing of the Certificate and such amendments and further certificates as may be necessary under the Act and as may be deemed necessary or advisable by the General Partner to qualify the Partnership to do business in other states. The General Partner shall not be required to send a copy of the Partnership's filed Certificate to each Partner and Investor. ARTICLE III PARTNERS; CAPITAL Section 3.1 General Partner; Assignor Limited Partner; ABR Special Limited Partner A. The name, address and Capital Contribution of the General Partner, the Assignor Limited Partner and the ABR Special Limited Partner are set forth on the Schedule. Upon the dissolution and termination of the Partnership, on or before the later of the last day of the fiscal year in which the dissolution of the Partnership occurs or ninety (90) days after the date of dissolution of the Partnership, the General Partner shall make a Capital Contribution to the Partnership in an amount equal to the lesser of (i) the deficit balance, if any, in its Capital Account or (ii) the excess of 1.01% of the Capital Contributions of the Investors and Limited Partners (excluding capital contributions of the Assignor Limited Partner on behalf of Investors) over the Capital Contributions previously contributed by the General Partner attributable to its interest as General Partner. B. The General Partner and its Affiliates may also be Investors or Limited Partners to the extent that they separately purchase or become transferees of Units and, to such extent, shall be treated as Investors or Limited Partners, subject to the limitations contained in this Agreement. Any purchases of Units by the General Partner or its Affiliates in connection with the initial public offering of Units shall not be counted in determining whether the minimum number of Units necessary for the Minimum Offering Amount has been achieved. Section 3.2 Investors A. The General Partner is authorized to accept orders for Units pursuant to the Offering. All orders for Units shall be held in trust and deposited in an escrow account with the Escrow Agent. Orders for Units shall be accepted or rejected by the General Partner within thirty (30) days after their receipt by the Escrow Agent. A-10 B. Upon the receipt by the Escrow Agent of orders for an amount equal to the Minimum Offering Amount, the Escrow Agent shall release the funds in the escrow account to the Assignor Limited Partner which shall immediately transmit such funds to the Partnership. Subsequent orders for Units that are accepted by the General Partner shall be released from the escrow account and transmitted to the Partnership or returned to subscribers in accordance with the Prospectus. Upon release of an Investor's funds from the escrow account to the Partnership, an Assigned Limited Partnership Interest shall be credited to the Assignor Limited Partner on the books and records of the Partnership in respect of such Unit and the Assignor Limited Partner shall assign all of its rights with respect to such Assigned Limited Partnership Interest to the Investor to the extent permitted by, and in accordance with, the Agreement and applicable law. The Assignor Limited Partner hereby agrees to exercise any and all rights with respect to such Assigned Limited Partnership Interest as directed by the Investor. C. Any interest earned on moneys paid by Investors during the period such moneys are held in escrow by the Escrow Agent shall be paid to the Partnership following the release of orders and shall be distributed in accordance with Section 4.5A hereof. Persons whose orders for Units are rejected by the General Partner shall be returned their moneys within ten (10) days after such rejection. D. No order for Units sold as part of the Offering shall be accepted after the Termination Date of the Offering. If the General Partner does not accept orders totalling an amount equal to the Minimum Offering Amount on or before the Termination Date of the Offering, the Escrow Agent shall promptly return all moneys deposited by subscribers together with any interest earned on such moneys. E. For purposes of this Agreement, an Investor who acquires Units in the Offering shall be recognized as an Investor with respect to such Units on the date that such Investor's funds are released from the escrow account to the Partnership. Section 3.3 MNC Special Limited Partner A. On each date that Investors subscribing for and purchasing Units are recognized as such on the books of the Partnership in accordance with Section 3.2B, the MNC Special Limited Partner shall purchase that number of Units necessary to maintain an investment in the Partnership equal to 4.9% of all outstanding Units, subject to a maximum purchase obligation of $2,500,000 (i.e., 107,526 Units). The purchase of such Units by the MNC Special Limited Partner shall be on the same basis as Units purchased by other Investors, provided that an amount equal to the Selling Commissions payable with respect to such Units shall be returned to the MNC Special Limited Partner. B. Upon the dissolution and termination of the Partnership (or the Interest of the MNC Special Limited Partner), on or before the later of the last day of the fiscal year in which the dissolution of the Partnership (or the liquidation of such Interest) occurs or ninety (90) days after the dissolution of the Partnership (or the liquidation of such Interest), the MNC Special Limited Partner shall make a Capital Contribution to the Partnership in an amount equal to the least of (i) the deficit balance, if any, in its Capital Account, (ii) the aggregate amount of distributions of Net Disposition Proceeds and Distributable Cash that it has received or (iii) the excess, if any of the Investors' aggregate Capital Contributions (other than the Capital Contributions of the MNC Special Limited Partner) over the amount of Net Disposition Proceeds and Distributable Cash distributed or to be distributed to the Investors (other than the MNC Special Limited Partner), provided that in no event shall the amount to be returned exceed the investment in the Partnership made by the MNC Special Limited Partner pursuant to Section 3.3A. C. Affiliates of the Manager may also be Investors or Limited Partners to the extent that they separately purchase or become transferees of Units and, to such extent, shall be treated as Investors or Limited Partners, subject to the limitations contained in this Agreement. Any purchases of Units by the officers and directors of the Manager and MNC Credit Corporation in connection with the initial public offering of Units shall be made net of Selling Commissions. A-11 Section 3.4 Partnership Capital A. Each Partner's and Investor's Capital Contribution shall be paid in cash on or prior to the date of such Partner's admission to the Partnership or the date of the recognition of the Investor on the books and records of the Partnership. B. Except to the extent of any interest income earned on an Investor's Capital Contribution while it is held in escrow, and later distributed to such Investor pursuant to Section 4.5A, no Partner or Investor shall be paid interest on any Capital Contribution. C. Except as otherwise provided in this Agreement, no Partner or Investor shall have the right to withdraw, or receive any return of, his Capital Contribution prior to December 31, 2019. D. Under circumstances requiring a return of any Capital Contribution, no Partner shall have the right to demand or receive property other than cash. Section 3.5 Liability of Partners and Investors A. Except as provided in Section 17-607 of the Act, or in Section 3.3 with respect to the MNC Special Limited Partner, the Limited Partners and Investors shall be liable only to pay their Capital Contributions and no Limited Partner or Investor will be personally liable for the debts, liabilities, contracts, or other obligations of the Partnership. B. Except as set forth in Section 3.5A, no Limited Partner or Investor shall be required to lend any funds to the Partnership or, after his Capital Contribution has been fully paid, to make any further capital contribution to the Partnership, nor, except as set forth in Section 3.3, shall any Limited Partner or Investor be liable for or have any obligation to restore any negative balance in his Capital Account. C. Subject to the provisions of Sections 3.1 and 5.9 of this Agreement, the General Partner shall not have any personal liability for the repayment of the Capital Contribution or the Cumulative Return of any Limited Partner or Investor or be required to repay to the Partnership all or any portion of any negative balance of the Capital Accounts of the Limited Partners or the Investors. ARTICLE IV ALLOCATIONS, DISTRIBUTIONS AND APPLICABLE RULES Section 4.1 Allocation of Profit or Loss A. Profit (including any Profit from any deemed Sale pursuant to Section 4.5) shall be allocated in the following order of priority: (i) First, Profit shall be allocated to the Partners and Investors in proportion to, and to the extent of, any Loss allocated to the Partners and Investors pursuant to Section 4.1B(ii), 4.1B(iii) and 4.1B(iv) for all prior fiscal years, in reverse order and priority to the order and priority specified under Section 4.1B(ii), 4.1B(iii) and 4.1B(iv) to offset such prior allocations of Loss. To the extent that any allocations of Loss are offset pursuant to this Section 4.1A(i), such allocations of Loss shall be disregarded for purposes of computing subsequent allocations pursuant to this Section 4.1. (ii) Second, Profit not allocated pursuant to Section 4.1A(i) shall be allocated (a) in the case of Profit from Operations, 98% to the Investors and 2% to the General Partner and (b) in the case of Profit from a Sale, 99% to the Investors and 1% to the General Partner, until the Capital Account of each Investor is equal to the sum of his Adjusted Capital Balance plus his unpaid Cumulative Return, if any. (iii) Third, Profit not allocated pursuant to Section 4.1A (i) and Section 4.1A (ii) shall be allocated to the General Partner until the Capital Account of the General Partner is equal to its Adjusted Capital Balance. A-12 (iv) Fourth, any remaining Profit shall be allocated 90% to the Investors (including the MNC Special Limited Partner), 5% to the MNC Special Limited Partner, 1% to the General Partner and 4% to the ABR Special Limited Partner. B. Loss (including any Loss from any deemed Sale pursuant to Section 4.5) shall be allocated in the following order of priority: (i) First, Loss shall be allocated to the Partners and Investors in proportion to, and to the extent of, any Profit allocated to the Partners and Investors pursuant to Section 4.1A(ii), 4.1A(iii) and 4.lA(iv) for all prior fiscal years, in reverse order and priority to the order and priority specified under Section 4.1A(ii), 4.lA(iii) and 4.1A(iv), to offset such prior allocations of Profit. To the extent that any allocations of Profit are offset pursuant to this Section 4.1B(i), such allocations of Profit shall be disregarded for purposes of computing subsequent allocations pursuant to this Section 4.1. (ii) Second, any Loss not allocated pursuant to Section 4.1B(i) shall be allocated 99% to the MNC Special Limited Partner and 1% to the General Partner until the aggregate Loss allocated to the MNC Special Limited Partner under this Section 4.1B(ii) for such fiscal year and all prior fiscal years is equal to the aggregate Capital Contributions of the MNC Special Limited Partner made pursuant to Section 3.3A (reduced by any prior or contemporaneous allocations of syndication expenses to the Special Limited Partner under Section 4.5L). (iii) Third, if one or more Partners or Investors has a positive Capital Account, any Loss not allocated pursuant to Sections 4.lB(i) and 4.lB(ii) shall be allocated to such Investors or Partners, in proportion to their positive Capital Accounts, until all such positive Capital Accounts have zero balances. (iv) Fourth, any remaining Loss shall be allocated 99% to the Investors and 1% to the General Partner. C. For each fiscal year, all Profit and Loss from Operations allocated pursuant to Section 4.1 to the Investors shall be allocated among the Persons that are recognized as Investors during such year by determining the Profit and Loss from Operations attributable to each month during such year and by allocating the amount of such Profit and Loss from Operations among Persons who are recognized as Investors on the books of the Partnership on the first business day of such month. The Profit or Loss from Operations attributable to each month of the fiscal year shall be determined in the discretion of the General Partner either (i) by dividing the Profit or Loss from Operations for such year by the number of days in such year, and then multiplying such per diem amount by the number of days in each month or (ii) by an interim closing of the books of the Partnership on a monthly basis. D. All Profit or Loss from a Sale (including all "recapture income" attributable to an installment Sale, as defined in Section 453(i) of the Code) allocated pursuant to Section 4.1 hereof with respect to any Unit which is transferred during a taxable year of the Partnership shall be allocated to the Persons recognized (in accordance with Section 7.4 hereof) as Investors as of the first business day of the month that includes the date on which the Sale occurs; provided, however, that all such Profit or Loss which is attributable to an installment or other deferred Sale (other than recapture income) shall be allocated to the Persons recognized as Investors as of the first business day of the month that includes the date on which the deferred Net Disposition Proceeds from such Sale are received by the Partnership, and the allocable cash basis items with respect thereto shall be allocated as required under Section 706(d) of the Code and the Income Tax Regulations thereunder. E. Notwithstanding Sections 4.1C and 4.1D, the Partnership shall adopt the daily proration method of allocating Profit and Loss (whether from operations or from Sales) among persons who become Investors pursuant to a closing of the sale of the Units on or before the Termination Date of the Offering. Accordingly, each Investor shall begin to be allocated Profit, and Loss on the date he is recognized on the books of the Partnership. A-13 Section 4.2 Distribution of Net Disposition Proceeds A. Upon a Sale that does not constitute a Sale of all or substantially all of the Equipment, Net Disposition Proceeds which are not reinvested in Additional Equipment pursuant to Section 5.2B shall be distributed, credited and applied in the following order of priority: (i) First, 99% to the Investors and 1% to the General Partner until each Investor has received an amount equal to his unpaid Cumulative Return, if any, and then his Adjusted Capital Balance. (ii) Second, to the General Partner, an amount equal to its Adjusted Capital Balance. (iii) Third, any Net Disposition Proceeds remaining after payment of the Subordinated Disposition Fee shall be distributed 90% to the Investors (including the MNC Special Limited Partner), 5% to the MNC Special Limited Partner, 1% to the General Partner and 4% to the ABR Special Limited Partner. B. Upon the Sale of all or substantially all of the Equipment, Net Disposition Proceeds shall be allocated to the Partners and Investors, in proportion to their positive Capital Accounts, after the allocation of Profit and Loss pursuant to Sections 4.1A and 4.1B, until all such Capital Accounts have been reduced to zero. C. All Net Disposition Proceeds distributable with respect to any Unit which is transferred during a taxable year of the Partnership shall be distributed to the Persons recognized (in accordance with Section 7.4 hereof) as Investors as of the first business day of the month that includes the date on which the Sale occurs; provided, however, that all Net Disposition Proceeds received by the Partnership as a result of an installment or other deferred Sale shall be distributed to the Persons recognized (in accordance with Section 7.4 hereof) as Investors as of the first business day of the month that includes the date on which the deferred Net Disposition Proceeds are received by the Partnership. Section 4.3 Distribution of Distributable Cash A. Distributable Cash, if any, for each year, or portion thereof, which is not reinvested in Additional Equipment pursuant to Section 5.2B shall be distributed, credited and applied in the following order of priority: (i) First, 98% to the Investors and 2% to the General Partner until each Investor has received an amount equal to his unpaid Cumulative Return, if any, and then his Adjusted Capital Balance. (ii) Second, to the General Partner, an amount equal to its Adjusted Capital Balance. (iii) Third, any Distributable Cash remaining after payment of the Subordinated Disposition Fee shall be distributed 90% to the Investors (including the MNC Special Limited Partner), 5% to the MNC Special Limited Partner, 1% to the General Partner and 4% to the ABR Special Limited Partner. To the extent practicable, the General Partner will endeavor to make distributions of Distributable Cash on a quarterly basis. B. All Distributable Cash distributable to the Investors pursuant to Section 4.3A, if any, attributable to each month of a fiscal quarter shall be distributed among the Persons recognized as Investors on the books of the Partnership on the first business day of such month during the fiscal quarter. The Distributable Cash attributable to each month of the fiscal quarter shall be determined in the discretion of the General Partner either (i) by dividing the amount of Distributable Cash for such quarter by the number of days in the quarter, and then multiplying such per diem amount by the number of days in each month or (ii) by an interim closing of the books of the Partnership on a monthly basis. C. Notwithstanding Section 4.3B, Distributable Cash distributable to the Investors pursuant to Section 4.3A for any fiscal quarter before the Termination Date of the Offering shall be distributed among the Persons who become Investors during such quarter pursuant to a closing of the sale of A-14 Units on or before the Termination Date of the Offering in accordance with the number of days each Investor is recognized as such during the fiscal quarter. The Distributable Cash attributable to each day of the fiscal quarter shall be determined by dividing the amount of Distributable Cash for such quarter by the number of days in such quarter. D. Notwithstanding the provisions of Section 4.3A, the General Partner is hereby authorized to make distributions of Distributable Cash to some or all of the Investors after the Termination Date of the Offering in order to equalize the Cumulative Return outstanding on all Units. Section 4.4 Liquidation or Dissolution A. If the Partnership is liquidated or dissolved, the net proceeds from such liquidation, as provided in Article VIII, shall be distributed first to creditors, including Partners who are creditors, to the extent otherwise permitted by law (whether by payment or by establishment of reserves), other than liabilities for distributions to Partners and Investors, and any remaining net proceeds shall be distributed in proportion to the Capital Accounts of the Partners and Investors, determined after the allocations in Sections 4.lA, 4.lB and 4.5. B. All distributions under this Section 4.4 shall be made by the end of the taxable year of liquidation of the Partnership or, within ninety (90) days of the date of liquidation, whichever is later. Section 4.5 General and Special Rules A. The timing and amount of all distributions shall be determined by the General Partner. Notwithstanding any other provision of this Agreement, the General Partner shall have authority to make the following distributions to certain of the Investors: First, if the Partnership has realized a savings on Selling Commissions payable by the Partnership with respect to the purchase of Units by an Investor (as more fully set forth in the Prospectus), the General Partner shall make a distribution to such Investor equal to the amount of such savings realized by the Partnership. Second, if any interest is earned on an Investor's Capital Contribution while it is held in escrow pending recognition as an Investor under Article VII, such interest shall be paid by the Partnership to such Investor and Profit attributable to such interest shall be allocated in the same manner. B. Subject to all of the special rules of this Section 4.5, if any property or assets of the Partnership are distributed to the Partners in kind, such property or assets first shall be valued on the basis of the fair market value thereof to determine the Profit or Loss that would have resulted if such property or assets had been sold, and then such Profit or Loss shall be allocated as provided in Section 4.1A and Section 4.1B, and shall be properly credited or charged to the Capital Accounts in accordance with Income Tax Reg. ss.1.704-1(b)(2)(iv)(e) or any successor provision thereto. Any Partner entitled to any interest in such property or assets shall receive such interest as a tenant-in-common with all other Partners so entitled. The fair market value of such property or assets shall be determined by an independent appraiser who shall be selected by the General Partner. This Section 4.5B governs income tax consequences only and shall not be read or construed as authorizing the distribution in kind of property or assets of the Partnership. C. Notwithstanding Section 4.1 hereof, if an allocation of Loss (or item thereof) to an Investor or a Partner would cause or increase a deficit balance in his or its Capital Account in excess of: (i) in the case of an Investor or a Partner other than the MNC Special Limited Partner and the General Partner, his proportionate share of Minimum Gain (as defined in Income Tax Regulation ss.1.704- 1T(b)(4)(iv)(f) and (h)(5)), (ii) in the case of the MNC Special Limited Partner, the sum of the amount it is obligated to restore to the Partnership pursuant to Section 3.3B hereof and its proportionate share of Minimum Gain (as defined in Income Tax Regulation ss.1.704-lT(b)(4)(iv)(f) and (h)(5)) or (iii) in the case of the General Partner, the sum of the amount which it is obligated to restore to the Partnership pursuant to Section 3.1 hereof and its proportionate share of Minimum Gain (as defined in Income Tax Regulation ss.1.704-lT(b)(4)(iv)(f) and (h)(5)) (in each case, such excess being referred to hereafter as the "Excess Deficit Balance"), then the allocation shall not be made to such Investor or Partner. Instead, such Loss (or deduction or item thereof) shall be allocated first to the Partners and Investors having positive Capital Accounts, in proportion to such positive Capital Accounts until all A-15 such positive Capital Accounts have been reduced to zero, and any additional Loss (or deduction or item thereof) shall be allocated to the General Partner. For purposes of making the determination set forth above, each Investor's and each Partner's Capital Account balance shall be reduced by reasonably expected allocations or adjustments of loss (or item thereof) including Loss from a Sale under Income Tax Regulation ss.ss.1.704-1(b)(2)(ii)(d)(4) and (5), and by reasonably expected distributions to the extent not offset by reasonably expected Capital Account increases ("Account Reduction Items"). For purposes of calculating reasonably expected Capital Account increases, the value of the Partner- ship's assets shall be presumed to be equal to their adjusted basis for federal income tax purposes. D. Notwithstanding Section 4.1 hereof, in accordance with Income Tax Regulation ss.ss.1.704- l(b)(2)(ii)(d), 1.704-IT(b)(4)(iv)(e)(2) and 1.7041T(b)(4)(iv)(h)(4), (i) if, in any fiscal year of the Partnership, an Account Reduction Item unexpectedly causes or increases an Investor's or a Partner's Excess Deficit Balance, or (ii) if there is a net decrease in Partnership Minimum Gain, including Minimum Gain attributable to Partner Nonrecourse Debt as defined in Income Tax Regulation ss.1.704-IT(b)(4)(iv)(h), during a taxable year, then each Investor or Partner with an Excess Deficit Balance or a share of Minimum Gain, shall be specially allocated, in order to eliminate such Excess Deficit Balance or reflect his share of the reduction in Minimum Gain, Profit and, to the extent necessary, gross income (as defined in Section 61 of the Code) in an amount and manner required by Income Tax Regulation ss.ss.1.7041(b)(2)(ii)(d) and 1.704-IT(b)(4)(iv)(e)(2) and (h)(4). All nonrecourse deductions attributable to Partner Nonrecourse debt (determined in accordance with Income Tax Regulations ss.1.704-IT(b)(4)(iv)(h)(3)) shall be allocated to the Partner that bears the economic risk of loss for such debt (within the meaning of Income Tax Regulations ss.1.704-IT(b)(4)(iv)(k)(1)). Any remaining Profit or Loss, after adjustment has been made for allocation of income or gain pursuant to this Section 4.5D, shall be allocated in accordance with Section 4.1 hereof. The General Partner shall be authorized to interpret and apply this Section 4.5D so as to satisfy the requirements of Income Tax Regulation ss.ss.1.704-1(b)(2)(ii)(d), 1.704 IT(b)(4)(iv)(e) and 1.704-IT(b)(4)(iv)(h) and any successor provisions. E. Any special allocations of Profit, Loss or gross income under Section 4.5D shall be taken into account in computing subsequent allocations of Profit or Loss, so that to the extent possible, the aggregate amounts of Profit or Loss allocated to each Partner or Investor will be equal to the aggregate amounts that would have been allocated to them in the absence of the unexpected Account Reduction Items or nonrecourse deductions attributable to Partner Nonrecourse Debt. F. Notwithstanding anything to the contrary that may be expressed or implied in this Agreement, if at any time the allocation provisions of this Article IV do not result in the allocation to the General Partner of at least 1% of the Profit or Loss being allocated, the General Partner shall be allocated 1% thereof. G. It is the intent of the General Partner that each Investor's and Partner's distributive share of Profit and Loss shall be determined and allocated in accordance with this Article IV to the fullest extent permitted by Sections 704(b) and 706 of the Code. Therefore, if the Partnership is advised by the Accountants or the Partnership's legal counsel, that the allocations provided in Article IV of this Agreement are unlikely to be respected for federal income tax purposes, the General Partner has been granted the power in Section 12.11B hereof to amend the allocation provisions of this Agreement, on advice of the Accountants or the Partnership's legal counsel, to the minimum extent necessary to conform to Sections 704(b) and 706 of the Code the plan of allocations and distributions of Profit and Loss, Distributable Cash and Net Disposition Proceeds provided in this Agreement. H. Notwithstanding any other provision of this Agreement the General Partner may, after giving ninety (90) days' prior Notification to the Investors, (i) adopt any other method for determining, in the event of transfers of Units, the Investors entitled to distributions of Distributable Cash or Net Disposition Proceeds that the General Partner, subject to the review and approval of the Account ants, determines is reasonable, and (ii) allocate Profit or Loss among the Investors during the taxable year in any other manner that the General Partner, determines satisfies the requirements of Section 706 of the Code, but only to the extent such allocation of Profit and Loss incorporates the minimum A-16 changes required to comply with such section and is supported by an opinion of counsel to the Partnership. I. Allocations and distributions to Investors as a class shall be made to each Investor entitled to such allocation or distribution based upon the ratio of the number of Units owned by each such Investor to the number of Units owned by all Investors entitled to such allocation or distribution. J. If a deduction for any fee paid in accordance with this Agreement is denied by the Internal Revenue Service on the basis that such fee was a distribution to a Partner by the Partnership, the Partner who received such fee shall be specially allocated an amount of gross income equal to the amount of the disallowed deduction. K. For purposes of determining the relative amounts of Distributable Cash and Net Disposition Proceeds to be distributed to the Investors and Partners under Sections 4.2 and 4.3 and the amounts to be reinvested in Additional Equipment under Section 5.2B, all distributions to Investors during any fiscal year shall be deemed made first from Distributable Cash and then from Net Disposition Proceeds. Any Distributable Cash of Net Disposition Proceeds remaining after such distributions shall be deemed reinvested in Additional Equipment. L. Syndication expenses of the Partnership (as defined in Treasury Regulations Section 1.709- 2(b)) shall be specially allocated among the Investors (i) in an amount equal to that actually charged with respect to each Investor's Units and (ii) with respect to syndication expenses that are not specifically charged with respect to Units, in proportion to the respective number of Units owned each Investor. M. Capital gains and losses realized by the Partnership in any fiscal year shall be allocated among the Investors and Partners in the same proportion that Profit or Loss is allocated to such Persons under Sections 4.1A, 4.1B and the other provisions of this Section 4.5. Allocations of tax credits, tax credit recapture, and any items related thereto shall be allocated to the Investors and Partners according to their interests in such items as determined by the General Partner taking into account the principles of Treas. Reg. ss.1.704-1(b)(4)(ii). ARTICLE V RIGHTS, POWERS AND DUTIES OF THE GENERAL PARTNER Section 5.1 Management and Control of the Partnership; Tax Matters Partner A. Subject to the Majority Vote of the Investors when required by this Agreement, the General Partner shall have the exclusive right to manage and control the business of the Partnership. B. No Limited Partner or Investor (except one who may also be a General Partner, and then only in his capacity as General Partner) shall have the right to participate in the control of the business of the Partnership, or have any authority or right to act for or bind the Partnership. C. The General Partner is hereby designated to serve as the Partnership's Tax Matters Partner and shall have all of the powers and responsibilities of such position as provided in Sections 6221 et seq. of the Code. All third party costs and expenses incurred by the General Partner in performing its duties as Tax Matters Partner shall be borne by the Partnership, as shall all expenses incurred by the Partnership and/or the Tax Matters Partner in connection with any tax audit or tax-related administrative or judicial proceeding. Each Partner and Investor shall be responsible for all costs incurred by such Partner or Investor with respect to any tax audit or tax-related administrative or judicial proceeding in connection with such Partner's or Investor's tax returns and all costs incurred by any such Partner or Investor who participates in any tax audit or tax-related administrative or judicial proceeding of or against the Partnership or any Partner. Each Partner and Investor hereby (i) expressly authorizes the Tax Matters Partner to enter into any settlement with the Internal Revenue Service with respect to any tax matter, tax item, tax issue, tax audit, or judicial proceeding, which settlement shall be binding on all Partners and Investors; (ii) waives the right to participate in any administrative or judicial proceeding in which the tax treatment of any Partnership item is to be A-17 determined; and (iii) agrees to execute such consents, waivers or other documents as the Tax Matters Partner may determine are necessary to accomplish the provisions of this Section 5.1C. The Tax Matters Partner shall have no liability to any Partner or Investor or the Partnership, and shall be indemnified by the Partnership to the full extent provided by law, for any act or omission performed or omitted by it within the scope of the authority conferred on it by this Agreement, except for acts of negligence or for damages arising from any misrepresentation or breach of any other agreement with the Partnership. The liability and indemnification of the Tax Matters Partner shall be determined in the same manner as is provided in Sections 5.9 and 5.10 hereof. Section 5.2 Authority of the General Partner A. Except to the extent otherwise provided herein, including, without limitation, Sections 5.3A, 5.4 and 5.5, the General Partner for, and in the name of and on behalf of, the Partnership is hereby authorized and empowered: (i) to enter into any kind of activity and to perform and carry out contracts of any kind necessary to, or in connection with, or incidental to the accomplishment of the purposes of the Partnership, so long as said activities and contracts may be lawfully carried on or performed by a limited partnership under applicable laws and regulations; (ii) to engage Persons, including the Sponsors as provided in Article IX, to provide services or goods to the Partnership, upon such terms as the General Partner deems fair and reasonable and in the best interest of the Partnership, provided, however, that, as to services or goods provided by a Sponsor (except for those services for which compensation is specifically authorized in Sections 9.1 and 9.2 of this Agreement), (a) the compensation for such services or goods must be comparable and competitive with the price that would be charged by non-affiliated persons or entities rendering similar types and quality of services in the same or comparable geographic locations; (b) the compensation and other terms of such contracts shall be fully disclosed to the Investors in the reports of the Partnership; (c) the Sponsor must have been previously engaged in the business of providing such services or goods, independent of the Partnership and as an ongoing business; and (d) all such transactions shall be embodied in a written contract that describes the services or goods to be provided and the compensation to be paid, which contract may only be modified by the Majority Vote of the Investors, and which contract shall permit termination without penalty on sixty (60) days notice; (iii) to operate the business of the Partnership in accordance with the Partnership's objectives and policies set forth in the Prospectus and to acquire, hold, lease, sell, trade, exchange or otherwise dispose of all or any portion of the Partnership's Equipment, the leases related thereto and other Partnership property, including but not limited to Warrants and Warrant Stock; (iv) to maintain and operate the Equipment so as to comply with the provisions of any lease of, or any indebtedness secured by, the Equipment; (v) to cause the Partnership to reinvest all or any portion of the Partnership's Distributable Cash and Net Disposition Proceeds in Additional Equipment, subject to the conditions of Section 5.2B; (vi) subject to the provisions of Section 5.4A(xvi), to borrow money from banks or others (including, to the extent permitted by this Agreement, a Sponsor or any Affiliates thereof) for any Partnership purpose and, as security therefor, to encumber the Equipment and the leases related thereto or other Partnership property or place title in the name of a nominee for the purpose of obtaining such financing; (vii) to repay in whole or in part, refinance, increase, modify or extend any obligation affecting the Partnership's Equipment, the leases related thereto or other Partnership property; (viii) to engage a sales agent (including a Sponsor) to sell any Partnership Equipment or assets or portions thereof upon such terms and conditions as are deemed fair and reasonable by the General Partner and to be in the best interest of the Partnership, and to pay reasonable A-18 compensation for such services; provided, however, that the total sales commission paid to all persons for the Sale of any Partnership Equipment or assets, shall not exceed the Competitive Equipment Sales Commission for like equipment and, in addition, if a Sponsor provides substantial services in such regard, to pay the Sponsor up to the lesser of (a) one-half of the Competitive Equipment Sales Commission or (b) 3% of the contract sales price for the Equipment received by the Partnership, provided, however, that the payment of such sales commission to the Sponsor shall be subordinated to distributions of Distributable Cash and Net Disposition Proceeds to the Investors and Partners until Payout occurs; (ix) to recognize transferees of Units as Investors and to admit Substitute Limited Partners in accordance with the terms described in the Prospectus and Article VII of this Agreement; (x) to invest Working Capital Reserves and, pending the investment of the Partnership's assets in Equipment, to invest the Partnership's assets (excluding Working Capital Reserves), in interest-bearing accounts and short-term investments, including obligations of federal, state and local governments and their agencies, regulated investment companies, commercial paper and certificates of deposit of federally-insured commercial banks, savings banks or savings and loan associations; provided, however, that such investments are short-term, highly-liquid and provide appropriate safety of principal; (xi) to purchase casualty, liability and other insurance to protect the Partnership's Equipment and its business and to cause the Partnership to enter into insurance or reinsurance arrangements with other Persons, including an Affiliate of a Sponsor, to provide such insurance; provided, however, that the premiums for any insurance obtained through an Affiliate of a Sponsor or pursuant to an insurance or reinsurance arrangement with an Affiliate of a Sponsor shall not exceed the lowest quote obtained from two unaffiliated insurance carriers; (xii) to exercise any and all Warrants and to convert or exchange any convertible or exchangeable Warrants or Warrant Stock; (xiii) to exercise any and all rights to vote or give any consent or approval with respect to any Warrants or Warrant or Stock, including, without limitation, any vote, consent or approval with respect to the election of directors, any merger, consolidation, reorganization, recapitalization, sale of assets, liquidation or dissolution of any issuer of any Warrants or Warrant Stock or the amendment, alteration or modification of the terms thereof; (xiv) to demand or request registration or qualification for sale of Warrants or Warrant Stock under any applicable Federal or state securities laws and to execute in the name and on behalf of the Partnership any registration or qualification statement or application and any underwriting or similar agreement with respect thereto; (xv) to purchase and cancel or otherwise retire or dispose of the Partnership Interests or Units of any Partner or Investor according to the provisions of this Agreement; (xvi) to execute and deliver all documents necessary or appropriate (a) for the sale of Units, including the Prospectus and filings under the Securities Act of 1933 and any other federal and state laws relating to the sale of securities and (b) to file state and local tax returns at the Partnership level on behalf of the Investors and Partners; (xvii) to require Investors to become Limited Partners (in which case the General Partner shall have the power to amend this Agreement without the Majority Vote of the Investors) and to take such other action with respect to the manner in which Units are being or may be transferred or traded as may be necessary or appropriate to preserve the tax status of the Partnership as a partnership for federal income tax purposes and the tax treatment of the Investors as Partners (but such action shall be taken only to the minimum extent required by an opinion of Counsel and only with the Majority Vote of Investors if the changes would adversely affect the Investors); (xviii) to take such steps (including amendment of this Agreement) as the General Partner determines is advisable or necessary and will not result in any material adverse effect on the economic position of a majority in interest of the Investors with respect to the Partnership in A-19 order to preserve the tax status of the Partnership as a partnership for federal income tax purposes and the tax treatment of the Investors as Partners, including, without limitation, removing the Units from public trading markets and imposing restrictions on transfers of Units or Interests (provided such restrictions on transfers do not cause the Partnership's assets to be deemed "plan assets" within the meaning of ERISA) (but such action shall be taken only to the minimum extent required by an opinion of Counsel and only with the Majority Vote of Investors if the changes would adversely affect the Investors); (xix) to cause the Partnership to enter into the Management Agreement with the Manager upon such terms and conditions as are deemed fair and reasonable by the General Partner and to be in the best interest of the Partnership, and to pay reasonable compensation for such services; provided, however, that if the Manager is a Sponsor, (a) fees for equipment management shall not exceed five percent (5%) of the Partnership's gross rentals (other than rentals consisting of amounts in respect of taxes and other costs paid or payable by the lessor for which the lessee is obligated to reimburse the lessor under such lease) under Operating Leases covering such Equipment, and two percent (2%) of the Partnership's gross rentals (other than rentals consisting of amounts in respect of taxes and other costs paid or payable by the lessor for which the lessee is obligated to reimburse the lessor under such lease) under Full Payout Leases (which contain Net Lease Provisions) covering such Equipment, in each case to the extent received by the Partnership during the immediately preceding calendar month and (b) fees for re-leasing services shall be limited to two percent (2%) of the Partnership's gross rentals (other than rentals consisting of amounts in respect of taxes and other costs paid or payable by the lessor for which the lessee is obligated to reimburse the lessor under the lease) from re-leased Equipment to the extent received by the Partnership during the immediately preceding calendar month, and (I) shall be payable only to the extent that the amount of the re-leasing fee does not exceed the competitive rate for comparable services for similar equipment and (II) the re-leasing fee shall not be paid if the Equipment is re-leased to a previous lessee or an Affiliate of such lessee, or the Manager has not rendered substantial re-leasing services in connection with such re-lease; (xx) to pay or reimburse any reasonable out-of-pocket expenses incurred by any Affiliate of the General Partner in connection with any report pursuant to Section 10.3, provided that no fee shall be paid to any Affiliate in connection with any such report; (xxi) upon the Majority Vote of the Investors to the matters set forth in Sections 5.4A(xvii), 5.4A(xviii) or 5.4A(xix), to take any actions which they deem appropriate to the extent authorized by the Investors to facilitate the purposes described in such sections, including, without limitation, amendments to this Agreement to change the dates upon which transfers of Units will be recognized, and the General Partner shall give prior written notice to the Investors of any such amendment; and (xxii) to take such steps as the General Partner determines are advisable or necessary and will not result in any material adverse effect on the economic position of a majority in interest of the Investors with respect to the Partnership to restructure the Partnership and its activities to obtain a prohibited transaction exemption from the Department of Labor or to comply with any exemption in final plan asset regulations adopted by the Department of Labor, including, but not limited to, establishing a fixed percentage of Units permitted to be held by qualified plans or other tax-exempt investors or discontinuing sales to such entities after a given date, in the event that either the assets of the Partnership constitute "plan assets" for purposes of ERISA or the transactions contemplated hereunder constitute prohibited transactions under ERISA or the Code. B. The General Partner may reinvest in Additional Equipment, as more fully described in the Prospectus, all Distributable Cash and Net Disposition Proceeds in excess of the amount of such funds projected by the General Partner to be necessary to distribute to the Investors an amount equal to the federal and state income tax liability of the Investors resulting from any Sale of Equipment as estimated by the General Partner, after taking into account the Profit or Loss otherwise derived from the Partnership during the taxable year in which the Sale occurs. A-20 C. Any person dealing with the Partnership or the General Partner may rely upon a certificate signed by the General Partner, as to: (i) the identity of the General Partner or any Limited Partner; (ii) the existence or non-existence of any fact or facts that constitute conditions precedent to acts by the General Partner or in any other manner are germane to the affairs of the Partnership; (iii) the Persons who are authorized to execute and deliver any instrument or document of the Partnership; or (iv) any act or failure to act by the Partnership or as to any other matter whatsoever involving the Partnership or any Partner. Section 5.3 Authority of Investors A. By the Majority Vote of the Investors, the Investors, without the consent of the General Partner, may: (i) amend this Agreement; provided that such amendment (a) shall not in any manner allow the Investors to take part in the control of the Partnership's business in a manner which would subject them to liability as general partners under the Act or any other applicable law, and (b) shall not, without the consent of the General Partner, modify the compensation, allocations or distributions to which the General Partner or any of its Affiliates are entitled or affect the duties, rights or powers of the General Partner or the indemnification to which the General Partner and its Affiliates and their officers, directors and employees are entitled; (ii) dissolve or terminate the Partnership prior to the expiration of its term; (iii) remove the General Partner and, pursuant to Section 6.2, elect a new General Partner, provided that, any portion of any fee payable to the General Partner under this Agreement which is then accrued and due, but not yet paid, shall be paid to the General Partner in cash within 30 days of the date of its removal; (iv) approve or disapprove of the Sale of all or substantially all of the Equipment; or (v) approve or disapprove of a material change in the Partnership's investment policies objectives as described in the Prospectus. B. Any action taken pursuant to Section 5.3A hereof shall be void ab initio, if prior to or within fifteen (15) days after such vote either (i) the Partnership shall have received an opinion of counsel, which counsel is approved by the Majority Vote of the Investors, that such action may not be effected without subjecting the Investors to liability as general partners under the Act or under the laws of such other jurisdiction in which the Partnership owns properties or is doing business, or (ii) a court of competent jurisdiction shall have entered a final judgment to the foregoing effect. For purposes of this paragraph, counsel will be deemed approved by the Majority Vote of the Investors if proposed by the General Partner and affirmatively approved in writing within forty-five (45) days; provided, that if the holders of 10% or more of the outstanding Units proposed counsel for this purpose, such proposed counsel, and not counsel proposed by the General Partner shall be submitted for such approval by the Investors. The existence of such an opinion of counsel or court judgment with respect to a particular contemplated Partnership action shall not affect the rights of the Investors to vote on other future actions or the existence of such rights. If the opinion of counsel or court judgment referred to above has not been obtained the vote shall proceed as scheduled and it shall not be delayed or postponed for any reason except as otherwise permitted by the Act. Section 5.4 Restrictions on Authority A. The General Partner and its Affiliates shall have no authority to perform any act in violation of any applicable laws or regulations thereunder, nor shall the General Partner as such have any authority: A-21 (i) to purchase or acquire property other than as described in the Prospectus; (ii) except as permitted in this Agreement, to do any act required to be approved by the investors under the Act; (iii) except for reinvestments in Equipment pursuant to Section 5.2B and investments in short-term securities pursuant to Section 10.2B, to reinvest any Distributable Cash or Net Disposition Proceeds; (iv) except with respect to the Interim Investments and Warrants and Warrant Stock, to invest in or underwrite securities of any type or kind for any purpose, or make investments other than in Equipment and property related and incidental thereto; (v) to possess the Partnership's Equipment, the leases related thereto or other Partnership property or assign the rights of the Partnership in specific Equipment, the leases related thereto or other property for other than a Partnership purpose; (vi) to sell all or substantially all of the assets of the Partnership without the prior Majority Vote of the Investors as provided in this Agreement, except in the ordinary course of business of the Partnership or in the orderly winding up of the business of the Partnership in contemplation of its liquidation; (vii) do any act in contravention of this Agreement; (viii) to do any act that would make it impossible to carry on the ordinary business of the Partnership; (ix) to confess a judgment against the Partnership in connection with any pending or threatened litigation; (x) to offer Interests or Units in exchange for Equipment; (xi) to possess any property, or assign the Partnership's rights in same, for other than the exclusive use of the Partnership; (xii) to operate in such a manner as to be classified as an "investment company" under the meaning of the Investment Company Act of 1940; (xiii) except as otherwise provided in Section 5.5C, to purchase or lease Equipment from the Partnership or sell or lease Equipment to the Partnership or cause one of its Affiliates to purchase or lease Equipment from the Partnership or sell or lease Equipment to the Partnership; (xiv) to admit a Person as a General Partner, except as provided in this Agreement; (xv) to admit a Person as an Investor or Limited Partner, except as provided in this Agreement; (xvi) to create or suffer to exist a total indebtedness incurred by the Partnership in excess of 50% of the cost of all of the Equipment of the Partnership; provided, however, that the General Partner shall have the authority to incur indebtedness with respect to specific items of Equipment up to but not in excess of 75% of the purchase price of such items of Equipment; (xvii) without the Majority Vote of the Investors, to cause or facilitate the merger or consolidation of the Partnership with other partnerships, including, but not limited to, mergers or consolidations in which the Investors receive in exchange for their Units interests in the surviving entity, with the objective of listing the interests of the surviving entity on a national or regional securities exchange or NASDAQ; (xviii) subject to Section 7.2A, without the Majority Vote of the Investors, to list the Units on a securities exchange or enable the Units to be traded in the over-the-counter market, or otherwise facilitate the establishment of a market for the trading of Units, or (except as set forth in Section 5.2A(xviii)) to withdraw the Units from such listing; A-22 (xix) without the Majority Vote of the Investors, to materially change the Partnership's investment policies and objectives as described in the Prospectus; (xx) to provide or permit a Sponsor or any of its Affiliates to provide permanent financing to the Partnership, which for purposes of this Agreement means any financing with a term in excess of 12 months; provided, however, that this provision shall not be construed to limit the ability of a Sponsor or an Affiliate thereof to provide other financing to the Partnership if the interest or other financing charges and fees do not exceed the amounts which would be charged by unrelated lending institutions for comparable loans for the same purposes; (xxi) to make distributions to Investors in kind except upon dissolution and liquidation, and then only to a liquidating trust which has been established for the purpose of the liquidation of the assets of the Partnership; or (xxii) to deposit the funds of the Partnership in a financial institution affiliated with the General Partner or to deposit funds of the Partnership in a "compensating balance" or similar arrangement for the benefit of any entity other than the Partnership. B. The General Partner shall not take any action which, for federal tax purposes, shall cause the Partnership to terminate or to be treated as an association taxable as a corporation. C. Investments in limited partnership interests of another limited partnership shall be prohib- ited; however, nothing herein shall preclude the investment in general partnerships or ventures which own and operate specific equipment provided the Partnership acquires a controlling interest in such other ventures or general partnerships and the non-controlling interest is owned by a non-affiliate. In such event, duplicate fees shall not be permitted. In no event will the Partnership invest more than 10% of the Gross Proceeds of the Offering in joint ventures with either affiliated or unaffiliated third parties. Section 5.5 Authority of Partners and Affiliated Persons to Deal with Partnership A. The General Partner may, for, in the name of, and on behalf of, the Partnership, acquire property from, borrow money from, enter into agreements, contracts or the like (in addition to those set forth herein) with, or reimburse for reasonable out-of-pocket expenses incurred in connection with the preparation of reports by, any Sponsor in an independent capacity, as distinguished from such capacity (if any) as a Sponsor, as if such Sponsor were an independent contractor; provided, however, that any such agreement shall be subject to the conditions set forth in Section 5.2A(ii) herein. B. Neither the General Partner nor any Affiliates thereof shall have the authority: (i) to cause the Partnership to invest in any program, partnership or other venture with a Sponsor or any Affiliates or any other partnership previously, currently or subsequently sponsored by a Sponsor or any Affiliates thereof, unless, (a) the Partnership and such other partnership have substantially identical investment objectives; (b) there are no duplicate fees; (c) the Sponsor (or Affiliate) compensation is substantially identical in the Partnership and such other partnership; (d) the Partnership has a right of first refusal to buy if such other partnership desires to sell equipment held in the joint venture; (e) the investment of the Partnership and such other partnership in the joint venture is on substantially the same terms and conditions; (f) the joint venture is done either for the purpose of effecting appropriate diversification for the Partnership or for the purpose of relieving the General Partner or an Affiliate from a commitment entered into for the purpose of facilitating the purchase of Equipment by the Partnership; and A-23 (g) the Prospectus discloses the potential risk of impasse on joint venture decisions since neither partnership controls and the potential risk that while one partnership may buy the equipment from the other joint venturer in the event of a sale, it may not have the resources to do so; (h) the investment, when considered in addition to any other joint venture investments made with either affiliated or unaffiliated third parties, does not cause the aggregate amount of such investments to exceed 10% of the Gross Proceeds of the Offering. (ii) to receive any compensation, fee or expense not otherwise permitted to be paid to it under the terms of this Agreement or the Prospectus; (iii) to commingle the Partnership's funds with those of any other Person, except that funds of the Partnership may be temporarily retained by agents of the Partnership pursuant to contracts for the rendering of services to the Partnership by such agents or held in accounts established and maintained for the purpose of making the Interim Investments and/or computerized disbursements; (iv) to cause the Partnership to lend money or other assets to a Sponsor or any Affiliates thereof; (v) to grant to a Sponsor or any Affiliates thereof an exclusive listing for the Sale of any assets of the Partnership; (vi) to receive any rebate or give-up, or to participate in any reciprocal business arrangement with a Sponsor or any Affiliates thereof; or (vii) to cause the Partnership to pay directly or indirectly, a commission or fee (except as provided under Sections 5.2A(viii) and 9.2A(v)) to a Sponsor in connection with the reinvest- ment or distribution of Distributable Cash or Net Disposition Proceeds. C. The Partnership may not purchase Equipment in which the General Partner, the Manager or any of their Affiliates either has or in the past has had an interest, except for Equipment acquired on an interim basis (generally not in excess of six (6) months but in no event more than one (1) year) by a Sponsor or any Affiliates thereof for the purpose of facilitating the acquisition by the Partnership of the Equipment or obtaining financing for the Partnership. The Partnership may acquire any such Equipment only if (i) such acquisition is in the best interests of the Partnership, (ii) such Equipment is purchased by the Partnership for a price no greater than the cost of such Equipment to the Sponsor or Affiliate, which is interpreted to be the reasonable necessary and actual expenses incurred by the Sponsor or Affiliate in holding title on a temporary or interim basis, (iii) the interest terms of the loans secured by such Equipment at the time such Equipment is acquired by the Partnership are no less favorable than the interest terms of any loans secured by the Equipment at the time the Equipment was acquired by the Sponsor or Affiliate, and (iv) no other benefit arises out of such transaction to the Sponsor or Affiliate apart from compensation otherwise permitted by this Agreement. The Partnership shall neither lease Equipment from nor lease or sell Equipment to a Sponsor or any Affiliates thereof. There is no assurance that the Partnership will ultimately purchase the Specified Equipment. Section 5.6 Duties and Obligations of the General Partner A. The General Partner shall take all action that may be necessary or appropriate (i) for the continuation of the Partnership's existence as a limited partnership under the Act (and under the laws of each other jurisdiction in which such existence is necessary to protect the limited liability of the Investors and the Limited Partners or to enable the Partnership to conduct the business in which it is engaged), and (ii) for the acquisition, maintenance, preservation and operation of the Equipment in accordance with the Prospectus, the provisions of this Agreement and applicable laws and regulations. The General Partner shall devote to the Partnership such time as may be necessary for the proper performance of its duties hereunder, but neither the General Partner nor any of its Affiliates shall be expected to devote their full time to the performance of such duties. The General Partner or A-24 its Affiliates may act as general or managing partners for other partnerships engaged in businesses similar to that conducted by the Partnership. Nothing herein shall limit the General Partner or its Affiliates from engaging in any such business activities, or any other activities which may be competitive with the Partnership. B. The General Partner shall at all times conduct its affairs, the affairs of all its Affiliates and the affairs of the Partnership in such a manner that no Limited Partner or Investor (except a Limited Partner or Investor who is also a General Partner) will have any personal liability for Partnership debts except as otherwise set forth herein and in the Prospectus. C. The General Partner shall prepare or cause to be prepared, and shall file, on or before the due date (or any extension thereof), any federal, state or local tax returns required to be filed by the Partnership. The General Partner shall cause the Partnership to pay any taxes payable by the Partnership to the extent same are not payable by any other party. D. The General Partner shall be under a fiduciary duty to conduct the affairs of the Partnership in the best interests of the Partnership, including the safekeeping and use of all Partnership funds and assets, whether or not in the General Partner's possession or control, and the use thereof for the benefit of the Partnership. The General Partner shall not enter into any contract or agreement relieving them of their common law fiduciary duty. The General Partner shall at all times act in good faith and exercise due diligence in all activities relating to the conduct of the business of the Partnership. The General Partner shall treat the Investors as a group and shall not favor the interests of any particular Investor. E. Neither the General Partner nor any of its Affiliates shall be obligated to present any particular investment opportunity to the Partnership, even if such investment opportunity is of a character which, if presented to the Partnership, could be made by the Partnership, and each of them shall have the right to make for its own account (individually or in a fiduciary or representative capacity), or to recommend to others, any such particular investment opportunity. F. The General Partner shall cause the Partnership to commit a percentage of the Gross Proceeds of the Offering to Investment in Equipment which is at least equal to the greater of: (i) 80% of the Gross Proceeds of the Offering reduced by 0.0625% for each 1% of indebtedness encumbering Equipment; or (ii) 75% of the Gross Proceeds of the Offering. Any proceeds of the Offering which have not been invested or committed for investment in Equipment within two years of the effective date of the Prospectus will be returned to Investors but will be net of Selling Commissions, Due Diligence Expense Reimbursement Fees and Offering and Organization Expense Fees attributable thereto (subject at all times to the Investment in Equipment requirement set forth in the preceding sentence). For the purposes of the preceding sentence, funds will be deemed to have been committed to investment to the extent written agreements in principle or letters of understanding are executed and such investments are subsequently consummated. G. The General Partner shall cause the Partnership to establish and maintain adequate Working Capital Reserves for contingencies related to ownership of the Equipment and will fund Working Capital Reserves from the Gross Proceeds of the Offering in an amount equal to 1% of the Gross Proceeds of the Offering. Working Capital Reserves may be used whenever deemed appropriate by the General Partner to meet the cash obligations of the Partnership or to exercise Warrants. If in any fiscal quarter, the General Partner determines in its sole discretion that the Working Capital Reserves of the Partnership are in excess of the amount deemed sufficient in connection with the ownership of the Equipment and that such Working Capital Reserves may be reduced, the amount of such reduction may be distributed to the Partners and Investors as a portion of the Partnership's Distributable Cash. If in any fiscal quarter, the General Partner determines that the Working Capital Reserves are insufficient in connection with the Partnership's operations and that such Working Capital Reserves shall be increased, the amount of such increase shall reduce Distributable Cash. H. Except for payment of the Selling Commissions and the allowance of the Due Diligence Expense Reimbursement Fee, the General Partner shall not directly or indirectly pay or award any A-25 commission or other compensation to any Person engaged by a potential Investor for investment advice as an inducement to such advisor to advise the purchase of Units. I. The General Partner shall, except as otherwise provided in this Agreement or by the Act, have all the rights and powers and shall be subject to all the restrictions of a partner in a partnership without limited partners, including the fiduciary responsibility for the safekeeping and use of all funds and assets of the Partnership, whether or not in its immediate possession or control. Section 5.7 Compensation of the General Partner Except as expressly provided in Articles IV and IX herein, the General Partner shall receive no fees, salaries, profits, distributions, reimbursement or other compensation for serving as General Partner. Section 5.8 Other Businesses of Partners The Partnership, any Partner, Investor, the Manager, any shareholder, officer, director, partner or employee thereof, may engage in or possess an interest in any other business or venture of every nature and description and shall not have any rights or obligations, by virtue of this Agreement, in or to any independent ventures of any nature or description, or the income or profits derived therefrom, in which any of them may engage, including, without limitation, the ownership, operation and management of other equipment. Section 5.9 Liability of General Partner and Affiliates to Limited Partners or Investors The General Partner and its Affiliates performing certain services on behalf of the Partnership shall not be liable, responsible, or accountable, in liabilities, damages or otherwise, to any Investor, Limited Partner or the Partnership for any loss, judgment, liability, expense or amount paid in settlement of any claims sustained which arise out of any act or omission performed or omitted by them within the scope of the authority conferred on them by this Agreement, provided that the General Partner determines, in good faith, that such act or omission was in the best interests of the Partnership, except for acts of negligence or misconduct or for damages arising from any misrepresentation or breach of an agreement with the Partnership. The Partnership shall not incur the cost of that portion of any liability insurance which insures the General Partner or its Affiliates performing certain services on behalf of the Partnership against any liability as to which the General Partner or its Affiliates may not be indemnified under Section 5.10 herein. Section 5.10 Indemnification A. The General Partner and its Affiliates performing certain services on behalf of the Partnership shall be indemnified to the full extent provided by law for any loss, judgment, liability, expense or amount paid in settlement of any claims sustained by them which arise out of any act or omission performed or omitted by any or all of them within the scope of the authority conferred on them by this Agreement, if the General Partner determine, in good faith, that such act or omission was in the best interests of the Partnership and that such act or omission did not constitute negligence or misconduct or breach of any other agreement with the Partnership, provided that any indemnity under this Section shall be provided out of and to the extent of Partnership assets only, and no Investor or Limited Partner shall have any personal liability on Account thereof. B. Notwithstanding Section 5.10A, the General Partner and its Affiliates performing certain services on behalf of the Partnership and any Person acting as a Broker-Dealer shall not be indemnified by the Partnership for any liability, loss or damage incurred by any or all of them in connection with (i) any claim or settlement arising under federal or state securities laws unless (a) there has been a successful adjudication on the merits of each count involving such securities laws violations as to the particular indemnities and the court approves indemnification of the litigation costs, (b) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnities and the court approves indemnification of the litigation costs, or (c) a court of competent jurisdiction approves a settlement of the claims and funds that indemnification of the A-26 settlement and related costs should be made, after being advised as to the current position of the Securities and Exchange Commission, the Massachusetts Securities Division, the California Commissioner of Corporations, the Pennsylvania Securities Commission, the Tennessee Securities Commission, the Missouri Securities Division (and such other state securities administrators as shall be required by such court), regarding indemnification for violations of securities law; or (ii) any liability imposed by law, including liability for negligence or misconduct. ARTICLE VI TRANSFERABILITY OF A GENERAL PARTNER'S INTEREST Section 6.1 Removal, Voluntary Retirement or Withdrawal of a General Partner; Transfer of Interests A. A General Partner may be removed in the manner specified in Section 5.3A herein. B. No General Partner may voluntarily withdraw or retire from its position as a General Partner of the Partnership unless another General Partner (including any Additional or Successor General Partner admitted pursuant to Section 6.2) remains, and unless (i) counsel for the Partnership is of the opinion that such voluntary retirement or withdrawal from the Partnership will not cause the Partnership: (a) to be dissolved under the Act; (b) to be classified other than as a partnership for federal income tax purposes; or (c) to terminate for federal income tax purposes; and (ii) the approval of the remaining General Partners, if any, and the Majority Vote of the Investors to such voluntary retirement or withdrawal is obtained. C. If a General Partner voluntarily retires or withdraws from the Partnership in violation of this Section 6.1, it shall be and remain liable to the Partnership and the Partners for damages resulting from its breach of this Agreement, and, without limitation of remedies, the Partnership may offset such damages against the amounts otherwise distributable to such General Partner. D. No General Partner shall have the right to sell, exchange, or otherwise dispose of all or any portion of-its Interest unless the proposed assignee or transferee of all or a portion of the Interest of such General Partner is admitted as a Successor or Additional General Partner to the Partnership pursuant to the provisions of Section 6.2 prior to any such sale, exchange or other disposition. E. The voluntary retirement or withdrawal of a General Partner shall become effective only upon (i) receipt by the Partnership of the opinions of counsel referred to in Section 6.1(B)(i); (ii) receipt by the Partnership of the approval and consent referred to in Section 6.1B(ii); and (iii) the amendment of the Partnership's Certificate to reflect such withdrawal or retirement and its filing for recordation. Section 6.2 Election and Admission of Successor or Additional General Partners A. A General Partner may at any time designate additional persons to be Successor or Additional General Partners, provided that the conditions of Section 6.2B are satisfied. B. Except as otherwise expressly provided herein, no Person shall be admitted as a Successor or Additional General Partner unless (i) counsel for the Partnership is of the opinion that the admission of such Successor or Additional General Partner will not cause the Partnership to be classified other than as a partnership for federal income tax purposes or cause the Partnership to terminate for federal income tax purposes; (ii) the consent of the then remaining General Partner(s), if any, is obtained; and (iii) the Majority Vote of the Investors to such admission has been obtained. C. The admission of such Successor or Additional General Partner shall become effective upon (i) receipt by the Partnership of the opinion referred to in Section 6.2B(i); (ii) receipt by the Partnership of the consents referred to in Section 6.2B(ii) and (iii), if applicable; and (iii) the amendment of the Certificate to reflect the admission of the Successor or Additional General Partner and its filing for recordation. A-27 Section 6.3 Events of Withdrawal of a General Partner A. In addition to a voluntary withdrawal of a General Partner pursuant to Section 6.lE, the General Partner shall be deemed to withdraw (i) if the General Partner assigns all of its Interest in the Partnership, (ii) if the General Partner is removed pursuant to Section 5.3A; and (iii) the filing of a certificate of dissolution, or its equivalent, for the General Partner or the revocation of its charter. To the maximum extent permitted by the Act, no other act or event shall be deemed an event of withdrawal of a General Partner or serve to convert a General Partner to a Limited Partner. B. In the event of the withdrawal of a General Partner and if a Successor or Additional General Partner has been admitted to the Partnership in accordance with Section 6.2, the remaining General Partner or General Partners, including such Successor or Additional General Partner may elect to continue the Partnership, and if such election is made, shall promptly give Notification of such event and shall make and file such amendments to the Certificate as are required by the Act to reflect the fact that the withdrawn General Partner has ceased to be a General Partner of the Partnership. C. In the event of the withdrawal of a General Partner and no Successor or Additional General Partner has been admitted to the Partnership, or such Successor or Additional General Partner does not elect to continue the Partnership, the withdrawn General Partner, or its successors, representatives or assigns shall promptly give Notification of such withdrawal to all remaining Partners and Investors. In such event, the Partnership shall be dissolved unless, within ninety (90) days after the withdrawal of the General Partner, the Investors, by the Majority Vote of the Investors (or such higher percentage vote as may be required by the Act), agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of withdrawal of the sole General Partner, of one or more Additional General Partners. If the Investors elect to reconstitute the Partnership and agree to admit an Additional General Partner, the relationship of the Investors and of the substitute General Partner in the Partnership shall be governed by this Agreement. Section 6.4 Liability of a Withdrawn General Partner A. Any General Partner who withdraws from the Partnership shall be, and remain, liable for all obligations and liabilities incurred by it as General Partner prior to the time such withdrawal becomes effective. In addition, a General Partner who voluntarily withdraws in violation of this Agreement shall be subject to the liability described in Section 6.1C. B. Upon the withdrawal of a General Partner, such General Partner shall immediately cease to be a General Partner, and such General Partner's Interest shall be acquired by the Partnership pursuant to Section 6.5. C. The personal representatives, heirs, successors or assigns of any General Partner who withdraws from the Partnership shall be, and remain, liable for all obligations and liabilities incurred by the General Partner prior to, or in connection with, its withdrawal. Section 6.5 Valuation of Partnership Interest of General Partner Upon the withdrawal of a General Partner, the Partnership shall purchase the Partnership Interest of the withdrawn General Partner. The price of the withdrawn General Partner's Interest shall be determined by two (2) independent appraisers, one selected by the withdrawn General Partner and one selected by the remaining General Partner, or if none is remaining, by the Investors. If the two appraisers are unable to agree on the value of the General Partner's Interest, they shall jointly appoint a third independent appraiser whose determination shall be final and binding. The Partnership shall then pay the withdrawn General Partner the price of its Interest as a General Partner as so determined. The expense of the appraisals shall be borne equally by the terminated General Partner and the Partnership. If the withdrawal is involuntary, payment shall be made by delivery of a promissory note bearing interest equal to the lowest rate permitted under the Code that avoids the imputation of interest income to the withdrawn General Partner, such note to have a term of five years and provide for equal annual installments of principal and interest. If the withdrawal is voluntary, payment shall be made by delivery of an unsecured promissory note bearing no interest, with principal payable only from distributions which the withdrawn General Partner would have A-28 received under this Agreement had the General Partner not withdrawn. Immediately upon receiving the note, the withdrawn General Partner shall cease to be a Partner of the Partnership for all purposes, except that the withdrawn General Partner shall continue to be subject to Section 6.4 hereunder. All amounts received pursuant to this Section 6.5 shall constitute complete and full discharge for all amounts owing to the withdrawn General Partner on account of its Interest in the Partnership. Any disputes regarding valuation or payment pursuant to this Section which are not resolved in a binding manner by the provisions of this Section shall be resolved by arbitration in accordance with the then current rules of the American Arbitration Association. The expense of arbitration shall be borne equally by the terminated General Partner and the Partnership. ARTICLE VII ASSIGNMENT OF ASSIGNEE UNITS TO INVESTORS; TRANSFERABILITY OF LIMITED PARTNER INTERESTS AND UNITS Section 7.1 Assignment of the Assignee Units to Investors A. Pursuant to Sections 3.2 and 7.1C hereof, the Assignor Limited Partner shall assign to each Investor Assignee Units equal to the number of Units purchased by each Investor in the Offering. B. Except as provided in Section 7.1A above, the Assignor Limited Partner may not transfer a Limited Partnership Interest without the prior written consent of the General Partner. The Assignor Limited Partner shall have no right to vote or consent with respect to Units owned by the Assignor Limited Partner for its own account and such Units shall not be considered outstanding Units for purposes of determining whether the Majority Vote of the Investors or the Consent of the Investors has occurred. The Assignor Limited Partner, by the execution of this Agreement, acknowledges and agrees that the Assignor Limited Partner's management will have fiduciary responsibility for the safekeeping and use of all funds and assets of the Investors, whether or not in the Assignor Limited Partner's management's possession or control, and that the management of the Assignor Limited Partner will not employ, or permit another to employ such funds or assets in any manner except for the exclusive benefit of the Investor. The Assignor Limited Partner agrees not to contract away the fiduciary duty owed to the Investors by the Assignor Limited Partner's management under the common law of agency. C. Except as set forth in Section 7.lF, the Assignor Limited Partner, by the execution of this Agreement, irrevocably transfers and assigns to the Investors all of the Assignor Limited Partner's rights and interest in and to the Assigned Limited Partnership Interests, as of the time that payment for such Assigned Limited Partnership Interests is received by the Partnership and such Assigned Limited Partnership Interests are credited to the Assignor Limited Partner on the books and records of the Partnership. The rights and interest so transferred and assigned shall include, without limitation, the following (i) all rights to receive distributions of uninvested Capital Contributions pursuant to Section 5.6F; (ii) all rights to receive cash distributions pursuant to Article IV; (iii) all rights in respect to allocations of Profit and Loss pursuant to Article IV; (iv) all other rights in respect of determinations of allocations and distributions pursuant to Article IV; (v) all rights to consent to the admission of Successor or Additional General Partners pursuant to Sections 6.1 and 6.2; (vi) all rights to receive any proceeds of liquidation of the Partnership pursuant to Section 8.2; (vii) all rights to inspect books and records and to receive reports pursuant to Article X; A-29 (vii) all voting rights, rights to attend or call meetings and other such rights; and (ix) all rights which the Limited Partners have, or may have in the future, under the Act. D. The General Partner, by the execution of this Agreement, irrevocably consents to and acknowledges that (i) the foregoing transfer and assignment pursuant to Section 7.1 by the Assignor Limited Partner to the Investors of the Assignor Limited Partner's rights and interest in the Assigned Limited Partnership Interests is effective, and (ii) the Investors are intended to be and shall be third party beneficiaries of all rights and privileges of the Assignor Limited Partner in respect of the Assigned Limited Partnership Interests. The General Partner covenants and agrees that, in accordance with the foregoing transfer and assignment, all the Assignor Limited Partner's rights and privileges in respect of Assigned Limited Partnership Interests may be exercised by the Investors including, without limitation, those cited in Section 7.l. E. In accordance with the transfer and assignment described in Section 7.1, Investors shall have the same rights that the Limited Partners have under this Agreement and under the Act. F. Notwithstanding the assignment of the Assigned Limited Partnership Interests referred to in this Section 7.1, the Assignor Limited Partner shall retain legal title to and be and remain a Limited Partner of the Partnership. Section 7.2 Transferability of Units A. Units are generally transferable, provided, however, that a transfer of Units shall be prohibited if one of the following restrictions applies: (i) No sale or exchange of any Units shall be made if the Units sought to be sold or exchanged, when added to the total of all other Units sold or exchanged within a period of twelve (12) consecutive months prior thereto, would, in the opinion of counsel for the Partnership, result in the Partnership being considered to have terminated within the meaning of Section 708(b)(1)(B) of the Code. The General Partner shall give Notification to all Investors in the event that sales or exchanges should be suspended for this reason. All deferred sales or exchanges shall be made (in chronological order to the extent practicable) as of the first day of the fiscal year beginning after the end of any such 12-month period, subject to the provisions of this Article VII. (ii) No transfer or assignment of any Unit shall be made if a counsel for the Partnership is of the opinion that the particular transfer or assignment would be in violation of any federal or state securities laws (including any investment suitability standards) applicable to the Partnership or would cause the Partnership to be classified other than as a partnership for federal income tax purposes. (iii) No transfer or assignment of any Unit shall be made if in the opinion of counsel to the Partnership such transfer would cause the Partnership to be treated as a "publicly traded partnership" under Sections 7704 and 469(k) of the Code. Each Investor agrees not to transfer, and agrees that the Partnership shall not recognize for any purpose any transfer on or through a listing on a securities exchange, over-the-counter market or secondary market or any transfer to or from a dealer in securities or partnership interests or other market maker, or any transfer arranged through or facilitated by means of an interdealer quotation system, information system or other facility that may create the equivalent of a secondary market in partnership interests, unless counsel to the Partnership is of the opinion that such transfers will not result in the partnership becoming taxable as a corporation or a publicly traded partnership. (iv) No transfer or assignment of Units shall be made after which any transferor or transferee would hold (a) a number of Units not evenly divisible by four, or (b) less than 200 Units, except for Individual Retirement Accounts, or (c) less than 80 Units in the case of Individual Retirement Accounts, provided, however, that any such transferor or transferee may hold zero Units. A-30 (v) No transfer or assignment of any Unit shall be made if it would result in the assets of the Partnership being treated as "plan assets" or the transactions contemplated hereunder to be prohibited transactions under ERISA or the Code. (vi) No transfer or assignment of a Unit shall be made to a foreign person under the Code or a minor or incompetent (unless such transfer or assignment shall be made to a legal guardian on such person's behalf). B. In order to record a trade on its books and records, the Partnership may require such evidence of transfer or assignment and authority of the transferor or assignor (including signature guarantees), evidence of the transferee's suitability under state securities laws, and the written acceptance and adoption by the transferee of the provisions of this Agreement, as the General Partner may determine. The General Partner may charge a transfer fee sufficient to cover all reasonable expenses connected with such transfer (with no profit to any party in the transaction). C. In no event shall an Investor be permitted to transfer a fraction of a Unit. D. Any attempted transfer or assignment in violation of the provisions of Section 7.2A shall be void and shall not bind the Partnership. Section 7.3 Death, Bankruptcy or Adjudication of Incompetence of an Investor or a Limited Partner Upon the death of an Investor or a Limited Partner, his executor, administrator, or trustee, or, if he is adjudicated incompetent or insane, his committee, guardian, or conservator, or, if he becomes bankrupt, the trustee or receiver of his estate, shall have all the rights of an Investor or a Limited Partner for the purpose of settling or managing his estate and shall have whatever power the deceased or incompetent Investor or Limited Partner possessed to assign all or any part of his Units or Interest. The death, dissolution, adjudication of incompetence, or bankruptcy of an Investor or a Limited Partner shall not dissolve the Partnership. Section 7.4 Effective Date The Partnership shall recognize the transferee of Units as an Investor on the Partnership's books and records on the first business day of the next calendar month after the month in which the Partnership receives all necessary documentation and consents required to effect the transfer of Units. Section 7.5 Substitute Limited Partners Any Investor may elect to become a Substitute Limited Partner upon (i) signing a counterpart of this Agreement and any other instrument or instruments deemed necessary by the General Partner, including a Power of Attorney in favor of the General Partner as described in Section 12.1A hereof, and (ii) paying a fee equal to the actual costs and expenses incurred by the General Partner for legal and administrative costs and recording fees. Investors who elect to become Substitute Limited Partners will receive one Limited Partnership Interest for each Unit they convert and will not be able to re-exchange their Limited Partnership Interests for Units. The Capital Account of the former Investor attributable to transferred Units shall be credited to the Capital Account of the Substitute Limited Partner. The Partnership's Certificate will be amended no less often than quarterly to reflect the substitution of Limited Partners. Section 7.6 Retirement or Withdrawal of an Investor A. No Investor shall have the right to voluntarily retire or withdraw from the Partnership unless the General Partner shall have consented to such voluntary retirement or withdrawal by an Investor. Upon the retirement or withdrawal of an Investor: (i) the Interest of such retiring or withdrawing Investor shall thereafter belong to the Partnership; (ii) such retiring or withdrawing Investor shall not be entitled to receive distributions with respect to any periods after the time of such retirement of withdrawal; and (iii) such retiring or withdrawing Investor shall not be entitled to receive any amount for the fair value of his Units as of the date of his retirement or withdrawal, other than as agreed to by A-31 the General Partner and the withdrawing Investor. The General Partner shall not consent to the voluntary retirement or withdrawal of an Investor if the General Partner receives an opinion of counsel to the Partnership that such retirement or withdrawal would cause the Partnership to be classified other than as a partnership for federal income tax purposes, or cause the Partnership to terminate for federal income tax purposes. B. At any time after the Termination Date of the Offering, the Partnership may, in its sole discretion, in response to the request of an Investor, repurchase any or all of the Units of such Investor upon mutually agreeable terms, provided that such repurchase does not materially impair the capital or operation of the Partnership. The determination to repurchase Units will be made in the sole discretion of the General Partner. The determination of the value of the repurchased Units will be based upon, among other factors, the current fair market value of the Equipment and the assets of the Partnership, less all Partnership debts and obligations. The Partnership will not repurchase Units prior to the Termination Date of the Offering and is not obligated to repurchase Units at any time. Units acquired by the General Partner and its Affiliates or by the Assignor Limited Partner will not be eligible for repurchase by the Partnership. Units purchased by the Partnership during any month shall be deemed cancelled effective as of the first day of the month following the effective date of such purchase. ARTICLE VIII DISSOLUTION, LIQUIDATION AND TERMINATION OF THE PARTNERSHIP Section 8.1 Events Causing Dissolution A. The Partnership shall dissolve and its affairs shall be wound up upon the first to occur of the following events: (i) the expiration of its term; (ii) the withdrawal of a General Partner, unless the Partnership is continued pursuant to Sections 6.3B or 6.3C; (iii) the Sale of all or substantially all of the Partnership's assets and the receipt in cash of the proceeds thereof, except in instances in which and proceeds are to be reinvested in accordance with the provisions of this Agreement; (iv) the election by the General Partner, with the Majority Vote of the Investors, to dissolve the Partnership; (v) by the Majority Vote of the Investors pursuant to Section 5.3A to dissolve the Partnership; or (vi) the happening of any other event causing the dissolution of the Partnership under applicable law. B. Dissolution of the Partnership shall be effective on the day on which the event occurs giving rise to the dissolution. A certificate of cancellation shall be filed under the Act upon the dissolution and the commencement of winding up of the Partnership; provided, however, that the Partnership shall not terminate until the assets of the Partnership has been distributed as provided in Section 8.2. Notwithstanding the dissolution of the Partnership, prior to the termination of the Partnership, the business of the Partnership and the affairs of the Partners, as such, shall continue to be governed by this Agreement. Section 8.2 Liquidation A. As soon as practical after the dissolution of the Partnership, the General Partner, or if there is no General Partner, any Limited Partner or the liquidating trustee under the Act, as the case may be, shall give Notification to all the Limited Partners and Investors of such fact and shall prepare a plan as to whether and in what manner the assets of the Partnership shall be liquidated. By the Majority Vote of the Investors, the assets of the Partnership, subject to its liabilities (and the establishment of A-32 reserves, if necessary, for such liabilities), may be transferred to a successor Entity, upon such terms and conditions as are then agreed upon. B. Unless the Investors agree to transfer the assets of the Partnership, subject to its liabilities, to a successor Entity pursuant to Section 8.2A, upon dissolution of the Partnership, the General Partner, any Limited Partner or the liquidating trustee under the Act, as the case may be, shall liquidate the assets of the Partnership, and apply and distribute the proceeds thereof in accordance with Section 4.4. C. Notwithstanding the provisions of Section 8.2B, in the event the General Partner or any liquidating agent under the Act, as the case may be, shall determine that an immediate Sale of all or a portion of the assets of the Partnership would cause undue loss to the Partners and Investors, the General Partner or liquidating agent under the Act, as the case may be, in order to avoid such loss, may, after having given Notification to all the Investors and Limited Partners, either defer liquidation of, and withhold from distribution for a reasonable time, any assets of the Partnership, or distribute the assets in kind to a liquidating trust to be held for the benefit of the Investors and Partners. Section 8.3 Capital Contribution Upon Dissolution Subject to the provisions of Section 5.9 of this Agreement, each Investor and Partner shall look solely to the assets of the Partnership for all distributions with respect to the Partnership and his Capital Contribution and shall have no recourse (upon dissolution or otherwise) against any Partner or Investor; provided, however, that upon the dissolution and termination of the Partnership, the General Partner and the MNC Special Limited Partner will make the Capital Contributions referred to in Sections 3.lA and 3.3B. All amounts so contributed by the General Partner and the MNC Special Limited Partner shall be distributed first to the Partnership's creditors entitled thereto, and the balance to the Investors and Partners in proportion to the positive balances in their Capital Accounts at the time of dissolution and termination of the Partnership. ARTICLE IX CERTAIN PAYMENTS TO THE GENERAL PARTNER AND AFFILIATES Section 9.1 Reimbursement of Certain Costs and Expenses of the General Partner and their Affiliates A. Subject to the provisions of Article V hereof, the Partnership shall be permitted to reimburse the General Partner and the Manager for the actual cost to the General Partner, the Manager or any of their Affiliates of the Partnership's operating expenses. In determining the actual cost to the General Partner, the Manager or Affiliates thereof of goods and materials and administrative services, actual cost means the actual cost to the General Partner, the Manager or any of their Affiliates or of goods and materials used for or by the Partnership and obtained from entities not affiliated with a General Partner or the Manager, and actual cost of administrative services, which are necessary to the prudent operation of the Partnership, means the pro rata cost of personnel (including an allocation of overhead directly attributable to such personnel) as if such persons were employees of the Partnership. The cost for administrative services to be reimbursed to a General Partner, the Manager or an Affiliate shall be at the lower of the General Partner's, the Manager's or Affiliate's actual cost of such services or the amount the Partnership would be required to pay to independent parties for comparable administrative services in the same geographic location. The General Partner shall use its best efforts to cause all of the Partnership's expenses to be billed directly to and paid by the Partnership to the extent practicable. B. Subject to the foregoing, the Partnership shall pay all expenses (which expenses shall be billed directly to the Partnership) of the Partnership which may include but are not limited to: (a) all costs of personnel (excluding rent or depreciation, utilities, capital equipment, and other administrative items) employed full-time or part-time by the Partnership and involved in the business of the Partnership and allocated pro rata to their administrative services performed on behalf of the A-33 Partnership, including Persons who may also be officers or employees of the General Partner or its Affiliates (other than Controlling Persons); (b) all costs of borrowed money, taxes and assessments on Equipment and other taxes applicable to the Partnership; (c) legal, audit, accounting, brokerage, approval and other fees; (d) printing, engraving and other expenses and taxes incurred in connection with the issuance, distribution, transfer, registration and recording of documents evidencing ownership of an Interest or Unit or in connection with the business of the Partnership; (e) fees and expenses paid to independent contractors, bankers, brokers, servicers, leasing agents, equipment lease brokers, and consultants and other agents (other than Controlling Persons and other officers of the General Partner or its Affiliates); (f) expenses in connection with the financing, disposition, replacement, alteration, repair, sales, leasing, re-leasing, refinancing and operating of the Equipment (including the costs and expenses of appraisals, foreclosures, insurance premiums, brokerage and leasing commissions and of maintenance of such Equipment); (g) expenses of organizing, revising, amending, converting, modifying or terminating the Partnership; (h) the costs of preparation and dissemination of the informational material and documentation relating to potential sale, refinancing, leasing or other disposition of Equipment; (i) expenses in connection with distributions made by the Partnership to, and communications and bookkeeping and clerical work necessary in maintaining relations with Investors, including the costs of printing and mailing to such persons certificates for Units and reports of meetings of the Partnership, and of preparation of proxy statements and solicitations of proxies in connection therewith; (j) expenses in connection with preparing and mailing reports required to be furnished to Investors for tax reporting or other purposes, or which reports the General Partner deems the furnishing thereof to Investors to be in the best interests of the Partnership; (k) the costs and expenses incurred in qualifying the Partnership to do business in any jurisdiction, including fees and expenses of any resident agent appointed by the Partnership; (1) the costs incurred in connection with any litigation or regulatory proceedings in which the Partnership is involved; and (m) computer services including the cost of any computer equipment or services used for or by the Partnership, including establishment and maintenance of investment records and processing of accounting records related to the Partnership. C. Notwithstanding any other provision of this Agreement, no reimbursement shall be permitted to the General Partner for services for which the General Partner is entitled to compensation by way of a separate fee, nor to the Manager, except as provided under the Management Agreement. Section 9.2 Fees and Other Payments A. The Partnership shall cause the following payments and fees to be paid to the General Partner, the Manager and their respective Affiliates: (i) to the Selling Agent, the Selling Commissions and the Due Diligence Expense Reimbursement Fee. (ii) to the General Partner or its Affiliates, the Offering and Organization Expense Fee, of which 2.85% shall be paid from Gross Proceeds of the Offering as the Gross Proceeds of the Offering are raised and 2.80% shall be paid from operating revenue of the Partnership upon the earlier to occur of (a) the date on which 80% of the Net Proceeds of the Offering has been invested in Equipment or (b) December 31, 1990. (iii) to the General Partner, the Manager or their Affiliates, in reimbursement of the Acquisition Expenses, if any, previously paid by such Person on behalf of the Partnership in connection with the acquisition of Equipment. (iv) to the General Partner, an Acquisition Fee in an amount equal to 0.75% Gross Proceeds of the Offering, payable as Gross Proceeds of the Offering are raised. (v) to the Manager, an Acquisition Fee in an amount equal to 1.5% of the purchase price of any item of Specified or Additional Equipment (whether from Net Proceeds of the Offering or from reinvestment of Distributable Cash and Net Disposition Proceeds), payable upon the purchase of such Equipment. A-34 (vi) to the Manager, the Equipment and Lease Management Fee, in accordance with the terms and conditions of the Management Agreement and subject to the limitations of Section 5.2A(xix). (vii) to the Manager, the Equipment Re-Leasing Fee, payable in accordance with the terms and conditions of the Management Agreement and subject to the limitations of Section 5.2A(xix). (viii) to the Manager, the Subordinated Disposition Fee, provided that payment of such fee shall cumulate and not be payable until Payout occurs. (ix) to the General Partner, an annual asset management fee equal to $50,000 for 1990 and increasing in each year thereafter by the annual increase in the Consumer Price Index for All Urban Consumers for the preceding calendar year; provided that the amount of any such fee to be paid in any calendar year shall not exceed 3% of the amount of Distributable Cash distributed to the Investors and Partners for such year pursuant to Section 4.3. B. Notwithstanding anything else in this Agreement to the contrary, the cumulative total of the fees payable to the General Partner, the Manager and their Affiliates as described in (i), (ii), (iii), (iv) and (v) above shall not exceed the limitation on Front-End Fees provided under Section 5.6F hereof. C. Notwithstanding any other provisions of this Agreement, in the event that the Management Agreement is terminated and the General Partner or any of its Affiliates performs some or all of the services agreed to be performed by the Manager under the Management Agreement, the General Partner or such Affiliate shall be entitled to receive as compensation for such services (it being agreed and understood that the provision of such services does not constitute a part of the duties or obligations of the General Partner as a general partner of the Partnership) the fees and compensation which would otherwise be payable to the Manager hereunder and under the Management Agreement. ARTICLE X BOOKS AND RECORDS; BANK ACCOUNTS; REPORTS Section 10.1 Books and Records A.Unless otherwise directed by the General Partner, the books and records of the Partnership shall be maintained by the General Partner at the Partnership's principal place of business. In all cases, said books and records shall be available for examination and copying by any Limited Partner, Investor or his duly authorized representatives, for any purpose related to the Limited Partner's or Investor's interest as a Limited Partner or Investor, at the expense of such Limited Partner or Investor, at any and all reasonable times. The Partnership shall keep at its principal place of business, without limitation, the following records: true and full information regarding the status of the business and financial condition of the Partnership; promptly after becoming available, a copy of the Partnership's federal, state and local income tax returns for each year; a current list of the names and last known business, residence or mailing addresses of and the numbers of Units held by each Partner and Investor; a copy of this Agreement and the Certificate and all amendments thereto; and other information regarding the affairs of the Partnership as is just and reasonable. The current list of the names and last known business, residence or mailing addresses of each Partner and Investor shall be mailed to any Investor upon payment of a reasonable charge for copy work. B. The Partnership shall keep its books and records in accordance with the accounting methods determined by the General Partner. The fiscal year of the Partnership shall be the calendar year. Section 10.2 Bank Accounts A. The General Partner shall have fiduciary responsibility for the safekeeping and use of all funds and assets of the Partnership, whether or not in their immediate possession or control. The General Partnership shall not employ, or permit any other Person to employ, such funds in any manner except for the benefit of the Partnership. A-35 B. The bank accounts of the Partnership shall be maintained in such banking institutions as the General Partner shall determine, and withdrawals shall be made only in the regular course of Partnership business on the signature of the General Partner or such other signature or signatures as the General Partner may determine. All deposits and other funds may be deposited in interest bearing or non-interest bearing accounts guaranteed by federal authorities, invested in short-term United States Government or municipal obligations, or deposited with a banking institution selected by the General Partner. Section 10.3 Reports A. No later than seventy-five (75) days after the end of each calendar year, the General Partner will furnish each Person who was an Investor or Limited Partner at any time during the fiscal year with all tax information relating to the Partnership's performance for the preceding calendar year that is required to be set forth in the Investor's and Limited Partner's federal and state income tax return. B. Within sixty (60) days after the end of each of the first three fiscal quarters of each fiscal year of the Partnership, the General Partner will furnish to each Person who was an Investor or Limited Partner at any time during the fiscal quarter then ended, a report setting forth information with respect to the progress of the Partnership's business, which report shall include: (i) an unaudited balance sheet of the Partnership; (ii) unaudited condensed statements of income for the quarter and year-to-date periods then ended; (iii) an unaudited cash flow statement for the quarter; (iv) an unaudited statement setting forth the services rendered to, and fees received from, the Partnership by any Sponsor; and (v) other pertinent information concerning the Partnership and its activities, including any material developments or events affecting the Partnership or its Equipment during the quarter. The various reports required pursuant to this Section 10.3B may be sent earlier than or sepa- rately from any of the other reports required pursuant to this Section 10.3B, and the information required to be contained in any of the reports may be contained in more than one report. C. Within one hundred twenty (120) days after the end of each fiscal year, the General Partner shall furnish an annual report to each Person who was a Limited Partner or an Investor as of the last business day of the fiscal year then ended. Such annual report will include: (i) a balance sheet as of the end of the Partnership's fiscal year, statements of income, Partners' equity and cash flow, which shall be prepared in accordance with generally accepted accounting principles and accompanied by (a) an auditor's report containing an opinion of an independent certified public accountant and (b) a reconciliation to information furnished to Investors for income tax purposes; (ii) a statement of any transactions with Sponsors, and any of their respective Affiliates and fees, commissions, compensation, reimbursements and other benefits paid or accrued to the Sponsors, and any of their respective Affiliates for such fiscal year, showing the amount paid or accrued to each recipient and the services performed; (iii) the breakdown of any Partnership costs reimbursed to a Sponsor; and (iv) a report of the activities of the Partnership during the fiscal year. Within the scope of the annual audit by the Accountants, the Accountants will verify that the amounts actually reimbursed were costs incurred in the management of the Partnership. The methods of verification used by the Accountants will be in accordance with generally accepted auditing standards. Within the scope of the annual audit of the General Partner's financial statements, the independent certified public accountants must issue a special report on the allocation of such costs to A-36 the Partnership in accordance with the Partnership Agreement. The special report shall at minimum provide: (1) A review of the time records of individual employees, the cost of whose services were reimbursed; and (2) A review of the specific nature of the work performed by each such employee. The special report shall be in accordance with the American Institute of Certified Public Accountants United States Auditing standards relating to special reports. The additional costs of such special report will be itemized by said accountants on a partnership by partnership basis and may be reimbursed to the General Partner by the Partnership in accordance with this subparagraph only to the extent that such reimbursement, when added to the cost for administrative services rendered, does not exceed the competitive rate for such services as determined above. The annual report shall also set forth distributions to the Investors for the period covered thereby and shall separately identify distributions from (a) Distributable Cash during the period, (b) Distributable Cash during a prior period which had been held as reserves, (c) Net Disposition Proceeds, and (d) Working Capital Reserves. For each item of Equipment acquired by the Partnership which individually represents at least 10% of the Partnership's total Investment in Equipment, the annual report shall include a status report which shall indicate (i) the condition of the Equipment, (ii) how the Equipment is being utilized as of the year end (whether leased, operated or held for lease, repair or sale), (iii) the remaining term of any lease, (iv) the projected use of the Equipment for the next year (e.g., renew the lease, lease, retire or sell) and (v) such other information relevant to the value or utilization of the Equipment as the General Partner deems appropriate. The status report shall describe the method used and basis for any valuation. D. Until the Net Proceeds of the Offering are fully invested or returned to the Investors and Limited Partners as set forth in Section 5.6F of this Agreement, the Partnership shall prepare a report of Equipment acquisitions made by the Partnership during each quarter. Such report will be distributed to the Investors and Limited Partners within 60 days following the end of each quarter during which Equipment acquisitions are made. Such report shall include, by way of illustration and not of limitation, a statement of the actual purchase price of Equipment acquired during the quarter, the terms of the purchase and the applicable lease and a statement of the total amount of cash expended by the Partnership to acquire such Equipment (including all commissions, fees and expenses). E. The General Partner shall prepare and timely file with appropriate federal and state regulatory authorities all reports required to be filed with such entities under then-applicable laws, rules and regulations. Such reports shall be prepared on the accounting or reporting basis required by such regulatory authorities. Upon request, copies of such reports will be furnished to any Investor or Limited Partner for any purpose reasonably related to the Investor's or Limited Partner's interest as an Investor or a Limited Partner. In the event that any regulatory authority promulgates rules or amendments thereto that would permit a reduction in any of the reporting requirements to which the Partnership is subject under this Agreement at the time of the execution hereof, the Partnership may cease to prepare and file any such reports in accordance with such rules or amendments. F. The General Partner shall maintain, for a period of at least six (6) years, a record of the information obtained to indicate that an Investor has met the suitability standards set forth in the Prospectus. Section 10.4 Federal Tax Elections The Partnership, in the sole discretion of the General Partner, may make elections for federal tax purposes as follows: (i) In case of a transfer of a Unit, the Partnership, in the sole discretion of the General Partner, may timely elect pursuant to Section 754 of the Code (or corresponding provisions of future law) and A-37 pursuant to similar provisions of applicable state or local income tax laws, to adjust the basis of the assets of the Partnership. (ii) All other elections required or permitted to be made by the Partnership under the Code shall be made by the General Partner in such manner as will, in their its sole opinion, be most advantageous to a majority of the Investors. ARTICLE XI MEETINGS OF INVESTORS Section 11.1 Calling Meetings Meetings of the Investors for any purpose may be called by the General Partner and shall be called by the General Partner upon receipt of a request in writing signed by Investors having in the aggregate more than 10% of the outstanding Units. Upon receipt of a written request stating the purpose(s) of the meeting, the General Partner shall provide all Investors within 10 days after receipt of such request with notice as described in Section 11.2. The meeting shall be held at a time and place convenient to the Investors. Section 11.2 Notice; Procedure If a meeting is called at the request of the Investors, the General Partner shall provide all Investors with notice of such meeting given either personally or by certified mail, which notice shall state the purpose thereof, such meeting to be held on a date not less than fifteen (15) nor more than sixty (60) days after the receipt by the General Partner of the request for the meeting. Notice of any other meeting shall be given either personally or by certified mail, not 1ess than fifteen (I 5) days nor more than sixty (60) days before the date of the meeting, to each Investor at his record mailing address. The notice shall be in writing, and shall state the place, date, hour, and purpose of the meeting, and shall indicate that it is being issued at or by the direction of the Partners or Investors calling the meeting. If a meeting is adjourned to another time or place, and if any announcement of the adjournment of time or place is made at the meeting, it shall not be necessary to give notice of the adjourned meeting. The presence in person or by proxy of the holders of more than 50% of the` outstanding Units shall constitute a quorum at all meetings of the Investors; provided, however, that if there is no quorum present, holders of a majority in interest of the Investors present or represented may adjourn the meeting from time to time without further notice until a quorum is obtained. No notice of the time, place or purpose of any meeting of Investors need be given to any Investor who attends in person or is present by proxy (except when an Investor attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business on the ground that the meeting is not lawfully called or convened), or to any Investor entitled to notice who, in a writing executed and filed with the records of the meeting, either before or after the time of the meeting, waives the notice requirement. Section 11.3 Right to Vote For the purpose of determining the Investors entitled to vote at any meeting of the Partnership, the General Partner or the Investors requesting the meeting may fix a date, in advance, as the record date for the determination of Investors entitled to vote. This date shall be not more than fifty (50) days nor less than ten (10) days before any meeting. Units purchased by the General Partner or the Affiliates will not possess any voting rights. Section 11.4 Proxies; Rules Each Investor may authorize any person or persons to act for him by proxy in all matters in which an Investor is entitled to participate, whether by waiving notice of any meeting, or voting or participating at a meeting. Every proxy must be signed by the Investor or his attorney-in-fact. No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy. Every proxy shall be recoverable at the pleasure of the Investor executing it. At each A-38 meeting of Investors, the General Partner shall appoint officers and adopt rules as they deem appropriate for the conduct of the meeting. ARTICLE XII GENERAL PROVISIONS Section 12.1 Appointment of General Partner as Attorney-in-Fact A. Each Limited Partner and Investor hereunder hereby irrevocably appoints and empowers the General Partner his attorney-in-fact to consent to or ratify any act listed in Subsections 5.4A(i) through (xxii) and Section 6.3C of this Agreement after the Majority Vote of the Investors thereto has been obtained, and to execute, acknowledge, swear to and deliver all agreements and instruments and file all documents requisite to carrying out the intentions and purposes contemplated in this Agreement, including, without limitation, the execution and delivery of this Agreement and all amendments hereto, the filing of all business certificates and necessary certificates of limited partnership and amendments thereto from time to time in accordance with all applicable laws and any certificates of cancellation. B. The appointment by all Limited Partners and Investors of the General Partner as attorney-in-fact shall be deemed to be a power coupled with an interest, shall not be affected by the subsequent disability or incapacity of the principal and shall survive the assignment by any Limited Partners or Investors of the whole or any part of his Interests or Units in the Partnership. C. The power of attorney granted by this Section 12.1 shall be governed by the laws of the State of Delaware. Section 12.2 Waiver of Partition Each Partner and Investor, on behalf of himself, his successors, representatives, heirs and assigns hereby waives any right of partition or any right to take any other action which otherwise might be available to him for the purpose of severing his relationship with the Partnership or his interest in the assets held by the Partnership from the interest of the other Partners or Investors. Section 12.3 Notification Any Notification, in order to be effective, shall be sent by registered or certified mail, postage prepaid, if to a Partner or Investor, to the address of the Partner or Investor set forth in the books and records of the Partnership, and if to the Partnership, to the principal place of business of the Partnership set forth in Section 2.2 (unless Notification of a change of the principal office is given), the date of registry thereof or the date of the certification thereof being deemed the date of receipt of Notification; provided, however, that any written communication sent to a Partner or Investor or to the Partnership and actually received by such Person shall constitute Notification for all purposes of this Agreement. Section 12.4 Word Meanings In this Agreement, the singular shall include the plural and the masculine gender shall include the feminine and neuter and vice versa, unless the context otherwise requires. Section 12.5 Binding Provisions The covenants and agreements contained herein shall be binding upon, and inure to the benefit of, the heirs, personal representatives, successors and assigns of the respective parties hereto. Section 12.6 Applicable Law This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, without regard to principles of conflict of laws. A-39 Section 12.7 Counterparts This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This Agreement shall become binding upon the date hereof. Each Additional or Successor General Partner shall become a signatory hereof by signing such number of counterparts of this Agreement and such other instrument or instruments, and in such manner as the General Partner shall determine, and by so signing, shall be deemed to have adopted and to have agreed to be bound by all the provisions of this Agreement. Section 12.8 Separability of Provisions Each provision of this Agreement shall be considered separable, and if for any reason any provision or provisions hereof are determined to be invalid or contrary to any existing or future law, such invalidly shall not impair the operation of or affect those portions of this Agreement which are valid. Section 12.9 Paragraph Titles Paragraph titles are for descriptive purposes only and shall not control or alter the meaning of this Agreement as set forth in the text. Section 12.10 Entire Agreement This Agreement and the exhibits and documents referred to herein constitute the entire understanding and agreement among the parties hereto with respect to the subject matter hereof, and supersede all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. This Agreement may not be modified or amended other than by an agreement in writing. Section 12.11 Amendments A. In addition to the amendments otherwise authorized herein, amendments may be made to this Agreement from time to time by the General Partner with the Majority Vote of the Investors; provided, however, that without the consent of the Partners or Investors to be adversely affected by the amendment, except as provided in Section 12.11B, this Agreement may not be amended so as to (i) convert an Investor's interest into a General Partner's interest; (ii) modify the limited liability of an Investor; (iii) alter the interest of a Partner or Investor in Distributable Cash, Profit or Loss, or Net Disposition Proceeds; or (iv) increase the amount of the Capital Contributions required to be paid by the Investors. B. In addition to the amendments otherwise authorized herein, amendments may be made to this Agreement from time to time by the General Partner, without the consent of any of the Investors, (i) to add to the duties or obligations of the General Partner or surrender any right or power granted to the General Partner herein, for the benefit of the Investors; (ii) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Agreement which will not be inconsistent with the provisions of this Agreement; (iii) to delete or add any provision of this Agreement required to be deleted or added by the Staff of the Securities and Exchange Commission or other federal agency or by a state securities commissioner or similar official and deemed by the commission, agency, commissioner, or official to be for the benefit or protection of the Investors; (iv) to make such amendments to this Agreement which, in the opinion of counsel to the Partnership, are necessary to ensure the continuation of partnership status for federal income tax purposes; provided, however, that, in the opinion of counsel to the Partnership, such amendments do not adversely affect in any way the rights or interests of any of the Investors; (v) to take any actions necessary to cause the assets of the Partnership to come within the exclusion from the definition of "plan assets" contained in Section 2550.40lb-1 of Title 29 of the Code of Federal Regulations or to cause the Partnership to comply with any requirement the Department of Labor may impose as a A-40 condition to granting a prohibited transaction exemption; and (vi) to give effect to any action permitted pursuant to Section 5.2; provided, however, that no amendment shall be adopted pursuant to this Section 12.2B unless its adoption (1) is not adverse to the interests of the Investors; (2) is consistent with Section 5.2; (3) does not affect the distribution of Distributable Cash or Net Disposition Proceeds or the allocation of Profit or Loss among the Investors as a class and the General Partner, except as provided below; and (4) does not affect the limited liability of the Investors or the status of the Partnership as a partnership for federal income tax purposes. In addition to the amendments otherwise authorized herein, amendments may be made to this Agreement to amend provisions of Article IV of this Agreement relating to the allocations of Profit or Loss and to distributions of Distributable Cash or Net Disposition Proceeds among the Partners and Investors if the Partnership is advised at any time by the Partnership's Accountants and counsel that the allocations provided in Article IV of this Agreement are unlikely to be respected for federal income tax purposes. The General Partner is empowered to amend the distribution and allocation provisions of Article IV pursuant to this Section 12.11B to the minimum extent necessary in accordance with the advice of the Partnership's Accountants and counsel to effect the plan of distribution of Distributable Cash and Net Disposition Proceeds, and, consistent therewith, the allocations of Profit and Loss provided in this Agreement. New allocations made by the General Partner in reliance upon the advice of the Partnership's Accountants and counsel shall be deemed to be made pursuant to the fiduciary obligation of the General Partner to the Partnership and the Investors. This Section 12.11 shall be subject to the provisions of Section 5.9 of this Agreement. C. If this Agreement is amended as a result of adding or substituting a Limited Partner or increasing the investment of a Limited Partner, the amendment shall be signed by the General Partner and by the Person to be substituted or added, or the Limited Partner increasing his investment in the Partnership, and, if a Limited Partner is to be substituted, by the assigning Limited Partner. If this Agreement is amended to reflect the designation of an Additional General Partner, the amendment shall be signed by the other General Partner or General Partner and by the Additional General Partner. If this Agreement is amended to reflect the withdrawal of a General Partner when the business of the Partnership is being continued, the amendment shall be signed by the withdrawing General Partner and by the remaining or successor General Partner or General Partners. D. In making any amendments, there shall be prepared and filed for recordation by the General Partner all documents and certificates required to be prepared and filed under the Act and under the laws of the other jurisdictions under the laws of which the Partnership is then formed or qualified. A-41 IN WITNESS WHEREOF, parties hereto have executed this Agreement as of the day of ,1990, effective as of the date first above written. GENERAL PARTNER ATTEST: REDWOOD LEASING, INC. By: (SEAL) Name: Title: ASSIGNOR LIMITED PARTNER: ATTEST: REDWOOD LEASING HOLDING COMPANY INC. By: (SEAL) Name: Title: MNC SPECIAL LIMITED PARTNER: ATTEST: MARYLAND NATIONAL LEASING SERVICES CORPORATION By: (SEAL) Name: Title: ABR SPECIAL LIMITED PARTNER: ATTEST: REALTY ASSOCIATES 1988 LIMITED PARTNERSHIP By: (SEAL) Name: Title: A-42 EX-27 4 ART. 5 FDS FOR 4TH QTR 10-K
5 (Replace this text with legend, if applicable) 0000857615 Redwood Equipment Leasing Income Fund 1 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-1-1997 DEC-31-1997 1 258,532 0 289,845 0 0 548,377 0 0 1,270,331 34,562 0 0 0 0 0 1,270,331 0 207,551 0 0 103,366 0 0 104,185 0 104,185 0 0 0 104,185 0.000 0.000
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