Exhibit 10.3

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RAND CAPITAL SBIC, L.P.

 

Dated as of January 16, 2002

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RAND CAPITAL SBIC, L.P.

Table of Contents

  Page ARTICLE 1  GENERAL PROVISIONS

1

     Section 1.01 Definitions

1

     Section 1.02 Name

6

     Section 1.03 Principal Office; Registered Office; and Qualification 7     
Section 1.04 Commencement and Duration 7      Section 1.05 Admission of Partners
7      Section 1.06 Representations of Partners 8      Section 1.07 Notices with
Respect to Representations by Private Limited Partners 10      Section 1.08
Liability of Partners 10 ARTICLE 2  PURPOSE AND POWERS 11      Section 2.01
Purpose and Powers 11      Section 2.02 Restrictions on Powers 11 ARTICLE 3 
MANAGEMENT     11      Section 3.01 Authority of General Partner 11      Section
3.02 Authority of the Private Limited Partners 12      Section 3.03 No
Investment Adviser/Manager 12      Section 3.04 Restrictions on Other Activities
of the General Partner and its Affiliates 12      Section 3.05 Management
Compensation 13      Section 3.06 Payment of Management Compensation 13     
Section 3.07 Partnership Expenses 14      Section 3.08 Valuation of Assets 15
     Section 3.09 Standard of Care 16      Section 3.10 Indemnification 16
ARTICLE 4  SMALL BUSINESS INVESTMENT COMPANY MATTERS 19      Section 4.01 SBIC
Act 19      Section 4.02 Consent or Approval of, and Notice to, SBA 19     
Section 4.03 Provisions Required by the SBIC Act for Issuers of Debentures 19
     Section 4.04 Effective Date of Incorporated SBIC Act Provisions 20     
Section 4.05 SBA as Third Party Beneficiary 20      Section 4.06 Interest of the
General Partner After Withdrawal 20 ARTICLE 5  PARTNERS' CAPITAL CONTRIBUTIONS
21      Section 5.01 Capital Commitments 21      Section 5.02 Capital
Contributions by the Private Limited Partners 21      Section 5.03 Capital
Contributions by the General Partner 21      Section 5.04 No Additional Private
Limited Partners 22      Section 5.05 Conditions to the Commitments of the
General Partner and the Private Limited Partners 22      Section 5.06
Termination of the Obligation to Contribute Capital 22      Section 5.07 Notice
and Opinion of Counsel 23      Section 5.08 Cure, Termination of Capital
Contributions and Withdrawal 23      Section 5.09 Failure to Make Required
Capital Contributions 23      Section 5.10 Notice and Consent of SBA with
respect to Capital Contribution Defaults 24      Section 5.11 Interest on
Overdue Contributions 25      Section 5.12 Termination of a Private Limited
Partner's Right to Make Further Capital Contributions 25      Section 5.13
Forfeiture of a Private Limited Partner's Interest in the Partnership 25     
Section 5.14 Withholding and Application of a Private Limited Partner's
Distributions 26      Section 5.15 Required Sale of a Private Limited Partner's
Interest in the Partnership 26 ARTICLE 6  ADJUSTMENT OF CAPITAL ACCOUNTS 28     
Section 6.01 Establishment of Capital Accounts 28      Section 6.02 Time of
Adjustment of Capital Accounts 28      Section 6.03 Adjustments to Capital
Accounts 29      Section 6.04 Tax Matters 30 ARTICLE 7  DISTRIBUTIONS 31     
Section 7.01 Distributions to Partners 31      Section 7.02 Distributions of
Noncash Assets in Kind 32      Section 7.03 Distributions Violative of the Act
Prohibited 32 ARTICLE 8  DISSOLUTION, LIQUIDATION, WINDING UP AND WITHDRAWAL 32
     Section 8.01 Dissolution 32      Section 8.02 Winding Up 33      Section
8.03 Withdrawal of the General Partner 34      Section 8.04 Continuation of the
Partnership After the Withdrawal of the General Partner 34      Section 8.05
Withdrawals of Capital 35      Section 8.06 Withdrawal by ERISA Regulated
Pension Plans 35      Section 8.07 Withdrawal by Government Plans complying with
State and Local Law 35      Section 8.08 Withdrawal by Government Plans
Complying with ERISA 35      Section 8.09 Withdrawal by Tax Exempt Private
Limited Partners 36      Section 8.10 Withdrawal by Registered Investment
Companies 36      Section 8.11 Distributions on Withdrawal 36 ARTICLE 9 
ACCOUNTS, REPORTS AND AUDITORS 37      Section 9.01 Books of Account 37     
Section 9.02 Audit and Report 37      Section 9.03 Fiscal Year 38 ARTICLE 10 
MISCELLANEOUS 39      Section 10.01 Assignability 39      Section 10.02 Binding
Agreement 40      Section 10.03 Gender 40      Section 10.04 Notices 40     
Section 10.05 Consents and Approvals 41      Section 10.06 Counterparts 41     
Section 10.07 Amendments 41      Section 10.08 Power of Attorney 42      Section
10.09 Applicable Law 43      Section 10.10 Severability 43      Section 10.11
Entire Agreement 43

 

RAND CAPITAL SBIC, L.P.

AGREEMENT OF LIMITED PARTNERSHIP dated and effective as of January 16, 2002,
among Rand Capital Management, LLC, a Delaware limited liability company in its
capacity as a general partner of the Partnership) and the private limited
partners, as amended from time to time.

The parties, in consideration of their mutual agreements stated in this
Agreement, agree to become partners and to form a limited partnership under the
Act. The purpose of the Partnership is to operate as a small business investment
company under the SBIC Act, licensed by SBA for the period and upon the terms
and conditions stated in this Agreement. The parties further agree as follows:

ARTICLE 1
General Provisions

Section 1.01 Definitions.

For the purposes of this Agreement, the following terms have the following
meanings:

"Act" means the Delaware Revised Uniform Limited Partnership Act.

"Affiliate" has the meaning stated in the SBIC Act.

"Agreement" means this agreement of limited partnership, as amended from time to
time. References to this Agreement will be deemed to include all provisions
incorporated in this Agreement by reference.

"Assets" means common and preferred stock (including warrants, rights and other
options relating to such stock), notes, bonds, debentures, trust receipts and
other obligations, instruments or evidences of indebtedness, and other
properties or interests commonly regarded as securities, and in addition,
interests in real property, whether improved or unimproved, and interests in
personal property of all kinds (tangible or intangible), choses in action, and
cash, bank deposits and so-called "money market instruments".

"Assets Under Management" means, as of any specified date, the value of all
Assets owned by the Partnership (the value to be determined as provided in this
Agreement), including contributions requested and due from Partners and uncalled
amounts of Commitments that are included in the Partnership's regulatory capital
(as such term is used in the SBIC Act), less the amount of any liabilities of
the Partnership, determined in accordance with generally accepted accounting
principles, consistently applied.

"Associate" has the meaning stated in the SBIC Act.

"Capital Account" means the account of each Partner that reflects its interest
in the Partnership determined in accordance with Section 6.03.

"Capital Contribution"

means a contribution of capital to the Partnership by a Partner.

"Certificate of Limited Partnership" means the certificate of limited
partnership with respect to the Partnership filed for record in the office of
the Secretary of State of the State of Delaware. 

"Closing Capital Account" means, with respect to any fiscal period, the Opening
Capital Account of each Partner for the fiscal period after allocations have
been made to the Capital Account in accordance with Section 6.03.

"Code" means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder and interpretations thereof promulgated by the Internal Revenue
Service, as in effect from time to time.

"Commitments" means the capital contributions to the Partnership that the
Partners have made or are obligated to make to the Partnership. The amounts and
terms of the Commitments of the General Partner and the Private Limited Partners
will be as stated in this Agreement.

"Control Person" has the meaning stated in the SBIC Act.

"Debentures" has the meaning stated in the SBIC Act.

"Designated Party" means any of the General Partner, any Investment Adviser/
Manager, and any partner, member, manager, stockholder, director, officer,
employee or Affiliate of the General Partner and any Investment Adviser/
Manager.

"ERISA" means the Employee Retirement Income Security Act of 1974, as amended,
and the regulations thereunder and interpretations thereof promulgated by the
Department of Labor, as in effect from time to time.

"Exchange Act" means the Securities Exchange Act of 1934, as amended, and the
regulations thereunder and interpretations thereof promulgated by the Securities
and Exchange Commission, as in effect from time to time.

"General Partner" means the general partner or general partners of the
Partnership, as set forth in this Agreement.

"Indemnifiable Costs" means all costs, expenses, damages, claims, liabilities,
fines and judgments (including the reasonable cost of the defense, and any sums
which may be paid with the consent of the Partnership in settlement), incurred
in connection with or arising from a claim, action, suit, proceeding or
investigation, by or before any court or administrative or legislative body or
authority.

"Investment"

means the securities acquired by the Partnership in any other corporation,
partnership, limited liability company, or any or business or concern in which
the Partnership becomes an investor in accordance with the provisions of this
Agreement, including capital stock, partnership interests, bonds, notes,
debentures, warrants, trust receipts, futures and other obligations and
instruments or evidences of indebtedness, as well as rights and options to
purchase, sell or invest in the foregoing. Except where the context requires
otherwise, any reference to an "Investment" shall refer to all securities
acquired by the Partnership with respect to a portfolio company in a single or a
series of related transactions.

"Investment Advisers Act" means the Investment Advisers Act of 1940, as amended,
and the regulations thereunder and interpretations thereof promulgated by the
Securities and Exchange Commission, as in effect from time to time.

"Investment Company Act" means the Investment Company Act of 1940, as amended,
and the regulations thereunder and interpretations thereof promulgated by the
Securities and Exchange Commission, as in effect from time to time.

"Investment Adviser/Manager" has the meaning stated in the SBIC Act.

"Leverage" has the meaning stated in the SBIC Act.

"Management Compensation" means the amounts payable by the Partnership to the
General Partner or Investment Adviser/Manager, as provided in Section 3.05.

"Net Losses" means, with respect to any fiscal period, the excess, if any, of:

            (i) all expenses and losses incurred during the fiscal period by the
Partnership from all sources over

            (ii) the aggregate revenue, income and gains realized during the
fiscal period by the Partnership from all sources.

For purposes of determining Net Losses:

(A) items will be taken into account to the extent that (1) they are includable
as items of income, credit, loss or deduction for Federal income tax purposes
(including items described in Section 705(a)(2)(B) of the Code, or treated as so
described in Treasury Regulation § 1.704-1(b)(2)(iv)(i)) or, (2) in the case of
items of income, they constitute income that is exempt from Federal income tax;
and

(B) if any Noncash Asset is distributed in kind, it will be deemed sold at the
value established at the most recent valuation of the Noncash Asset under this
Agreement (or such other valuation date as is required under the SBIC Act) and
any unrealized appreciation or depreciation with respect to the Noncash Asset
will be deemed realized and included in the determination of Net Losses.

"Net Profits" means, with respect to any fiscal period, the excess, if any, of:

(i) the aggregate revenue, income and gains realized during the fiscal period by
the Partnership from all sources over

(ii) all expenses and losses incurred during the fiscal period by the
Partnership from all sources.

For purposes of determining Net Profits:

(A) items will be taken into account to the extent that (1) they are includable
as items of income, credit, loss or deduction for Federal income tax purposes
(including items described in Section 705(a)(2)(B) of the Code, or treated as so
described in Treasury Regulation § 1.704-1(b)(2)(iv)(i)) or, (2) in the case of
items of income, constitute income that is exempt from Federal income tax; and

(B) if any Noncash Asset is distributed in kind, it will be deemed sold at the
value established at the most recent valuation of the Noncash Asset under this
Agreement (or such other valuation date as is required under the SBIC Act) and
any unrealized appreciation or depreciation with respect to the Noncash Asset
will be deemed realized and included in the determination of Net Profits.

"Noncash Asset" means any Asset of the Partnership other than cash.

"Opening Capital Account," with respect to any fiscal period, means:

(i) with respect to any Partner admitted during the fiscal period, the Partner's
initial capital contribution (or in the case of any Partner admitted as a
transferee of all or part of the interest in the Partnership of another Partner,
with respect to such transferred interest in the Partnership, that portion of
the transferor's initial capital contribution transferred to the transferee);
and

(ii) with respect to any Partner admitted during any prior fiscal period (other
than a Partner who has withdrawn as of the last day of the preceding fiscal
period), the Partner's Closing Capital Account for the preceding fiscal period
(or in the case of any Partner admitted as a transferee of all or part of the
interest in the Partnership of another Partner, with respect to such transferred
interest in the Partnership, that portion of the transferor's Closing Capital
Account transferred to the transferee).

"Optionor" shall have the meaning set forth in Section 5.15.

"Optionees" shall have the meaning set forth in Section 5.15.

"Optioned Partnership Interest" shall have the meaning set forth in Section
5.15.

"Option Price" shall have the meaning set forth in Section 5.15.

"

Organization Expenses" shall mean all organizational and syndication costs,
fees, and expenses incurred by or on behalf of the General Partner in connection
with the formation, organization, marketing and licensing of the Partnership and
the formation and organization of the General Partner, which include, without
limitation, all interest expense, accounting and legal fees, any fees associated
with placing interests in the Partnership, all costs incurred in connection with
making, registering and selling Partnership investments, including but not
limited to, travel, meeting, printing, telephone, office and support staff
costs, and the cost of meetings held in connection therewith (including
reimbursement of the General Partner and the members, officers and employees of
the General Partner for such expenses).

"Outstanding Leverage" means the total amount of outstanding securities
(including, but not limited to, Debentures) issued by the Partnership that
qualify as Leverage and have not been redeemed or repaid as provided in the SBIC
Act.

"Parent Fund" means Rand Capital Corporation, a New York corporation and
Business Development Company as defined under § 2(a)(48) of the Investment
Company Act of 1940.

"Partners" means the General Partner and the Private Limited Partners.

"Partnership" means the limited partnership established by this Agreement.

"Percentage Interest"

means the percentage determined for each Partner by dividing (i) the aggregate
Capital Contributions credited to such Partner's Capital Account as provided in
Section 6.03 below at the time of any relevant calculation, by (ii) the
aggregate Capital Contributions credited to the Capital Accounts of all the
Partners at such time. The sum of the respective Percentage Interests shall at
all times equal one hundred percent (100%).

"Private Limited Partners" means any limited partners of the Partnership.

"Regulatory Capital"

has the meaning stated in the SBIC Act.

"Remaining Portion" shall have the meaning set forth in Section 5.15.

"SBA"

means the United States Small Business Administration.

"SBA Agreements" has the meaning stated in Section 10.11.

"SBIC" means a small business investment company licensed under the SBIC Act.

"SBIC Act" means the Small Business Investment Act of 1958, as amended, and the
rules and regulations thereunder and interpretations thereof promulgated by SBA,
as in effect from time to time.

"SEC" means the Securities and Exchange Commission.

"Securities Act" means the Securities Act of 1933, as amended, and the
regulations thereunder and interpretations thereof promulgated by the SEC, as in
effect from time to time.

"Special Private Limited Partner" has the meaning stated in Section 4.06 and
Section 8.03(c).

Section 1.02 Name.

(a) The name of the Partnership will be "Rand Capital SBIC, L.P."

(b) Subject to the prior approval of SBA, the General Partner has the power at
any time to:

(i) change the name of the Partnership; and

(ii) qualify the Partnership to do business under any name when the
Partnership's name is unavailable for use, or may not be used, in a particular
jurisdiction.

(c) The General Partner will give prompt notice of any action taken under this
Section to each Partner and SBA.

Section 1.03 Principal Office; Registered Office; and Qualification. 

    (a) The principal office of the Partnership will be at 2200 Rand Building,
Buffalo, NY 14203, or such other place as may from time to time be designated by
the General Partner, subject to the approval of SBA.

    (b) The registered office of the Partnership in the State of Delaware will
be located at 1209 Orange Street, Wilmington, Delaware, 19801. The name of the
registered agent for the Partnership will be the Corporation Trust Center. The
General Partner may from time to time change the registered agent and registered
office of the Partnership.

    (c) The General Partner will qualify the Partnership to do business in each
jurisdiction where the activities of the Partnership make such qualification
necessary.

    (d) The General Partner will give prompt notice of any action taken under
this Section to each Partner and SBA.

Section 1.04 Commencement and Duration.

    (a) The Partnership will commence upon the filing for record of the
Certificate of Limited Partnership in the office of the Secretary of State of
the State of Delaware.

    (b) The Partnership will be dissolved and wound up at the time and in the
manner provided for in Article 8.

Section 1.05 Admission of Partners.

    (a) No person may be admitted as a General Partner or a Private Limited
Partner without subscribing and delivering to the Partnership a counterpart of
this Agreement, or other written instrument, which sets forth:

        (i) the name and address of the Partner,

        (ii) the Commitment of the Partner, and

        (iii) the agreement of the Partner to be bound by the terms of this
Agreement.

    (b) Without the prior approval of SBA, no person may be admitted as:

        (i) a General Partner, or

        (ii) a Private Limited Partner with an ownership interest of ten percent
(10%) or more of the Partnership's capital. 

    (c) The General Partner will compile, and amend from time to time as
necessary,

    Schedule A attached to this Agreement, which will list:

        (i) the name and address of the General and each Private Limited
Partner, and

        (ii) the Commitment of the General Partner and each Private Limited
Partner to the Partnership.

    (d) The addition to the Partnership at any time of one or more Partners will
not be a cause for dissolution of the Partnership, and all the Partners will
continue to be subject to the provisions of this Agreement in all respects.

Section 1.06 Representations of Partners.

    (a) This Agreement is made with the General Partner in reliance upon the
General Partner's representation to the Partnership and SBA, that:

        (i) it is duly organized, validly existing and in good standing under
the laws of the State of Delaware, and is qualified to do business under the
laws of each state where such qualification is required to carry on the business
of the Partnership;

        (ii) it has full power and authority to execute and deliver this
Agreement and to act as General Partner under this Agreement;

        (iii) this Agreement has been authorized by all necessary actions by it,
has been duly executed and delivered by it, and is a legal, valid and binding
obligation of it, enforceable according to its terms; and

        (iv) the execution and delivery of this Agreement and the performance of
its obligations under this Agreement will not conflict with, or result in any
violation of, or default under, any provision of any governing instrument
applicable to it, or any agreement or other instrument to which it is a party or
by which it or any of its properties are bound, or any provision of law,
statute, rule or regulation, or any ruling, writ, order, injunction or decree of
any court, administrative agency or governmental body applicable to it.

    (b) This Agreement is made with each Private Limited Partner in reliance
upon each Private Limited Partner's representation to the General Partner, the
Partnership and SBA, that:

        (i) it has full power and authority to execute and deliver this
Agreement and to act as a Private Limited Partner under this Agreement; this
Agreement has been authorized by all necessary actions by it; this Agreement has
been duly executed and delivered by it; and this Agreement is a legal, valid and
binding obligation of it, enforceable against it according to its terms;

        (ii) the execution and delivery of this Agreement and the performance of
its obligations under this Agreement do not require the consent of any third
party not previously obtained, and will not conflict with, or result in any
violation of, or default under, any provision of any governing instrument
applicable to it, or any agreement or other instrument to which it is a party or
by which it or any of its properties are bound, or any provision of law,
statute, rule or regulation, or any ruling, writ, order, injunction or decree of
any court, administrative agency or governmental body applicable to it;

        (iii) if the Private Limited Partner is a bank (as the term is used in
the SBIC Act, at 15 U.S.C. § 682(b)), the total amount of such Private Limited
Partner's investments in SBICs, including such Private Limited Partner's
interest in the Partnership, does not exceed five percent (5%) of such Private
Limited Partner's capital and surplus; 

        (iv) unless otherwise disclosed to the Partnership in writing, the
Partner is a citizen or resident of the United States, an entity organized under
the laws of the United States or a state within the United States or an entity
engaged in a trade or business within the United States; and

        (v) unless otherwise disclosed to the Partnership in writing, the
Partner is not subject to Title I of ERISA.

    (c) Each Partner who has disclosed to the Partnership in writing that it is
not a person described in Section 1.06(b)(iv), agrees to provide the Partnership
with any information or documentation necessary to permit the Partnership to
fulfill any tax withholding or other obligation relating to the Partner,
including but not limited to any documentation necessary to establish the
Partner's eligibility for benefits under any applicable tax treaty.

    (d) With respect to actions under this Agreement that require the approval
of the Private Limited Partners, the Parent Fund shall exercise its rights in a
manner that produces the same result that would be produced if (i) the Parent
Fund were not a Partner and (ii) each limited partner of the Parent Fund were a
Private Limited Partner that had made aggregate Capital Contributions equal to
the product of (x) the aggregate Capital Contributions of the Parent Fund and
(y) a fraction, the numerator of which equals the aggregate capital
contributions made by such limited partner to the Parent Fund and the
denominator of which equals the aggregate capital contributions made by all of
the partners of the Parent Fund to the Parent Fund.

Section 1.07 Notices With Respect to Representations by Private Limited
Partners.

    (a) If any representation made by a Private Limited Partner in Section
1.06(b)(i), (ii) or (iii) ceases to be true, then the Private Limited Partner
will promptly provide the Partnership with a correct separate written
representation as provided in each such Section.

    (b) The Partnership will give SBA prompt notice of any corrected
representation received from any Private Limited Partner under Section 1.07(a).

Section 1.08 Liability of Partners

    (a) Losses, liabilities and expenses incurred by the Partnership during any
fiscal year will be allocated among the Partners in accordance with the
procedures for allocating Net Losses as provided in Section 6.03.

    (b) The General Partner has the liability for the liabilities of the
Partnership provided for in the Act and the SBIC Act. The General Partner will
not:

        (i) be obligated to restore by way of capital contribution or otherwise
any deficits in the respective Capital Accounts of the Private Limited Partners
should such deficits occur, or

        (ii) have any greater obligation with respect to any Outstanding
Leverage than is required by the SBIC Act or by SBA.

    (c) Except as otherwise required under the Act and the SBIC Act, no Private
Limited Partner will be liable for any loss, liability or expense whatsoever of
the Partnership. Notwithstanding the preceding sentence, a Private Limited
Partner will remain liable for any portion of such Private Limited Partner's
Commitment not paid to the Partnership.

    (d) If a Private Limited Partner is required to return to the Partnership,
for the benefit of creditors of the Partnership, amounts previously distributed
to the Private Limited Partner, the obligation of the Private Limited Partner to
return any such amount to the Partnership will be the obligation of the Private
Limited Partner and not the obligation of the General Partner. No Private
Limited Partner will be liable under this Agreement for the obligations under
this Agreement of any other Partner.

    (e) Nothing in this Agreement limits any liability of any Partner under any
agreement between the Partner and SBA.

ARTICLE 2

Purpose and Powers

Section 2.01 Purpose and Powers.

    (a) The Partnership is organized solely for the purpose of operating as a
small business investment company under the SBIC Act and conducting the
activities described under Title III of the SBIC Act. The Partnership has the
powers and responsibilities, and is subject to the limitations, provided in the
SBIC Act. The operations of the Partnership and the actions taken by the
Partnership and the Partners will be conducted and taken in compliance with the
SBIC Act.

    (b) Subject to Section 2.01(a), the Partnership may make, manage, own and
supervise investments of every kind and character in conducting its business as
a small business investment company.

        (i)    Subject to the provisions of the SBIC Act, the Partnership has
all powers necessary, suitable or convenient for the accomplishment of the
purposes set forth in Section 2.01(a) and Section 2.01(b), alone or with others,
as principal or agent, including without limitation, to engage in any lawful act
or activity for which limited partnerships may be organized under the Act.

Section 2.02 Restrictions on Powers. 

    Notwithstanding any provision of Section 2.01(b), the Partnership will not
(i) make investments precluded under 13 C.F.R. § 107.720, including but not
limited to foreign investments described therein, (ii) without the prior
approval of the SBA, make any investment that exceeds the diversification
limitation that is described in 13 C.F.R. § 107.740 or (iii) make investments
precluded under 13 C.F.R. § 107.530.

ARTICLE 3

Management

Section 3.01 Authority of General Partner.

    (a) The management and operation of the Partnership and the formulation of
investment policy is vested exclusively in the General Partner.

    (b) The act of the General Partner in carrying on the business of the
Partnership will bind the Partnership.

    (c) In the case of any General Partner other than a natural person, at any
time that the Partnership is licensed as an SBIC, the General Partner will not
allow any person to serve as a general partner, director, officer or manager of
the General Partner, unless such person has been approved by SBA. 

    (d) So long as the General Partner remains the general partner of the
Partnership:

        (i) it will comply with the requirements of the SBIC Act, including,
without limitation, 13 C.F.R. § 107.160(a) and (b) as in effect from time to
time; and

        (ii) in the case of any General Partner other than a natural person,
except as set forth in Section 3.01(d)(iii), it will devote all of its
activities to the conduct of the business of the Partnership and will not engage
actively in any other business, unless its engagement is related to and in
furtherance of the affairs of the Partnership.

        (iii) The General Partner may, however:

            (A) act as the general partner or Investment Adviser/Manager for one
or more other SBICs, and

            (B) receive, hold, manage and sell Assets received by it from the
Partnership (or other SBIC for which it acts as general partner or Investment
Adviser/Manager), or through the exercise or exchange of Assets received by it
from the Partnership (or other SBIC for which it acts as general partner or
Investment Adviser/Manager).

Section 3.02 Authority of the Private Limited Partners.

    The Private Limited Partners will take no part in the control of the
business of the Partnership, and the Private Limited Partners will not have any
authority to act for or on behalf of the Partnership except as is specifically
permitted by this Agreement.

Section 3.03 No Investment Adviser/Manager. 

    The General Partner may not delegate any part of its authority to an
Investment Adviser/Manager.

Section 3.04 Restrictions on Other Activities of the General Partner and its
Affiliates.

    Except as provided in the SBIC Act and as otherwise specifically provided in
this Agreement, no provision of this Agreement will be construed to preclude any
(i) Partner, or (ii) Affiliate, general partner, member, manager or stockholder
of any Partner, from engaging in any activity whatsoever or from receiving
compensation therefor or profit from any such activity. Such activities may
include, without limitation, (A) receiving compensation from issuers of
securities for investment banking services, (B) managing investments,
(C) participating in investments, brokerage or consulting arrangements or
(D) acting as an adviser to or participant in any corporation, partnership,
limited liability company, trust or other business person.

Section 3.05 Management Compensation.

    (a)    During the five year period commencing on the date hereof, Management
Compensation with respect to each year during such period commencing on the same
day and month as the date hereof will be 7.5% of the Partnership's Regulatory
Capital.

    (b)    During the period commencing on the first day following the fifth
anniversary hereof, Management Compensation with respect to each year during
such period commencing on the same day and month as the date hereof will be 2.5%
of the Partnership's Combined Capital.

    (c)    The Management Compensation shall not be modified in any respect
except (i) upon the approval of the Parent Fund and (ii) with the prior written
approval of SBA.

    (d)    If the Partnership fails to pay any Management Compensation provided
herein, due to the SBIC Act or otherwise, the unpaid amount shall continue to be
due and payable or shall become due and payable at the earliest date on which
the payment of such amount or any portion thereof could be made without
violation of the SBIC Act. Until paid, the unpaid amount shall accrue interest
that shall be compounded on a monthly basis at the highest prime rate reported
in The Wall Street Journal, from time to time, during the period of non-payment.

    (e)    Management Compensation otherwise payable for any quarterly period
will be reduced by 100% of all fees described in 13 C.F.R. §§ 107.860 and
107.900.

  

 (f)    The Partnership will not pay any Management Compensation with respect to
any fiscal year in excess of the amount of Management Compensation approved by
SBA. 

Section 3.06 Payment of Management Compensation.

    (a) The Management Compensation will be paid by the Partnership to the
General Partner.

    (b) Management Compensation will be paid in advance in four quarterly
installments on the first business day of each quarter of each year commencing
on the same day and month as the date hereof. The amount to be paid in each such
quarterly installment initially shall be determined in accordance with Section
3.05, based upon (i) the amounts of Regulatory Capital the Partnership
reasonably expects to have during such fiscal quarter and (ii) during the period
starting on the fifth anniversary hereof, the amounts of Leverage, if any, the
Partnership reasonably expects to have outstanding during such fiscal quarter;
provided, however, that such amount shall be subject to adjustment in accordance
with Section 3.06(c). With respect to partial quarters (such as the final
quarter of the Partnership), Management Compensation shall be pro rated based on
the number of days in such quarters.

    (c) Within thirty (30) days after (i) the end of each quarter of each year
commencing on the same day and month as the date hereof, and (ii) the date of
the Partnership's dissolution, appropriate adjustment (by way of payment or
refund) will be made so that Management Compensation paid with respect to such
quarter then ended or the period from the end of the last quarter to the date
set forth in clause (ii) or (iii) will be equal to Management Compensation that
would have resulted had it been calculated on a daily basis under
Section 3.05(a) or Section 3.05(b) for such period.

Section 3.07 Partnership Expenses. 

    (a) The General Partner will pay:

        (i) the compensation of all professional and other employees of the
Partnership or the General Partner who provide services to the Partnership;

        (ii) except as provided in Section 3.07(b), the cost of providing
support and general services to the Partnership, including, without limitation:

            (A) office expenses,

            (B) travel,

            (C) business development,

            (D) office and equipment rental,

            (E) bookkeeping, and

            (F) the development, investigation and monitoring of investments;
and

        (iii) all other expenses of the Partnership not authorized to be paid by
the Partnership under Section 3.07(b).

    (b) The Partnership will pay the following Partnership expenses:

        (i) all interest and expenses payable by the Partnership on any
indebtedness incurred by the Partnership;

        (ii) all amounts payable to SBA under the SBIC Act, and all amounts
payable in connection with any Leverage commitment and any Outstanding Leverage;

        (iii) taxes payable by the Partnership to Federal, state, local and
other governmental agencies;

        (iv) Management Compensation;

        (v) expenses incurred in the actual or proposed acquisition or
disposition of Assets, including without limitation, accounting fees, brokerage
fees, legal fees, transfer taxes and costs related to the registration or
qualification for sale of Assets;

        (vi) legal, insurance (including any insurance as contemplated in
Section 3.10(m)), accounting and auditing expenses;

        (vii) all expenses incurred by the Partnership in connection with
commitments for or issuance of Leverage;

        (viii) fees or dues in connection with the membership of the Partnership
in any trade association for small business investment companies or related
enterprises; and

        (ix) Organization Expenses up to but not exceeding $300,000.

    (c) All Partnership expenses paid by the Partnership will be made against
appropriate supporting documentation. The payment by the Partnership of
Partnership expenses will be due and payable as billed.

Section 3.08 Valuation of Assets. 

    (a) The Partnership will adopt written guidelines for determining the value
of its Assets. Assets held by the Partnership will be valued by the General
Partner in a manner consistent with the Partnership's written guidelines and the
SBIC Act. The Valuation Guidelines attached to this Agreement as Exhibit I are
the Partnership's written guidelines for valuation. 

    (b) To the extent that the SBIC Act requires any Asset held by the
Partnership to be valued other than as provided in this Agreement, the General
Partner will value the Asset in such manner as it determines to be consistent
with the SBIC Act.

    (c) Assets held by the Partnership will be valued at least annually (or more
often, as SBA may require), and will be valued at least semi-annually (or more
often, as SBA may require) at any time that the Partnership has Outstanding
Leverage. 

Section 3.09 Standard of Care.

    (a) No Designated Party will be liable to the Partnership or any Partner for
any action taken or omitted to be taken by it or any other Partner or other
person in good faith and in a manner it reasonably believed to be in or not
opposed to the best interests of the Partnership, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe its conduct
was unlawful.

    (b) Neither any Private Limited Partner, nor any member of any Partnership
committee or board who is not an Affiliate of the General Partner, will be
liable to the Partnership or any Partner as the result of any decision made in
good faith by the Private Limited Partner or member, in its capacity as such.

    (c) Any Designated Party, any Private Limited Partner and any member of a
Partnership committee or board, may consult with independent legal counsel
selected by it and will be fully protected, and will incur no liability to the
Partnership or any Partner, in acting or refraining to act in good faith in
reliance upon the opinion or advice of such counsel.

    (d) This Section does not constitute a modification, limitation or waiver of
Section 314(b) of the SBIC Act, or a waiver by SBA of any of its rights under
Section 314(b). 

    (e) In addition to the standards of care stated in this Section, this
Agreement may also provide for additional (but not alternative) standards of
care that must also be met.

Section 3.10 Indemnification. 

    (a) The Partnership will indemnify and hold harmless, but only to the extent
of Assets Under Management (less any Outstanding Leverage not included as a
liability in the computation of Assets Under Management), any Designated Party,
from any and all Indemnifiable Costs which may be incurred by or asserted
against such person or entity, by reason of any action taken or omitted to be
taken on behalf of the Partnership and in furtherance of its interests.

    (b) The Partnership will indemnify and hold harmless, but only to the extent
of Assets Under Management (less any Outstanding Leverage not included as a
liability in the computation of Assets Under Management), the Private Limited
Partners, and members of any Partnership committee or board who are not
Affiliates of the General Partner or any Investment Adviser/Manager from any and
all Indemnifiable Costs which may be incurred by or asserted against such person
or entity, by any third party on account of any matter or transaction of the
Partnership, which matter or transaction occurred during the time that such
person has been a Private Limited Partner or member of any Partnership committee
or board.

    (c) The Partnership has power, in the discretion of the General Partner, to
agree to indemnify on the same terms and conditions applicable to persons
indemnified under Section 3.10(b), any person who is or was serving, under a
prior written request from the Partnership, as a consultant to, agent for or
representative of the Partnership as a director, manager, officer, employee,
agent of or consultant to another corporation, partnership, limited liability
company, joint venture, trust or other enterprise, against any liability
asserted against such person and incurred by the person in any such capacity, or
arising out of the person's status as such.

    (d) No person may be entitled to claim any indemnity or reimbursement under
Section 3.10(a), (b) or (c) in respect of any Indemnifiable Cost that may be
incurred by such person which results from the failure of such person to act in
accordance with the provisions of this Agreement and the applicable standard of
care stated in Section 3.09. The termination of any action, suit or proceeding
by judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, will not, of itself, preclude a determination that such person
acted in accordance with the applicable standard of care stated in Section 3.09.

    (e) To the extent that a person claiming indemnification under
Section 3.10(a), (b) or (c) has been successful on the merits in defense of any
action, suit or proceeding referred to in Section 3.10(a), (b) or (c) or in
defense of any claim, issue or matter in any such action, suit or proceeding,
such person must be indemnified with respect to such matter as provided in such
Section. Except as provided in the foregoing sentence and as provided in Section
3.10(h) with respect to advance payments, any indemnification under this Section
3.10 will be paid only upon determination that the person to be indemnified has
met the applicable standard of conduct stated in Section 3.09(a) or Section
3.09(b), as applicable.

    (f) A determination that a person to be indemnified under this Section has
met the applicable standard stated in Section 3.09(a) or Section 3.09(b) may be
made by (i) the General Partner, with respect to the indemnification of any
person other than a person claiming indemnification under Section 3.10(a), (ii)
a committee of the Partnership whose members are not affiliated with the General
Partner or any Investment Adviser/Manager with respect to indemnification of any
person indemnified under Section 3.10(a) or (iii) at the election of the General
Partner, independent legal counsel selected by the General Partner, with respect
to the indemnification of any person indemnified under this Section, in a
written opinion.

    (g) In making any determination with respect to indemnification under
subsection (f) above, the General Partner, a committee of the Partnership whose
members are not affiliated with the General Partner or any Investment
Adviser/Manager or independent legal counsel, as the case may be, is authorized
to make the determination on the basis of its evaluation of the records of the
General Partner, the Partnership or any Investment Adviser/Manager to the
Partnership and of the statements of the party seeking indemnification with
respect to the matter in question and is not required to perform any independent
investigation in connection with any determination. Any party making any such
determination is authorized, however, in its sole discretion, to take such other
actions (including engaging counsel) as it deems advisable in making the
determination.

    (h) Expenses incurred by any person in respect of any Indemnifiable Cost may
be paid by the Partnership before the final disposition of any such claim or
action upon receipt of an undertaking by or on behalf of such person to repay
such amount unless it is ultimately determined as provided in Section 3.10(e) or
(f) that the person is entitled to be indemnified by the Partnership as
authorized in this Section 3.10.

    (i) The rights provided by this Section 3.10 will inure to the benefit of
the heirs, executors, administrators, successors, and assigns of each person
eligible for indemnification under this Agreement.

    (j) The rights to indemnification provided in this Section 3.10 are the
exclusive rights of all Partners to indemnification by the Partnership. No
Partner may have any other rights to indemnification from the Partnership or
enter into, or make any claim under, any other agreement with the Partnership
(whether direct or indirect) providing for indemnification.

    (k) The Partnership may not enter into any agreement with any person
(including, without limitation, any Investment Adviser/Manager, Partner or any
person that is an employee, officer, director, partner or shareholder, or an
Affiliate, Associate or Control Person of any Partner) providing for
indemnification of any such person (i) except as provided for under this Section
3.10, and (ii) unless such agreement provides for a determination with respect
to the indemnification as provided under Section 3.10(f).

    (1) The provisions of this Section 3.10 do not apply to indemnification of
any person that is not at the expense (whether in whole or in part) of the
Partnership.

    (m) The Partnership may purchase and maintain insurance on its own behalf,
or on behalf of any person or entity, with respect to liabilities of the types
described in this Section 3.10. The Partnership may purchase such insurance
regardless of whether the person is acting in a capacity described in this
Section 3.10 or whether the Partnership would have the power to indemnify the
person against such liability under the provisions of this Section.

ARTICLE 4

Small Business Investment Company Matters

 

Section 4.01 SBIC Act.

 

  (a)    The provisions of this Agreement must be interpreted to the fullest
extent possible in a manner consistent with the SBIC Act. If any provision of
this Agreement conflicts with any provision of the SBIC Act (including, without
limitation, any conflict with respect to the rights of SBA or the respective
Partners under this Agreement), the provisions of the SBIC Act will control.

Section 4.02 Consent or Approval of, and Notice to, SBA.

    (a) The requirements of the prior consent or approval of, and notice to, SBA
in this Agreement will be in effect at any time that the Partnership is licensed
as an SBIC or has Outstanding Leverage. These requirements will not be in effect
if the Partnership is not licensed as an SBIC and does not have any Outstanding
Leverage. 

    (b) Except as provided in the SBIC Act, a consent or approval required to be
given by SBA under this Agreement will be deemed given and effective for
purposes of this Agreement only if the consent or approval is:

        (i) given by SBA in writing, and

        (ii) delivered by SBA to the party requesting the consent or approval in
the manner provided for notices to such party under Section 10.04.

Section 4.03 Provisions Required by the SBIC Act for Issuers of Debentures. 

    (a) The provisions of 13 C.F.R. § 107.1810(i) are incorporated by reference
in this Agreement as if fully stated in this Agreement.

    (b) The Partnership and the Partners consent to the exercise by SBA of all
of the rights of SBA under 13 C.F.R. § 107.1810(i), and agree to take all
actions that SBA may require in accordance with 13 C.F.R. § 107.1810(i).

    (c) This Section will be in effect at any time that the Partnership has
outstanding Debentures, and will not be in effect at any time that the
Partnership does not have outstanding Debentures.

    (d) Nothing in this Section may be construed to limit the ability or
authority of SBA to exercise its regulatory authority over the Partnership as a
licensed small business investment company under the SBIC Act.

Section 4.04 Effective Date of Incorporated SBIC Act Provisions. 

    (a)    Any section of this Agreement which relates to Debentures issued by
the Partnership and incorporates or refers to the SBIC Act or any provision of
the SBIC Act (including, without limitation, 13 C.F.R. §§ 107.1810(i), 107.1820,
and 107.1830 - 107.1850)) will, with respect to each Debenture, be deemed to
refer to the SBIC Act or such SBIC Act provision as in effect on the date on
which the Debenture was purchased from the Partnership.

    (b)    Section 4.04(a) will not be construed to apply to:

        (i) the provisions of the SBIC Act which relate to the regulatory
authority of SBA under the SBIC Act over the Partnership as a licensed small
business investment company; or

        (ii) the rights of SBA under any other agreement between the Partnership
and SBA.

    (c) The parties acknowledge that references in this Agreement to the
provisions of the SBIC Act relating to SBA's regulatory authority refer to the
provisions as in effect from time to time.

Section 4.05 SBA as Third Party Beneficiary.

    SBA will be deemed an express third party beneficiary of the provisions of
this Agreement to the extent of the rights of SBA under this Agreement and under
the Act. SBA will be entitled to enforce the provisions (including, without
limitation, the obligations of each Partner to make capital contributions to the
Partnership) for its benefit, as if SBA were a party to this Agreement.

Section 4.06 Interest of the General Partner After Withdrawal.

    If the General Partner withdraws as a general partner of the Partnership by
notice from SBA as provided in the SBIC Act or otherwise, then the entire
interest of the General Partner in the Partnership will be converted into an
interest as a Special Private Limited Partner on the terms provided in Section
8.03(c).

ARTICLE 5

Partners' Capital Contributions

Section 5.01 Capital Commitments. 

    The Private Limited Partners and the General Partner commit to make capital
contributions to the Partnership in the amounts set forth by their respective
names on the signature pages of this Agreement (and its counterparts) executed
by each such Partner.

Section 5.02 Capital Contributions by the Private Limited Partners. 

    (a) All capital contributions to the Partnership by Private Limited Partners
must be in cash, except as provided in this Agreement and approved by SBA.

    (b) The Private Limited Partners will contribute to the capital of the
Partnership in cash the aggregate amount that is set forth opposite their
respective names on Schedule A payable in such installments, as specified by the
General Partner in its sole discretion, from time to time, upon not less than
ten (10) business days' prior notice; provided that the time requirement for
such notice may be waived by a Limited Partner.

Section 5.03 Capital Contributions by the General Partner.

    (a) All capital contributions to the Partnership by the General Partner must
be in cash, except as provided in this Agreement and approved by SBA.

    (b) The General Partner must pay its Commitment in installments at the same
times and in the same percentage amounts as the Private Limited Partners.

    (c) If the Commitment of the General Partner is increased as a result of an
increase in the Commitment of the Private Limited Partners or the admission of
any Additional Private Limited Partner, the amount of the increased Commitment
will be payable by the General Partner in installments, the first of which will
be due upon the effectiveness of the increased Commitment and each subsequent
installment will be due at the same times and in the same percentage amounts as
the Private Limited Partners. 

    (d) When the partnership is liquidated, the General Partner will contribute
to the Partnership within the time period provided in Treasury Regulation
§ 1.704-(1)(b)(2)(ii)(b)(3) an amount equal to any deficit balance in its
Capital Account after giving effect to its contribution of its Commitment as
provided in Section 5.03(a) and (b). 

Section 5.04     No Additional Private Limited Partners.

    No Private Limited Partners other than the Parent Fund may be admitted to
the Partnership.

Section 5.05 Conditions to the Commitments of the General Partner and the
Private Limited Partners.

    (a) Notwithstanding any provision in this Agreement to the contrary, on the
earlier of (i) the completion of the liquidation of the Partnership or (ii) one
year from the commencement of the liquidation, the General Partner and the
Private Limited Partners will be obligated to contribute any amount of their
respective Commitments not previously contributed to the Partnership, if and to
the extent that the other Assets of the Partnership have not been sufficient to
permit at that time the redemption of all Outstanding Leverage, the payment of
all amounts due with respect to the Outstanding Leverage as provided in the SBIC
Act, and the payment of all other amounts owed by the Partnership to SBA.

    (b) The provisions of this Section do not apply to the Commitment of any
Private Limited Partner whose obligation to make capital contributions has been
terminated or who has withdrawn from the Partnership, with the consent of SBA,
under a provision of this Article 5 or Article 8 or any agreement, release,
settlement or action under any provision of this Agreement. No Private Limited
Partner or General Partner has any right to delay, reduce or offset any
obligation to contribute capital to the Partnership called under this Section by
reason of any counterclaim or right to offset by the Partner or the Partnership
against SBA.

Section 5.06 Termination of the Obligation to Contribute Capital.

    (a) Any Private Limited Partner may elect to terminate its obligation in
whole or in part to make a capital contribution required under this Agreement,
or upon demand by the General Partner, will no longer be entitled to make such
capital contribution, if the Private Limited Partner or the General Partner
obtains an opinion of counsel as provided under Section 5.07 to the effect that
making such contribution would require the Private Limited Partner to withdraw
from the Partnership under Section 8.06 through Section 8.10.

    (b) Upon receipt by the General Partner of a notice and opinion as provided
under Section 5.07, unless cured within the period provided under Section 5.08,
the Commitment of the Private Limited Partner delivering the opinion will be
deemed to be reduced by the amount of such unfunded capital contribution and
this Agreement will be deemed amended to reflect a corresponding reduction of
aggregate Commitments to the Partnership.

Section 5.07 Notice and Opinion of Counsel.

    (a) A copy of any opinion of counsel issued as described in Section 5.06 or
Section 8.06 through Section 8.10 must be sent by the General Partner to SBA,
together with (i) the written notice of the election of the Private Limited
Partner or (ii) the written demand of the General Partner, to which the opinion
relates.

    (b) An opinion rendered to the Partnership as provided in Section 5.06 or
Section 8.06 through Section 8.10 will be deemed sufficient for the purposes of
those Sections only if the General Partner and SBA each approve (i) the counsel
rendering the opinion, and (ii) the form and substance of the opinion.

Section 5.08 Cure, Termination of Capital Contributions and Withdrawal.

    (a) Unless within ninety (90) days after the giving of written notice and
opinion of counsel, as provided in Section 5.07, the Private Limited Partner or
the Partnership eliminates the necessity for termination of the obligation of
the Private Limited Partner to make further capital contributions or for the
withdrawal of the Private Limited Partner from the Partnership in whole or in
part to the reasonable satisfaction of the Private Limited Partner and the
General Partner, the Private Limited Partner will withdraw from the Partnership
in whole or in part to the extent required, effective as of the end of the
ninety (90) day period.

    (b) Subject to the provisions of Section 5.10, in its discretion the General
Partner may waive all or any part of the ninety (90) day cure period and cause
such termination of capital contributions or withdrawal to be effective at an
earlier date as stated in the waiver. 

    (c) Any distributions made to a Private Limited Partner with respect to such
Partner's withdrawal under this Section will be subject to and made as provided
in Section 8.11.

Section 5.09 Failure to Make Required Capital Contributions. 

    The Partnership is entitled to enforce the obligations of each Partner to
make the contributions to capital specified in this Agreement. The Partnership
has all rights and remedies available at law or equity if any such contribution
is not so made. 

   Section 5.10 Notice and Consent of SBA with respect to Capital Contribution
Defaults.

    (a) The Partnership must give SBA prompt written notice of any failure by a
Private Limited Partner to make any capital contribution to the Partnership
required under this Agreement when due, which failure continues beyond any
applicable grace period specified in this Agreement.

    (b) Unless SBA has given its prior consent or the provisions of subsection
(c) of this Section have become applicable, the Partnership will not (i) take
any action (including entering into any agreement (whether oral or written),
release or settlement with any Partner) which defers, reduces, or terminates the
obligations of the Partner to make contributions to the capital of the
Partnership, or (ii) commence any legal proceeding or arbitration, which seeks
any such deferral, reduction or termination of such obligation. Without the
consent of SBA (including SBA's deemed consent under subsection (c) of this
Section) no such agreement, release, settlement or action taken will be
effective with respect to the Partnership or any Partner.

    (c) If the Partnership has given SBA thirty (30) days prior written notice
of any proposed legal proceeding, arbitration or other action described under
subsection (b) of this Section with respect to any default by a Private Limited
Partner in making any capital contribution to the Partnership, and the
Partnership has not received written notice from SBA that it objects to the
proposed action within the thirty (30) day period, then SBA will be deemed to
have consented to the proposed Partnership action.

    (d) Any notice given by the Partnership to SBA under this Section must:

        (i) be given by separate copies directed to each of the Investment
Division and the Office of the General Counsel of SBA;

        (ii) explicitly state in its caption or first sentence that the notice
is being given with respect to a specified default by a Private Limited Partner
in making a capital contribution to the Partnership and a proposed legal
proceeding, arbitration, agreement, release, settlement or other action with
respect to that default; and

        (iii) state the nature of the default, the identity of the defaulting
Private Limited Partner, and the nature and terms of the proposed legal
proceeding, arbitration, agreement, release, settlement or other action with
respect to that default.

Section 5.11 Interest on Overdue Contributions.

    In the event that any Private Limited Partner fails to make a contribution
required under this Agreement within ten (10) days after the date such
contribution is due, then the General Partner may, in its sole discretion, elect
to charge such Private Limited Partner interest at an annual rate equal to the
then current prime rate published in The Wall Street Journal dated the business
day preceding the tenth day after such contribution is due, plus two percent
(2%) per annum on the amount due from the date such amount became due until the
earlier of (i) the date on which such payment is received by the Partnership
from such Private Limited Partner or (ii) the date of any notice given to such
Private Limited Partner by the General Partner pursuant to Section 5.12 or
Section 5.13 or (iii) the date on which such payment is received by the
Partnership under Section 5.14 or Section 5.15. Any distributions to which such
Private Limited Partner is entitled shall be reduced by the amount of such
interest, and such interest shall be deemed to be income to the Partnership.

Section 5.12 Termination of a Private Limited Partner's Right to Make Further
Capital Contributions.

    In the event that any Private Limited Partner (other than the Parent Fund)
fails to make a contribution required under this Agreement within ten (10) days
after the date such contribution is due, the General Partner may, in its sole
discretion (but only with the consent of SBA given as provided in Section 5.
10), elect to declare, by notice to such Private Limited Partner, that:

    (a) Such Private Limited Partner's Commitment shall be deemed to be reduced
to the amount of any contributions of capital timely made pursuant to this
Agreement; and

    (b) Upon such notice (i) such Private Limited Partner shall have no right to
make any capital contribution thereafter (including the contribution as to which
the default occurred and any contribution otherwise required to be made
thereafter pursuant to the terms of this Agreement) and (ii) this Agreement
shall be deemed amended to reflect such reduced Commitment.

Section 5.13 Forfeiture of a Private Limited Partner's Interest in the
Partnership. 

    In the event that any Private Limited Partner (other than the Parent Fund)
fails to make a contribution required under this Agreement within ten (10) days
after notice by the General Partner to such Private Limited Partner that it has
failed to make its contribution on the date such contribution was due, the
General Partner may in its sole discretion (but only with the consent of SBA
given as provided in Section 5. 10) elect to declare, by notice of forfeiture to
such Private Limited Partner, that one hundred percent (100%) of the interest of
such Private Limited Partner in the Partnership (including amounts in its
Capital Account as well as any interest in future profits, losses or
distributions of the Partnership) is forfeited, effective as of the date of such
Private Limited Partner's failure to make such required contribution. As of the
date such notice of forfeiture is given (i) the Private Limited Partner shall
cease to be a Partner with respect to such forfeited interest; provided,
however, that such forfeited Private Limited Partner shall cease to have any
liability for the payment of the forfeited percentage of any capital
contributions due at such time or in the future and (ii) the forfeited
percentage of such Private Limited Partner's Capital Account shall be held by
the Partnership and reallocated among the Capital Accounts of the Partners pro
rata in proportion to their respective Percentage Interests (other than such
forfeited Private Limited Partner) to be apportioned among such Private Limited
Partners in accordance with their respective aggregate capital contributions.

Section 5.14 Withholding and Application of a Private Limited Partner's
Distributions.

    No part of any distribution shall be paid to any Private Limited Partner
(other than the Parent Fund) from which there is then due and owing to the
Partnership, at the time of such distribution, any amount required to be paid to
the Partnership. At the election of the General Partner, which it may make in
its sole discretion, the Partnership may either (i) apply all or part of any
such withheld distribution in satisfaction of the amount then due to the
Partnership from such Private Limited Partner or (ii) withhold such distribution
until all amounts then due are paid to the Partnership by such Private Limited
Partner. Upon payment of all amounts due to the Partnership (by application of
withheld distributions or otherwise), the General Partner shall distribute any
unapplied balance of any such withheld distribution to such Private Limited
Partner. No interest shall be payable on the amount of any distribution withheld
by the Partnership pursuant to this Section.

Section 5.15 Required Sale of a Private Limited Partner's Interest in the
Partnership. 

    In the event that any Private Limited Partner (other than the Parent Fund)
fails to make a contribution required under the Agreement within ten(10) days
after notice by the General Partner to such Private Limited Partner that it has
failed to make its contribution on the date such contribution was due, unless
the General Partner has acted pursuant to Section 5.12 or Section 5.13, the
General Partner may, in its sole discretion, (but only with the consent of SBA
given as provided in Section 5.10) elect to declare by notice of default to such
Private Limited Partner that such Private Limited Partner is in default. If the
General Partner so elects to declare such Private Limited Partner in default
(such Private Limited Partner being hereinafter referred to as the "Optionor"),
then the other Private Limited Partners of the Partnership which are not in
default (the "Optionees") and the General Partner shall have the right and
option to acquire one hundred percent (100%) of the Partnership interest, which
shall include one hundred percent (100%) of the Capital Account (the "Optioned
Partnership Interest") of the Optionor on the following terms:

        (a) The General Partner shall give the Partners notice promptly after
declaration of any such default. Such notice shall advise each Optionee of the
portion of the Optioned Partnership Interest available to it and the price
therefor. The portion available to each Optionee shall be that portion of the
Optioned Partnership Interest that bears the same ratio to the Optioned
Partnership Interest as each Optionee's capital contributions to the Partnership
bears to the aggregate capital contributions to the Partnership, exclusive of
the capital contributions to the Partnership of the Optionor. The aggregate
price for the Optioned Partnership Interest shall be the assumption of the
unpaid Commitment obligation (both that portion then due and amounts due in the
future) of the Optionor (the "Option Price"). The Option Price for each Optionee
shall be prorated according to the portion of the Optioned Partnership Interest
purchased by each such Optionee so that the percentage of the unpaid Commitment
assumed by each Optionee is the same as the percentage of the Optioned
Partnership Interest purchased by such Optionee. The option granted hereunder
shall be exercisable by each Optionee in whole only at any time within ten (10)
days of the date of the notice from the General Partner by the delivery to the
General Partner of (i) a notice of exercise of option, and (ii) the capital
contribution due in accordance with Section 5.15 (e)(i). The General Partner
shall forward the above notices of exercise of option received to the Optionor.

        (b) Should any Optionee not exercise its option within the period
provided in subsection (a), the General Partner, within ten (10) days of the end
of such period, shall notify the other Optionees who have previously exercised
their options in full, which Optionees shall have the right and option ratably
among them to acquire the portion of the Optioned Partnership Interest not so
acquired (the "Remaining Portion") within ten (10) days of the date of the
notice specified in this subsection on the same terms as provided in Section
5.15(a).

        (c) The amount of the Remaining Portion not acquired by the Optionees
pursuant to Section 5.15(b) may be acquired by the General Partner within ten
(10) days of the expiration of the period specified in subsection (b) on the
same terms as set forth in Section 5.15(a).

        (d) The amount of the Remaining Portion not acquired by the Optionees
and the General Partner pursuant to Section 5.15(c) may, if the General Partner
deems it in the best interest of the Partnership, be sold to any other persons
on terms not more favorable to such purchaser than the Optionees' option (and
the General Partner may admit any such third party purchaser as a Private
Limited Partner, subject to the approval of SBA, if required under the SBIC
Act). Any consideration received by the Partnership for such amount of the
Optionor's interest in the Partnership in excess of the Option Price therefor
shall be retained by the Partnership and allocated among the Partners' Capital
Accounts in proportion to the respective Partners' capital contributions.

        (e) Upon exercise of any option hereunder, such Optionee (or the General
Partner, if it has exercised its rights pursuant to Section 5.15(c)) shall be
deemed to have assumed the portion of the Optionor's unpaid Commitment that
constitutes the Option Price for the portion of the Optioned Partnership
Interest purchased by such Optionee, and shall be obligated (i) to contribute to
the Partnership the portion of the capital contribution then due from the
Optionor equal to the percentage of the Optioned Partnership Interest purchased
by such Optionee and (ii) to pay the same percentage of any further
contributions which would have otherwise been due from such Optionor.

        (f) Upon the purchase by the General Partner of any portion of the
Optioned Partnership Interest in the Partnership pursuant to Section 5.15(c),
the General Partner shall also become a Private Limited Partner to the extent of
such interest.

        (g) Upon the purchase of any portion of any Optioned Partnership
Interest by an Optionee, the General Partner or other person pursuant to this
Section, the Optionor shall have no further rights or obligations under this
Agreement with respect to such portion.

        (h) Upon the purchase of any portion of the Optioned Partnership
Interest, for purposes of computing such purchaser's aggregate capital
contributions, such purchaser shall be deemed to have aggregate capital
contributions (or the aggregate capital contributions of any Optionee, shall be
increased by an amount) equal to the percentage of the defaulting Private
Limited Partner's aggregate capital contribution which the purchased portion of
the Optioned Partnership Interest represents of the defaulting Private Limited
Partner's entire Partnership interest, and the aggregate capital contributions
of such defaulting Private Limited Partner shall be reduced by a corresponding
amount.

ARTICLE 6

Adjustment of Capital Accounts

Section 6.01 Establishment of Capital Accounts.

    There will be established on the books of the Partnership an Opening Capital
Account for each Partner in accordance with the definitions and methods of
allocation prescribed in this Agreement.

Section 6.02 Time of Adjustment of Capital Accounts.

    Allocations will be made to the Opening Capital Account of each Partner in
accordance with Section 6.03, as of the following dates:

        (i) the close of each fiscal year of the Partnership;

        (ii) the day before the date of the admission of an Additional Private
Limited Partner or increase in any Private Limited Partner's Commitment;

        (iii) the day before the dissolution of the Partnership;

        (iv) the date of a distribution; and

        (v) such other dates as this Agreement may provide.

Section 6.03 Adjustments to Capital Accounts. 

    (a) As of the times stated in Section 6.02, allocations will be made to the
Opening Capital Accounts of the Partners to arrive at each Partner's Closing
Capital Account for the period in the following order and amounts:

        (i) The amount of any capital contributions paid by each Partner during
such period will be credited to the Partner's Opening Capital Account (other
than capital contributions referred to in clause (i) of the definition of
"Opening Capital Account" in Article 1); provided, however, that any such
capital contribution will be credited to the Partner's Opening Capital Account
on the later of the date the capital contribution was due or the date on which
the capital contribution was actually received by the Partnership;

        (ii) The amount of any distributions made to each Partner during the
period will be debited against the Partner's Opening Capital Account;

        (iii) Net Profits will be credited and Net Losses will be debited to the
Opening Capital Accounts of the Partners in proportion to their respective
Percentage Interests.

    (b) Notwithstanding the provisions of Section 6.03(a)(iii):

        (i) at such time as the Capital Account of the General Partner or any
Private Limited Partner is reduced to an amount equal to the aggregate capital
contributions of such Partner (less all distributions to such Partner), the
balance of all Net Losses will be allocated:

            (A) first, to the remaining Capital Accounts of the General Partner
and Private Limited Partners which have not been reduced to zero (to be
apportioned among them in accordance with their respective positive Capital
Accounts); and

            (B) second, after the Capital Accounts of all Private Limited
Partners have been reduced to zero, then the balance to the General Partner.

    (ii) If Net Losses are allocated in accordance with the foregoing clause
(i), any Net Profits that are required to be allocated after such special
allocation of Net Losses as provided in the foregoing clause will be allocated:

           (A) first, to the General Partner until the effect of the special
allocation of Net Losses under clause (i)(B) is reversed and eliminated; and

          (B) second, to the General Partner and Private Limited Partners to
whom the allocation of such Net Losses has been made under clause (i)(A) until
the effect of such special allocation of Net Losses has been reversed and
eliminated.

    (c) To the extent not otherwise accomplished by the provisions of Section
6.03(a) and Section 6.03(b), the Opening Capital Accounts of the Partners will
be adjusted to effect any allocation of any item of income, gain, loss,
deduction or credit to a Partner required by the Code.

Section 6.04 Tax Matters.

    (a) If at the end of a fiscal year of the Partnership, a Private Limited
Partner unexpectedly receives an adjustment, allocation, or distribution
described in clauses (4), (5) and (6) of Treasury Regulation § 1.704-1(b)(2)(ii)
and that adjustment, allocation, or distribution reduces that Private Limited
Partner's Opening Capital Account below zero (0), then the Private Limited
Partner will be allocated all items of income and gain of the Partnership for
that year and for all subsequent fiscal years until the deficit balance has been
eliminated as provided in Treasury Regulation § 1.704-1(b)(2)(ii)(d), as quickly
as possible. If any such unexpected adjustment, allocation or distribution
creates a deficit balance in the Opening Capital Accounts of more than one
Private Limited Partner in any fiscal year, all items of income and gain of the
Partnership for the fiscal year and all subsequent fiscal years will be
allocated among all such Private Limited Partners in proportion to their
respective deficit balances until such balances have been eliminated. If any
allocation is made pursuant to this paragraph, subsequent allocations shall be
made (in a manner consistent with this paragraph) to offset the effects of such
prior allocation. This provision is intended to qualify as a "qualified income
offset" within the meaning of Treasury Regulation § 1.704-1(b)(2)(ii)(d). 

    (b) For Federal, state and local income tax purposes, each item of
Partnership income, credit, gain or loss will be allocated among the Partners as
provided in Section 6.03.

    (c) The General Partner has the power to make such allocations and to take
such actions necessary under the Code or other applicable law to effect and to
maintain the substantial economic effect of allocations made to the Partners
under Section 704(b) of the Code. All allocations made and other actions taken
by the General Partner under this paragraph will be consistent to the maximum
extent possible with the provisions of this Agreement.

    (d) The General Partner is the "tax matters partner," as the term is used in
the Code.

    (e) The General Partner is expressly authorized to (i) elect that the
Partnership be classified as a partnership for federal tax purposes, and (ii) to
make any election or other action on behalf of the Partnership permitted under
the Code with respect to the election of that tax classification.

    (f) The General Partner must keep the Partners informed of all
administrative and judicial proceedings with respect to Partnership tax returns
or the adjustment of Partnership items. Any Partner who enters into a settlement
agreement with respect to Partnership items must promptly give the General
Partner notice of the settlement agreement and terms that relate to Partnership
items.

    (g) Anything contained in this Agreement to the contrary notwithstanding, if
the Partnership is deemed liquidated within the meaning of Treasury Regulation
§ 1.704-1(b)(2)(ii)(g) but has not dissolved under Section 8.01(a), then the
assets of the Partnership will, after provision for payment to creditors, be
deemed distributed to the Partners in accordance with Treasury Regulation
§ 1.704-1(b)(2)(ii)(b)(2) and immediately recontributed to the Partnership and
the General Partner must make the contributions contemplated by Section 5.03(d).

ARTICLE 7

Distributions

Section 7.01 Distributions to Partners. 

    (a) The Partnership may make distributions of cash and/or property, if any,
at such times as the SBIC Act permits and as are determined under this
Agreement. 

    (b) All distributions must be made to the Partners in proportion to their
respective Percentage Interests.

Section 7.02 Distributions of Noncash Assets in Kind. 

    (a) Subject to the provisions of the SBIC Act and the provisions of this
Section, the Partnership at any time may distribute Noncash Assets in kind. 

    (b) Any distribution of Noncash Assets will be made pro rata among the
Partners (based upon the respective amounts which each Partner would be entitled
to receive if the distribution were made in cash) with respect to the
distribution of each Noncash Asset.

    (c) Distributions of Noncash Assets in kind before the dissolution of the
Partnership will be made only (i) if the Noncash Assets are Distributable
Securities or (ii) with the prior approval of the Parent Fund.

    (d) Subject to the SBIC Act, Noncash Assets distributed in kind under this
Section 7.02 will be subject to such conditions and restrictions as are legally
required, including, without limitation, such conditions and restrictions
required to assure compliance by the Partners and/or the Partnership with the
aggregation rules and volume limitations under Rule 144 promulgated under the
Securities Act.

Section 7.03 Distributions Violative of the Act Prohibited. 

    Notwithstanding anything contained in this Agreement to the contrary, no
distribution may be made by the Partnership if and to the extent that such
distribution would violate Section 17-607 of the Act.

ARTICLE 8

Dissolution, Liquidation, Winding Up and Withdrawal

Section 8.01 Dissolution. 

    (a) The Partnership will be dissolved upon the first to occur of the
following:

        (i) subject to Section 8.04 of this Agreement, an event of withdrawal
(as defined in Sections 17-101(3) and 17-402 of the Act) of the General Partner;

        (ii) the later of:

            (A) ten (10) years from the formation of the Partnership; or

            (B) two years after all Outstanding Leverage has matured; or 

        (iii) the determination of the Partners to dissolve and terminate the
Partnership as provided in Section 8.01(c).

    (b) The Partnership will not dissolve upon the withdrawal, dissolution,
bankruptcy, death or adjudication of incompetence or insanity of any Private
Limited Partner.

    (c) The Parent Fund may elect to dissolve the Partnership by giving notice
to each Partner and SBA of the election. Any notice of an election to dissolve
the Partnership may only be given:

        (i) on or after the tenth (10th) anniversary of the date hereof;

        (ii) if all Outstanding Leverage has been repaid or redeemed; and

        (iii) if all amounts due the SBA, its agent or trustee have been paid. 

    Any election to dissolve the Partnership given under this Section 8.01(c)
will not be effective until the later of: (A) thirty (30) days from the date the
notice is given to all parties or (B) the effective date of dissolution stated
in the notice.

    (d) The Parent Fund and the General Partner may elect to extend the date set
forth in Section 8.01(a)(ii)(A) and Section 8.01(c)(i) at any time within ninety
(90) days prior to such date. Such date can be extended by any such election for
up to three (3) additional successive periods of one (1) year each.

 

Section 8.02 Winding Up.

    (a) Subject to the SBIC Act and Section 8.03, when the Partnership is
dissolved, the property and business of the Partnership will be liquidated by
the General Partner or if there is no General Partner or the General Partner is
unable to act, a person designated by the Parent Fund.

    (b) Within a reasonable period (and subject to the requirements of Treasury
Regulation §§ 1.704-1(b)(ii)(g) and 1.704-1(b)(2)(ii)(b)(2)) after the effective
date of dissolution of the Partnership, the affairs of the Partnership will be
wound up and the Partnership's assets will be distributed as follows:

        (i)    First, to the payment of the debts and liabilities of the
Partnership and the expenses of liquidation;

       (ii)    Second, to the setting up of any reserves that the General
Partner may deem reasonably necessary for any contingent or unforeseen
liabilities or obligations of the Partnership or of the Partners arising out of
or in connection with the Partnership;

        (iii)    Third, to the distribution to each of the Partners of the
amounts in their respective Capital Accounts or, if the amount available is less
than the aggregate amount of such Capital Accounts, then pro rata to the
Partners in proportion to the amounts in their respective Capital Accounts; and

      (iv)    Any balance remaining shall be distributed among the Partners, pro
rata in proportion their respective Percentage Interests.

Section 8.03 Withdrawal of the General Partner. 

    (a) Except as provided in Section 4.03, the General Partner may not withdraw
as the general partner of the Partnership without the approval of the Parent
Fund.

    (b) To the extent required by the SBIC Act, no transfer of the interest of
the General Partner, or any portion of such interest, will be effective without
the consent of SBA.

    (c) Subject to the limitations set forth in Section 8.03(b), Section
10.01(b), Section 10.01(d), or Section 10.01(f), any person who acquires the
interest of the General Partner, or any portion of such interest, in the
Partnership, will not be a General Partner but will become a special private
limited partner (a "Special Private Limited Partner") upon his written
acceptance and adoption of all the terms and provisions of this Agreement. Such
person will acquire no more than the interest of the General Partner in the
Partnership as it existed on the date of the transfer, but will not be entitled
to any priority given to the Private Limited Partners, their successors and
assigns, in respect of the interest. No such person will have any right to
participate in the management of the affairs of the Partnership or to vote with
the Private Limited Partners, and the interest acquired by such person will be
disregarded in determining whether any action has been taken by any percentage
of the limited partnership interests. 

    (d) Upon an event of withdrawal of the General Partner without continuation
of the Partnership as provided in Section 8.04, the affairs of the Partnership
will be wound up in accordance with the provisions of Section 8.02.

Section 8.04 Continuation of the Partnership After the Withdrawal of the General
Partner.

    Upon the occurrence of an event of withdrawal (as defined in the Act) of the
General Partner, the Partnership will not be dissolved, if, within ninety (90)
days after the event of withdrawal, the Parent Fund agrees in writing to
continue the business of the Partnership and to the appointment of one or more
additional general partners (subject to the approval of SBA), effective as of
the date of withdrawal of the General Partner.

Section 8.05 Withdrawals of Capital.

    Except as specifically provided in this Agreement, withdrawals by a Partner
of any amount of its Capital Account are not permitted. 

Section 8.06 Withdrawal by ERISA Regulated Pension Plans. 

    Notwithstanding any other provision of this Agreement, any Private Limited
Partner that is (x) an "employee benefit plan" within the meaning of, and
subject to the provisions of, ERISA, or (y) any other Person, any of the assets
of which constitute "plan assets" of an "employee benefit plan" within the
meaning of, and subject to the provisions of, ERISA, may elect to withdraw from
the Partnership in whole or in part, or upon demand by the General Partner must
withdraw from the Partnership in whole or in part, if either such Private
Limited Partner or the General Partner obtains an opinion of counsel to the
effect that, as a result of ERISA, (i) the withdrawal of the Private Limited
Partner from the Partnership to such extent is required to enable the Private
Limited Partner to avoid a violation of, or breach of the fiduciary duties of
any person under ERISA (other than a breach of the fiduciary duties of any such
person based upon the investment strategy or performance of the Partnership) or
any provision of the Code related to ERISA or (ii) all or any portion of the
assets of the Partnership (as opposed to the Private Limited Partner's
partnership interest) constitute assets of the Private Limited Partner for
purposes of ERISA and are subject to the provisions of ERISA to substantially
the same extent as if owned directly by the Private Limited Partner.

Section 8.07 Withdrawal by Government Plans Complying with State and Local Law. 

    Notwithstanding any other provision of this Agreement, any Private Limited
Partner that is a "government plan" within the meaning of ERISA may elect to
withdraw from the Partnership in whole or in part, or upon demand by the General
Partner must withdraw from the Partnership in whole or in part, if either such
Private Limited Partner or the General Partner obtains an opinion of counsel to
the effect that as a result of state statutes, regulations, case law,
administrative interpretations or similar authority applicable to the
"government plan", the withdrawal of such Private Limited Partner from the
Partnership to such extent is required to enable the Private Limited Partner or
the Partnership to avoid a violation (other than a violation based upon the
investment performance of the Partnership) of the applicable state law.

Section 8.08 Withdrawal by Government Plans Complying with ERISA. 

    Notwithstanding any other provision of this Agreement, any Private Limited
Partner that is a "government plan" within the meaning of ERISA may elect to
withdraw from the Partnership in whole or in part, if the "government plan"
obtains an opinion of counsel to the effect that, as a result of ERISA, (i) the
withdrawal of the "government plan" from the Partnership to such extent would be
required if it were an "employee benefit plan" within the meaning of, and
subject to the provisions of, ERISA, to enable the "government plan" to avoid a
violation of, or breach of the fiduciary duties of any person under ERISA (other
than a breach of the fiduciary duties of any such person based upon the
investment strategy or performance of the Partnership) or any provision of the
Code related to ERISA or (ii) all or any portion of the assets of the
Partnership would constitute assets of the "government plan" for the purposes of
ERISA, if the "government plan" were an "employee benefit plan" within the
meaning of, and subject to the provisions of, ERISA and would be subject to the
provisions of ERISA to substantially the same extent as if owned directly by the
"government plan."

Section 8.09 Withdrawal by Tax Exempt Private Limited Partners. 

    Notwithstanding any other provision of this Agreement, any Private Limited
Partner that is exempt from taxation under Section 501(a) or 501(c)(3) of the
Code may elect to withdraw from the Partnership in whole or in part, if the
Private Limited Partner obtains an opinion of counsel to the effect that as a
result of applicable statutes, regulations, case law, administrative
interpretations or similar authority, the withdrawal of the Private Limited
Partner from the Partnership to such extent is required to enable the tax exempt
Private Limited Partner to avoid loss of its tax exempt status under Section
501(a) or 501(c)(3) of the Code.

Section 8.10 Withdrawal by Registered Investment Companies. 

    Notwithstanding any other provision of this Agreement, any Private Limited
Partner that is an "investment company" subject to registration under the
Investment Company Act, may elect to withdraw from the Partnership in whole or
in part, or upon demand by the General Partner must withdraw from the
Partnership in whole or in part, if either such Private Limited Partner or the
General Partner obtains an opinion of counsel to the effect that, as a result of
the Investment Company Act, the withdrawal of the Private Limited Partner from
the Partnership to such extent is required to enable such Private Limited
Partner or the Partnership to avoid a violation of applicable provisions of the
Investment Company Act or the requirement that the Partnership register as an
investment company under the Investment Company Act.

Section 8.11 Distributions on Withdrawal. 

    (a) Subject to the provisions of this Section, upon withdrawal under any
provision of this Agreement, a Private Limited Partner will have the rights to
distributions provided in the Act with respect to distributions to be made to
limited partners upon withdrawal from a limited partnership.

    (b) The Partnership will not make any distribution to any Partner in
connection with its withdrawal under any provision of this Agreement or the Act,
unless the distribution is permitted by the SBIC Act and SBA has given its
consent to such distribution before the distribution is made.

    (c) Except in the case of distributions made as permitted under subsection
(b), the right of any Partner to receive any distribution from the Partnership
as a result of such Partner's withdrawal, including any right any Partner may
have as a creditor of the Partnership with respect to the amount of any such
distribution, is subordinate to any amount due to SBA by the Partnership.

ARTICLE 9

Accounts, Reports and Auditors

Section 9.01 Books of Account.

    (a) The Partnership must maintain books and records in accordance with the
provisions of the SBIC Act regarding financial accounts and reporting and,
except as otherwise provided in this Agreement, generally accepted accounting
principles.

    (b) The books and records of the Partnership must be kept at the principal
place of business of the Partnership. Each Partner will have access, upon
reasonable notice and during regular business hours, to all books and records of
the Partnership for all proper purposes as a Partner of the Partnership. Each
Partner will have the right to receive copies of such books and records, subject
to payment of the reasonable costs of such copies. 

    (c) The Partnership will not be required to disclose, however, any
confidential or proprietary information received by the Partnership in
connection with its investment operations, except for any disclosure to SBA
required by the SBIC Act. 

Section 9.02 Audit and Report.

    (a) The financial statements of the Partnership must be audited and
certified as of the end of each fiscal year by a firm of independent certified
public accountants selected by the Partnership.

    (b) Within ninety (90) days of the end of each fiscal year, the Partnership
must prepare and mail to each Partner a report prepared in accordance with the
provisions of the SBIC Act regarding financial reporting, setting forth as at
the end of the fiscal year: 

        (i) a balance sheet of the Partnership;

        (ii) a statement of operations for the year;

        (iii) a statement of cash flows;

        (iv) a statement of changes in partners' capital, and such Partner's
Closing Capital Account;

        (v) a statement of the Assets, valued as provided under this Agreement;

        (vi) the amount of such Partner's share in the Partnership's taxable
income or loss for the year, in sufficient detail to enable it to prepare its
Federal, state and other tax returns;

        (vii) any other information the General Partner, after consultation with
any Private Limited Partner requesting the same, deems necessary or appropriate;

        (viii) upon request by any Partner, such other information as is needed
by such Partner in order to enable it to file any of its tax returns; and

        (ix) such other information as any Partner may reasonably request for
the purpose of enabling it to comply with any reporting or filing requirements
imposed by any statute, rule, regulation or otherwise by any governmental agency
or authority.

    The items set forth in clauses (i), (ii), (iii), (iv), (v) and (vi) of this
Section 9.02(b) will be certified by the firm of independent certified public
accountants selected by the Partnership

    (c) Within forty-five (45) days of the end of each of the fiscal quarters,
the Partnership will prepare and mail to each Partner a report of the General
Partner prepared in accordance with the provisions of the SBIC Act regarding
financial reporting setting forth the information described in Section
9.02(b)(i) - (iv), identifying the securities held by the Partnership and
stating the amount of each security held and the cost and value thereof as
determined under Section 3.08.

Section 9.03 Fiscal Year.

    The fiscal year of the Partnership will be a twelve-month year (except for
the first and last partial years, if any) ending on December 31. 

 

ARTICLE 10

Miscellaneous

Section 10.01 Assignability. 

    (a) No Private Limited Partner may assign, pledge or otherwise grant a
security interest in its or his interest in the Partnership or in this
Agreement, except with the prior written consent of the General Partner (which
consent may be withheld in the absolute discretion of the General Partner). 

     (b) No General Partner or Private Limited Partner may transfer any interest
of ten percent (10%) or more in the capital of the Partnership without the prior
approval of SBA. 

    (c) The General Partner may not assign, pledge or otherwise grant a security
interest in its interest in the Partnership or in this Agreement, except with
the prior consent of SBA and the prior approval of the Parent Fund.

    (d) No transfer of any interest in the Partnership will be allowed if such
transfer or the actions to be taken in connection with that transfer would:

        (i) result in any violation of the SBIC Act;

        (ii) result in a violation of any law, rule or regulation by the
Partnership;

        (iii) cause the termination or dissolution of the Partnership;

        (iv) cause the Partnership to be classified other than as a partnership
for Federal income tax purposes;

        (v) result in the transfer of a limited partnership interest with a cost
of less than $20,000 or cause the Partnership to be classified as a "publicly
traded partnership" within the meaning of Section 469(k)(2) of the Code or for
the purposes of Section 512(c)(2) of the Code;

        (vi) result in a violation of the Securities Act;

        (vii) require the Partnership to register as an investment company under
the Investment Company Act;

        (viii) require the Partnership, the General Partner or the Investment
Adviser/Manager to register as an investment adviser under the Investment
Advisers Act; or

        (ix) result in a termination of the Partnership for Federal or state
income tax purposes.

    (e) If a natural person Private Limited Partner dies or become
incapacitated, his or her legal representative will, upon execution of a
counterpart of this Agreement, be substituted as a Private Limited Partner,
subject to all the terms and conditions of this Agreement. 

    (f) Any transferee of any interest in the Partnership by a transfer in
compliance with this Section will become a substituted Partner under this
Agreement upon delivery and execution of a counterpart of this Agreement, will
have the same rights and responsibilities under this Agreement as its assignor
and will succeed to the Capital Account and balances thereof. 

Section 10.02 Binding Agreement.

    Subject to the provisions of Section 10.01, this Agreement is binding upon,
and inures to the benefit of, the heir, successor, assign, executor,
administrator, committee, guardian, conservator or trustee of any Partner.

Section 10.03 Gender.

    As used in this Agreement, masculine, feminine and neuter pronouns include
the masculine, feminine and neuter; and the singular includes the plural.

Section 10.04 Notices.

    (a) All notices under this Agreement must be in writing and may be given by
personal delivery, telex, telegram, private courier service or registered or
certified mail.

    (b) A notice is deemed to have been given:

        (i) by personal delivery, telex, telegram, or private courier service,
as of the day of delivery of the notice to the addressee; and

        (ii) by mail, as of the fifth (5th) day after the notice is mailed.

    (c) Notices must be sent to:

        (i) the Partnership, at the address of the General Partner in the
Certificate of Limited Partnership, or such other address or addresses as to
which the Partners have been given notice;

        (ii) the Private Limited Partners, at the addresses in Schedule A
attached to this Agreement (as Schedule A may be amended from time to time) or
such other addresses as to which the Partnership has been given notice; and

        (iii) SBA, at the address of the Investment Division of SBA and, if so
required under any Section of this Agreement, in duplicate at the address of the
Office of the General Counsel of SBA.

Section 10.05 Consents and Approvals.

    A consent or approval required to be given by any party under this Agreement
will be deemed given and effective for purposes of this Agreement only if the
consent or approval is:

        (i) given by such party in writing, and

        (ii) delivered by such party to the party requesting the consent or
approval in the manner provided for notices to such party under Section 10.04.

Section 10.06 Counterparts.

    This Agreement and any amendment to this Agreement may be executed in more
than one counterpart with the same effect as if the parties executed one
counterpart as of the day and year first above written on this Agreement or any
such amendment. To be effective, each separate counterpart must be executed by
the General Partner.

Section 10.07 Amendments.

    (a) This Agreement may not be amended except by an instrument in writing
executed by the Parent Fund and the General Partner, and approved by SBA. 

    (b) In addition to the requirements in Section 10.06 and Section 10.07(a),
any amendment that:

        (i) increases the amount of a Private Limited Partner's Commitment
requires that Partner's consent;

        (ii) may cause a Private Limited Partner to become liable as a general
partner of the Partnership requires the written consent of all Partners;

        (iii) amends this Section requires the consent of all Partners; or

        (iv) dilutes the relative interest of any Private Limited Partner in the
profits or capital of the Partnership or in allocations or distributions
attributable to the ownership of such interest requires that Partner's consent;

    (c) Each Private Limited Partner consents to:

        (i) any amendment of this Agreement or the Certificate of Limited
Partnership to comply with or conform to any amendments of applicable laws
governing the Partnership; and

        (ii) any amendment to this Agreement that the General Partner reasonably
determines is necessary or advisable in connection with Partnership's efforts to
receive a license to operate as an SBIC; provided, however, that such consent
with respect to any such amendment is contingent on the General Partner having
reasonably determined that such amendment will not subject any Private Limited
Partner (or any limited partner of any Private Limited Partner) to any material
adverse economic consequences, alter or waive the right to receive allocations
and distributions that otherwise would be made to any Private Limited Partner
(or any limited partner of any Private Limited Partner), or alter or waive in
any material respect the duties and obligations of the General Partner to the
Partnership or any Private Limited Partner (or any limited partner of any
Private Limited Partner).

    (d) The General Partner must distribute to each Private Limited Partner and
SBA a copy of:

        (i) any Certificate of Amendment to the Certificate of Limited
Partnership, and

        (ii) any amendment to this Agreement.

    (e) Copies of any Certificate of Amendment to the Certificate of Limited
Partnership, and any amendment to this Agreement must be distributed in the same
manner as provided for notices in Section 10.04.

Section 10.08 Power of Attorney.

    (a) Each Private Limited Partner appoints the General Partner, and each
general partner of the General Partner, as its true and lawful representative
and attorney-in-fact, in its name, place and stead, to make, execute, sign and
file:

        (i) any amendments of this Agreement necessary to reflect an amendment
of this Agreement adopted by the Partners under Section 10.07; and

        (ii) all instruments, documents and certificates which, from time to
time, may be required by the law of the United States of America, the State of
Delaware or any other state in which the Partnership determines to do business,
or any political subdivision or agency thereof, to execute, implement and
continue the valid and subsisting existence of the Partnership and in
conformance to the provisions of this Agreement.

    (b) The General Partner and its partners, as representatives and
attorneys-in-fact, do not have any rights, powers or authority to amend or
modify this Agreement when acting in such capacity, except as expressly provided
in this Agreement. This power of attorney is coupled with an interest and will
continue in full force and effect notwithstanding the subsequent death or
incapacity of such party.

Section 10.09 Applicable Law.

    This Agreement is governed by, and construed in accordance with, applicable
Federal laws and the laws of the State of Delaware.

Section 10.10 Severability.

    If any one or more of the provisions contained in this Agreement, or any
application of any such provision, is invalid, illegal, or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained in this Agreement and all other applications of any such provision
will not in any way be affected or impaired.

Section 10.11 Entire Agreement.

    This Agreement, and all other written agreements executed by or on behalf of
the General Partner and/or the Private Limited Partners and executed or approved
by SBA, up to and including the date of this Agreement (such other written
agreements, collectively, the "SBA Agreements"), state the entire understanding
among the parties relating to the subject matter of this Agreement and the SBA
Agreements. Any and all prior conversations, correspondence, memoranda or other
writings are merged in, and replaced by this Agreement and the SBA Agreements,
and are without further effect on this Agreement and the SBA Agreements. No
promises, covenants, representations or warranties of any character or nature
other than those expressly stated in this Agreement and the SBA Agreements have
been made to induce any party to enter into this Agreement or any SBA Agreement.

    IN WITNESS WHEREOF, the parties to this Agreement have executed this
Agreement as of the date first written above.

General Partner:

Rand Capital Management, LLC

 

By:   /s/ Allen F. Grum, Jr.
      Name:  Allen F. Grum, Jr.
      Title:     President

Commitment Amount:

$50,000

 

Private Limited Partner:

Rand Capital Corporation

 

By:  /s/ Allen F. Grum, Jr.
     Name:  Allen F. Grum, Jr.
     Title:     President

Commitment Amount:

$5,000,000

Address of Private Limited Partner:

2200 Rand Building
Buffalo, NY 14203

 

Federal Tax I.D. Number:
                                                           

SCHEDULE A

Partners and Commitments

Partners: Commitments  

 

  Private Limited Partner:   Rand Capital Corporation
2200 Rand Building
Buffalo, NY 14203 $5,000,000      

 

  General Partner:   Rand Capital Management, LLC
2200 Rand Building
Buffalo, NY 14203 $50,000     TOTAL $5,050,000    

 

EXHIBIT I

Valuation Guidelines

 

General

The General Partner has sole responsibility for determining the Asset Value of
each of the Loans and Investments and of the portfolio in the aggregate.

Loans and Investments shall be valued individually and in the aggregate at least
semi-annually - as of the end of the second quarter of the fiscal year-end and
as of the end of the fiscal year. Fiscal year-end valuations are audited as set
forth in SBA's Accounting Standards and Financial Reporting Requirements for
Small Business Investment Companies.

This Valuation Policy is intended to provide a consistent, conservative basis
for establishing the Asset Value of the portfolio. The Policy presumes that
Loans and Investments are acquired with the intent that they are to be held
until maturity or disposed of in the ordinary course of business.

Interest-Bearing Securities

Loans shall be valued in an amount not greater than cost with Unrealized
Depreciation being recognized when value is impaired. The valuation of loans and
associated interest receivables on interest-bearing securities should reflect
the portfolio concern's current and projected financial condition and operating
results, its payment history and its ability to generate sufficient cash flow to
make payments when due.

When a valuation relies more heavily on asset versus earnings approaches,
additional criteria should include the seniority of the debt, the nature of any
pledged collateral, the extent to which the security interest is perfected, the
net liquidation value of tangible business assets, and the personal integrity
and overall financial standing of the owners of the business. In those instances
where a loan valuation is based on an analysis of certain collateralized assets
of a business or assets outside the business, the valuation should, at a
minimum, consider the net liquidation value of the collateral after reasonable
selling expenses. Under no circumstances, however, shall a valuation based on
the underlying collateral be considered as justification for any type of loan
appreciation.

Appropriate unrealized depreciation on past due interest which is converted into
a security (or added to an existing security) should be recognized when
collection is doubtful. Collection is presumed to be in doubt when one or both
of the following conditions occur: (i) interest payments are more than 120 days
past due; or (ii) the small concern is in bankruptcy, insolvent, or there is
substantial doubt about its ability to continue as a going concern.

The carrying value of interest bearing securities shall not be adjusted for
changes in interest rates.

Valuation of convertible debt may be adjusted to reflect the value of the
underlying equity security net of the conversion price.

Equity Securities - Private Companies

Investment cost is presumed to represent value except as indicated elsewhere in
these guidelines.

Valuation should be reduced if a company's performance and potential have
significantly deteriorated. If the factors which led to the reduction in
valuation are overcome, the valuation may be restored.

The anticipated pricing of a Small Concern's future equity financing should be
considered as a basis for recognizing Unrealized Depreciation, but not for
Unrealized Appreciation. If it appears likely that equity will be sold in the
foreseeable future at a price below the Licensee's current valuation, then that
prospective offering price should be weighed in the valuation process.

Valuation should be adjusted to a subsequent significant equity financing that
includes a meaningful portion of the financing by a sophisticated, unrelated new
investor. A subsequent significant equity financing that includes substantially
the same group of investors as the prior financing should generally not be the
basis for an adjustment in valuation. A financing at a lower price by a
sophisticated new investor should cause a reduction in value of the prior
securities.

If substantially all of a significant equity financing is invested by an
investor whose objectives are in large part strategic, or if the financing is
led by such an investor, it is generally presumed that no more than 50% of the
increase in investment price compared to the prior significant equity financing
is attributable to an increased valuation of the company.

Where a company has been self-financing and has had positive cash flow from
operations for at least the past two fiscal years, Asset Value may be increased
based on a very conservative financial measure regarding P/E ratios or cash flow
multiples, or other appropriate financial measures of similar publicly-traded
companies, discounted for illiquidity. Should the chosen valuation cease to be
meaningful, the valuation may be restored to a cost basis, or if of significant
deterioration in performance or potential, to a valuation below cost to reflect
impairment.

With respect to portfolio companies that are likely to face bankruptcy or
discontinue operations for some other reason, liquidating value may be employed.
This value may be determined by estimating the realizable value (often through
professional appraisals or firm offers to purchase) of all assets and then
subtracting all liabilities and all associated liquidation costs.

Warrants should be valued at the excess of the value of the underlying security
over the exercise price.

Equity Securities - Public Companies

Public securities should be valued as follows: (a) For over-the-counter stocks,
take the average of the bid price at the close for the valuation date and the
preceding two days, and (b) for listed stocks, take the average of the close for
the valuation date and the preceding two days.

The valuation of public securities that are restricted should be discounted
appropriately until the securities may be freely traded. Such discounts
typically range from 10% to 40%, but the discounts can be more or less,
depending upon the resale restrictions under securities laws or contractual
agreements.

When the number of shares held is substantial in relation to the average daily
trading volume, the valuation should be discounted by at least 10%, and
generally by more.