Document:

Exhibit 10.3

 

Portions of this exhibit
have been omitted and filed separately pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended.  Omissions are designated as [***].

 

Execution Copy

 

Deerfield Pegasus Loan
Capital LP

DPLC General Partner LLC

Deerfield Capital Corp.

Deerfield Capital Management
LLC

 

April 9, 2009

 

Pegasus Deerfield (AIV), LLC

PGS Management, LLC

 

Ladies and Gentlemen:

 

This letter agreement (this “Agreement”)
records our understanding regarding certain matters relating to the acquisition
by Pegasus Deerfield (AIV), LLC or an Affiliate thereof (collectively, the “Investor”) of an
interest in any Deerfield Pegasus Fund GP or any Deerfield Pegasus Fund, the
consideration of which is the Investors’ acquisition of a limited partner
interest in Deerfield Pegasus Loan Capital LP,
a Delaware  limited partnership (“Fund
I”), pursuant to (a) the Amended and Restated Limited Partnership
Agreement of Fund I, dated April 9,
2009 (as amended from time to time, the “Fund I LPA”), among DPLC General Partner LLC as
general partner of Fund I (“DLC GP”), Investor and the other limited
partners of Fund I and (b) the Subscription Agreement executed by
Investor, dated April 9, 2009.  In
consideration of the foregoing, the parties hereto hereby agree as follows:

 

1.             Definitions.  As used herein, the
capitalized terms listed below shall have the following respective meanings:

 

Acquiring
Person:  the meaning set forth in Section 3(d).

 

Advisory
Agreement:  the investment advisory agreement of even
date herewith by and between Fund I and DCM as may be amended from time to
time.

 

Affirmation:  the meaning set forth in Section 3(d).

 

Agreement:  the
meaning set forth in the first paragraph of this Agreement.

 

Affiliate: when used with reference to a specified
Person, any Person that directly, or indirectly through one or more
intermediaries, Controls, is Controlled by, or is under common Control with, such
Person.

 

Competitive
Opportunity: the
meaning set forth in Section 24.

 

Confidential
Information:  the meaning set forth in Section 12(b).

 

1

 

Control
(and its corollaries):  the possession, directly or indirectly, of
the power to cause the direction of the management and policies of a Person,
whether through the ownership of voting securities or otherwise.

 

Covered
Managed Account: any
managed account for a single investor or a group of affiliated investors for
which DCM, DFR, any DFR Affiliate or any DFR Related Entity provides investment
advisory services, on a discretionary basis, in return for a fee and which
invests primarily in broadly syndicated bank loans to non-investment grade
borrowers and bonds issued by non-investment grade borrowers but shall exclude (i) any
collateralized debt obligation or collateralized loan obligation and (ii) any
managed account for a single investor or a group of affiliated investors that
has an investment strategy that is materially different than the investment
strategy of Fund I.

 

Covered
Loan Fund: any
alternative investment fund with or targeting third party investors for which
DCM, DFR, any DFR Affiliate or any DFR Related Entity provides investment
advisory services, on a discretionary basis, in return for a fee and which
invests primarily in broadly syndicated bank loans to non-investment grade
borrowers and bonds issued by non-investment grade borrowers but shall exclude (i) any
collateralized debt obligation or collateralized loan obligation, (ii) any
fund that was originally advised by an advisor (other than DCM or an Affiliate
of DCM) and for which DCM becomes the replacement advisor and (iii) any
managed account.

 

DCM: 
Deerfield Capital Management LLC, a Delaware limited liability company.

 

Deerfield
Pegasus Fund:  Any Covered Loan Fund in which Investor has
an economic interest (other than through the Warrants) other than an Excluded
Fund and Fund I.

 

Deerfield
Pegasus Fund Documents:  the limited partnership agreement of each
Deerfield Pegasus Fund, the Deerfield Pegasus Fund GP Agreements, the
investment advisory agreement of each Deerfield Pegasus Fund, the subscription
agreement of any Deerfield Pegasus Fund (if any) and any side letter agreement
or other similar agreement (including, without limitation, this Agreement) as
such agreements may be amended from time to time.

 

Deerfield Pegasus Fund GP:  the
general partner of any Deerfield Pegasus Fund.

 

Deerfield
Pegasus Fund GP Agreement:  any limited liability company
agreement of any Deerfield Pegasus Fund GP.

 

Deerfield
Pegasus Fund Investment Advisor:  the meaning set forth in Section 7(d).

 

DFR: 
Deerfield Capital Corp., a Maryland corporation and any successor
thereto.

 

DFR
Affiliate:  any direct or indirect subsidiary of DFR.

 

DFR
Common Stock:  the common stock, par value $.01 per share,
of DFR.

 

DFR
Entities: the meaning
set forth in Section 24.

 

DFR
Related Entity: 
any Affiliate of DFR for whom one or more of the Key Investment Professionals
renders services or which uses the track record of any Covered Loan Fund.

 

DLC
GP:  the meaning set forth in the first paragraph
of this Agreement.

 

 

DLC
GP Agreement:  the amended and restated limited liability
company agreement of DLC GP dated as of the date hereof, as may be amended from
time to time.

 

Excluded
Fund: the meaning set
forth in Section 7(a)(5).

 

Fund I:  the
meaning set forth in the first paragraph of this Agreement.

 

Fund II:  the
meaning set forth in Section 7(a)(1).

 

Fund III:  the
meaning set forth in Section 7(a)(2).

 

Fund IV:  the
meaning set forth in Section 7(a)(3).

 

Fund
I LPA:  the meaning set forth in the first paragraph
of this Agreement.

 

Fund
I Side Letter:  the meaning set forth in Section 8(c)(6).

 

Initial
Closing Date:  The date on which Investor or any Affiliate
thereof makes the Initial Investor Contribution and acquires a limited partner
interest in Fund I and a limited liability company interest in the DLC GP.

 

Initial Investor Contribution:  $5,000,000.

 

Investor:  the
meaning set forth in the first paragraph of this Agreement.

 

Investor Parent: Pegasus
Partners IV, L.P.

 

Investor
Permitted Transferee:  the meaning set forth in Section 19.

 

Key
Investment Professionals:  the meaning set forth in Section 11(b).

 

Lender
Transfer:  any pledge, hypothecation or other customary
encumbrance of (i) an interest in DCM to or by the current lenders of DFR in
connection with the debt of DFR and the DFR Affiliates existing as of the date
hereof or any DFR Affiliate or upon the refinancing of such existing
debt, and (ii)  an interest in any non-material assets
of DCM (currently owned or acquired in the future) in connection with
the purchase of such assets and to secure the repayment of the purchase price
therefor, and which purchase and corresponding pledge, hypothecation or
encumbrance occurs in the ordinary course, consistent with past practice.

 

Minimum Investment:  the meaning
set forth in Section 7(a).

 

Pegasus
Entities: the meaning
set forth in Section 24.

 

Person:  any
corporation, association, joint venture, partnership, limited liability
company, government or political subdivision thereof, government agency, trust
or other entity or an individual.

 

PM:  PGS
Management, LLC, a Delaware  limited
liability company.

 

Registration
Rights Agreement:  the registration rights agreement of even
date herewith by and between Investor and DFR in respect of the DFR Common
Stock underlying the Warrants.

 

 

Restrictive Covenant
Agreements:  the meaning set forth in the Fund I Side
Letter.

 

Subsequent
Funds:  the meaning set forth in Section 7(a)(4).

 

Tag
Along Right:  the meaning set forth in Section 19.

 

Transaction
Documents:  the Deerfield Pegasus Fund Documents, the
Registration Rights Agreement, any of the Warrants and any other document,
instrument or certificate executed and delivered in connection with any of the
foregoing or the consummation of the Transactions.

 

Transaction
Information:  the meaning set forth in Section 12(a).

 

Transactions:  the
transactions contemplated by the Transaction Documents.

 

Transfer:  any
direct or indirect sale, transfer, assignment, gift, distribution,
conveyance,  issuance, pledge, hypothecation or other
encumbrance or disposition (whether voluntary or involuntary or by operation of
law), whether in one or a series of transactions and whether by means of a
direct purchase, merger, recapitalization, reorganization, consolidation,
refinancing or otherwise.  For the
avoidance of doubt, the Transfer of an asset of a Person shall be deemed to
have occurred upon a direct or indirect change in Control of the beneficial
ownership of such Person.

 

Warrants:  (a) the
warrant to purchase 2,500,000 shares of DFR Common Stock at $4.25 per share,
and (b) the warrant to purchase 500,000 shares of DFR Common Stock at
$10.00 per share, in each case as issued to Investor as of the date hereof.

 

2.             Placement
Fees.

 

To the
extent there are any
third party placement fees and expenses incurred in respect of any Deerfield
Pegasus Fund, such fees
shall be (i) paid by such Deerfield Pegasus Fund and offset against the
management fees received by DCM (or if applicable, any Affiliate thereof) in
respect of third party investors of such Deerfield Pegasus Fund (and reduce pro
rata payments under Section 7 hereof) or (ii) be borne by each
of DCM and PM on a pro rata basis by deducting the portion of the
management fee or incentive allocation paid
to the third party placement agent prior to calculating the incentive
allocation or consulting fee payable or allocable to Investor.

 

3.             Investor
Approval.  Each of the following actions may not be
taken without the prior written consent of Investor:

 

(a)           Any action by DFR or any DFR
Affiliate that could have a material adverse effect on (i) any Deerfield
Pegasus Fund, any Deerfield Pegasus Fund GP, the Investor or any Affiliate
thereof that has an interest in any Deerfield Pegasus Fund or Deerfield Pegasus
Fund GP; or (ii) any other Affiliate of the Investor to which DFR or any
DFR Affiliate has knowledge and to which DFR or any DFR Affiliate has knowledge
that such action could have a material adverse effect on such Affiliate.

 

(b)           [Intentionally Omitted]

 

(c)           Any amendment to any advisory
agreement in respect of any Deerfield Pegasus Fund that could have an adverse
effect on the Investor with respect to its interests in such Deerfield Pegasus
Fund.

 

 

(d)           (i) 
the Transfer to any Person of
all or a substantial segment of the properties and assets of DCM (for the
avoidance of doubt, any Transfer of the Advisory Agreement shall be deemed a
Transfer of a substantial segment of the properties and assets of DCM); or (ii) the
Transfer of any debt or equity securities or other interests in DCM, other than
in each case, to a Person (A) who is a wholly-owned subsidiary of DFR, or (B) who
is also acquiring 51% or more of the properties and assets of DFR (each Person
acquiring properties and assets or securities or other interests in any
Transfer of the type described in (i) or (ii) above (whether or not
Investor consent is required), an “Acquiring Person”).  Each Acquiring Person in connection with the
direct Transfer of any Transaction Document shall execute and deliver to
Investor such documents as Investor may reasonably request wherein such
Acquiring Person agrees to assume and perform all of the respective obligations
of DCM and DFR under the Transaction Documents, as applicable (an “Affirmation”).  Further, the transferor in any Transfer to an
Acquiring Person shall remain liable for the performance of any and all
obligations of such transferor under the Transaction Documents so
Transferred.  DFR hereby represents that
the debt of DFR and the DFR Affiliates as of December 31, 2008 is as set
forth in DFR’s audited consolidated balance sheet as of December 31, 2008,
a true, correct and complete copy of which has been provided to Investor, and
that the amount of the debt of DFR and the DFR Affiliates existing as of the
date hereof has not materially increased from the amount of consolidated debt
reflected on such balance sheet. 
Notwithstanding the foregoing, neither (A) a Lender Transfer, nor (B) the
acquisition of an equity or other interest in DFR by a Person who is not also
directly acquiring an equity or other interest in DCM or any of its
Affiliates (other than DFR), shall be a Transfer that requires consent of
Investor or an Affirmation pursuant to this Section 3(d).

 

(e)           The exercise by any of a Deerfield Pegasus
Fund GP, DCM or any Affiliate thereof of any power of attorney on behalf of
Investor or any Affiliate thereof that (1) correlates to actions that are
not ministerial in nature, (2) are material to any Deerfield Pegasus Fund
GP or any Deerfield Pegasus Fund or (3) could have an adverse effect on
any of the Investor or any of its Affiliates.

 

(f)            [Intentionally Omitted]

 

4.             Additional Governance Matters.

 

(a)           [Intentionally
Omitted]

 

(b)           [Intentionally
Omitted]

 

(c)           None
of DCM, DFR or any DFR Affiliate shall amend or waive any provision of any
Restrictive Covenant Agreement without the consent of Investor.

 

(d)           [Intentionally
Omitted]

 

(e)           [Intentionally
Omitted]

 

(f)            [Intentionally
Omitted]

 

(g)           [Intentionally Omitted]

 

(h)           [Intentionally
Omitted]

 

(i)            [Intentionally
Omitted]

 

(j)            [Intentionally
Omitted]

 

 

Portions of this exhibit
have been omitted and filed separately pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended.  Omissions are designated as [***].

 

5.             [Intentionally Omitted]

 

6.             Mutual Non-Disparagement.  Each of Investor and DFR shall not make, and
Investor shall cause its Affiliates not to make, and DFR shall cause its
Affiliates not to make, any comment, statement or other communication that
shall disparage the good name or business or professional reputation of the other
party or such party’s Affiliates.  To the
fullest extent permitted by law, the only exception to the foregoing shall be
those circumstances in which a party is obligated to provide information in
response to an investigation by a duly authorized governmental entity in
connection with legal proceedings, and then only after consultation with the
other parties to the extent that such consultation is reasonably possible and,
in such event, only to the extent that such responses shall be true and
correct.

 

7.             Subsequent Funds.

 

(a)           Provided
that the average invested capital of Investor and its Affiliates in Fund I
during the period commencing on the date that is six months following the
Initial Closing Date and terminating on the date that is two years following
the Initial Closing Date is at least equal to $[***] (the “Minimum
Investment”):

 

(1)           Investor
and/or its Affiliates shall be entitled to receive [***]% of
the incentive allocation and the advisory fees received by DFR or any Affiliate
thereof by the first Covered Loan Fund formed
subsequent to Fund I (“Fund II”).

 

(2)           Investor
and/or its Affiliates shall be entitled to receive [***]% of
the incentive allocation and the advisory fees received by DFR or any Affiliate
thereof by the first Covered Loan Fund formed
subsequent to Fund II (“Fund III”).

 

(3)           Investor
and/or its Affiliates shall be entitled to receive [***]% of
the incentive allocation and the advisory fees received by DFR or any Affiliate
thereof the first Covered Loan Fund formed
subsequent to Fund III (“Fund IV”).

 

(4)           Investor
and/or its Affiliates shall be entitled to receive [***]% of
the incentive allocation and the advisory fees received by DFR or any Affiliate
thereof by all subsequent Covered Loan
Funds formed subsequent to Fund IV that commence marketing subsequent to
Fund IV (the funds described in paragraphs (1)-(4) of this Section 7(a),
the “Subsequent Funds”).

 

(5)           The
rights granted to Investor and/or its Affiliates pursuant to clauses (1) through
(4) of this Section 7(a) shall not apply to any Covered Loan
Fund that commences marketing after the [***] anniversary of the period ending on the
12 month anniversary of the Initial Closing Date (any such Covered Loan Fund,
an “Excluded Fund”).

 

(6)           The
rights granted to Investor and/or its Affiliates pursuant to this clause (a) are
not
contingent upon Investor or any of its Affiliates making an investment in any
of the Subsequent Funds referred to in clauses (a)(1) through (a)(4).

 

(7)           Notwithstanding
anything to the contrary set forth in clauses (1) through (6) above,
the shares of incentive allocations and advisory fees granted to Investor
and/or its Affiliates

 

 

(described in clauses (1) through
(4) above) shall be net of (i) any third party placement fees or
expenses paid in respect of third party investors in the applicable Deerfield
Pegasus Fund, and (ii) any portion of (A) the incentive allocation
for a Deerfield Pegasus Fund made to an unaffiliated third party seed capital
investor in such Deerfield Pegasus Fund and (B) the management fees for
such Deerfield Pegasus Fund paid to such unaffiliated third party seed capital
investor, provided that in
respect of clauses (i) and (ii) of this Section 7(a)(7), none of
DFR or any of its Affiliates shall share in any of such placement fees, incentive
allocations or management fees allocated to such third party placement agents
or seed capital investors.

 

(8)           In the event that on the second annual anniversary of the Initial
Closing Date Investor and its Affiliates have failed to maintain the Minimum
Investment, Investor and its Affiliates shall forfeit any interests and/or
rights granted pursuant to Section 7(a) and return any amounts
received in connection therewith (less any taxes paid on such amounts).

 

(b)           DFR
shall promptly notify Investor in writing 60 days prior to the commencement of
the marketing period for Fund III (which, for the avoidance of doubt, shall
not, without Investor’s consent, occur prior to the earlier of (1) the
fourth anniversary of the last day of the month of Fund II’s final closing, (2) the
fifth anniversary of the last day of the month of Fund II’s initial closing and
(3) in the event Fund II does not have an indefinite investment period,
the termination of Fund II’s investment period, provided that in no event shall such marketing period
commence prior to the second anniversary of the Initial Closing Date).  On or prior to the 30th day following the date of such notice,
Investor shall elect in writing whether to retain or forfeit the Warrants.  If Investor elects to retain the Warrants,
regardless of whether Investor chooses to exercise the Warrants at such time,
Investor shall forfeit (1) its rights pursuant to clauses (a)(2), (a)(3) and
(a)(4) of this Section 7 and (2) upon the liquidation of Fund
II, its consent rights set forth in Section 3(d).

 

(c)           DCM
shall promptly notify and consult with Investor if any addition or variation is
proposed to be made to the terms and provisions relating to incentive
allocations or the management fee in the limited partnership agreement (or any
other operating agreement) of any Deerfield Pegasus Fund (including, without
limitation, pursuant to any side letters relating thereto), provided, that without the prior approval
of Investor, in no event may DCM or any Affiliate thereof agree to any addition
or variation that would have the effect of (i) holding Investor jointly
liable with DCM, DFR or any DFR Affiliate for the return of any incentive
allocations or (ii) requiring Investor or any of its employees, officers
or directors to guaranty the return of any incentive allocations not received
by such Person.

 

(d)           Subject
to Section 28, DFR shall cause each Deerfield Pegasus Fund, each Deerfield
Pegasus Fund GP of, and each investment advisor other than DCM (such investment
advisors, the “Deerfield Pegasus Fund Investment Advisors”) to, such
Deerfield Pegasus Fund to execute a counterparty signature page to this
Agreement agreeing to be bound by the terms and conditions hereof (including
the representations and warranties contained in Exhibit A) promptly upon
the formation of such entities.

 

(e)           For the avoidance of doubt, unless Investor otherwise agrees, the
limited liability company agreement of each Deerfield Pegasus Fund GP shall be
substantially the same (except as otherwise agreed to by DCM and Investor) as
the DLC GP Agreement, provided that
Investor shall not be entitled to the rights in any such agreement that are set
forth in sections 3.2 (other than sections 3.2(b)(i), 3.2(c)(i), 3.2(c)(ii), 3.2(c)(xii)
(except with respect to section 10.08 of the Fund I LPA), 3.2(c)(xiii),
3.2(c)(xxi)(but only in respect of determination under sections 5.2, 5.6, 8.1 and 8.2 of the DLC GP
Agreement) and 3.2(c)(xxiii)), 3.3, 3.4, 3.6(b), 3.6(c), 3.7, 3.8 and 5.8 of the DLC GP Agreement.

 

 

8.             Use of Name.

 

(a)           Except with the prior written consent of Investor or as
required by applicable law, rule or regulation (including for the purpose
of making any filing or other disclosure but only if the procedures described
in Section 12 regarding disclosures required by applicable law, rule or
regulation are followed) or as authorized pursuant to Section 12, none of (1) the
Deerfield Pegasus Funds, their respective general partners, DFR, DCM or any DFR
Affiliate, or (2) any member, partner, manager, director, officer,
employee, agent or service provider of a Person listed in clause (1), may
disclose, use or otherwise refer to in any written material the name “Pegasus”
or any derivative thereof or the names of any Affiliate, member, partner,
director, officer or employee of Investor or any investment fund or other
entity associated with Investor.

 

(b)           Except
with the prior written consent of DFR or as required by applicable law, rule or
regulation (including
for the purpose of making any filing or other disclosure but only if the
procedures described in Section 12 regarding disclosures required by
applicable law, rule or regulation are followed) or as authorized pursuant
to Section 12, none of (1) Investor or any of its respective
Affiliates, or (2) any member, partner, manager, director, officer,
employee, agent or service provider of a Person listed in clause (1), may
disclose, use or otherwise refer to in any written material the name “Deerfield”
or any derivative thereof or the names of any Affiliate, member, partner,
director, officer or employee of DFR or any investment fund or other entity
associated with DFR.

 

(c)           Notwithstanding
Section 12(a), the following may be disclosed without the prior written
consent of Investor in a communication to an actual or prospective investor in
any Deerfield Pegasus Fund or in any securities filing if required by law, rule or
regulation:

 

(1)           The
terms “Pegasus” or “Deerfield” in the title of any Deerfield Pegasus Fund and
references to the name of such Deerfield Pegasus Fund;

 

(2)           Investor’s
role as a limited partner in any Deerfield Pegasus Fund and the amount of its
investment in such capacity, if any;

 

(3)           Investor’s
role as a holder of interests in any Deerfield Pegasus Fund GP; other than with
respect to the specific terms and economic interests of Investor therein;

 

(4)           the
identity of Investor’s representatives on the investment committee of any
Deerfield Pegasus Fund GP, the board of managers of any Deerfield Pegasus Fund
GP or any other committee;

 

(5)           the
side letter among the parties hereto in respect of the applicable Deerfield
Pegasus Fund (the actual reproduction of the letter as opposed to any
descriptions thereof); and

 

(6)           the
side letter dated as of the Initial Closing Date in respect of Fund I by and
among the signatories thereto (the “Fund I Side Letter”) (the actual
reproduction of the letter as opposed to any descriptions thereof).

 

(d)           Notwithstanding
Section 12(a), DCM may disclose Investor’s name, it’s jurisdiction of
formation and its interest in the applicable Deerfield Pegasus Fund GP and the
applicable Deerfield Pegasus Fund (but not for the avoidance of doubt, the
identities of the Investor Parent’s limited partners) for
purposes of making any disclosure required by trading counterparties (including
disclosure required by LCDS and hedge counterparties and disclosure required in
order to comply with requests to provide “KYC” information and similar
information to counterparties and service providers), provided that any

 

 

Portions of this exhibit have been omitted and filed
separately pursuant to a request for confidential treatment filed with the
Securities and Exchange Commission pursuant to Rule 24b-2 under the
Securities Exchange Act of 1934, as amended. 
Omissions are designated as [***].

 

service provider receiving such
information agrees to be bound by customary confidentiality provisions, and, provided, further,
that if Investor consents to the disclosure of more information than is
permitted by this clause (d) to any-counter party, DCM shall be permitted
to disclose such information to future counter-parties.

 

(e)           For
the avoidance of doubt, nothing in this Agreement shall authorize DFR, DCM or
any Affiliate thereof on the one hand, or Investor or any Affiliate on the
other hand, to issue a press release referring to the other party (or any
Affiliate thereof) without such other party’s consent.

 

(f)            Except
as provided in Sections 8(c)(1),(2),(4) and (5), Investor shall have the
right to approve any description or disclosure of Investor or any Affiliate
thereof in any offering or other materials disseminated to any prospective
investor in any Deerfield Pegasus Fund.

 

9.             Services of
Investor.  Except as expressly set forth herein, none of Investor or any Affiliate
thereof shall be obligated to provide any support services to DCM, any
Deerfield Pegasus Fund, any Deerfield Pegasus Fund GP, any portfolio company of
any Deerfield Pegasus Fund or any Affiliate of any of the foregoing.

 

10.           Information and Records.

 

(a)           DCM,
each Deerfield Pegasus Fund Investment Advisor, each Deerfield Pegasus Fund and
each Deerfield Pegasus Fund GP shall preserve, during such entity’s existence
and for six (6) years thereafter, adequate financial and accounting
records pertaining to the operating agreement of the applicable entity to
verify the amounts, recipients, and uses of all material disbursements made in
connection with each such entity and the activities thereof (but with respect
to DCM and the Deerfield Pegasus Fund Investment Advisors solely in relation to
the Deerfield Pegasus Funds).  With
respect to each such entity (but with respect to DCM and Deerfield Pegasus Fund
Investment Advisors solely in relation to the Deerfield Pegasus Funds), during
such period, Investor (so long as Investor or any Affiliate thereof is a
beneficial interest holder in such entity), upon reasonable notice to the
applicable entity and during normal business hours, shall have the right to
audit such financial and accounting records to the fullest extent authorized
and permitted by applicable law.

 

(b)           Subject to the same confidentiality obligations of DCM, Investor shall (i) be
provided access to the custodian and administrator of each Deerfield Pegasus
Fund that is equivalent to the access that is provided to DCM and any Deerfield
Pegasus Fund Investment Advisor, provided, that
Investor shall not be able to direct such custodians and administrators to take
any action and (ii) receive all reports and correspondence set forth on Exhibit B
from such service providers in connection with any Deerfield Pegasus Fund.

 

11.           Non-Competition.  So long as
Investor’s rights pursuant to Section 7 have not terminated, without
Investor’s consent, none of DFR, DCM, any DFR Affiliate or any DFR Related
Entity shall, during the period commencing on the Initial Closing Date and
ending on the [***]
anniversary
of the final closing of Fund I, manage
any (1) Covered Managed Account that is not existing as of the date hereof
or (2) any successor to any Covered Managed Account that is existing as of
the date hereof or sponsor any subsequent Covered Loan Fund with a target size
of less than $400 million of third party capital contributions.  Furthermore, none of DFR, DCM, any DFR
Affiliate or any DFR Related Entity 

 

 

shall sponsor or market any Covered Loan Fund until
the termination of the marketing period of Fund I so long as Investor’s rights
hereunder have not been terminated as set forth in this Agreement.

 

12.           Confidentiality.

 

(a)           Except
as set forth in Section 12(c), without the consent of the other party, each
of Investor and DFR shall keep confidential and shall not disclose the specific
terms, conditions and provisions of this Agreement, the transactions
contemplated hereby and any other agreement referenced herein or relating
hereto (the “Transaction Information”) and shall cause each Person to
whom it provides the Transaction Information pursuant to Section 12(c) to
keep confidential and not disclose the Transaction Information.

 

(b)           Except
as set forth in Section 12(c), (1) without the consent of DFR, Investor
shall keep confidential and shall not disclose or use (except in connection
with this Agreement and its interests in the Deerfield Pegasus Funds) any
confidential or proprietary information relating to DCM, DFR or any Affiliate
thereof and (2) without the consent of Investor, DFR and DCM shall keep
confidential and shall not disclose or use (except in connection with this
Agreement and its interests in the Deerfield Pegasus Funds) any confidential or
proprietary information relating to Investor or any Affiliate thereof (collectively,
“Confidential Information”). 
Confidential Information shall not include information which (1) is
or becomes generally available to the public other than as a result of a
disclosure by a party in breach of this Agreement or any of the Deerfield
Pegasus Fund Documents (it being understood that information disclosed to
investors in a fund is not considered generally available to the public), (2) was
in a party’s possession prior to its disclosure to such party, or (3) was
received by a party from a Person who is not known by such party to be bound by
an applicable confidentiality agreement. Notwithstanding anything to the
contrary herein, DFR, DCM or any DFR Affiliate may disclose, subject to
applicable securities laws, the track record of Fund I and any Deerfield
Pegasus Fund for purposes of preparing and disclosing investment performance
data of any Deerfield Pegasus Fund when soliciting investors for such Deerfield
Pegasus Fund and any other investment vehicles sponsored by DFR, DCM or any DFR
Affiliate; provided that DCM
shall include a disclaimer in such marketing materials that states that only
DCM, DFR and/or any DFR Affiliate had a role in the calculation or presentation
of the information contained therein.

 

(c)           The parties
(except as otherwise specified below) may disclose Transaction Information and
Confidential Information:

 

(1)           to
their Affiliates and to their directors and officers and legal and accounting
personnel or outside accountants or lawyers and to the directors and officers
and legal and accounting personnel or outside accountants or lawyers of any
Affiliate or other representatives and in the case of Investor, to the Investor
Parent’s limited partners or to any lender of DFR, Investor Parent or any of
their respective Affiliates, provided that
any such Person is notified of the confidentiality obligations herein and
agrees to be bound thereto or in the case of Investor Parent’s limited
partners, bound by comparable confidentiality provisions;

 

(2)           to
regulatory authorities in connection with the preparation or submission of
financial reports, tax returns or reports required by law to be submitted or
made available to any governmental or regulatory agency;

 

(3)           as
required by applicable laws, rules and regulations (including for purposes
of making any filing or other disclosure); provided
that in the case of (2) and (3), except as required in connection with
securities filings, the party required to disclose such information notifies
the other party in advance of such disclosure, cooperates with such party
should it choose to seek a protective order, and

 

 

use its best efforts to obtain
confidential treatment for such information, and, provided,
further, that in connection with any
securities filings, the party required to make the filing shall provide a draft
of any securities filing that references the other party or any of their
Affiliates within a reasonable time prior to the applicable filing date and
shall incorporate such party’s reasonable comments thereto;

 

(4)                                  with
the prior written consent of Investor or DFR, as applicable; and

 

(5)                                  in
connection with any proposed authorized Transfer of any of their respective
interests in DFR, DCM, PM, any Deerfield Pegasus Fund and any Deerfield Pegasus
Fund GP or any DFR Affiliate.

 

(d)                                 The
foregoing shall not limit the disclosure of the tax treatment or tax structure
of any Deerfield Pegasus Fund (or any transactions undertaken by any Deerfield
Pegasus Fund).  As used herein, the term “tax
treatment” refers to the purported or claimed tax treatment and the term “tax
structure” refers to any fact that may be applicable to understanding the
purported or claimed tax treatment, provided
that, for the avoidance of doubt, (1) except to the extent otherwise
established in published guidance, tax treatment and tax structure shall not
include the name of or contact information for, or any other similar
identifying information regarding, any Deerfield Pegasus Fund, any related
investment fund or any of their investments (including, without limitation, the
names of any employees or Affiliates thereof) and (2) nothing in this Section 12
shall limit the ability of a limited partner of any Deerfield Pegasus Fund to
make any disclosure to such limited partner’s tax advisors or to the U.S.
Internal Revenue Service or any other taxing authority.

 

13.                                 Compliance with
Applicable Laws; Insurance.

 

(a)                                  Each party hereto shall perform its
obligations under the Transaction Documents in compliance with all applicable
laws.  In addition, DFR shall use
reasonable best efforts to cause DCM, each Deerfield Pegasus Fund Investment
Advisor, each Deerfield Pegasus Fund and each Deerfield Pegasus Fund GP to
comply with all laws, rules and regulations applicable to such entities,
including, without limitation, all applicable securities and anti-money
laundering laws, rules and regulations in all material respects.

 

(b)                                 In respect of each Deerfield Pegasus Fund and
each Deerfield Pegasus Fund GP, DFR shall procure and maintain appropriate
levels of insurance coverage.

 

14.                                 [Intentionally
Omitted]

 

15.                                 [Intentionally
Omitted]

 

16.                                 Prior Agreements.  Each Deerfield Pegasus Fund GP shall disclose
to Investor all agreements,
whether written or oral, other than any subscription agreement, with any Person
in connection with the acquisition by such Person of a limited partner interest
in the applicable Deerfield Pegasus Fund.

 

17.                                 [Intentionally
Omitted]

 

18.                                 [Intentionally
Omitted]

 

19.                                 Transfers of Interests in Deerfield
Pegasus Funds and Deerfield Pegasus Fund GPs.  Notwithstanding anything to the
contrary contained in any Deerfield Pegasus Fund Document, (a) Investor
may Transfer any of its interests in any Deerfield Pegasus Fund GP or in any
Deerfield Pegasus 

 

 

Fund, if applicable, and its corresponding
rights and obligations pursuant to the Transaction Documents or any
Deerfield Pegasus Fund Document, as applicable, to an Investor Permitted
Transferee without the consent of DCM or any Affiliate thereof, (b) Investor
may Transfer any of its economic interests in any Deerfield Pegasus Fund or any
Deerfield Pegasus Fund GP, including its economic rights pursuant to the
Transaction Documents (but not any governance rights specific to Investor under
this Agreement or any of the Transaction Documents) to any non-Affiliate of
Investor without the consent of DCM or any Affiliate thereof, (c) DCM (or
its Affiliates) may Transfer its interests in any Deerfield Pegasus Fund GP and
its corresponding rights and obligations pursuant to Transaction Documents or
any Deerfield Pegasus Fund Document, as applicable, to any wholly-owned
subsidiary of DFR or to any non-DFR Affiliate in connection with the
Transfer to such non-DFR Affiliate of 51% or more of the properties and assets
of DFR as set forth in Section 3(d), without the consent of Investor; provided, that in connection with a Transfer by DCM or an
Affiliate of an interest in any Deerfield Pegasus Fund GP to any non-DFR
Affiliate, Investor shall be entitled to Transfer its interests therein on the
same terms and conditions as DCM or its Affiliate, as applicable, as set forth
in Section 6.2 of the DLC GP Agreement (the “Tag Along Right”); and
provided, further, that each transferee in
connection with the direct Transfer by DCM or any Affiliate of DCM of any
Transaction Document or Deerfield Pegasus Fund Document, as applicable, shall
execute and deliver to Investor an Affirmation and provided, finally, that any
such Transfer shall comply with section 6.2(e) of the applicable Deerfield
Pegasus Fund GP Agreement.  Further, the
transferor in any Transfer by DCM or any Affiliate of DCM of any interest in
any Deerfield Pegasus Fund GP or in any Deerfield Pegasus Fund shall remain
liable for the performance of any and all obligations of such transferor under
the Transaction Documents or Deerfield Pegasus Fund Documents, as applicable,
that such transferor has so Transferred. 
Any other Transfer by DCM (or its Affiliates) of any of its interests in
any Deerfield Pegasus Fund GP, any Deerfield Pegasus Fund or the Transaction
Documents not expressly permitted by the terms contained in this Section 19
shall require the consent of Investor; provided that
no Transfer by DCM (or its Affiliates) of an interest in any Deerfield Pegasus
Fund GP or any Deerfield Pegasus Fund which is a Lender Transfer or a Transfer
in connection with the acquisition of an equity or other interest in DFR by a
Person who is not also directly acquiring an equity or other interest in
DCM or any of its Affiliates (other than DFR), shall be a Transfer that
requires consent of Investor pursuant to this Section 19 or that triggers
the Tag Along Right.  For the avoidance
of doubt, the parties hereto agree that each Deerfield Pegasus Fund GP is an
Affiliate of DCM.  “Investor Permitted
Transferee” shall mean any Affiliate of Investor, any operating adviser of
Pegasus Capital Advisors and any employee, officer, director, shareholder,
member or partner of such entities.

 

20.                                 Assignment by Parties.  Except as expressly set forth in Sections 3
and 19, no party may Transfer or delegate any of its rights or obligations
pursuant to this Agreement without the consent of the other parties
hereto.  All rights and obligations of a
Person hereunder shall, to the fullest extent permitted by law, become the
rights and obligations of any successor to that Person, whether through merger,
reorganization or other transaction.

 

Notwithstanding anything to the contrary herein, none of DCM, Investor
or any of their respective Affiliates may Transfer any of its interests in a
Deerfield Pegasus Fund unless, based upon advice from tax counsel that is
reasonably satisfactory to counsel to the applicable Deerfield Pegasus Fund,
such Transfer will not cause the Deerfield Pegasus Fund to be treated as a
publicly traded partnership taxable as a corporation for U.S. federal tax
purposes.

 

21.                                 Notice.  Any notice or other
communication contemplated by any provision of this Agreement shall be in
writing and may be delivered personally, sent by telecopy, commercial courier
or mailed by certified mail, postage prepaid, return receipt requested,
addressed to such party at the address, or sent to its telecopy number, as
follows:

 

 

	
  If to Investor:

  	
   

  	
  Pegasus Partners IV, L.P.

  	
   

  	
   

  
	
   

  	
   

  	
  505 Park Avenue

  	
   

  	
   

  
	
   

  	
   

  	
  New York, NY 10022

  	
   

  	
   

  
	
   

  	
   

  	
  Attn: Rodney Cohen

  	
   

  	
   

  
	
   

  	
   

  	
  Fax No.: 212-355-2303

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  with a copy to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Jason Schaefer

  	
   

  	
   

  
	
   

  	
   

  	
  Fax No.: 212-710-2551

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  With a copy to: Akin Gump Strauss
  Hauer & Feld LLP

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  One Bryant Park

  	
   

  	
   

  
	
   

  	
   

  	
  New York, NY 10036

  	
   

  	
   

  
	
   

  	
   

  	
  Attn: Patrick Fenn

  	
   

  	
   

  
	
   

  	
   

  	
  Fax No.: 212-872-1002

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  If to DFR:

  	
   

  	
  Deerfield Capital Corp.

  	
   

  	
   

  
	
   

  	
   

  	
  6250 North River
  Road

  	
   

  	
   

  
	
   

  	
   

  	
  Rosemont, Illinois
  60018

  	
   

  	
   

  
	
   

  	
   

  	
  Attn: Jonathan Trutter

  	
   

  	
   

  
	
   

  	
   

  	
  Fax No.: (773) 867-5186

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  with a copy to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  General Counsel

  	
   

  	
   

  
	
   

  	
   

  	
  Fax No.: (773) 380-1695

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  With a copy to:  Schulte
  Roth & Zabel LLP

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  919 Third Avenue

  	
   

  	
   

  
	
   

  	
   

  	
  New York, New York 10022

  	
   

  	
   

  
	
   

  	
   

  	
  Attn: Paul Watterson

  	
   

  	
   

  
	
   

  	
   

  	
  Fax No.:  212-593-5955

  	
   

  	
   

  

 

Notice sent by telecopy shall be deemed given when confirmation of
transmission is received, and notice sent by any other means shall be deemed
given when received at the address set forth above; but any party may designate
a different address by a notice similarly given to the other party.

 

22.                                 Attorneys’ Fees.  All reasonable and documented costs and
expenses (including, without limitation, the fees and expenses of counsel,
accountants and financial advisors) incurred in connection with the
consummation of the Transactions shall be paid by the party incurring such
costs and expenses, including, without limitation, the fees and expenses of
their respective counsel and financial advisers.

 

23.                                 Conflicts.  To the extent there is any conflict between
this Agreement and the limited partnership agreement of any Deerfield Pegasus
Fund (including, without limitation, any side letter relating thereto), any
Deerfield Pegasus Fund GP Agreement or any investment advisory agreement 

 

 

between
any Deerfield Pegasus Fund and DCM or any Deerfield Pegasus Fund Investment
Advisor, the provisions of this Agreement shall apply with respect to the
parties hereto.

 

24.                                 Related Party Transactions.(1) 
If Investor or any Affiliate thereof or any of such person’s partners,
members, shareholders, directors, managers, officers, agents or operating
advisors (collectively, the “Pegasus Entities”), acquires knowledge
of a potential transaction or matter which may be an investment or business
opportunity or prospective economic or competitive advantage in which DFR,
DCM, any Deerfield Pegasus Fund GP, any Deerfield Pegasus Fund or any Affiliate
thereof or any of such entity’s partners, members, shareholders, directors,
managers, officers, agents or advisors (collectively, the “DFR Entities”)
could have an interest or expectancy (a “Competitive Opportunity”) or
otherwise is then exploiting any Competitive Opportunity, none of the DFR
Entities will have any interest in, and no expectation that, such
Competitive Opportunity be offered to any DFR Entity.  To the fullest extent provided by law, any
such interest or expectation is hereby renounced so that none of the
Pegasus Entities shall have any duty to communicate or present
such Competitive Opportunity to any DFR Entity and each Pegasus
Entity shall have the right to either hold any such Competitive
Opportunity for such Pegasus Entity’s (and its agents’, partners’ or Affiliates’)
own account and benefit or to recommend, assign or otherwise transfer such
Competitive Opportunity to Persons other than to a DFR Entity.

 

25.                                 Determinations of the Investor.  Except as otherwise
expressly provided in the Transaction Documents, notwithstanding any applicable
provision of law or equity, to the fullest extent permitted by law, whenever
Investor or any of its Affiliates is permitted to make a decision or consent to
any action pursuant to this Agreement or any other Transaction Document, any of
the Investor and its Affiliates shall be permitted to make such decision or
provide or withhold such consent in its “sole discretion” and shall be entitled
to consider only such interests and factors as it desires, including its own
interests, and shall have no duty or obligation to give any consideration to
any interest of or factors affecting any other Person.

 

26.                                 Representations and Warranties.  Each
of the parties makes representations and warranties as set forth in Exhibit A
attached hereto, as applicable.

 

(1)                                  To the extent there is 3rd party capital; to
include similar language in the PPM; including a disclaimer relating to
Investor’s liability under the Fund Agreement (i.e., notwithstanding Investor’s
various consent and other rights, Investor is not acting in the capacity of a
general partner and no person has any rights against Investor in connection
therewith).

 

 

27.                                 Amendments and Waivers.  This Agreement may be amended and the
observance of any provision of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively) only
with the written consent of each party hereto.

 

28.                                 Termination.  Except as otherwise expressly stated herein,
the provisions of this Agreement shall terminate on the later of the date that
Investor and its Affiliates (a) no longer have the potential right to
acquire any future economic interest in any Subsequent Fund pursuant to Section 7,
(b) no longer have any interest (including the right to receive a portion
of the incentive allocation) in any Deerfield Pegasus Fund GP, (c) no longer
have any interest in any Deerfield Pegasus Fund or (d) elect to exercise
the Warrants, provided that,
notwithstanding the foregoing, Sections 6, 8, 9 and 12 shall survive
indefinitely.

 

29.                                 Side Letter Provision.  To the extent that any of the Investor or its
Affiliates has an interest in any Deerfield Pegasus Fund or any Deerfield
Pegasus Fund GP, DCM shall ensure that each Deerfield Pegasus Fund Document
relating thereto, to the extent applicable, contain express provisions
authorizing the provisions contained herein.

 

30.                                 Successors and Assigns.  This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the respective successors and
permitted assigns of the parties hereto.

 

31.                                 Miscellaneous.  This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Delaware,
without regard to conflict of laws principles. 
The parties hereto hereby submit to the nonexclusive jurisdiction of the
federal and state courts located in New York, New York for the resolution of
all matters pertaining to the enforcement and interpretation of this
Agreement.  This Agreement may be
executed in any number of counterparts, each of which shall be deemed an
original and all of which taken together shall constitute one and the same
instrument.

 

[Remainder of page intentionally left
blank; signature page follows.]

 

 

If
the above correctly reflects our understanding and agreement with respect to
the foregoing matters, please so confirm by signing the enclosed copy of this
Agreement in the space provided below.

 

 

	
   

  	
  DEERFIELD PEGASUS LOAN CAPITAL LP

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  DPLC General Partner LLC, its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Robert A. Contreras

  
	
   

  	
   

  	
  Name: Robert A. Contreras

  
	
   

  	
   

  	
  Title: Deerfield Manager

  
	
   

  	
   

  	
   

  
	
   

  	
  DPLC General Partner LLC

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Robert A. Contreras

  
	
   

  	
   

  	
  Name: Robert A. Contreras

  
	
   

  	
   

  	
  Title: Deerfield Manager

  
	
   

  	
   

  	
   

  
	
   

  	
  DEERFIELD
  CAPITAL CORP.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Robert A. Contreras

  
	
   

  	
   

  	
  Name: Robert A. Contreras

  
	
   

  	
   

  	
  Title: General Counsel

  
	
   

  	
   

  	
   

  
	
   

  	
  DEERFIELD
  CAPITAL MANAGEMENT LLC

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Robert A. Contreras

  
	
   

  	
   

  	
  Name: Robert A. Contreras

  
	
   

  	
   

  	
  Title: General Counsel

  
	
   

  	
   

  	
   

  
	
   

  	
  PEGASUS
  DEERFIELD (AIV), LLC

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Pegasus
  Investors IV, L.P., its managing member

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Pegasus
  Investors IV GP, L.L.C., its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Rodney Cohen

  
	
   

  	
  Name:

  	
  Rodney Cohen

  
	
   

  	
  Title:

  	
  Vice President

  
	
   

  	
   

  	
   

  
	
   

  	
  PGS
  MANAGEMENT, LLC

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Pegasus
  Capital Advisors IV, L.P., its managing member

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Pegasus
  Capital Advisors IV GP, L.L.C., its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/
  Rodney Cohen

  
	
   

  	
  Name: 

  	
  Rodney Cohen

  
	
   

  	
  Title: 

  	
  Authorised Person

  
				

 

Signature
Page

 

 

Exhibit A

 

Representations
and Warranties

 

Representations
and Warranties of Each Party. 
Each party to the Agreement represents and warrants to the
other parties as follows:

 

(a)                                  Organization and Qualification.  Such party is a duly organized
or formed, as applicable, and subsisting legal entity under the laws of the
state of its organization or formation, as applicable.  Such party has the requisite legal power and
authority to conduct its business as currently conducted.  Such party is duly qualified or licensed to
do business and is in good standing in every jurisdiction where its business so
requires, except for such failures to be so qualified or licensed as would not,
individually or in the aggregate, be reasonably expected to have a material
adverse effect with respect to such party.

 

(b)                                 Authority.  Such
party has full legal  power
and authority to enter into the Agreement and each other Transaction Document
to which it is a party, to perform its obligations hereunder and thereunder,
and to carry out the Transactions.  Such
party has taken all requisite action necessary to be taken by it to authorize
the execution, delivery, and performance of this Agreement and each other
Transaction Document to which it is a party, and no further company action, or
action on the part of its owners, is necessary to authorize this Agreement or
any other Transaction Document to which it is a party or to consummate the
Transactions.  This Agreement and each
other Transaction Document to which such party is a party have been (or, when
executed and delivered, will be) duly executed and delivered by such party, and
are (or, when executed and delivered, will constitute) valid and legally
binding agreements and obligations of such party, enforceable against it in
accordance with its terms, except as may be limited by or subject to any
bankruptcy, insolvency, reorganization, moratorium, or other similar laws
affecting the enforcement of creditors’ rights generally and subject to general
principles of equity, regardless of whether enforcement is sought in a
proceeding in equity or at law.

 

(c)                                  No Violations.  The execution, delivery and performance of this Agreement and the other
Transaction Documents by such party, and the consummation of the Transactions,
will not breach or violate any provision of any governing document of such
party, nor breach or violate the terms of any material agreement to which it is
a party or by which its assets or properties are bound or any applicable law to
which it is subject or by which it is obligated or any of its properties or
assets are bound, other than breaches and violations that would not,
individually or in the aggregate, affect (a) the validity or
enforceability of this Agreement or any other Transaction Document, or (b) materially
and adversely affect such party’s business, Fund I, the Transactions or the
performance by such party of its obligations under the Transaction Documents.

 

(d)                                 No
Consents. 
There is no consent of any Person, or any declaration to or
filing or registration with, any governmental authority, that is required on
the part of such party in connection with the execution, delivery and
performance of this Agreement and the other Transaction Documents or the
consummation of the Transactions.

 

(e)                                  Litigation.  No
litigation is pending or, to such party’s knowledge, threatened against (a) such
party arising out of, resulting from or relating to such party’s business, or (b) arising
out of, resulting from or relating to this Agreement, any other Transaction
Document or the Transactions that would, individually or in the aggregate,
affect (a) the validity or enforceability of this Agreement or any other
Transaction Document, or (b) materially and adversely affect such party’s
business, Fund I, the Transactions or the performance by such party of its
obligations under the Transaction Documents and, in each case, such party has
no knowledge of any events, facts or circumstances that could reasonably likely
serve as the basis for any such litigation. 
There are, and within the past five years have been, no 

 

 

outstanding judgments, decrees,
injunctions, stipulations or orders against or relating to such party.  There are no consent decrees or similar
arrangements entered into with a governmental authority or other Person by, or
relating to, such party or such party’s business that are still in effect or
were in effect within the past five years.

 

A-2

 

Exhibit B

 

Reports
and Correspondence

 

1.                                       Deerfield Pegasus Fund Balance Sheet

2.                                       Deerfield Pegasus Fund Income Statement

3.                                       Investor Capital Rollforward including Return
by Investor

4.                                       Individual Partner Statement

5.                                       Deerfield Pegasus Fund Holdings ReportExhibit 10.4

 

Portions of this exhibit
have been omitted and filed separately pursuant to a request for confidential
treatment filed with the Securities and Exchange Commission pursuant to Rule 24b-2
under the Securities Exchange Act of 1934, as amended.  Omissions are designated as [***].

 

Execution
Copy

 

Deerfield Capital Corp.

Deerfield Capital Management
LLC

 

April 9, 2009

 

Pegasus
Deerfield (AIV), LLC

 

Ladies and Gentlemen:

 

This letter agreement (this “Letter
Agreement”) between Pegasus Deerfield (AIV), LLC  (“Investor”),
Deerfield Capital Corp. (“DFR”) and Deerfield Capital Management LLC (“DCM”
and, together with Investor and DFR, the “Parties”) records the
understanding among the Parties regarding the Board of Managers of DCM (the “DCM
Board”), the Board of Directors of DFR (the “DFR Board”), that
certain Rights Agreement dated as of March 11, 2009 between DFR and the
rights agent listed therein (the “Rights Agreement”), the restrictions
on transfer and ownership contained in DFR’s charter (the “Charter”) and
the proposed amendment to the Charter referenced below.  This Letter Agreement is being entered into
in connection with and in consideration of certain other transactions being
entered into simultaneously by the Parties and their respective Affiliates,
including the acquisition by Investor of a limited partner interest in Deerfield Pegasus Loan Capital LP,
a Delaware  limited partnership (“Fund
I”).  Capitalized terms used but not defined herein shall
have the respective meanings assigned to such terms in that certain side letter
agreement dated of even date herewith between Fund I, DPLC General Partner LLC,
DFR, DCM and Investor (the “Side Letter Agreement”).

 

1.                                       DCM Board.  DCM, DFR
and Investor agree that until the complete liquidation of Fund I (at which time
the rights set forth in this Section 1 will terminate):

 

(a)                                  The DCM Board shall consist of 5 (five)
managers (each individually, a “Manager” and, collectively, the “Managers”).

 

(b)                                 Two (2) Managers, which shall initially
be Jeffrey B. Scott and Cary Meadow, shall be designated by Investor (each, an “Investor
Designee”).

 

(c)                                  Investor shall have the right to direct the
removal, for any reason and at any time, of any Investor Designee.  No Investor Designee may be removed without
the consent of Investor except in the case of conduct by such Investor Designee
constituting fraud, willful misconduct or gross negligence.

 

(d)                                 If an Investor Designee ceases to serve as a
Manager (whether by reason of death, resignation, removal (including removal for
fraud, willful misconduct or gross negligence), expiration of term or
otherwise), only Investor shall be entitled to designate a successor Manager to
fill the vacancy created thereby.

 

 

(e)                                  Each of DCM and DFR shall (i) take all
necessary action to ensure that the provisions of the Certificate of Formation
and the Third Amended and Restated Operating Agreement of DCM, effective as of December 21,
2007 (the “Operating Agreement”) are not inconsistent with the
provisions of this Letter Agreement, and (ii) not take any action to
amend, change or otherwise modify (A) Article V or Article VI of
the Operating Agreement, or (B) any other provision of the Operating
Agreement or any provision of the Certificate of Formation of DCM, which
amendment, change or modification (in the case of this subclause (B)) could
subvert, nullify or adversely affect the agreement and intent of the parties as
set forth in this Letter Agreement.  DFR
shall cause the applicable DFR Affiliates to vote all of the voting interests
in DCM beneficially owned or held of record by DFR or such DFR Affiliates in
accordance with this Letter Agreement (including, without limitation, the
election of the Investor Designees and any successors thereto to the DCM
Board).  Further, DCM shall take, and DFR
shall cause the applicable DFR Affiliates to cause DCM to take, all necessary
measures to carry out the agreements of the parties set forth in this Letter
Agreement.

 

(f)                                    DCM shall reimburse each Investor Designee for all reasonably necessary and proper
out-of-pocket costs and expenses (including, without
limitation, reasonable travel, lodging and meal
expenses) incurred in connection with each Investor Designee’s attendance and
participation at meetings of the DCM Board or any committees thereof.  Further, except as otherwise agreed
by each Investor Designee and DCM, each Investor Designee shall receive the
compensation and benefits as a Manager that are set forth on Schedule A hereto.

 

2.                                       IRS Clarification. DFR and Investor agree that,
upon the agreement by both parties that it is necessary and/or advisable to do
so (taking into account the totality of the circumstances, including, without
limitation, the costs associated with doing so), they shall cooperate and act
in good faith together (including, without limitation, with respect to the
timing, content and form of any submission and the costs pertaining thereto) to
seek clarification from the Internal Revenue Service (“IRS”) that the
granting of observer rights to the DFR Board by DFR to Investor will not cause
the Warrants to be treated as exercised for purposes of determining whether DFR
has had an “ownership change” as defined in Section 382 of the Internal
Revenue Code of 1986, as amended (the “Code”).

 

3.                                       Rights Agreement and Charter Restrictions.  (a)                                    None of
Investor or its Affiliates (as defined in the Rights Agreement) or Associates
(as defined in the Rights Agreement) and no direct or indirect transferee
or any subsequent transferee of the Warrants or the shares of common stock of
DFR (“Common Stock”) issuable upon exercise of such Warrants (the “Warrant
Shares”) from any source (Investor, its Affiliates and Associates and such
transferees collectively, the “Investor Warrant Parties”) shall be
deemed to be an Acquiring Person under the Rights Agreement by reason of being
or becoming a Beneficial Owner (as defined in the Rights Agreement) of the
Warrants or any Warrant Shares.  The DFR
Board has the authority pursuant to Section 29 of the Rights Agreement to
determine that a person is an Exempt Person (as defined in the Rights
Agreement).  DFR agrees that as soon as is reasonably practicable
following the date of this Letter Agreement, the DFR Board shall consider and
vote upon a proposal to declare that, from and after January 1, 2011, each
Investor Warrant Party shall be an Exempt Person with respect to such Investor
Warrant Party’s being or becoming a Beneficial Owner of any securities of DFR
other than Warrants or Warrant Shares (“Other DFR Securities”) and the
application of all restrictions applicable to Acquiring Persons under the
Rights Agreement shall be waived.  The
management of DFR shall recommend to the DFR Board that the DFR Board adopt and
approve such proposal.  The DFR Board
shall set no other terms, conditions or limitations to the treatment of
any Investor Warrant Party as an Exempt Person under the Rights Agreement.  DFR hereby acknowledges and agrees that any
and all conditions to the determination that each Investor Warrant Party is an
Exempt Person under the Rights Agreement have been satisfied or are hereby
waived, except as expressly set forth in this Section 3(a).

 

 

(b)                                 The DFR Board
has determined pursuant to Section 4.7 of the Charter that that it is no longer in the best interests
of DFR to continue to be qualified as a real estate investment trust under
Sections 856 through 860 of the Code (“REIT”), and therefore, the DFR
Board has revoked or otherwise terminated DFR’s REIT election pursuant to Section 856(g) of
the Code.  As a consequence, the
Restriction Termination Date (as defined in the Charter) has occurred, and the
restrictions and limitations on Beneficial Ownership, Constructive Ownership
and Transfers of shares of Capital Stock (each as defined in the Charter) set
forth in Article VI of the Charter no longer apply, including, without
limitation, to any Investor Warrant Party.

 

(c)                                  The DFR Board
has submitted to the stockholders of DFR for their consideration and approval
an amendment to the Charter in the form attached hereto as Exhibit A
(the “Charter Amendment”) at the Annual Meeting of Stockholders of DFR
scheduled for May 19, 2009 and has recommended that the stockholders
approve such Charter Amendment.  The issuance of the Warrants and any
Warrant Shares and each other Transfer (as defined in the Charter Amendment) or
acquisition of the Warrants or any Warrant Shares, in each case by or to any
Investor Warrant Party, shall be deemed to be a Permitted Transfer (as defined
in the Charter Amendment) under Article IX of the Charter Amendment.  The DFR Board will, following stockholder
approval of the Charter Amendment, have the authority pursuant to Section 9.4
of the Charter Amendment to except a Transfer that is otherwise a 5%
Transaction (as defined in the Charter Amendment) from being a Prohibited
Transfer (as defined in the Charter Amendment) and thereby subject to the
transfer restrictions set forth in Section 9.3 of the Charter
Amendment.  Further, as set forth in Section 9.2(m) of
the Charter Amendment, no Permitted Transfer shall be a Prohibited Transfer.   DFR agrees that as soon as is reasonably
practicable following the later of the date of this Letter Agreement and the
date on which the stockholders of DFR approve the Charter Amendment, the DFR
Board shall consider and vote upon a proposal to declare that, from and after January 1,
2011, if any of the Investor Warrant Parties Transfers or acquires any Other
DFR Securities, then such Transfer or acquisition of Other DFR Securities shall
be approved by the DFR Board pursuant to Section 9.4 of the Charter Amendment
and the application of the restrictions contained in Article IX with
respect thereto shall be waived.  The
management of DFR shall recommend to the DFR Board that the DFR Board adopt and
approve such proposal.  The parties
hereby acknowledge and agree that any and all conditions to the determination
as to a transaction involving an Investor Warrant Party being a Permitted
Transfer as set forth above and the waiver of the restrictions applicable to
any transaction involving an Investor Warrant Party that may otherwise be a
Prohibited Transaction under Article IX of the Charter Amendment have been
satisfied or are hereby waived, except as expressly set forth in this Section 3(c).

 

(d)                                 The DFR Board
has taken all necessary actions to grant and approve, as applicable, the
designations, determinations and/or actions contained in subsections (a), (b) and
(c) of this Section 3 with respect to each Investor Warrant Party,
except as is otherwise expressly set forth herein.

 

(e)                                  DFR shall not
adopt, recommend or effectuate or assist in the adoption,
recommendation or effectuation of any other plan, program or other policy
(regardless of the form of any such plan, program or policy) that is similar to
or has similar restrictions on the acquisition or transfer of securities or
other interests in DFR, without also providing for exceptions to such
restrictions for each Investor Warrant Party that are consistent with the
exceptions, each as set forth in this Section 3.

 

(f)                                    The
determinations and designations set forth in this Section 3 may not be
revoked without the prior written consent of the Investor.

 

 

(g)                                 DFR agrees that the Warrant Shares shall be
listed on the trading exchange on which DFR’s Common Stock then trades by the
date upon which the Warrants first vest in respect of any Warrant Shares
(the “Listing Date”); provided, that,
if the issuance of the Warrants requires the consent of DFR’s shareholders to
effect such listing, then the Warrant Shares shall be listed within sixty (60)
days following the Listing Date.  If the
Warrant Shares are not listed within the time periods and otherwise as set
forth in this Section 4(g) and if, at such time, DFR’s Common Stock
remains listed on such exchange, then DFR shall have breached its obligations
under this Letter Agreement, the Registration Rights Agreement, the Warrants
and the Side Letter and each Investor Warrant Party shall have the rights and
remedies against DFR in respect of such breach as are available in law or
equity.

 

4.                                       Certain
Transactions.

 

(a)                                  Without the prior written consent of Investor, DFR shall not declare any
dividend or any other distribution upon the Common Stock (other than any
dividend or distribution upon an Organic Change (as defined below)) that is
payable in any of its assets (including cash) or in debt securities or that is
payable in Non-Common Stock Options (as defined below), except that DFR shall
be permitted, without the prior written consent of Investor, to make regular
quarterly cash dividends; provided
that the per share amount of such quarterly cash dividends does not exceed the
per share amount of the last regular quarterly cash dividend immediately
preceding the date of this Letter Agreement.

 

(b)                                 Without
the prior written consent of Investor, DFR shall not issue or sell Discounted
Stock (as defined below) to any Person other than Investor or its Affiliates at a
price per share that is lower than the then current Fair Market Value (as
defined below) per share of Common Stock in effect immediately prior to such
sale or issuance.

 

(c)                                  Notwithstanding Section 4(b) above,
the prior written consent of Investor shall not be required for DFR to issue (i) securities to employees, officers,
directors, consultants or other service providers of DFR pursuant to a plan or
agreement approved by the DFR Board, including pursuant to DFR’s Amended and
Restated Stock Incentive Plan;  provided that the number  of shares of Common Stock issued (on a fully
diluted basis) pursuant to such plans or agreements after the date hereof shall
not exceed 569,253, (ii) securities pursuant to the exercise of
Common Stock Options and Non-Common
Stock Options issued and outstanding as of the date hereof (but
excluding the rights issuable pursuant to DFR’s Rights Agreement dated as of March 11,
2009 by and between DFR and American Stock Transfer & Trust Company
LLC as Rights Agent), (iii) securities at a value not less than the Fair
Market Value as consideration for, or in connection with the financing of, an
acquisition of shares or assets of a target company, or (iv) Common Stock
or other equity securities to Investor or its Affiliates.

 

(d)                                 Definitions:

 

(i) 
“Discounted
Stock” means shares of Common Stock or any right,
option, warrant or other security that is convertible into, or exchangeable or
exercisable for, shares of Common Stock (each, a “Common Stock Option”) issued or sold at a price per share
(determined, in the case of Common Stock Options, by dividing (A) the
total amount receivable by DFR in consideration (notes or debt shall not be
considered consideration) of the issuance and sale of such Common Stock
Options, plus the total consideration, if any, payable to DFR upon exercise
thereof, by (B) the total number of shares of Common Stock covered by such
Common Stock Options), which price is lower than the then current Fair Market
Value per share of Common Stock in effect immediately prior to such sale or
issuance.

 

 

(ii)  “Fair Market Value” means (A) with
respect to the Common Stock or any other security, as applicable, the average
VWAP (as defined below) of the Common Stock or such security for the ten days
preceding the issuance of such shares of Common Stock or other security, and (B) with
respect to any other property or asset, the fair market value thereof as
determined by an independent appraiser mutually agreed to by Investor and DFR
(and in the event such Parties cannot agree within a reasonable time on an
appraiser, each  of them shall appoint an
appraiser and such appraisers shall appoint a third who shall act as the
independent appraiser for purposes of this Section 4(d)); the fees and
expenses in relation to such appraisal shall be paid by DFR.

 

(iii) 
“Non-Common Stock Options” means any right, option, warrant or other
security that is convertible into, or exchangeable or exercisable for, debt securities,
assets or other securities of DFR other than shares of Common Stock.

 

(iv) 
“Organic Change” means any recapitalization, reorganization,
reclassification, consolidation or merger of DFR following which DFR is not a
surviving entity, sale of all or substantially all of DFR’s assets to another
Person or any similar transaction, in which the holders of Common Stock are
entitled to receive (either directly or upon subsequent liquidation) securities
or assets (including cash) in respect of or in exchange for their Common Stock.

 

(v) 
“VWAP” means, for any
date, the price determined by the first of the following clauses that applies: (A) if
the Common Stock or other security, as applicable, is then listed or quoted on
a trading market, the daily volume weighted average price of the Common Stock
or other security for such date (or the nearest preceding date) on the trading
market on which the Common Stock or other security is then listed or quoted for
trading as reported by Bloomberg L.P. (based on a trading day of standard
length); (B) if the Common Stock or other security is not then quoted for
trading on a trading market and if prices for the Common Stock or other
security are then reported in the “Pink Sheets” published by Pink Sheets, LLC
(or a similar organization or agency succeeding to its functions of reporting
prices), the most recent bid price per share of the Common Stock or other
security so reported; or (C) in all other cases, the fair market value of
a share of Common Stock or other security as determined by an independent
appraiser mutually agreed to by Investor and DFR (and in the event such Parties
cannot agree within a reasonable time on an appraiser, each  of them shall appoint an appraiser and such
appraisers shall appoint a third who shall act as the independent appraiser for
purposes of this Section 4(d)); the fees and expenses in relation to such
appraisal shall be paid by DFR.

 

(e)                                  DCM, DFR and Investor agree
that the rights and restrictions set forth in this Section 4 shall expire
and terminate on the earlier of the expiration of the Warrants in accordance
with their terms or the exercise of the Warrants in respect all of the Warrant
Shares.

 

5.                                       Assignment.  The rights and obligations of the Parties set
forth in this Letter Agreement may
only be Transferred or delegated simultaneously with and to the extent that
each Party Transfers or delegates its rights or obligations under the Side
Letter Agreement, except that the rights and obligations of Investor and its
Affiliates pursuant to Section 4 may be Transferred to any Investor
Warrant Party.  All rights and
obligations of a Party hereunder shall become the rights and obligations of any
successor to that Party, whether through merger, reorganization or other
transaction.  This Letter Agreement shall
be binding upon and inure to the benefit of and be enforceable by the
respective successors and permitted assigns of the Parties.

 

 

6.                                       Notice.  Any notice or other communication
contemplated by any provision of this Letter Agreement shall be in writing and
may be delivered personally, sent by telecopy, commercial courier or mailed by
certified mail, postage prepaid, return receipt requested, addressed to such
party at the address, or sent to its telecopy number, as follows:

 

	
  If to Investor:

  	
   

  	
  Pegasus Partners
  IV, L.P.

  	
   

  	
   

  
	
   

  	
   

  	
  505 Park
  Avenue

  	
   

  	
   

  
	
   

  	
   

  	
  New York,
  NY 10022

  	
   

  	
   

  
	
   

  	
   

  	
  Attn: Rodney Cohen

  	
   

  	
   

  
	
   

  	
   

  	
  Fax No.:
  212-355-2303

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  with a copy to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Jason Schaefer

  	
   

  	
   

  
	
   

  	
   

  	
  Fax No.: 212-710-2551

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  With a copy to: Akin
  Gump Strauss Hauer & Feld LLP

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  One Bryant Park

  	
   

  	
   

  
	
   

  	
   

  	
  New York, NY 10036

  	
   

  	
   

  
	
   

  	
   

  	
  Attn: Patrick Fenn

  	
   

  	
   

  
	
   

  	
   

  	
  Fax No.:
  212-872-1002

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  If to DFR or DCM:

  	
   

  	
  Deerfield Capital
  Corp.

  	
   

  	
   

  
	
   

  	
   

  	
  6250 North
  River Road

  	
   

  	
   

  
	
   

  	
   

  	
  Rosemont,
  Illinois 60018

  	
   

  	
   

  
	
   

  	
   

  	
  Attn: Jonathan
  Trutter

  	
   

  	
   

  
	
   

  	
   

  	
  Fax No.: (773) 867-5186

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  with a copy to:

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  General Counsel

  	
   

  	
   

  
	
   

  	
   

  	
  Fax No.: (773) 380-1695

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  And with a copy
  to:

  	
   

  	
  Schulte
  Roth & Zabel LLP

  	
   

  	
   

  
	
   

  	
   

  	
  919 Third Avenue

  	
   

  	
   

  
	
   

  	
   

  	
  New York, New York
  10022

  	
   

  	
   

  
	
   

  	
   

  	
  Attn: Paul
  Watterson

  	
   

  	
   

  
	
   

  	
   

  	
  Fax
  No.:  212-593-5955

  	
   

  	
   

  

 

Notice sent by
telecopy shall be deemed given when confirmation of transmission is received,
and notice sent by any other means shall be deemed given when received at the
address set forth above; but any Party may designate a different address by a
notice similarly given to the other Parties.

 

7.                                       Conflicts.  To the extent there is any conflict between
this Letter Agreement and any other Transaction Document or Deerfield Pegasus
Fund Document, the provisions of this Letter Agreement shall apply with respect
to the Parties.

 

 

8.                                       Amendments and Waivers.  This Letter Agreement may be amended and the
observance of any provision of this Letter Agreement may be waived (either
generally or in a particular instance and either retroactively or prospectively)
only with the written consent of each Party hereto.

 

9.                                       Miscellaneous.  This Letter Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of
Delaware, without regard to conflict of laws principles.  The parties hereto hereby submit to the
nonexclusive jurisdiction of the federal and state courts located in New York,
New York for the resolution of all matters pertaining to the enforcement and
interpretation of this Letter Agreement. 
This Letter Agreement may be executed in any number of counterparts,
each of which shall be deemed an original and all of which taken together shall
constitute one and the same instrument.

 

[Remainder of page intentionally
left blank; signature page follows.]

 

 

If the
above correctly reflects our understanding and agreement with respect to the
foregoing matters, please so confirm by signing the enclosed copy of this
Letter Agreement in the space provided below.

 

 

	
   

  	
  DEERFIELD CAPITAL CORP.

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Robert A. Contreras

  
	
   

  	
   

  	
  Name: Robert A. Contreras

  
	
   

  	
   

  	
  Title: General Counsel

  
	
   

  	
   

  	
   

  
	
   

  	
  DEERFIELD CAPITAL
  MANAGEMENT LLC

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Robert A. Contreras

  
	
   

  	
   

  	
  Name: Robert A. Contreras

  
	
   

  	
   

  	
  Title: General Counsel

  
	
   

  	
   

  	
   

  
	
   

  	
  PEGASUS DEERFIELD (AIV),
  LLC

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Pegasus Investors IV,
  L.P.,

  
	
   

  	
   

  	
  its managing member

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  Pegasus Investors IV GP,
  L.L.C.,

  
	
   

  	
   

  	
  its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Rodney Cohen

  
	
   

  	
  Name:

  	
  Rodney Cohen

  
	
   

  	
  Title:

  	
  Vice
  President

  
				

 

 

Portions of this exhibit have been omitted and filed separately
pursuant to a request for confidential treatment filed with the Securities and
Exchange Commission pursuant to Rule 24b-2 under the Securities Exchange
Act of 1934, as amended.  Omissions are
designated as [***].

 

Schedule A

 

Investor Designee Compensation and Benefits

 

Each Investor Designee
to the DCM Board shall receive compensation equal to $[***] per annum payable quarterly and coverage
under the applicable DFR health insurance benefits to the extent such coverage
remains available to DFR Board directors.  The cost of such health insurance
coverage will be deducted from such compensation consistent with whatever
policies are enacted by DFR for the non-employee members of the DFR Board.

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