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growth, add-on acquisitions and dispositions by our businesses; and ● the |
performance of our businesses. We |
cannot predict these factors, which may cause significant fluctuations in our adjusted net assets and, in turn, impact the management |
fee we pay to our manager. Accordingly, we cannot determine the amount of management fee that will be paid to our manager over time with |
any certainty, which management fee may represent a significant cash obligation and may reduce the cash available for our operations |
and distributions to our shareholders. We |
must pay our manager the management fee regardless of our performance. Therefore, our manager may be induced to increase the amount of |
our assets rather than the performance of our businesses. Our |
manager is entitled to receive a management fee that is based on our adjusted net assets, as defined in the management services agreement, |
regardless of the performance of our businesses. In this respect, the calculation of the management fee is unrelated to our net income. |
As a result, the management fee may encourage our manager to increase the amount of our assets by, for example, recommending to our board |
of directors the acquisition of additional assets, rather than increase the performance of our businesses. In addition, payment of the |
management fee may reduce or eliminate the cash we have available for distributions to our shareholders. The |
management fee is based solely upon our adjusted net assets; therefore, if in a given year our performance declines, but our adjusted |
net assets remain the same or increase, the management fee we pay to our manager for such year will increase as a percentage of our net |
income and may reduce the cash available for distributions to our shareholders. The |
management fee we pay to our manager will be calculated solely by reference to our adjusted net assets. If in a given year our performance |
declines, but our adjusted net assets remain the same or increase, the management fee we pay to our manager for such year will increase |
as a percentage of our net income and may reduce the cash available for distributions to our shareholders. See Item 1 “ Business—Our |
Manager—Our Manager as a Service Provider—Management Fee ” for more information about the terms and calculation |
of the management fee. The |
amount of profit allocation to be paid to our manager could be substantial. However, we cannot determine the amount of profit allocation |
that will be paid over time or the put price with any certainty. We |
cannot determine the amount of profit allocation that will be paid over time or the put price with any certainty. Such determination |
would be dependent on, among other things, the number, type and size of the acquisitions and dispositions that we make in the future, |
the distributions we pay to our shareholders, the earnings of our businesses and the market value of common shares from time to time, |
factors that cannot be predicted with any certainty at this time. Such factors will have a significant impact on the amount of any profit |
allocation to be paid to our manager, especially if our share price significantly increases. See Item 1 “ Business—Our |
Manager—Our Manager as an Equity Holder—Manager’s Profit Allocation ” for more information about the calculation |
and payment of profit allocation. Any amounts paid in respect of the profit allocation are unrelated to the management fee earned for |
performance of services under the management services agreement. The |
management fee and profit allocation to be paid to our manager may significantly reduce the amount of cash available for distributions |
to shareholders and for operations. Under |
the management services agreement, we will be obligated to pay a management fee to and, subject to certain conditions, reimburse the |
costs and out-of-pocket expenses of our manager incurred on our behalf in connection with the provision of services to us. Similarly, |
our businesses will be obligated to pay fees to and reimburse the costs and expenses of our manager pursuant to any offsetting management |
services agreements entered into between our manager and our businesses, or any transaction services agreements to which such businesses |
are a party. In addition, our manager, as holder of the allocation shares, will be entitled to receive a profit allocation upon satisfaction |
of applicable conditions to payment and may be entitled to receive the put price upon the occurrence of certain events. While we cannot |
quantify with any certainty the actual amount of any such payments in the future, we do expect that such amounts could be substantial. |
See Item 1 “ Business—Our Manager ” for more information about these payment obligations. The management fee, |
put price and profit allocation are payment obligations and, as a result, will be senior in right to the payment of any distributions |
to our shareholders. Likewise, the profit allocation may also significantly reduce the cash available for operations. 79 Our |
manager’s influence on conducting our business and operations, including acquisitions, gives it the ability to increase its fees |
and compensation to our Chief Executive Officer, which may reduce the amount of cash available for distributions to our shareholders. Under |
the terms of the management services agreement, our manager is paid a management fee calculated as a percentage of our adjusted net assets |
for certain items and is unrelated to net income or any other performance base or measure. See Item 1 “ Business—Our Manager—Our |
Manager as a Service Provider—Management Fee ” for more information about the calculation of the management fee. Our manager, |
which Ellery W. Roberts, our Chief Executive Officer, controls, may advise us to consummate transactions, incur third-party debt or conduct |
our operations in a manner that may increase the amount of fees paid to our manager which, in turn, may result in higher compensation |
to Mr. Roberts because his compensation is paid by our manager from the management fee it receives from us. Fees |
paid by our company and our businesses pursuant to transaction services agreements do not offset fees payable under the management services |
agreement and will be in addition to the management fee payable by our company under the management services agreement. The |
management services agreement provides that businesses that we may acquire in the future may enter into transaction services agreements |
with our manager pursuant to which our businesses will pay fees to our manager. See Item 1 “ Business—Our Manager—Our |
Manager as a Service Provider ” for more information about these agreements. Unlike fees paid under the offsetting management |
services agreements, fees that are paid pursuant to such transaction services agreements will not reduce the management fee payable by |
us. Therefore, such fees will be in addition to the management fee payable by us or offsetting management fees paid by businesses that |
we may acquire in the future. The |
fees to be paid to our manager pursuant to these transaction service agreements will be paid prior to any principal, interest or dividend |
payments to be paid to us by our businesses, which will reduce the amount of cash available for distributions to our shareholders. Our |
manager’s profit allocation may induce it to make decisions and recommend actions to our board of directors that are not optimal |
for our business and operations. Our |
manager, as holder of all of the allocation shares, will receive a profit allocation based on the extent to which gains from any sales |
of our subsidiaries plus their net income since the time they were acquired exceed a certain annualized hurdle rate. As a result, our |
manager may be encouraged to make decisions or to make recommendations to our board of directors regarding our business and operations, |
the business and operations of our businesses, acquisitions or dispositions by us or our businesses and distributions to our shareholders, |
any of which factors could affect the calculation and payment of profit allocation, but which may otherwise be detrimental to our long-term |
financial condition and performance. The |
obligations to pay the management fee and profit allocation, including the put price, may cause us to liquidate assets or incur debt. If |
we do not have sufficient liquid assets to pay the management fee and profit allocation, including the put price, when such payments |
are due and payable, we may be required to liquidate assets or incur debt in order to make such payments. This circumstance could materially |
adversely affect our liquidity and ability to make distributions to our shareholders. See Item 1 “ Business—Our Manager ” |
for more information about these payment obligations. Risks |
Related to Taxation Our |
shareholders will be subject to taxation on their share of our taxable income, whether or not they receive cash distributions from us. Our |
company is a limited liability company and is classified as a partnership for U.S. federal income tax purposes. Consequently, our shareholders |
are subject to U.S. federal income taxation and, possibly, state, local and foreign income taxation on their share of our taxable income, |
whether or not they receive cash distributions from us. There is, accordingly, a risk that our shareholders may not receive cash distributions |
equal to their allocated portion of our taxable income or even in an amount sufficient to satisfy the tax liability that results from |
that income. This risk is attributable to a number of variables, such as results of operations, unknown liabilities, government regulations, |
financial covenants relating to our debt, the need for funds for future acquisitions and/or to satisfy short- and long-term working capital |
needs of our businesses, and the discretion and authority of our board of directors to make distributions or modify our distribution |
policy. 80 As |
a partnership, our company itself will not be subject to U.S. federal income tax (except as may be imposed under certain recently enacted |
partnership audit rules), although it will file an annual partnership information return with the IRS. The information return will report |
the results of our activities and will contain a Schedule K-1 for each company shareholder reflecting allocations of profits or losses |
(and items thereof) to our members, that is, to the shareholders. Each partner of a partnership is required to report on his or her income |
tax return his or her share of items of income, gain, loss, deduction, credit, and other items of the partnership (in each case, as reflected |
on such Schedule K-1) without regard to whether cash distributions are received. Each holder will be required to report on his or her |
tax return his or her allocable share of company income, gain, loss, deduction, credit and other items for our taxable year that ends |
with or within the holder’s taxable year. Thus, holders of common shares will be required to report taxable income (and thus be |
subject to significant income tax liability) without a corresponding current receipt of cash if we were to recognize taxable income and |
not make cash distributions to the shareholders. Generally, |
the determination of a holder’s distributive share of any item of income, gain, loss, deduction, or credit of a partnership is |
governed by the operating agreement, but is also subject to income tax laws governing the allocation of the partnership’s income, |
gains, losses, deductions or credits. These laws are complex, and there can be no assurance that the IRS would not successfully challenge |
any allocation set forth in any Schedule K-1 issued by us. Whether an allocation set forth in any particular K-1 issued to a shareholder |
will be accepted by the IRS also depends on a facts and circumstances analysis of the underlying economic arrangement of our shareholders. |
If the IRS were to prevail in challenging the allocations provided by the operating agreement, the amount of income or loss allocated |
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