As filed with the U.S. Securities and Exchange Commission on
June 5, 1998
Investment Company Act File No. 811-_________
-----------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
|X| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
|_| Amendment No. ___
-------------------------
CONGRESS STREET ASSOCIATES, L.P.
(Exact name of Registrant as specified in Charter)
1285 Avenue of the Americas
New York, New York 10019-6028
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code:
(212) 713-2000
-------------------------
MARK D. GOLDSTEIN, ESQ.
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019-6028
(Name and address of agent for service)
Copy to:
STUART H. COLEMAN, ESQ.
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
-------------------------
<PAGE>
This Registration Statement has been filed by Registrant pursuant to Section
8(b) of the Investment Company Act of 1940, as amended. However, partnership
interests in the Registrant are not being registered under the Securities Act of
1933, as amended (the "1933 Act"), since such interests will be issued solely in
private placement transactions which do not involve any "public offering" within
the meaning of Section 4(2) of the 1933 Act. Investments in the Registrant may
be made only by individuals or entities which are "accredited investors" within
the meaning of Regulation D under the 1933 Act. This Registration Statement does
not constitute an offer to sell, or the solicitation of an offer to buy, any
partnership interests in the Registrant.
<PAGE>
FORM N-2
CONGRESS STREET ASSOCIATES, L.P.
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
PART A
ITEM NUMBER CAPTION PROSPECTUS CAPTION
- -------- ------- -----------------
1. Outside Front Cover Outside Front Cover of
Confidential Memorandum
2. Inside Front and Outside Front Cover of
Outside Back Cover Page Confidential Memorandum
3. Fee Table and Synopsis Summary of Terms; Fees and
Expenses; Capital Accounts and
Allocations - Incentive
Allocations
4. Financial Highlights Not Applicable
5. Plan of Distribution Not Applicable
6. Selling Shareholders Not Applicable
7. Use of Proceeds Not Applicable
8. General Description of Summary of Terms; The
the Registrant Partnership; Investment Program;
Types of Investments and Related
Risk Factors; Additional Risk
Factors
9. Management Summary of Terms; The
Partnership; Directors; The
Manager, PWFA and Granum;
Brokerage; Fees and Expenses;
Capital Accounts and Allocations
- Incentive Allocation;
Additional Information and
Summary of Limited Partnership
Agreement - Custodian
10. Capital Stock, Summary of Terms; Voting; Capital
Long-Term Debt, and Other Accounts and Allocations;
Securities Subscription for Interests;
Redemptions, Repurchases of
Interests and Transfers; Tax
Aspects; Additional Information
and Summary of Limited
Partnership Agreement
11. Defaults and Arrears on Not Applicable
Senior Securities
12. Legal Proceedings Not Applicable
<PAGE>
PART B
ITEM NUMBER CAPTION PROSPECTUS CAPTION
---------- ------- -----------------
13. Table of Contents of Not Applicable
the Statement of
Additional Information
14. Cover Page Not Applicable
15. Table of Contents Not Applicable
16. General Information Not Applicable
and History
17. Investment Objective Summary of Terms; Investment
and Policies Program; Types of Investments
and Related Risk Factors;
Additional Risk Factors;
Brokerage
18. Management Summary of Terms; Directors
19. Control Persons and The Manager, PWFA and Granum
Principal Holders of
Securities
20. Investment Advisory Summary of Terms; The Manager,
and Other Services PWFA and Granum; Fees and
Expenses; Capital Accounts and
Allocations - Incentive
Allocations; Additional
Information and Summary of
Limited Partnership Agreement
21. Brokerage Allocation Conflicts of Interest; Brokerage
and Other Practices
22. Tax Status Summary of Terms; Tax Aspects
23. Financial Statements Because Registrant has no
assets, financial statements
are omitted.
PART C
----------
The information required to be included in Part C is set forth under
the appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
Copy Number: ________________
----------------------------
CONGRESS STREET ASSOCIATES, L.P.
----------------------------
CONFIDENTIAL MEMORANDUM
_______ 1998
----------------------------
CONGRESS STREET MANAGEMENT, L.L.C.
INVESTMENT ADVISER
GENERAL PARTNER
----------------------------
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019
(212) 713-2000
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY UPON THEIR OWN
EXAMINATION OF CONGRESS STREET ASSOCIATES, L.P. (THE "PARTNERSHIP") AND THE
TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THE LIMITED
PARTNERSHIP INTERESTS OF THE PARTNERSHIP HAVE NOT BEEN FILED WITH OR APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION ("SEC") OR ANY OTHER
FEDERAL OR STATE GOVERNMENTAL AGENCY OR REGULATORY AUTHORITY OR ANY NATIONAL
SECURITIES EXCHANGE. NO AGENCY, AUTHORITY OR EXCHANGE HAS PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS CONFIDENTIAL MEMORANDUM ("MEMORANDUM") OR THE
MERITS OF AN INVESTMENT IN THE PARTNERSHIP INTERESTS OFFERED HEREBY. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TO ALL INVESTORS
THE PARTNERSHIP INTERESTS WHICH ARE DESCRIBED IN THIS MEMORANDUM HAVE
NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "1933 ACT"), OR THE SECURITIES LAWS OF ANY OF THE STATES OF THE UNITED
STATES. THE OFFERING CONTEMPLATED BY THIS MEMORANDUM WILL BE MADE IN RELIANCE
UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT FOR OFFERS
AND SALES OF SECURITIES WHICH DO NOT INVOLVE ANY PUBLIC OFFERING, AND ANALOGOUS
EXEMPTIONS UNDER STATE SECURITIES LAWS.
THIS MEMORANDUM SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF PARTNERSHIP
INTERESTS IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE IS NOT
AUTHORIZED OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER,
SOLICITATION OR SALE. NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATIONS
CONCERNING THE PARTNERSHIP THAT ARE INCONSISTENT WITH THOSE CONTAINED IN THIS
MEMORANDUM. PROSPECTIVE INVESTORS SHOULD NOT RELY ON ANY INFORMATION NOT
CONTAINED IN THIS MEMORANDUM OR THE EXHIBITS HERETO.
THIS MEMORANDUM IS INTENDED SOLELY FOR THE USE OF THE PERSON TO WHOM
IT HAS BEEN DELIVERED FOR THE PURPOSE OF EVALUATING A POSSIBLE INVESTMENT BY THE
RECIPIENT IN THE PARTNERSHIP INTERESTS DESCRIBED HEREIN, AND IS NOT TO BE
REPRODUCED OR DISTRIBUTED TO ANY OTHER PERSONS (OTHER THAN PROFESSIONAL ADVISERS
OF THE PROSPECTIVE INVESTOR RECEIVING THIS DOCUMENT).
PROSPECTIVE INVESTORS SHOULD NOT CONSTRUE THE CONTENTS OF THIS
MEMORANDUM AS LEGAL, TAX OR FINANCIAL ADVICE. EACH PROSPECTIVE INVESTOR SHOULD
CONSULT HIS OR HER OWN PROFESSIONAL ADVISERS AS TO THE LEGAL, TAX, FINANCIAL OR
OTHER MATTERS RELEVANT TO THE SUITABILITY OF AN INVESTMENT IN THE PARTNERSHIP
FOR SUCH INVESTOR.
THESE SECURITIES ARE SUBJECT TO SUBSTANTIAL RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE LIMITED PARTNERSHIP AGREEMENT OF THE PARTNERSHIP, THE 1933
ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR UP TO TWO YEARS FROM THE DATE THAT A
REPURCHASE REQUEST HAS BEEN MADE BY AN INVESTOR.
<PAGE>
TABLE OF CONTENTS
PAGE
SUMMARY OF TERMS........................................................1
THE PARTNERSHIP........................................................14
STRUCTURE..............................................................14
INVESTMENT PROGRAM.....................................................15
TYPES OF INVESTMENTS AND RELATED RISK FACTORS..........................16
ADDITIONAL RISK FACTORS................................................27
PERFORMANCE INFORMATION................................................29
THE DIRECTORS..........................................................29
THE MANAGER, PWFA AND GRANUM...........................................31
VOTING.................................................................34
CONFLICTS OF INTEREST..................................................34
BROKERAGE..............................................................38
FEES AND EXPENSES......................................................39
CAPITAL ACCOUNTS AND ALLOCATIONS.......................................41
ALLOCATION OF SPECIAL ITEMS--CERTAIN WITHHOLDING TAXES
AND OTHER EXPENDITURES..............................................44
SUBSCRIPTION FOR INTERESTS.............................................46
REDEMPTIONS, REPURCHASES OF INTERESTS AND TRANSFERS....................48
TAX ASPECTS............................................................53
ERISA CONSIDERATIONS...................................................71
ADDITIONAL INFORMATION AND SUMMARY OF LIMITED PARTNERSHIP
AGREEMENT...........................................................73
APPENDIX A--PERFORMANCE INFORMATION...................................A-1
<PAGE>
SUMMARY OF TERMS
The following summary is qualified entirely by the detailed
information appearing elsewhere in this Memorandum and by the terms and
conditions of the Partnership's limited partnership agreement (the "Partnership
Agreement"), each of which should be read carefully and retained for future
reference.
THE PARTNERSHIP Congress Street Associates, L.P.
(the "Partnership") is a newly organized
Delaware limited partnership, registered
under the Investment Company Act of
1940, as amended (the "1940 Act"), as a
closed-end, non-diversified, management
investment company.
The Partnership is a specialized
investment vehicle that may be referred
to as a registered private investment
partnership. The Partnership is similar
to an unregistered private investment
partnership in that (i) the
Partnership's portfolio may be more
aggressively managed than other
investment companies, (ii) partnership
interests in the Partnership will be
sold in large minimum denominations in
private placements solely to high net
worth individual and institutional
investors, and will be restricted as to
transfer, and (iii) the capital accounts
in the Partnership of persons who
purchase the partnership interests
offered hereby (the "Limited Partners")
will be subject to both asset-based
charges and performance-based
allocations. Unlike a private investment
partnership but like other registered
investment companies, however, the
Partnership has registered under the
1940 Act to be able to offer its
interests without limiting the number of
investors that can participate in its
investment program.
INVESTMENT PROGRAM The Partnership's investment
objective is long-term capital
appreciation. It will seek to achieve
its investment objective by investing
principally in equity securities of U.S.
issuers and other securities having
equity characteristics that the Manager
believes are substantially undervalued
relative to their potential for earnings
growth. The Partnership also may invest
in equity securities of foreign issuers
and in fixed-income securities of U.S.
and foreign issuers when the yield and
potential for capital appreciation of
such securities are considered
sufficiently attractive.
Congress Street Management, L.L.C. (the
"Manager") is the Partnership's manager
and General Partner. The Manager
emphasizes the use of fundamental
research, particularly balance sheet and
return-on-equity analysis, in
identifying companies that it believes
to be undervalued, and focuses on those
companies that it believes have, or have
the potential to develop, above-average
earnings, sales or asset growth.
The Partnership may use various
investment techniques to hedge some or
all of its investment portfolio and for
non-hedging purposes to pursue its
investment objective. For example, the
Partnership may utilize leverage, sell
securities short and purchase and sell
options on securities and stock indexes,
and engage in other derivative
transactions, subject to certain
limitations described elsewhere in this
Memorandum. The use of these techniques
will be an integral part of the
Partnership's investment program, and
involves certain risks.
See "TYPES OF INVESTMENTS AND RELATED
RISK FACTORS."
RISK FACTORS The Partnership's investment program is
speculative and entails substantial
risks. No assurance can be given that
the Partnership's investment objective
will be achieved. In particular, the
Partnership's limited diversification,
use of leverage, short sales and
derivative transactions, in certain
circumstances, can result in significant
losses to the Partnership. Investments
in illiquid securities and foreign
securities also involve certain risks.
See "TYPES OF INVESTMENTS AND RELATED
RISK FACTORS."
As a non-diversified investment company,
there are no percentage limitations on
the portion of the Partnership's assets
that may be invested in the securities
of any one issuer. As a result, the
Partnership's investment portfolio may
be subject to greater risk and
volatility than if investments had been
made in the securities of a broader
range of issuers.
The Manager will charge the Partnership
an asset-based fee and receive a
performance-based allocation. The
performance-based allocation that may be
credited to the capital account of the
Manager may create an incentive for the
Manager to cause the Partnership to make
investments that are riskier or more
speculative than those that might have
been made in the absence of the
performance-based allocation. In
addition, because the performance-based
allocation is calculated on a basis that
includes unrealized appreciation of the
Partnership's assets, the allocation may
be greater than if it were based solely
on realized gains. See "SUMMARY OF
TERMS--Fees and Expenses" and
"--Incentive Allocation."
An investment in the Partnership entails
special tax risks. See "SUMMARY OF
TERMS--Summary of Taxation."
The Partnership and the Manager are
newly formed entities and have no
operating histories upon which investors
can evaluate the performance of the
Partnership. The personnel of the
principal members of the Manager,
however, have substantial experience in
managing separately managed client
accounts and private investment
partnerships that have investment
programs that are similar to the
Partnership's investment program.
Partnership interests will not be traded
on any securities exchange or other
market and are subject to substantial
restrictions on transfer. Although the
Partnership may offer to repurchase
interests from time to time, a Limited
Partner may not be able to liquidate its
interest in the Partnership for up to
two years. See "SUMMARY OF
TERMS--Transfer Restrictions" and
"--Withdrawals and Repurchases of
Interests by the Partnership."
Limited Partners will be required each
year to pay applicable Federal and state
income taxes on their share of the
Partnership's taxable income. Because
the Partnership does not intend to make
periodic distributions of its net income
or gains, if any, to the Limited
Partners, the payment of any such taxes
by a Limited Partner will have to be
made from other sources.
LEVERAGE The Manager uses leverage in the
Partnership's investment program when
the Manager believes it appropriate to
do so. The Manager believes that the use
of leverage may enable the Partnership
to achieve a higher rate of return.
However, the use of leverage has risks
and, in certain circumstances, will
magnify the volatility of changes in the
value of the Partnership's investment
portfolio. See "TYPES OF INVESTMENTS AND
RELATED RISK FACTORS--Leverage."
MANAGEMENT The Partnership's General Partner, to
the fullest extent permitted by
applicable law, has irrevocably
delegated to a group of individuals (the
"Directors") its rights and powers to
manage and control the business affairs
of the Partnership, including the
exclusive authority to oversee and to
establish policies regarding the
management, conduct and operation of the
Partnership's business. See "THE
DIRECTORS."
The Directors have engaged the Manager
to provide investment advice to, and
day-to-day management of, the
Partnership. The Manager is a joint
venture between PW Fund Advisor, L.L.C.
("PWFA") and Granum Capital Management,
L.L.C. ("Granum"). Investment
professionals employed by Granum will
manage the Partnership's investment
portfolio on behalf of the Manager under
the supervision of PWFA's personnel.
PWFA is an indirect, wholly-owned
subsidiary of Paine Webber Group Inc.
("PW Group"), and is registered as an
investment adviser under the Investment
Advisers Act of 1940, as amended (the
"Advisers Act"). PWFA and its affiliates
provide investment advisory services to
registered investment companies, private
investment funds and individual accounts
with aggregate assets in excess of $92
billion. Granum, a registered investment
adviser under the Advisers Act, is
controlled by Lewis M. Eisenberg and
Walter F. Harrison, III, who serve as
its managing members. Granum and its
affiliates provide investment advisory
services to a registered investment
company, an offshore private investment
fund and private investment partnerships
with aggregate assets in excess of $700
million.
PLACEMENT AGENT PaineWebber Incorporated acts as
placement agent for the Partnership,
without special compensation from the
Partnership, and will bear its own costs
associated with its activities as
placement agent. PWFA and PaineWebber
Incorporated intend to compensate
PaineWebber Incorporated's or its
affiliates' account executives and
others for their ongoing servicing of
clients with whom they have placed
interests in the Partnership, and such
compensation will be based upon a
formula that takes into account the
amount of client assets being serviced
as well as the investment results
attributable to such clients' assets in
the Partnership. See "CONFLICTS OF
INTEREST--PWFA."
CONFLICTS OF INTEREST The investment activities of the Manager
and its affiliates for their own
accounts and the other accounts they
manage may give rise to conflicts of
interest which may disadvantage the
Partnership. See "CONFLICTS OF
INTEREST."
FEES AND EXPENSES PWFA provides certain management and
administrative services to the
Partnership, including, among other
things, providing office space and other
support services to the Partnership. In
consideration for such services, the
Partnership will pay PWFA a monthly
management fee of .125% (1.50% on an
annualized basis) of the Partnership's
net assets for the month, excluding
assets attributable to the Manager's
capital account (the "Fee"). The Fee
will be paid to PWFA out of the
Partnership's assets, and debited
against Limited Partners' capital
accounts. A portion of the Fee will be
paid by PWFA to Granum.
The Partnership will bear all expenses
incurred in the business of the
Partnership, including, but not limited
to, the following: all costs and
expenses related to portfolio
transactions and positions for the
Partnership's account; legal fees;
accounting fees; costs of insurance;
organizational and registration
expenses; certain offering costs;
expenses of meetings of Directors and
Limited Partners; and the fee paid to
______________, or such other
administrator, including PaineWebber
Incorporated or its affiliates, as may
be appointed by the Directors, for
providing certain administration,
accounting and investor services to the
Partnership. See "FEES AND EXPENSES."
ALLOCATION OF PROFIT
AND LOSS The net profits or net losses of the
the Partnership (including, without
limitation, net realized gain or loss
and the net change in unrealized
appreciation or depreciation of
securities positions) will be credited
to or debited against the capital
accounts of the Manager in its capacity
as General Partner and Limited Partners
(collectively, the "Partners") at the
end of each fiscal period in accordance
with their respective partnership
percentages for such period. Each
Partner's partnership percentage will be
determined by dividing as of the start
of a fiscal period the balance of the
Partner's capital account by the sum of
the balances of the capital accounts of
all Partners of the Partnership. See
"CAPITAL ACCOUNTS AND ALLOCATIONS--
Allocation of Net Profits and Net
Losses."
INCENTIVE ALLOCATION At the end of the 12-month period
following the admission of a Limited
Partner to the Partnership, and
generally at the end of each fiscal year
thereafter, an amount equal to 20% of
the net profits, if any, that would
otherwise be credited to the Limited
Partner's account for such period will
instead be credited to the account of
the Manager. This allocation (the
"Incentive Allocation") will be made
only with respect to net profits that
exceed any net losses previously debited
to the account of such Limited Partner
which have not been offset by any net
profits subsequently credited to the
account of the Limited Partner. See
"CAPITAL ACCOUNTS AND
ALLOCATIONS--Incentive Allocation."
SUBSCRIPTION FOR INTERESTS Both initial and additional
subscriptions for interests by eligible
investors may be accepted at such times
as the Manager may determine, subject to
the receipt of cleared funds on or
before the acceptance date set by the
Manager. The Partnership reserves the
right to reject any subscription for
interests in the Partnership. Generally,
the minimum initial investment in the
Partnership is $250,000. For employees
of the Manager and its affiliates, and
members of their immediate families, the
minimum initial investment is $________.
The Partnership may vary the investment
minimums from time to time. The
Partnership, in its discretion, may
suspend subscriptions for interests at
any time. In addition, because the
Partnership may generate "unrelated
business taxable income" ("UBTI"),
charitable remainder trusts may not want
to purchase Partnership interests.
INITIAL CLOSING DATE The initial closing date for
subscriptions of interests in the
Partnership is August 20, 1998. The
Manager, in its sole discretion, may
postpone the closing date for up to 60
days.
TRANSFER RESTRICTIONS Limited Partner interests in the
Partnership may be transferred only (i)
by operation of law pursuant to the
death, bankruptcy, insolvency or
dissolution of a Limited Partner or (ii)
with the written consent of the Manager,
which may be withheld in its sole and
absolute discretion and is expected to
be granted, if at all, only under
extenuating circumstances, in connection
with a transfer to an entity that does
not result in a change of beneficial
ownership. The foregoing permitted
transferees will not be allowed to
become substituted Limited Partners
without the consent of the Manager,
which may be withheld in its sole and
absolute discretion. See "REDEMPTIONS,
REPURCHASES OF INTERESTS AND
TRANSFERS--Transfers of Interests."
WITHDRAWALS AND REPURCHASES
OF INTERESTS BY THE
PARTNERSHIP No Limited Partner will have the right
to require the Partnership to redeem the
Limited Partner's Partnership interest.
The Partnership from time to time may
offer to repurchase interests pursuant
to written tenders by Partners. These
repurchases will be made at such times
and on such terms as may be determined
by the Directors, in their complete and
exclusive discretion. In determining
whether the Partnership should
repurchase interests or portions thereof
from Partners pursuant to written
tenders, the Directors will consider the
recommendation of the Manager. Beginning
in 2000, the Manager expects that
generally it will recommend to the
Directors that the Partnership offer to
repurchase interests from Partners twice
each year, in June and December, and
intends to recommend the making of an
offer to repurchase interests effective
as of September 1999 and December 1999.
The Directors also will consider the
following factors, among others, in
making such determination: (i) whether
any Limited Partners have requested to
tender interests or portions thereof to
the Partnership; (ii) the liquidity of
the Partnership's assets; (iii) the
investment plans and working capital
requirements of the Partnership; (iv)
the relative economies of scale with
respect to the size of the Partnership;
(v) the history of the Partnership in
repurchasing interests or portions
thereof; (vi) the condition of the
securities markets; and (vii) the
anticipated tax consequences of any
proposed repurchases of interests or
portions thereof. In addition, the
Partnership may repurchase an interest
in the Partnership or portion thereof of
a Partner or any person acquiring an
interest or portion thereof from or
through a Partner if, among other
reasons, the Manager determines that it
would be in the best interests of the
Partnership for the Partnership to
repurchase such an interest or portion
thereof. See "REDEMPTIONS, REPURCHASES
OF INTERESTS AND TRANSFERS--No Right of
Redemption" and "--Repurchases of
Interests."
The Partnership Agreement provides that
the Partnership shall be dissolved if
the interest of any Limited Partner that
has submitted a written request, in
accordance with the terms of the
Partnership Agreement, to tender its
entire interest for repurchase by the
Partnership has not been repurchased
within a period of two years of such
request.
SUMMARY OF TAXATION Counsel to the Partnership has rendered
an opinion that the Partnership will be
treated as a partnership and not as an
association taxable as a corporation for
Federal income tax purposes. Counsel to
the Partnership has rendered its opinion
that, under a "facts and circumstances"
test set forth in regulations adopted by
the U.S. Treasury Department, the
Partnership will not be treated as a
"publicly traded partnership" taxable as
a corporation. Accordingly, the
Partnership should not be subject to
Federal income tax, and each Limited
Partner will be required to report on
its own annual tax return its
distributive share of the Partnership's
taxable income or loss.
If it were determined that the
Partnership should be treated as an
association or a publicly traded
partnership taxable as a corporation, as
a result of a successful challenge to
the opinions rendered by counsel to the
Partnership or otherwise, the taxable
income of the Partnership would be
subject to corporate income tax and any
distributions of profits from the
Partnership would be treated as
dividends.
ERISA PLANS AND OTHER
TAX-EXEMPT ENTITIES Investors subject to the Employee
Retirement Income Security Act of 1974,
as amended ("ERISA"), and other
tax-exempt entities (each a "tax-exempt"
entity) may purchase interests in the
Partnership. The Partnership's assets
should not be considered to be "plan
assets" for purposes of ERISA's
fiduciary responsibility and prohibited
transaction rules or similar provisions
of the Internal Revenue Code of 1986, as
amended (the "Code"). The Partnership
may utilize leverage in connection with
its trading activities. Therefore, a
tax-exempt Limited Partner may incur
income tax liability with respect to its
share of the net profits from such
leveraged transactions to the extent
they are treated as giving rise to UBTI.
The Partnership will provide to
tax-exempt Limited Partners such
accounting information as such Partners
require to report their UBTI for income
tax purposes.
Investment in the Partnership by
tax-exempt entities requires special
consideration. Trustees or
administrators of such entities are
urged to review carefully the matters
discussed in this Memorandum.
TERM The Partnership's term is perpetual
unless the Partnership is otherwise
terminated under the terms of the
Partnership Agreement. See "ADDITIONAL
INFORMATION AND SUMMARY OF LIMITED
PARTNERSHIP AGREEMENT-- Term,
Dissolution and Liquidation."
REPORTS TO PARTNERS The Partnership will furnish to
Partners as soon as practicable after
the end of each taxable year such
information as is necessary for Partners
to complete Federal and state income tax
or information returns, along with any
other tax information required by law.
The Partnership also will send to
Partners a semi-annual and an audited
annual report generally within 60 days
after the close of the period for which
the report is being made, or as
otherwise required by the 1940 Act.
Quarterly reports from the Manager
regarding the Partnership's operations
during each quarter also will be sent to
Partners.
<PAGE>
THE PARTNERSHIP
The Partnership is registered under the 1940 Act as a non-diversified,
closed-end management investment company. The Partnership was organized as a
limited partnership under the laws of Delaware on June 5, 1998, and has no
operating history. The Partnership's principal office is located at 1285 Avenue
of the Americas, New York, New York 10019, and its telephone number is (212)
713-2000. Investment advisory services are provided to the Partnership by the
Manager, which also is the Partnership's General Partner.
STRUCTURE
The Partnership is a specialized investment vehicle that combines many
of the features of a private investment partnership with those of a closed-end
investment company. Private investment partnerships are unregistered, commingled
asset pools that often are highly leveraged, managed aggressively and offered in
large minimum denominations, often over $1 million, through private placements
to a limited number of high net worth individual and institutional investors.
The general partners of these partnerships typically are compensated through
asset-based fees and performance-based allocations. Closed-end investment
companies are 1940 Act registered pools typically organized as corporations or
business trusts that usually are managed more conservatively than most private
investment partnerships, subject to relatively modest minimum investment
requirements (often less than $2,000), and publicly offered to a broad range of
investors. The advisers to these companies typically are compensated through
asset-based, but not performance-based, fees.
The Partnership is similar to private investment partnerships in that
its investment portfolio may be actively managed and Partnership interests will
be sold in comparatively large minimum denominations in private placements
solely to high net worth individual and institutional investors, whose capital
accounts will be subject to both asset-based fees and performance-based
allocations. However, the Partnership, like other closed-end investment
companies, has registered under the 1940 Act to be able to offer its interests
without limiting the number of investors that can participate in its investment
program. This structure permits a larger number of investors that have a higher
tolerance for investment risk to participate in an aggressive investment program
without making the more substantial minimum capital commitment that is required
by many private investment partnerships.
INVESTMENT PROGRAM
The Partnership's investment objective is long-term capital
appreciation. The Partnership seeks to achieve its investment objective by
investing principally in equity securities of U.S. issuers and other securities
having equity characteristics that the Manager believes are substantially
undervalued relative to their potential for earnings growth. The Partnership
also may invest in equity securities of foreign issuers and in fixed-income
securities of U.S. and foreign issuers when the yield and potential for capital
appreciation of such securities are considered sufficiently attractive.
The Manager emphasizes the use of fundamental research, particularly
balance sheet and return-on-equity analysis, in identifying companies that it
believes to be undervalued, and focuses on those companies that it believes
have, or have the potential to develop, above-average earnings, sales or asset
growth. In evaluating investments, the Manager also seeks to identify companies
that may be involved in special corporate situations, the occurrence of which
would favorably affect the value of the companies' equity securities. Such
situations could include, among other developments, the following: a change in
management or management policies; the acquisition of a significant equity
position in the company by an investor or investor group; a merger,
reorganization or the sale of a division; the spin-off of a subsidiary,
division, or other substantial assets; or a third-party or issuer tender offer.
The Manager believes that these situations can serve as catalysts for capital
appreciation in the equity securities of undervalued companies. The
Partnership's investments are made without regard to market capitalization. From
time to time, the Partnership may invest a significant portion of its assets in
the securities of companies that have smaller market capitalizations.
Unlike many other investment companies which, as a matter of
investment policy, diversify portfolio holdings so that no more than a specified
percentage of their assets are invested in the securities of any one issuer, the
Partnership does not have fixed guidelines for diversification. In addition,
although the Partnership will not invest more than 25% of the value of its net
assets in the securities of issuers engaged in any one industry (other than U.S.
Government securities), investments by the Partnership may emphasize particular
industries or market segments which the Manager believes offer the opportunity
for maximizing profit. See "TYPES OF INVESTMENTS AND RELATED RISK
FACTORS--Non-Diversified Status."
The Partnership may use various investment techniques to hedge some or
all of its investment portfolio or to pursue its investment objective. In this
regard, the Partnership may utilize leverage, sell securities short, and
purchase and sell options on securities and stock indexes and other derivatives,
subject to certain limitations. See "TYPES OF INVESTMENTS AND RELATED RISK
FACTORS--Leverage," "--Short Sales," and "--Special Investment Instruments and
Techniques."
The Partnership may invest, for defensive purposes or otherwise, some
or all of its assets in high quality fixed-income securities and money market
instruments, or may hold cash or cash equivalents in such amounts as the Manager
deems appropriate under the circumstances. The Partnership also may invest in
these instruments pending allocation of the offering proceeds. See "TYPES OF
INVESTMENTS AND RELATED RISK FACTORS--Money Market Instruments."
Additional information about the types of investments that will be
made by the Partnership, its investment practices and related risk factors is
provided below. Except as otherwise indicated, the Partnership's investment
policies and restrictions are not fundamental and may be changed without a vote
of the Limited Partners. See "TYPES OF INVESTMENTS AND RELATED RISK
FACTORS--Investment Restrictions."
THE PARTNERSHIP'S INVESTMENT PROGRAM IS SPECULATIVE AND ENTAILS
SUBSTANTIAL RISKS. THERE CAN BE NO ASSURANCE THAT THE PARTNERSHIP'S INVESTMENT
OBJECTIVE WILL BE ACHIEVED OR THAT ITS INVESTMENT PROGRAM WILL BE SUCCESSFUL. IN
PARTICULAR, THE PARTNERSHIP'S USE OF LEVERAGE, SHORT SALES AND DERIVATIVE
TRANSACTIONS, AND ITS LIMITED DIVERSIFICATION CAN, IN CERTAIN CIRCUMSTANCES,
RESULT IN SIGNIFICANT LOSSES TO THE PARTNERSHIP. INVESTORS SHOULD CONSIDER THE
PARTNERSHIP AS A SUPPLEMENT TO AN OVERALL INVESTMENT PROGRAM AND SHOULD INVEST
ONLY IF THEY ARE WILLING TO UNDERTAKE THE RISKS INVOLVED. AN INVESTOR COULD LOSE
MONEY BY INVESTING IN THE PARTNERSHIP.
TYPES OF INVESTMENTS AND RELATED RISK FACTORS
GENERAL
All securities investments risk the loss of capital. To the extent the
Partnership holds the securities of a limited number of issuers, and emphasizes
the securities of issuers in a limited number of industries or market segments,
the risk of an investment in the Partnership is increased. The value of the
Partnership's total net assets should be expected to fluctuate. The
Partnership's use of leverage is likely to cause its net assets to appreciate or
depreciate at a greater rate than if leverage were not used.
EQUITY SECURITIES
The Partnership's investment portfolio may include long and short
positions in common stocks, preferred stocks and convertible securities of U.S.
and foreign issuers. The Partnership also may invest in depositary receipts
relating to foreign securities. See "TYPES OF INVESTMENTS AND RELATED RISK
FACTORS--Foreign Securities." The Partnership may purchase equity securities
issued by real estate investment trusts. Equity securities also include warrants
and options. Equity securities fluctuate in value, often based on factors
unrelated to the value of the issuer of the securities, and such fluctuations
can be pronounced.
The Partnership may invest in equity securities without restriction as
to market capitalization, such as those issued by smaller capitalization
companies, including micro cap companies. The prices of the securities of these
smaller companies may be subject to more abrupt or erratic market movements than
larger, more established companies, because these securities typically are
traded in lower volume and the issuers typically are more subject to changes in
earnings and prospects. The Partnership may purchase securities in all available
securities trading markets, including initial public offerings and the
aftermarket.
FIXED-INCOME SECURITIES
The Partnership may invest in fixed-income securities. The Manager
will invest in these securities when their yield and potential for capital
appreciation are considered sufficiently attractive and also may invest in these
securities for defensive purposes and to maintain liquidity. Fixed-income
securities include bonds, notes and debentures issued by corporations; debt
securities issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities ("U.S. Government Securities"); municipal securities; and
mortgage-backed and asset-backed securities. These securities may pay fixed,
variable or floating rates of interest, and may include zero coupon obligations.
Fixed-income securities are subject to the risk of the issuer's inability to
meet principal and interest payments on its obligations (i.e., credit risk) and
are subject to the risk of price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness or financial condition of
the issuer and general market liquidity (i.e., market risk). Certain portfolio
securities, such as those with interest rates that fluctuate directly or
indirectly based on multiples of a stated index, are designed to be highly
sensitive to changes in interest rates and can subject the holders thereof to
extreme reductions of yield and possibly loss of principal.
The Partnership may invest in both investment grade and non-investment
grade debt securities. Investment grade debt securities are securities that have
received a rating from at least one nationally recognized statistical rating
organization ("NRSRO") in one of the four highest rating categories or, if not
rated by any NRSRO, have been determined by the Manager to be of comparable
quality. Non-investment grade debt securities are considered by the NRSRO to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. Non-investment grade debt securities in the lowest rating
categories may involve a substantial risk of default or may be in default.
Adverse changes in economic conditions or developments regarding the individual
issuer are more likely to cause price volatility and weaken the capacity of the
issuers of non-investment grade debt securities to make principal and interest
payments than is the case for higher grade debt securities. In addition, the
market for lower grade debt securities may be thinner and less liquid than for
higher grade debt securities.
FOREIGN SECURITIES
Although the Partnership will invest principally in equity securities
of publicly traded U.S. companies, it may invest in equity and fixed-income
securities of foreign issuers and in depositary receipts, such as American
Depositary Receipts ("ADRs"), that represent indirect interests in securities of
foreign issuers. Foreign securities in which the Partnership may invest may be
listed on foreign securities exchanges or traded in foreign over-the-counter
markets.
Foreign securities markets generally are not as developed or efficient
as those in the United States. Securities of some foreign issuers are less
liquid and more volatile than securities of comparable U.S. issuers. Similarly,
volume and liquidity in most foreign securities markets are less than in the
United States and, at times, volatility of price can be greater than in the
United States.
Because evidences of ownership of such securities usually are held
outside the United States, the Partnership will be subject to additional risks
which include possible adverse political and economic developments, seizure or
nationalization of foreign deposits or adoption of governmental restrictions
which might adversely affect or restrict the payment of principal and interest
on the foreign securities to investors located outside the country of the
issuer, whether from currency blockage or otherwise.
Since foreign securities often are purchased with and payable in
currencies of foreign countries, the value of these assets as measured in U.S.
dollars may be affected favorably or unfavorably by changes in currency rates
and exchange control regulations.
Developing countries have economic structures that are generally less
diverse and mature, and political systems that are less stable, than those of
developed countries. The markets of developing countries may be more volatile
than the markets of more mature economies; however, such markets may provide
higher rates of return to investors. Many developing countries providing
investment opportunities for the Partnership have experienced substantial, and
in some periods extremely high, rates of inflation for many years. Inflation and
rapid fluctuations in inflation rates have had and may continue to have adverse
effects on the economies and securities markets of certain of these countries.
FOREIGN CURRENCY TRANSACTIONS
The Partnership may engage in foreign currency transactions for a
variety of purposes, including: to fix in U.S. dollars, between trade and
settlement date, the value of a security the Partnership has agreed to buy or
sell; or to hedge the U.S. dollar value of securities the Partnership already
owns, particularly if it expects a decrease in the value of the currency in
which the foreign security is denominated.
Foreign currency transactions may involve, for example, the
Partnership's purchase of foreign currencies for U.S. dollars or the maintenance
of short positions in foreign currencies, which would involve the Partnership
agreeing to exchange an amount of a currency it did not currently own for
another currency at a future date in anticipation of a decline in the value of
the currency sold relative to the currency the Partnership contracted to receive
in the exchange. The Partnership's success in these transactions will depend
principally on the Manager's ability to predict accurately the future exchange
rates between foreign currencies and the U.S. dollar.
MONEY MARKET INSTRUMENTS
The Partnership may invest, for defensive purposes or otherwise, some
or all of its assets in high quality fixed-income securities, money market
instruments, and money market mutual funds, or hold cash or cash equivalents in
such amounts as the Manager deems appropriate under the circumstances. The
Partnership also may invest in these instruments pending allocation of the
offering proceeds. Money market instruments are high quality, short-term
fixed-income obligations, which generally have remaining maturities of one year
or less, and may include U.S. Government Securities, commercial paper,
certificates of deposit and bankers' acceptances issued by domestic branches of
United States banks that are members of the Federal Deposit Insurance
Corporation, and repurchase agreements.
NON-DIVERSIFIED STATUS
The classification of the Partnership as a "non-diversified"
investment company means that the percentage of the Partnership's assets that
may be invested in the securities of a single issuer is not limited by the 1940
Act. A "diversified" investment company is required by the 1940 Act generally,
with respect to 75% of its total assets, to invest not more than 5% of such
assets in the securities of a single issuer. Since a relatively high percentage
of the Partnership's assets may be invested in the securities of a limited
number of issuers, some of which may be within the same industry, the
Partnership's portfolio securities may be more sensitive to changes in the
market value of a single issuer and to events affecting a particular industry or
market segment.
The Partnership does not intend to make investments for the purpose of
exercising control or management over a portfolio company.
LEVERAGE
The Partnership may borrow money from brokers and banks for investment
purposes. Borrowing for investment purposes, which is known as "leverage," is a
speculative investment technique and involves certain risks.
Although leverage will increase investment return if the Partnership
earns a greater return on the investments purchased with borrowed funds than it
pays for the use of such funds, using leverage will decrease investment return
if the Partnership fails to earn as much on such investments as it pays for the
use of such funds. Using leverage, therefore, will magnify the volatility of the
value of the Partnership's investment portfolio. If the Partnership's equity or
debt instruments decline in value, the Partnership could be required to deposit
additional collateral with the lender or suffer mandatory liquidation of the
pledged securities to compensate for the decline in value. In the event of a
sudden, precipitous drop in value of the Partnership's assets, whether resulting
from changes in market value or from redemptions, the Partnership might not be
able to liquidate assets quickly enough to pay off its borrowing. Money borrowed
for leveraging will be subject to interest costs that may or may not be
recovered by return on the securities purchased. The Partnership also may be
required to maintain minimum average balances in connection with its borrowings
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate.
The 1940 Act limits the amount an investment company can borrow by
imposing an asset coverage requirement of 300% of its indebtedness, including
amounts borrowed, measured at the time the investment company incurs the
indebtedness (the "Asset Coverage Requirement"). This means that the value of
the Partnership's total indebtedness may not exceed one-third the value of its
total assets, including such indebtedness, measured at the time the Partnership
incurs the indebtedness.
To obtain "leveraged" market exposure in certain investments and to
increase the overall return to the Partnership of various investments, the
Partnership may purchase options and other instruments that do not constitute
"indebtedness" for purposes of the Asset Coverage Requirement. These instruments
nevertheless may involve significant economic leverage and therefore, in some
cases, may involve significant risks of loss.
SHORT SALES
The Partnership may attempt to limit exposure to a possible market
decline in the value of its portfolio securities through short sales of
securities that the Manager believes possess volatility characteristics similar
to those being hedged. In addition, the Partnership may use short sales for
non-hedging purposes. To effect a short sale, the Partnership will borrow a
security from a brokerage firm to make delivery to the buyer. The Partnership
then is obligated to replace the borrowed security by purchasing it at the
market price at the time of replacement. The price at such time may be more or
less than the price at which the security was sold by the Partnership, which
would result in a loss or gain, respectively. These techniques are speculative
and, in certain circumstances, can substantially increase the impact of adverse
price movements on the Partnership's portfolio. A short sale of a security
involves the risk of an unlimited increase in the market price of the security
which could result in an inability to cover the short position and thus a
theoretically unlimited loss. There can be no assurance that securities
necessary to cover the short position will be available for purchase.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements involve the sale of a security to a bank
or securities dealer and the simultaneous agreement to repurchase the security
for a fixed price, reflecting a market rate of interest, on a specific date.
These transactions involve a risk that the other party to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as scheduled,
which may result in losses to the Partnership. Reverse repurchase agreements are
a form of leverage which also may increase the volatility of the Partnership's
investment portfolio.
SPECIAL INVESTMENT TECHNIQUES
The Partnership may utilize a variety of special investment techniques
to hedge its investment portfolio against various risks (such as changes in
interest rates) or other factors that generally affect the values of securities
and for non-hedging purposes. These techniques may involve the use of derivative
transactions. The techniques the Partnership may employ may change over time as
new instruments and techniques are introduced or as a result of regulatory
developments. Certain of the special investment techniques that the Partnership
may use are speculative and involve a high degree of risk, particularly when
used for non-hedging purposes.
DERIVATIVES. The Partnership may invest in, or enter into, derivatives
("Derivatives"). These are financial instruments which derive their performance,
at least in part, from the performance of an underlying asset, index or interest
rate. Derivatives can be volatile and involve various types and degrees of risk,
depending upon the characteristics of the particular Derivative and the
portfolio as a whole. Derivatives permit the Partnership to increase or decrease
the level of risk, or change the character of the risk, to which its portfolio
is exposed in much the same way as the Partnership can increase or decrease the
level of risk, or change the character of the risk, of its portfolio by making
investments in specific securities.
Derivatives may entail investment exposures that are greater than
their cost would suggest, meaning that a small investment in Derivatives could
have a large potential impact on the Partnership's performance.
If the Partnership invests in Derivatives at inopportune times or
judges market conditions incorrectly, such investments may lower the
Partnership's return or result in a loss. The Partnership also could experience
losses if its Derivatives were poorly correlated with its other investments, or
if the Partnership were unable to liquidate its position because of an illiquid
secondary market. The market for many Derivatives is, or suddenly can become,
illiquid. Changes in liquidity may result in significant, rapid and
unpredictable changes in the prices for Derivatives.
OPTIONS. Specifically, the Partnership may engage in options
transactions. The Partnership also may invest in so-called "synthetic" options
or other derivative instruments written by broker-dealers. Options transactions
may be effected on securities exchanges or in the over-the-counter market. When
options are purchased over-the-counter, the Partnership bears the risk that the
counterparty that wrote the option will be unable or unwilling to perform its
obligations under the option contract. These options also may be illiquid and,
in such cases, the Partnership may have difficulty closing out its position.
Over-the-counter options purchased and sold by the Partnership also may include
options on baskets of specific securities.
The Partnership may purchase and sell call and put options in respect
of specific securities, and may write and sell covered or uncovered call and put
options.
A covered call option, which is a call option with respect to which
the Partnership owns the underlying security, that is sold by the Partnership
exposes the Partnership during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or to possible continued holding of a security that might otherwise
have been sold to protect against depreciation in the market price of the
security. A covered put option, which is a put option with respect to which the
Partnership has segregated cash or liquid securities to fulfill the obligation
undertaken, that is sold by the Partnership exposes the Partnership during the
term of the option to a decline in price of the underlying security while
depriving the Partnership of the opportunity to invest the segregated assets.
The Partnership may close out a position when writing options by
purchasing an option on the same security with the same exercise price and
expiration date as the option that it has previously written on such security.
The Partnership will realize a profit or loss if the amount paid to purchase an
option is less or more, as the case may be, than the amount received from the
sale thereof. To close out a position as a purchaser of an option, the
Partnership would ordinarily make a similar "closing sale transaction," which
involves liquidating the Partnership's position by selling the option previously
purchased, although the Partnership would be entitled to exercise the option
should it deem it advantageous to do so.
WARRANTS. Warrants are derivative instruments that permit, but do not
obligate, the holder to subscribe for other securities. Warrants do not carry
with them the right to dividends or voting rights with respect to the securities
that they entitle the holder to purchase, and they do not represent any rights
in the assets of the issuer. As a result, warrants may be considered more
speculative than certain other types of investments. In addition, the value of a
warrant does not necessarily change with the value of the underlying securities
or commodities, and a warrant ceases to have value if it is not exercised prior
to its expiration date.
CALL AND PUT OPTIONS ON SECURITIES INDEXES. The Partnership may
purchase and sell call and put options on stock indexes, such as the Standard &
Poor's 500 Composite Stock Price Index (the "S&P 500") or the Standard & Poor's
100 Index, listed on national securities exchanges or traded in the over-the-
counter market for hedging purposes and to pursue its investment objective. A
stock index fluctuates with changes in the market values of the stocks that
comprise the index. Accordingly, successful use by the Partnership of options on
stock indexes will be subject to the Manager's ability to predict correctly
movements in the direction of the stock market generally or segments thereof.
This requires different skills and techniques than forecasting changes in the
price of individual stocks.
LENDING PORTFOLIO SECURITIES
The Partnership may lend securities from its portfolio to brokers,
dealers and other financial institutions needing to borrow securities to
complete certain transactions. The Partnership continues to be entitled to
payments in amounts equal to the interest, dividends or other distributions
payable on the loaned securities which affords the Partnership an opportunity to
earn interest on the amount of the loan and on the loaned securities'
collateral. Loans of portfolio securities may not exceed 33-1/3% of the value of
the Partnership's total assets, and the Partnership will receive collateral
consisting of cash, U.S. Government Securities or irrevocable letters of credit
which will be maintained at all times in an amount equal to at least 100% of the
current market value of the loaned securities. The Partnership might experience
risk of loss if the institution with which it has engaged in a portfolio loan
transaction breaches its agreement with the Partnership.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT SECURITIES
To reduce the risk of changes in interest rates and securities prices,
the Partnership may purchase securities on a forward commitment, when-issued or
delayed delivery basis, which means delivery and payment take place a number of
days after the date of the commitment to purchase. The payment obligation and
the interest rate receivable with respect to such purchases are fixed when the
Partnership enters into the commitment, but the Partnership does not make
payment until it receives delivery from the counterparty. The Partnership will
commit to purchase such securities only with the intention of actually acquiring
the securities, but the Partnership may sell these securities before the
settlement date if it is deemed advisable. The Partnership will place in a
segregated account permissible liquid assets at least equal at all times to the
amount of the commitments.
Securities purchased on a forward commitment or when-issued or
delayed delivery basis are subject to changes in value, generally changing in
the same way, i.e., appreciating when interest rates decline and depreciating
when interest rates rise, based upon the public's perception of the
creditworthiness of the issuer and changes, real or anticipated, in the level of
interest rates. Securities so purchased may expose the Partnership to risks
because they may experience such fluctuations prior to their actual delivery.
Purchasing securities on a when-issued or delayed delivery basis can involve the
additional risk that the yield available in the market when the delivery takes
place actually may be higher than that obtained in the transaction itself.
Purchasing securities on a forward commitment, when-issued or delayed delivery
basis when the Partnership is fully or almost fully invested may result in
greater potential fluctuation in the value of the Partnership's net assets. In
addition, there is a risk that securities purchased on a when-issued or delayed
delivery basis may not be delivered and that the purchaser of securities sold by
the Partnership on a forward basis will not honor its purchase obligation. In
such cases, the Partnership may incur a loss.
RESTRICTED AND ILLIQUID INVESTMENTS
Although the Partnership will invest primarily in publicly traded
securities, it may invest up to 10% of its assets in restricted securities and
other investments which are illiquid. Restricted securities are securities that
may not be sold to the public without an effective registration statement under
the 1933 Act, or, if they are unregistered, may be sold only in a privately
negotiated transaction or pursuant to an exemption from registration under the
1933 Act.
Where registration is required to sell a security, the Partnership may
be obligated to pay all or part of the registration expenses, and a considerable
period may elapse between the decision to sell and the time the Partnership may
be permitted to sell a security under an effective registration statement. If
during such a period adverse market conditions were to develop, the Partnership
might obtain a less favorable price than prevailed when it decided to sell.
Restricted securities for which no market exists and other illiquid investments
are valued at fair value as determined in accordance with procedures approved
and periodically reviewed by the Directors.
The Partnership may be unable to sell restricted and other illiquid
securities at the most opportune times or at prices approximating the value at
which the Partnership purchased such securities.
INVESTMENT RESTRICTIONS
The Partnership has adopted the following investment restrictions as
fundamental policies, which cannot be changed without approval by holders of a
majority (as defined in the 1940 Act) of the Partnership's outstanding voting
securities. The Partnership may not:
(1) Issue senior securities, except that, to the extent permitted by the
1940 Act, the Partnership may borrow money (a) to finance portfolio
transactions and engage in other transactions involving the issuance
by the Partnership of "senior securities" representing indebtedness,
and (b) from banks for temporary or emergency purposes or in
connection with repurchases of, or tenders for, the Partnership's
interests.
(2) Underwrite securities of other issuers, except insofar as the
Partnership may be deemed an underwriter under the 1933 Act in
connection with the disposition of its portfolio securities.
(3) Make loans, except through purchasing fixed-income securities, lending
portfolio securities or entering into repurchase agreements in a
manner consistent with the Partnership's investment policies or as
otherwise permitted under the 1940 Act.
(4) Purchase, hold or deal in real estate, except that the Partnership may
invest in securities that are secured by real estate, or issued by
companies that invest or deal in real estate or real estate investment
trusts.
(5) Invest in commodities or commodity contracts, except that the
Partnership may purchase and sell foreign currency and options and
forward contracts, including those related to indexes, and options on
indexes.
(6) Invest more than 25% of the value of its total assets in the
securities of issuers in any single industry, except that the
Partnership may purchase U.S. Government Securities without
limitation.
Under the 1940 Act, the vote of a majority of the outstanding voting
securities of an investment company, such as the Partnership, means the vote, at
the annual or a special meeting of the security holders of such company duly
called, (A) of 67% or more of the voting securities present at such meeting, if
the holders of more than 50% of the outstanding voting securities of such
company are present or represented by proxy; or (B) of more than 50% of the
outstanding voting securities of such company, whichever is less.
With respect to these investment restrictions, and other policies
described in this Memorandum, if a percentage restriction is adhered to at the
time of an investment or transaction, a later change in percentage resulting
from a change in the values of investments or the value of the Partnership's
total assets, unless otherwise stated, will not constitute a violation of such
restriction or policy.
The Partnership's investment objective is fundamental and may not be
changed without the vote of a majority (as defined by the 1940 Act) of the
Partnership's outstanding voting securities.
ADDITIONAL RISK FACTORS
INCENTIVE ALLOCATION
The Incentive Allocation of 20% of net profits to the capital account
of the Manager may create an incentive for the Manager to cause the Partnership
to make investments that are riskier or more speculative than would be the case
in the absence of the Incentive Allocation. In addition, because the allocation
is calculated on a basis that includes unrealized appreciation of the
Partnership's assets, the Incentive Allocation may be greater than if it were
based solely on realized gains. See "CAPITAL ACCOUNTS AND ALLOCATIONS--Incentive
Allocation."
TAX RISKS
Counsel to the Partnership has rendered an opinion that the
Partnership will be treated as a partnership and not as an association taxable
as a corporation for Federal income tax purposes. Counsel to the Partnership has
rendered its opinion that, under a "facts and circumstances" test set forth in
regulations adopted by the U.S. Treasury Department, the Partnership will not be
treated as a "publicly traded partnership" taxable as corporation. If it were
determined that the Partnership should be treated as an association or publicly
traded partnership taxable as a corporation, as a result of a successful
challenge to the opinions rendered by counsel to the Partnership or otherwise,
the taxable income of the Partnership would be subject to corporate income tax
and distributions of profits from the Partnership would be treated as dividends.
See "TAX ASPECTS--Tax Treatment of Partnership Operations--Classification of
the Partnership."
LACK OF OPERATING HISTORY
The Partnership and the Manager are newly formed entities and have no
operating histories upon which investors can evaluate the performance of the
Partnership. However, as discussed below, the personnel of the principal members
of the Manager have substantial experience in managing portfolios of securities
through separately managed client accounts and through private investment funds.
Moreover, the personnel of Granum who are responsible for managing the
Partnership's investment portfolio have substantial experience in managing
investment funds that have investment programs that are substantially similar to
the Partnership's investment program. See "PERFORMANCE INFORMATION," "THE
MANAGER, PWFA AND GRANUM" and "CONFLICTS OF INTEREST--Participation in
Investment Opportunities."
LIQUIDITY RISKS
Partnership interests will not be traded on any securities exchange or
other market and are subject to substantial restrictions on transfer. Although
the Partnership may offer to repurchase Limited Partner interests from time to
time, a Limited Partner may not be able to liquidate its interest in the
Partnership for up to two years. Beginning in 2000, the Manager expects that
generally it will recommend to the Directors that the Partnership offer to
repurchase interests from Partners twice each year, in June and December, and
also intends to recommend the making of offers to repurchase interests effective
as of September 1999 and December 1999. See "REDEMPTIONS, REPURCHASES OF
INTERESTS AND TRANSFERS."
DISTRIBUTIONS TO LIMITED PARTNERS AND PAYMENT OF TAX LIABILITY
The Partnership does not intend to make periodic distributions of its
net income or gains, if any, to Limited Partners. Whether or not distributions
are made, Limited Partners will be required each year to pay applicable Federal
and state income taxes on their respective shares of the Partnership's taxable
income, and will have to pay applicable taxes from other sources. The amount and
times of any distributions will be determined in the sole discretion of the
Directors.
PERFORMANCE INFORMATION
Appendix A contains performance information for a private investment
partnership (the "Granite Partnership") that has been managed by Granum's
personnel since its inception in 1990, with Walter F. Harrison, III as the
primary portfolio manager, in accordance with an investment program that is
substantially similar to the Partnership's expected investment program. In
addition, Appendix A contains composite performance information for all accounts
(including investment funds) (together with the Granite Partnership, "Granum
Accounts") managed by Granum's personnel pursuant to an investment program that
also is substantially similar to the Partnership's expected investment program.
The future performance of the Granite Partnership and the other Granum Accounts
may vary from the future performance of the Partnership. See "CONFLICTS OF
INTEREST--Participation in Investment Opportunities." PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS.
THE DIRECTORS
The business affairs of the Partnership are managed under the general
supervision of the Directors. The Partnership's General Partner, to the fullest
extent permitted by applicable law, has irrevocably delegated to the Directors
its rights and powers to manage and control the business affairs of the
Partnership, including the complete and exclusive authority to oversee and to
establish policies regarding the management, conduct and operation of the
Partnership's business. The Directors exercise the same powers, authority and
responsibili ties on behalf of the Partnership as are customarily exercised by
the directors of a registered investment company organized as a corporation. The
General Partner retains only those rights, powers and duties that may not be
delegated under Delaware law. The General Partner will not cease to be the
general partner of the Partnership and will continue to be liable as such.
The Directors are not general partners or limited partners of the
Partnership and, accordingly, have no liability as such. The Directors will not
contribute to the capital of the Partnership and will not hold partnership
interests in the Partnership. A majority of the Directors are not "interested
persons" (as defined in the 1940 Act) of the Partnership (collectively, the
"Independent Directors") and perform the same functions for the Partnership as
are customarily exercised by the non-interested directors of a registered
investment company organized as a corporation.
The identity of the Directors and brief biographical information
regarding each Director is set forth below.
NAME, ADDRESS PRINCIPAL OCCUPATION(S)
AND AGE DURING PAST 5 YEARS
- ------------- ------------------------
Each of the Directors was appointed to serve in such position by the
General Partner and, on _____________, 1998, such appointment was approved and
ratified by the General Partner and Mark F. Vassallo, in his capacity as the
Partnership's organizational limited partner, who were the sole holders of
partnership interests in the Partnership on such date.
A Director's position in that capacity will terminate if such Director
is removed, resigns or is subject to various disabling events such as death or
incapacity. A Director may resign upon 90 days' prior written notice to the
other Directors, and may be removed either by vote of two-thirds of the
Directors not subject to the removal vote or vote of the Partners holding not
less than two-thirds of the total number of votes eligible to be cast by all
Partners. In the event of any vacancy in the position of a Director, the
remaining Directors may appoint an individual to serve as a Director, so long as
immediately after such appointment at least two-thirds of the Directors then
serving would have been elected by the Partners. The Directors may call a
meeting of Partners to fill any vacancy in the position of a Director, and must
do so within 60 days after any date on which Directors who were elected by the
Partners cease to constitute a majority of the Directors then serving. If no
Director remains to continue the business of the Partnership, the General
Partner may manage and control the Partnership, but must convene a meeting of
Partners within 60 days for the purpose of either electing new Directors or
dissolving the Partnership.
The Independent Directors are each paid an annual retainer of $2,500
and per meeting fees of $700, or $250 in the case of telephonic meetings by the
Partnership. The other Directors receive no annual or other fees from the
Partnership. All Directors are reimbursed by the Partnership for their
reasonable out-of-pocket expenses. It is estimated that the aggregate annual
compensation paid by the Partnership to each Independent Director will be $____
during the coming year, and that, together with compensation paid to them by
other registered investment companies advised by affiliates of the Manager,
_____________, _____________ and ____________ will receive aggregate annual
compensation from all such companies of $________, $________ and $________,
respectively, for such year. The Directors do not receive any pension or
retirement benefits from the Partnership.
THE MANAGER, PWFA AND GRANUM
The Manager is the Partnership's General Partner. The Directors have
engaged the Manager to provide investment advice to, and the day-to-day
management of, the Partnership, in each case under the ultimate supervision of
and subject to any policies collectively established by the Directors. The
Manager was formed as a Delaware limited liability company on May 29, 1998 and,
upon commencement of the Partnership's operations, will be registered as an
investment adviser under the Advisers Act. The offices of the Manager are
located at 1285 Avenue of the Americas, New York, New York 10019, and its
telephone number is (212) 713-2000. As of _____________, 1998, the Manager owned
99% of the outstanding interests in the Partnership (thereby controlling the
Partnership) and was the only person to own of record or beneficially 5% or more
of the outstanding interests in the Partnership. The Manager maintains the
Partnership's accounts, books and other documents required to be maintained
under the 1940 Act at 1285 Avenue of the Americas, New York, New York 10019.
The Manager is a joint venture between PWFA and Granum. PWFA is the
managing member of the Manager and oversees the Manager's provision of
investment advice and day-to-day management to the Partnership. Granum provides
the Manager with use of and access to such of its personnel, research and
facilities as the Manager requires to manage the Partnership's investment
portfolio, and such personnel have the sole responsibility, subject only to the
supervision of the Manager and the Directors, for the investment advisory
services provided to the Partnership.
PWFA is an indirect, wholly-owned subsidiary of PW Group and is
registered as an investment adviser under the Advisers Act. PWFA and its
affiliates provide investment advisory services to registered investment
companies, private investment funds and individual accounts with aggregate
assets in excess of $92 billion. PaineWebber Incorporated, a wholly-owned
subsidiary of PW Group, is registered as a broker-dealer under the Securities
Exchange Act of 1934, as amended, and is a member of the New York Stock
Exchange, Inc. and other principal securities exchanges.
Granum, a registered investment adviser under the Advisers Act, is
controlled by Lewis M. Eisenberg and Walter F. Harrison, III, who serve as its
managing members. Mr. Harrison will be primarily responsible for the day-to-day
management of the Partnership's investment portfolio. In addition to Mr.
Harrison, Mr. Eisenberg and Paul Matten, a Vice President of Granum, also will
be responsible for managing the Partnership's investment portfolio. Granum and
its affiliates provide investment advisory services to a registered investment
company, private investment partnerships and individual accounts with aggregate
assets in excess of $700 million.
Mr. Harrison graduated from Dartmouth College in 1966 and received an
M.B.A. in 1969 from the Amos Tuck School of Business Administration. He has
served as a managing member of Granum since its formation in 1997 and as a
founding partner of a private investment advisory firm that is under common
control with Granum since 1990. Mr. Harrison serves as a portfolio manager to a
registered investment company, an offshore private investment fund and private
investment partnerships, each advised by Granum or an affiliate thereof. From
1971 to 1980, Mr. Harrison was associated with A.W. Jones & Associates and A.W.
Jones Co., two investment limited partnerships (collectively, "A.W. Jones").
During his tenure with A.W. Jones, Mr. Harrison became a managing general
partner and was a member of the Policy Committee, set guidelines for equity
exposure, and performed extensive work on equities valuation techniques. From
1980 to 1983, Mr. Harrison was senior vice president and a principal of Brokaw
Capital Management Co., Inc., and from 1983 to 1989, Mr. Harrison was associated
with Siebel Capital Management.
Mr. Eisenberg graduated from Dartmouth College in 1964 and received an
M.B.A. from Cornell University in 1966. He has served as a managing member of
Granum since its formation in 1997 and as a founding partner of a private
investment advisory firm that is under common control with Granum since 1990.
Mr. Eisenberg also serves as a portfolio manager to a registered investment
company, an offshore private investment fund and four private investment
partnerships advised by Granum or an affiliate thereof. From 1966 to 1989, he
was associated with Goldman, Sachs & Co. ("Goldman, Sachs"). While at Goldman,
Sachs, Mr. Eisenberg became a general partner of the firm, was co-head of the
Equities Division and served on the Sales, Trading and Research Policy
Committee, the Budget Committee and the International Equity Policy Committee,
among others.
The authority of the Manager to serve or act as investment adviser,
and be responsible for the day-to-day management, of the Partnership
(collectively, "Advice and Management"), and the incentive allocation
arrangement between the Partnership and the Manager, as the foregoing are set
forth in the limited partnership agreement of the Partnership (the "Partnership
Agreement"), was initially approved by the Directors, including each Independent
Director, and by vote of Partners holding interests in the Partnership on
____________, 1998. The authority of the Manager to provide Advice and
Management will terminate under the following circumstances:
(1) if revoked by (A) vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the Partnership
or (B) the Directors, including a majority of the
Independent Directors, in either case with 60 days' prior
written notice to the Manager;
(2) at the election of the Manager, with 60 days' prior written
notice to the Directors;
(3) if, after ______, 1999, any period of 12 consecutive months
shall conclude without the approval of the continuation of
such authority by (A) the vote of a majority (as defined in
the 1940 Act) of the outstanding voting securities of the
Partnership or (B) the Directors and, in either case, a
majority of the Independent Directors by vote cast at a
meeting called for such purpose;
(4) to the extent required by the 1940 Act, upon the occurrence
of any event in connection with the Manager, its provision
of Advice and Management, the Partnership Agreement or
otherwise constituting an "assignment" within the meaning of
the 1940 Act; or
(5) if the Manager is no longer a General Partner of the
Partnership.
The Manager also may withdraw, or be removed by the Partnership, as a
General Partner. If the Manager gives notice to the Partnership of its intention
to withdraw, it will be required to remain as a General Partner for one year, or
until such earlier date as a successor Manager is approved by the Partnership,
if, in the opinion of counsel to the Partnership, earlier withdrawal is likely
to cause the Partnership to lose its partnership tax classification or as
otherwise required by the 1940 Act. At the request of the Partnership, the
Manager will remain as a General Partner of the Partnership for a period of six
months if the Partnership has terminated the authority of the Manager to provide
Advice and Management, unless a successor General Partner to the Manager is
earlier approved by the Partnership.
VOTING
Each Partner will have the right to cast a number of votes based on
the value of such Partner's respective capital account at any meeting of
Partners called by the Directors or Partners holding at least a majority of the
total number of votes eligible to be cast by all Partners. Limited Partners will
be entitled to vote on any matter on which shareholders of a registered
investment company organized as a corporation would be entitled to vote,
including selection of Directors, approval of the authority of the Manager to
provide Advice and Management to the Partnership and approval of the
Partnership's auditors. Except for the exercise of their voting privileges,
Limited Partners will not be entitled to participate in the management or
control of the Partnership's business, and may not act for or bind the
Partnership.
CONFLICTS OF INTEREST
PWFA
PWFA and its affiliates manage the assets of registered investment
companies, private investment funds and individual accounts (collectively, "PWFA
Clients"). The Partnership has no interest in these activities. PWFA and its
officers or employees who assist PWFA in its oversight of the Manager will be
engaged in substantial activities other than on behalf of the Manager and may
have conflicts of interest in allocating their time and activity between the
Manager and PWFA Clients. PWFA and its officers and employees will devote so
much of their time to the affairs of the Manager as in their judgment is
necessary and appropriate.
PaineWebber Incorporated acts as the placement agent for the
Partnership, without special compensation from the Partnership, and will bear
its own costs associated with its activities as placement agent. PWFA and
PaineWebber Incorporated intend to compensate PaineWebber Incorporated's or its
affiliates' account executives, as well as third-party securities dealers and
other industry professionals, for their ongoing servicing of clients with whom
they have placed interests in the Partnership and such compensation will be
based upon a formula that takes into account the amount of client assets being
serviced as well as the investment results attributable to the clients' assets
in the Partnership. See "FEES AND EXPENSES" and "CAPITAL ACCOUNTS AND
ALLOCATIONS--Incentive Allocation."
PaineWebber Incorporated or its affiliates may provide brokerage and
other services from time to time to one or more accounts or entities managed by
Granum or one of its affiliates.
GRANUM AND HARRISON AND EISENBERG
Messrs. Harrison and Eisenberg are the general partners of and provide
investment advisory and other services to the Granite Partnership and control
the investment advisers that provide investment advisory and other services to
the other Granum Accounts. Granum, of which Messrs. Harrison and Eisenberg are
the managing members, or its affiliates, provides investment advisory and other
services to a registered investment company, an offshore private investment fund
and to private investment partnerships and separately managed client accounts.
Granum and certain of the investment professionals who are principals of or
employed by Granum or its affiliates (collectively with Granum, the "Granum
Managers") also carry on substantial investment activities for their own
accounts, for the accounts of family members and for the accounts of others.
(All investment funds and other accounts managed by the Granum Managers,
including the Granite Partnership, but excluding the Partnership, are referred
to collectively as the "Granum Accounts.") The Partnership has no interest in
these activities. As a result of the foregoing, Granum and the investment
professionals who, on behalf of the Manager, will manage the Partnership's
investment portfolio will be engaged in substantial activities other than on
behalf of the Manager and may have conflicts of interest in allocating their
time and activity between the Partnership and the Granum Accounts. Such persons
will devote only so much time to the affairs of the Manager as in their judgment
is necessary and appropriate.
PWFA or its affiliates, or private investment funds, other entities or
accounts managed by PWFA or its affiliates, may have an interest in the Granum
Accounts on terms different than an interest in the Partnership. In addition,
the Granum Managers may receive research products and services in connection
with the brokerage services that PWFA and its affiliates may provide from time
to time (1) to one or more Granum Accounts or (2) to the Partnership.
PARTICIPATION IN INVESTMENT OPPORTUNITIES
The Manager expects to employ an investment program for the
Partnership that is substantially similar to the investment program employed by
the Granum Managers for the Granum Accounts. Accordingly, as a general matter,
the Manager will consider participation by the Partnership in all appropriate
investment opportunities that are under consideration for investment by the
Granum Managers for the Granum Accounts. There may be, however, circumstances
under which the Granum Managers will cause one or more Granum Accounts to commit
a larger percentage of their respective assets to an investment opportunity than
to which the Manager will commit the Partnership's assets. There also may be
circumstances under which the Granum Managers will consider participation by the
Granum Accounts in investment opportunities in which the Manager does not intend
to invest on behalf of the Partnership, or vice versa.
The Manager will evaluate for the Partnership, and it is anticipated
that the Granum Managers will evaluate for each Granum Account, a variety of
factors that may be relevant in determining whether, and to what extent, a
particular investment opportunity or strategy is appropriate and feasible for
the Partnership or a Granum Account at a particular time, including, but not
limited to, the following: (1) the nature of the investment opportunity taken in
the context of the other investments at the time; (2) the liquidity of the
investment relative to the needs of the particular entity or account; (3) the
availability of the opportunity (i.e., size of obtainable position); (4) the
transaction costs involved; and (5) the investment or regulatory limitations
applicable to the particular entity or account. Because these considerations may
differ for the Partnership and the Granum Accounts in the context of any
particular investment opportunity, the investment activities of the Partnership
and the Granum Accounts may differ from time to time. In addition, the fees and
expenses of the Partnership will differ from those of the Granum Accounts.
Accordingly, prospective Limited Partners should note that the future
performance of the Partnership and the Granum Accounts will vary.
When the Manager and the Granum Managers determine that it would be
appropriate for the Partnership and one or more Granum Accounts to participate
in an investment opportunity at the same time, they will attempt to aggregate,
place and allocate orders on a basis that the Manager believes to be fair and
equitable, consistent with its responsibilities under applicable law. Decisions
in this regard are necessarily subjective and there is no requirement that the
Partnership participate, or participate to the same extent as the Granum
Accounts, in all trades. However, no participating entity or account will
receive preferential treatment over any other and the Manager and the Granum
Managers will take steps to ensure that no participating entity or account will
be systematically disadvantaged by the aggregation, placement and allocation of
orders.
Situations may occur, however, where the Partnership could be
disadvantaged because of the investment activities conducted by the Granum
Managers for the Granum Accounts. Such situations may be based on, among other
things, the following: (1) legal restrictions on the combined size of positions
that may be taken for the Partnership and the Granum Accounts, thereby limiting
the size of the Partnership's position; (2) the difficulty of liquidating an
investment for the Partnership and the Granum Accounts where the market cannot
absorb the sale of the combined positions; and (3) the determination that a
particular investment is warranted only if hedged with an option or other
instrument and there is a limited availability of such options or other
instruments. In particular, the Partnership may be legally restricted from
entering into a "joint transaction" (as defined in the 1940 Act) with the Granum
Accounts with respect to the securities of an issuer without first obtaining
exemptive relief from the SEC. See "CONFLICTS OF INTEREST--Other Matters."
The members of the Manager, and their members, directors, officers and
employees, may buy and sell securities or other investments for their own
accounts and may have actual or potential conflicts of interest with respect to
investments made on behalf of the Partnership. As a result of differing trading
and investment strategies or constraints, positions may be taken by members,
directors, officers and employees of PWFA or Granum, or by the Granum Managers
for the Granum Accounts, that are the same, different or made at a different
time than positions taken for the Partnership.
OTHER MATTERS
Except in accordance with applicable law, the Manager and its members
are not permitted to buy securities or other property from, or sell securities
or other property to, the Partnership. However, the Partnership may effect
certain principal transactions in securities with one or more Granum Accounts,
except for accounts in which Granum or any affiliate thereof serves as a general
partner or in which it has a financial interest, other than an interest that
results solely from Granum's or any affiliate's appointment as an investment
adviser to the account. Such transactions would be made in circumstances where
the Manager has determined it would be appropriate for the Partnership to
purchase and a Granum Account to sell, or the Partnership to sell and a Granum
Account to purchase, the same security or instrument on the same day.
Future investment activities of PWFA or Granum, or their affiliates,
and the principals, partners, directors, officers or employees of the foregoing,
may give rise to additional conflicts of interest.
BROKERAGE
The Manager is responsible for the execution of the Partnership's
portfolio transactions and the allocation of brokerage. Transactions on U.S.
stock exchanges and on some foreign stock exchanges involve the payment of
negotiated brokerage commissions. On the great majority of foreign stock
exchanges, commissions are fixed. No stated commission is generally applicable
to securities traded in over-the-counter markets, but the prices of those
securities include undisclosed commissions or mark-ups.
In executing transactions on behalf of the Partnership, the Manager
seeks to obtain the best price and execution for the Partnership, taking into
account factors such as price, size of order, difficulty of execution and
operational facilities of a brokerage firm, and in the case of transactions
effected by the Partnership with unaffiliated brokers, the firm's risk in
positioning a block of securities. Although the Manager generally seeks
reasonably competitive commission rates, the Partnership will not necessarily
pay the lowest commission available on each transaction. The Partnership has no
obligation to deal with any broker or group or brokers in executing transactions
in portfolio securities. The Partnership may execute portfolio brokerage
transactions through PaineWebber Incorporated or its affiliates, subject to
compliance with the 1940 Act.
Following the principle of seeking best price and execution, the
Manager may place brokerage business on behalf of the Partnership with brokers
that provide the Manager and its affiliates, including the Granum Managers, with
supplemental research, market and statistical information, including advice as
to the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities, and furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy and the
performance of accounts. The expenses of the Manager are not necessarily reduced
as a result of the receipt of this supplemental information, which may be useful
to the Manager and its affiliates in providing services to clients other than
the Partnership. In addition, not all of the supplemental information is used by
the Manager in connection with the Partnership. Conversely, the information
provided to the Manager by brokers and dealers through which other clients of
the Manager and its affiliates effect securities transactions may be useful to
the Manager in providing services to the Partnership.
Although the Partnership cannot accurately predict its portfolio
turnover, the Partnership expects that its annual portfolio turnover rate will
not exceed ____%. A portfolio turnover rate of 100% is equivalent to the
Partnership buying and selling all of the securities in its portfolio once in
the course of a year. Higher portfolio turnover rates usually generate
additional brokerage commissions and transaction costs and the short-term gains
realized from these transactions are taxable to the Limited Partners as ordinary
income.
FEES AND EXPENSES
PWFA provides certain management and administrative services to the
Partnership, including, among other things, providing office space and other
support services to the Partnership. In consideration for such services, the
Partnership will pay PWFA a monthly fee of .125% (1.50% on an annualized basis)
of the Partnership's net assets, excluding assets attributable to the Manager's
capital account (the "Fee"). Net assets means the total value of all assets of
the Partnership, less an amount equal to all accrued debts, liabilities and
obligations of the Partnership, calculated before giving effect to any
repurchases of interests. The Fee will be computed based on the net assets of
the Partnership as of the start of business on the first business day of each
month, after adjustment for any subscriptions effective on such date, and will
be due and payable in arrears within five business days after the end of such
month. The Fee will be charged in each fiscal period to the capital accounts of
all Limited Partners in proportion to their capital accounts at the beginning of
such fiscal period. A portion of the Fee will be paid by PWFA to Granum.
_______ (the "Administrator"), or such other administrator, including
PaineWebber Incorporated or its affiliates, as may be appointed by the
Directors, provides administration, accounting and investor services to the
Partnership, which are in addition to the services provided by PWFA to the
Partnership, as described above. In consideration for such services, the
Partnership will pay the Administrator an annual fee (the "Administrator Fee")
that is not anticipated to exceed ______% of the Partnership's net assets, as
defined above, plus reimbursement of certain out-of-pocket expenses.
In addition, the capital accounts of Limited Partners may be subject
to an Incentive Allocation depending upon the investment performance of the
Partnership. See "CAPITAL ACCOUNTS AND ALLOCATIONS--Incentive Allocation."
The Partnership will bear all expenses incurred in the business of the
Partnership other than those specifically required to be borne by PWFA. Expenses
to be borne by the Partnership include, but are not limited to, the following:
- all costs and expenses directly related to portfolio transactions
and positions for the Partnership's account, including, but not
limited to, brokerage commissions, research fees, interest and
commitment fees on loans and debit balances, borrowing charges on
securities sold short, dividends on securities sold but not yet
purchased, custodial fees, margin fees, transfer taxes and
premiums, taxes withheld on foreign dividends and indirect
expenses from investments in investment funds;
- all costs and expenses associated with the organization and
registration of the Partnership, certain offering costs and the
costs of compliance with any applicable Federal or state laws;
- the costs and expenses of holding any meetings of any Partners
that are regularly scheduled, permitted or required to be held
under the terms of the Partnership Agreement, the 1940 Act or
other applicable law;
- fees and disbursements of any attorneys, accountants, auditors
and other consultants and professionals engaged on behalf of the
Partnership;
- the Fee, the Administrator Fee and the fees of custodians and
other persons providing administrative services to the
Partnership;
- the costs of a fidelity bond and any liability insurance obtained
on behalf of the Partnership, the General Partner or the
Directors;
- all costs and expenses of preparing, setting in type, printing
and distributing reports and other communications to Limited
Partners;
- all expenses of computing the Partnership's net asset value,
including any equipment or services obtained for the purpose of
valuing the Partnership's investment portfolio;
- all charges for equipment or services used for communications
between the Partnership and any custodian, or other agent engaged
by the Partnership; and
- such other types of expenses as may be approved from time to time
by the Directors.
The Manager will be reimbursed by the Partnership for any of the above expenses
that it pays on behalf of the Partnership.
The Partnership's organizational and offering expenses are estimated
at $__________. The Partnership also will bear certain on-going offering costs
associated with any periodic offers of Partnership interests. Offering costs
cannot be deducted by the Partnership or the Partners.
CAPITAL ACCOUNTS AND ALLOCATIONS
CAPITAL ACCOUNTS
The Partnership will maintain a separate capital account for each
Partner, which will have an opening balance equal to such Partner's initial
contribution to the capital of the Partnership. Each Partner's capital account
will be increased by the sum of the amount of cash and the value of any
securities constituting additional contributions by such Partner to the capital
of the Partnership, plus any amounts credited to such Partner's capital account
as described below. Similarly, each Partner's capital account will be reduced by
the sum of the amount of any repurchase by the Partnership of the interest, or
portion thereof, of such Partner, plus the amount of any distributions to such
Partner which are not reinvested, plus any amounts debited against such
Partner's capital account as described below. To the extent that any debits
would reduce the balance of the capital account of any Limited Partner below
zero, that portion of any such debits will instead be allocated to the capital
account of the Manager; any subsequent credits that would otherwise be allocable
to the capital account of any such Limited Partner will instead be allocated to
the capital account of the Manager in such amounts as are necessary to offset
all previous debits attributable to such Limited Partner.
Capital accounts of Partners are adjusted as of the close of business
on the last day of each fiscal period. Fiscal periods begin on the day after the
last day of the preceding fiscal period and end at the close of business on (1)
the last day of each year, (2) the day preceding the date on which a
contribution to the capital of the Partnership is made, (3) the day on which the
Partnership repurchases any interest or portion of an interest of any Partner,
or (4) the day on which any amount is credited to or debited from the capital
account of any Partner other than an amount to be credited to or debited from
the capital accounts of all Partners in accordance with their respective
partnership percentages. A partnership percentage will be determined for each
Partner as of the start of each fiscal period by dividing the balance of such
Partner's capital account as of the commencement of such period by the sum of
the balances of all capital accounts of all Partners as of such date.
ALLOCATION OF NET PROFITS AND NET LOSSES
Net profits or net losses of the Partnership for each fiscal period
will be allocated among and credited to or debited against the capital accounts
of all Partners as of the last day of each fiscal period in accordance with
Partners' respective partnership percentages for such fiscal period. Net profits
or net losses will be measured as the net change in the value of the net assets
of the Partnership, including any net change in unrealized appreciation or
depreciation of investments and realized income and gains or losses and expenses
during a fiscal period, before giving effect to any repurchases by the
Partnership of interests or portions thereof, and excluding the amount of any
items to be allocated among the capital accounts of the Partners other than in
accordance with the Partners' respective partnership percentages.
Allocations for Federal income tax purposes generally will be made
among the Partners so as to reflect equitably amounts credited or debited to
each Partner's capital account for the current and prior fiscal years.
INCENTIVE ALLOCATION
So long as the Manager provides Advice and Management to the
Partnership, the Manager will be entitled to a performance-based allocation (the
"Incentive Allocation"), charged to the capital account of each Limited Partner
as of the last day of each "allocation period," of 20% of the amount by which
any "allocated gain" during an "allocation period" exceeds the positive balance
in the Limited Partner's "loss recovery account." The Incentive Allocation will
be credited to the capital account of the Manager.
For purposes of calculating the Incentive Allocation, "allocated gain"
means the excess of the balance of the Limited Partner's capital account at the
end of an "allocation period," after giving effect to allocations other than the
Incentive Allocation, but before giving effect to repurchases of interests by
the Partnership or debits to such capital account to reflect any item not
chargeable ratably to all Partners, over the balance of the Limited Partner's
capital account at the start of such "allocation period." Consequently, any
Incentive Allocation to be credited to the Manager will be increased by a
portion of the amount of any net unrealized appreciation, as well as net
realized gains, allocable to a Limited Partner.
An Incentive Allocation will be charged only with respect to any
"allocated gain" in excess of the positive balance of a "loss recovery account"
maintained for each Limited Partner. A "loss recovery account" is a memorandum
account maintained by the Partnership for each Limited Partner, which has an
initial balance of zero and is (1) increased after the close of each "allocation
period" by the amount of any negative performance for such Limited Partner
during such "allocation period," and (2) decreased (but not below zero) after
the close of each "allocation period" by the amount of any allocated gain for
such Limited Partner during such "allocation period." Any positive balance in a
Limited Partner's "loss recovery account" would be reduced as the result of a
repurchase or certain transfers with respect to the Limited Partner's interest
in the Partnership in proportion to the reduction of the Limited Partner's
capital account attributable to the repurchase or transfer.
An "allocation period" as to each Limited Partner is a period
commencing on the admission of such Limited Partner to the Partnership and
ending at the close of business on the last day of the twelfth complete calendar
month after such admission, and thereafter is each period commencing as of the
day following the last day of the preceding allocation period with respect to
the Limited Partner and ending as of the close of business on the first to occur
of (1) the last day of a fiscal year of the Partnership, (2) the day as of which
the Partnership repurchases the entire interest of such Limited Partner, (3) the
day as of which the Partnership admits as a substitute Limited Partner a person
to whom the entire interest of such Limited Partner has been transferred or (4)
the day as of which the authority of the Manager to provide Advice and
Management is terminated. The measurement of any Incentive Allocation for an
"allocation period" must take into account any negative performance from a prior
allocation period to the extent reflected in the "loss recovery account."
Therefore, the Incentive Allocation for any allocation period after the initial
12-month period in effect is a reflection of the extent to which cumulative
performance achieved with respect to a Limited Partner's account since such
Partner's admission to the Partnership exceeds the highest previous level of
performance achieved through the close of any prior allocation period. If any
subsequent allocation period is less than 12 calendar months, the Incentive
Allocation for such period will be computed over the period commencing at the
start of the last allocation period which commenced more than 12 calendar months
previously and ending at the end of the current allocation period, with
appropriate adjustment for any Incentive Allocation made with respect to the
prior allocation periods.
Within 30 days of each allocation period with respect to each Limited
Partner, and subject to certain limitations, the Manager may withdraw up to 98%
of the Incentive Allocation, computed on the basis of unaudited data, that was
credited to the Manager's capital account and debited from the Limited Partner's
capital account with respect to such allocation period. The Partnership will pay
the balance, subject to audit adjustments, within 30 days after the completion
of the audit of the Partnership's books.
ALLOCATION OF SPECIAL ITEMS--CERTAIN WITHHOLDING
TAXES AND OTHER EXPENDITURES
Withholding taxes or other tax obligations incurred by the Partnership
which are attributable to any Partner will be debited against the capital
account of such Partner as of the close of the fiscal period during which the
Partnership paid such obligation, and any amounts then or thereafter
distributable to such Partner will be reduced by the amount of such taxes. If
the amount of such taxes is greater than any such distributable amounts, then
the Partner and any successor to the Partner's interest is required to pay to
the Partnership as a contribution to the capital of the Partnership, upon demand
of the Partnership, the amount of such excess.
RESERVES
Appropriate reserves may be created, accrued and charged against net
assets and proportionately against the capital accounts of the Partners for
contingent liabilities as of the date any such contingent liabilities become
known to the Partnership. Reserves will be in such amounts, subject to increase
or reduction, which the Partnership may deem necessary or appropriate. The
amount of any reserve, or any increase or decrease therein, will be
proportionately charged or credited, as appropriate, to the capital accounts of
those investors who are Partners at the time when such reserve is created,
increased or decreased, as the case may be; provided, however, that if any such
reserve, or any increase or decrease therein, exceeds the lesser of $500,000 or
1% of the aggregate value of the capital accounts of all such Partners, the
amount of such reserve, increase, or decrease shall instead be charged or
credited to those investors who, as determined by the Partnership, were Partners
at the time of the act or omission giving rise to the contingent liability for
which the reserve was established, increased or decreased in proportion to their
capital accounts at that time.
NET ASSET VALUATION
Net asset value of the Partnership will be determined by or at the
direction of the Manager as of the close of business at the end of any fiscal
period in accordance with the valuation principles set forth below or as may be
determined from time to time pursuant to policies established by the Directors.
Domestic exchange traded securities and securities included in the
NASDAQ National Market System will be valued at their last composite sale prices
as reported on the exchanges where such securities are traded. If no sales of
such securities are reported on a particular day, the securities will be valued
based upon their composite bid prices for securities held long, or their
composite ask prices for securities held short, as reported by such exchanges.
Securities traded on a foreign securities exchange will be valued at their last
sale prices on the exchange where such securities are primarily traded, or in
the absence of a reported sale on a particular day, at their bid prices, in the
case of securities held long, or ask prices, in the case of securities held
short, as reported by such exchange. Listed options will be valued using last
sales prices as reported by the exchange with the highest reported daily volume
for such options or, in the absence of any sales on a particular day, at their
bid prices as reported by the exchange with the highest volume on the last day a
trade was reported. Other securities for which market quotations are readily
available will be valued at their bid prices, or ask prices in the case of
securities held short, as obtained from one or more dealers making markets for
such securities. If market quotations are not readily available, securities and
other assets will be valued at fair value as determined in good faith by, or
under the supervision of, the Directors.
Debt securities will be valued in accordance with the procedures
described above, which with respect to such securities may include the use of
valuations furnished by a pricing service which employs a matrix to determine
valuations for normal institutional size trading units. The Directors will
monitor periodically the reasonableness of valuations provided by any such
pricing service. Debt securities with remaining maturities of 60 days or less,
absent unusual circumstances, will be valued at amortized cost, so long as such
valuation is determined by the Directors to represent fair value.
All assets and liabilities initially expressed in foreign currencies
will be converted into U.S. dollars using foreign exchange rates provided by a
pricing service compiled as of 4:00 p.m. London time. Trading in foreign
securities generally is completed, and the values of such securities are
determined, prior to the close of securities markets in the U.S. Foreign
exchange rates are also determined prior to such close. On occasion, the values
of securities and exchange rates may be affected by events occurring between the
time as of which determination of such values or exchange rates are made and the
time as of which the net asset value of the Partnership is determined. When such
events materially affect the values of securities held by the Partnership or its
liabilities, such securities and liabilities may be valued at fair value as
determined in good faith by, or under the supervision of, the Directors.
Prospective investors should be aware that situations involving
uncertainties as to the valuation of portfolio positions could have an adverse
effect on the Partnership's net assets if the Directors' judgments regarding
appropriate valuations should prove incorrect.
SUBSCRIPTION FOR INTERESTS
SUBSCRIPTION TERMS
Both initial and additional subscriptions for interests in the
Partnership may be accepted from eligible investors (as described below) at such
times as the Manager may determine on the terms set forth below. The Partnership
may, in its discretion, suspend the offering of interests at any time or permit
subscriptions on a more frequent basis. The Partnership reserves the right to
reject any subscription for interests in the Partnership. Generally, the minimum
required initial contribution to the capital of the Partnership from each
investor is $250,000. For employees of the Manager and its affiliates, and
members of their immediate families, the minimum required initial contribution
to the capital of the Partnership is $________. The Partnership may vary the
investment minimums from time to time. The initial closing date for
subscriptions of interests in the Partnership is August 20, 1998. The Manager,
in its sole discretion, may postpone the closing date for up to 60 days.
Interests may not be purchased by nonresident aliens, foreign corporations,
foreign partnerships, foreign trusts or foreign estates, all as defined in the
Code. In addition, because the Partnership may generate "unrelated business
taxable income" ("UBTI"), charitable remainder trusts may not want to purchase
interests in the Partnership because a charitable remainder trust will not be
exempt from Federal income tax under Section 664(c) of the Code for any year in
which it has UBTI.
Except as otherwise permitted by the Partnership, initial and any
additional contributions to the capital of the Partnership by any Partner will
be payable in cash, and all contributions must be transmitted by such time and
in such manner as is specified in the subscription documents of the Partnership.
Initial and any additional contributions to the capital of the Partnership will
be payable in one installment and will be due prior to the proposed acceptance
of the contribution, although the Partnership may accept, in its discretion, a
subscription prior to its receipt of cleared funds.
Each new Limited Partner will be obligated to agree to be bound by all
of the terms of the Partnership Agreement. Each potential investor also will be
obligated to represent and warrant in a subscription agreement, among other
things, that such investor is purchasing an interest for its own account, and
not with a view to the distribution, assignment, transfer or other disposition
of such interest.
If and when the Partnership determines to accept securities as a
contribution to the capital of the Partnership, the Partnership will charge each
Partner making such contribution an amount determined by the Directors and not
exceeding 2% of the value of such contribution in order to reimburse the
Partnership for any costs it incurs in liquidating and accepting such
securities. Any such charge will be due and payable by the contributing Partner
in full at the time the contribution to the capital of the Partnership to which
such charge relates is due.
ELIGIBLE INVESTORS
Each prospective investor will be required to certify that the
interest subscribed for is being acquired directly or indirectly for the account
of an "accredited investor" as defined in Regulation D under the 1933 Act, and
that such investor, as well as each of the investor's beneficial owners under
certain circumstances, has a net worth immediately prior to the time of
subscription of at least $1 million. Existing Limited Partners who subscribe for
additional interests in the Partnership will be required to represent that the
Limited Partner meets the foregoing eligibility criteria at the time of the
additional subscription. The relevant investor qualifications will be set forth
in a subscription agreement to be provided to prospective investors, which must
be completed by each prospective investor.
MANAGER'S INVESTMENT IN THE PARTNERSHIP
The Manager, in its capacity as General Partner, is required by the
Partnership Agreement to contribute amounts to the Partnership sufficient to
maintain its capital account balance at a level, if any, necessary to ensure
that the Partnership will be treated as a partnership for Federal income tax
purposes.
REDEMPTIONS, REPURCHASES OF
INTERESTS AND TRANSFERS
NO RIGHT OF REDEMPTION
No Partner or other person holding an interest or a portion of an
interest will have the right to require the Partnership to redeem the interest
or portion thereof. No public market exists for interests in the Partnership,
and none is expected to develop. Consequently, investors may not be able to
liquidate their investment other than as a result of repurchases of interests by
the Partnership, as described below.
REPURCHASES OF INTERESTS
The Directors, from time to time and in their complete and exclusive
discretion, may determine to direct the Manager to cause the Partnership to
repurchase interests or portions thereof from Partners, including the Manager,
pursuant to written tenders by Partners on such terms and conditions as the
Directors may determine. In determining whether the Partnership should
repurchase interests or portions thereof from Partners pursuant to written
tenders, the Directors will consider the recommendation of the Manager.
Beginning in 2000, the Manager expects that generally it will recommend to the
Directors that the Partnership offer to repurchase interests from Partners twice
in each year, in June and December, and also intends to recommend the making of
offers to repurchase interests effective as of September 1999 and December 1999.
The Directors also will consider the following factors, among others, in making
such determination:
- whether any Partners have requested to tender interests or
portions thereof to the Partnership;
- the liquidity of the Partnership's assets;
- the investment plans and working capital requirements of the
Partnership;
- the relative economies of scale with respect to the size of the
Partnership;
- the history of the Partnership in repurchasing interests or
portions thereof;
- the condition of the securities markets; and
- the anticipated tax consequences of any proposed repurchases of
interests or portions thereof.
The Directors will determine that the Partnership repurchase interests
or portions thereof from Partners pursuant to written tenders only on terms they
determine to be fair to the Partnership and to all Partners or persons holding
interests acquired from Partners, as applicable. When the Directors determine
that the Partnership will repurchase interests in the Partnership or portions
thereof, notice will be provided to each Partner describing the terms thereof,
and containing information Partners should consider in deciding whether and how
to participate in such repurchase opportunity. Partners who are deciding whether
to tender their interests or portions thereof during the period that a
repurchase offer is open may ascertain the net asset value of their interest in
the Partnership from the Manager during such period.
The Partnership Agreement provides that the Partnership shall be
dissolved if the interest of any Limited Partner that has submitted a written
request to tender its entire interest for repurchase by the Partnership has not
been repurchased within a period of two years of such request.
Repurchases of interests or portions thereof from Partners by the
Partnership may be made, in the discretion of the Manager, in part or in whole
for cash or for securities of equivalent value and will be effective after
receipt by the Partnership of all eligible written tenders of interests or
portions thereof from Partners. The amount due to any Partner whose interest or
portion thereof is repurchased will be equal to the value of the Partner's
capital account or portion thereof based on the net asset value of the
Partnership's assets as of the effective date of repurchase, after giving effect
to all allocations to be made to the Partner's capital account as of such date.
Payment of the purchase price pursuant to a tender of interests will consist of,
first, cash and/or marketable securities traded on an established securities
exchange, valued at net asset value in accordance with the Partnership Agreement
and distributed to tendering Partners on a PARI PASSU basis, in an aggregate
amount equal to at least 95% of the estimated unaudited net asset value of the
interests tendered, determined as of the expiration date of the tender offer
(the "expiration date"). Payment of such amount will be made promptly after the
expiration date (the "cash payment"). Generally, payment pursuant to such a
tender also will consist of a promissory note that bears no interest and is not
transferable (the "note") entitling the holder thereof to a contingent payment
equal to the excess, if any, of (a) the net asset value of the interests
tendered as of the expiration date, determined based on the audited financial
statements of the Partnership, over (b) the cash payment. The note would be
delivered to the tendering Partner promptly after the expiration date and would
be payable in cash promptly after completion of the audit of the financial
statements of the Partnership. The audit of the Partnership's financial
statements is expected to be completed within 60 days after the end of each
year. The Partnership does not impose any charges on a repurchase of interests
or portion of interests in the Partnership.
The Partnership intends to maintain daily a segregated account
containing permissible liquid assets in an amount equal to the aggregate amount
of the notes. Payment for repurchased interests may require the Partnership to
liquidate portfolio holdings earlier than the Manager otherwise would liquidate
such holdings, potentially resulting in losses, and may increase the
Partnership's portfolio turnover. The Manager intends to take measures to
attempt to avoid or minimize such potential losses and turnover.
A Limited Partner who tenders for repurchase any amount of the
interest of such Partner in the Partnership prior to having been a Limited
Partner for 12 consecutive months or who tenders for repurchase a portion of the
interest of such Partner will be required to maintain a capital account balance
equal to the greater of (1) $250,000 and (2) the amount of Incentive Allocation
that would be debited from such Partner's capital account if the date of
repurchase were a date on which an Incentive Allocation would otherwise be made.
The Partnership may repurchase an interest in the Partnership or
portion thereof of a Partner or any person acquiring an interest or portion
thereof from or through a Partner if:
- such an interest or portion thereof has been transferred or such
an interest or portion thereof has vested in any person by
operation of law as the result of the death, dissolution,
bankruptcy or incompetency of a Partner;
- ownership of such an interest by a Partner or other person will
cause the Partnership to be in violation of, or require
registration of any interest or portion thereof under, or subject
the Partnership to additional registration or regulation under,
the securities, commodities or other laws of the United States or
any other relevant jurisdiction;
- continued ownership of such an interest may be harmful or
injurious to the business or reputation of the Partnership or the
Manager, or may subject the Partnership or any Partners to an
undue risk of adverse tax or other fiscal consequences;
- any of the representations and warranties made by a Partner in
connection with the acquisition of an interest in the Partnership
or portion thereof was not true when made or has ceased to be
true; or
- it would be in the best interests of the Partnership for the
Partnership to repurchase such an interest or portion thereof.
The Manager is entitled to tender for repurchase all or a portion of
its interest in the Partnership only if the Manager maintains the requisite
minimum capital account balance described previously, or if, in the opinion of
legal counsel to the Partnership, such repurchase would not jeopardize the
classification of the Partnership as a partnership for U.S. Federal income tax
purposes. The Manager also is entitled to tender its interest to the Partnership
in certain circumstances described in the Partnership Agreement and where the
status of the Manager is terminated or the authority of the Manager to provide
Advice and Management is terminated.
TRANSFERS OF INTERESTS
No person may become a substituted Limited Partner without the written
consent of the Manager, which consent may be withheld for any reason in the
Manager's sole and absolute discretion. Limited Partner interests may be
transferred only (i) by operation of law pursuant to the death, bankruptcy,
insolvency or dissolution of a Limited Partner or (ii) with the written consent
of the Manager, which may be withheld in its sole and absolute discretion and is
expected to be granted, if at all, only under extenuating circumstances, in
connection with a transfer to a family trust or other entity that does not
result in a change of beneficial ownership. Notice to the Manager of any
proposed transfer must include evidence satisfactory to the Manager that the
proposed transfer is exempt from registration under the 1933 Act, that the
proposed transferee meets any requirements imposed by the Partnership with
respect to investor eligibility and suitability, including the requirement that
any investor, or investor's beneficial owners in certain circumstances, has a
net worth immediately prior to the time of subscription of at least $1 million,
and must be accompanied by a properly completed subscription agreement. In
addition to the foregoing, no Limited Partner will be permitted to transfer an
interest or portion thereof unless after such transfer the balance of the
capital account of the transferee, and any Partner transferring less than its
entire interest, is at least $250,000.
Any transferee that acquires an interest or portion thereof in the
Partnership by operation of law as the result of the death, dissolution,
bankruptcy or incompetency of a Limited Partner or otherwise, will be entitled
to the allocations and distributions allocable to the interest so acquired and
to transfer such interest in accordance with the terms of the Partnership
Agreement, but will not be entitled to the other rights of a Limited Partner
unless and until such transferee becomes a substituted Limited Partner as
provided in the Partnership Agreement. If a Limited Partner transfers an
interest or portion thereof with the approval of the Manager, under the policies
established by the Directors, the Manager will promptly take all necessary
actions to admit such transferee or successor to the Partnership as a Limited
Partner. Each Limited Partner and transferee is required to pay all expenses,
including attorneys' and accountants' fees, incurred by the Partnership in
connection with such transfer.
By subscribing for an interest in the Partnership, each Limited
Partner has agreed to indemnify and hold harmless the Partnership, the
Directors, the Manager, each other Limited Partner and any affiliate of the
foregoing against all losses, claims, damages, liabilities, costs and expenses,
including legal or other expenses incurred in investigating or defending against
any such losses, claims, damages, liabilities, costs and expenses or any
judgments, fines and amounts paid in settlement, joint or several, to which such
persons may become subject by reason of or arising from any transfer made by
such Limited Partner in violation of these provisions or any misrepresentation
made by such Limited Partner in connection with any such transfer.
The Manager may not transfer its interest as a General Partner, except
to a person who has agreed to be bound by all of the terms of the Partnership
Agreement and pursuant to applicable law.
TAX ASPECTS
The following is a summary of certain aspects of the income taxation
of the Partnership and its Partners which should be considered by a prospective
Limited Partner. The Partnership has not sought a ruling from the Internal
Revenue Service (the "Service") or any other Federal, state or local agency with
respect to any of the tax issues affecting the Partnership, nor has it obtained
an opinion of counsel with respect to any tax issues other than the
characterization of the Partnership as a partnership for Federal income tax
purposes.
This summary of certain aspects of the Federal income tax treatment of
the Partnership is based upon the Code, judicial decisions, Treasury Regulations
(the "Regulations") and rulings in existence on the date hereof, all of which
are subject to change. This summary does not discuss the impact of various
proposals to amend the Code which could change certain of the tax consequences
of an investment in the Partnership. This summary also does not discuss all of
the tax consequences that may be relevant to a particular investor or to certain
investors subject to special treatment under the Federal income tax laws, such
as insurance companies.
EACH PROSPECTIVE LIMITED PARTNER SHOULD CONSULT WITH ITS OWN TAX
ADVISER IN ORDER FULLY TO UNDERSTAND THE FEDERAL, STATE, LOCAL AND FOREIGN
INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE PARTNERSHIP.
In addition to the particular matters set forth in this section,
tax-exempt organizations should review carefully those sections of this
Memorandum regarding liquidity and other financial matters to ascertain whether
the investment objective of the Partnership is consistent with their overall
investment plans. Each prospective tax-exempt Limited Partner is urged to
consult its own counsel regarding the acquisition of Partnership interests.
TAX TREATMENT OF PARTNERSHIP OPERATIONS
CLASSIFICATION OF THE PARTNERSHIP. The Partnership has received an
opinion of Stroock & Stroock & Lavan LLP, counsel to the Partnership, that under
the provisions of the Code and the Regulations, as in effect on the date of the
opinion, the Partnership will be treated as a partnership for Federal income tax
purposes and not as an association taxable as a corporation.
Under Section 7704 of the Code, "publicly traded partnerships" are
generally treated as corporations for Federal income tax purposes. A publicly
traded partnership is any partnership the interests in which are traded on an
established securities market or which are readily tradable on a secondary
market, or the substantial equivalent thereof. Interests in the Partnership will
not be traded on an established securities market. Regulations (the
"Regulations") concerning the classification of partnerships as publicly traded
partnerships provide certain safe harbors under which interests in a partnership
will not be considered readily tradable on a secondary market, or the
substantial equivalent thereof. The Partnership will not be eligible for any of
those safe harbors. In particular, it will not qualify under the private
placement safe harbor set forth in the Regulations if, as is anticipated, the
Partnership has more than 100 Partners.
The Regulations specifically provide that the fact that a partnership
does not qualify for the safe harbors is disregarded for purposes of determining
whether interests in a partnership are readily tradable on a secondary market,
or the substantial equivalent thereof. Rather, in this event the partnership's
status is examined under a general facts and circumstances test set forth in the
Regulations. Counsel to the Partnership has also rendered its opinion that,
under this "facts and circumstances" test, and based upon the anticipated
operations of the Partnership as well as the legislative history to Section 7704
and the text of the Regulations, interests in the Partnership will not be
readily tradable on a secondary market, or the substantial equivalent thereof,
and, therefore, the Partnership will not be treated as a publicly traded
partnership taxable as a corporation.
Neither of the opinions of counsel described above, however, is
binding on the Service or the courts. If it were determined that the Partnership
should be treated as an association or a publicly traded partnership taxable as
a corporation for Federal income tax purposes, as a result of a successful
challenge to such opinions by the Service, changes in the Code, the Regulations
or judicial interpretations thereof, a material adverse change in facts, or
otherwise, the taxable income of the Partnership would be subject to corporate
income tax when recognized by the Partnership; distributions of such income,
other than in certain redemptions of Partnership interests, would be treated as
dividend income when received by the Partners to the extent of the Partnership's
current or accumulated earnings and profits; and Partners would not be entitled
to report profits or losses realized by the Partnership.
As a partnership, the Partnership is not itself subject to Federal
income tax. The Partnership files an annual partnership information return with
the Service which reports the results of operations. Each Partner is required to
report separately on its income tax return its distributive share of the
Partnership's net long-term, mid-term and short-term capital gain or loss and
all other items of ordinary income or loss. Each Partner is taxed on its
distributive share of the Partnership's taxable income and gain regardless of
whether it has received or will receive a distribution from the Partnership.
ALLOCATION OF PROFITS AND LOSSES. Under the Partnership Agreement, the
Partnership's net capital appreciation or net capital depreciation for each
accounting period is allocated among the Partners and to their capital accounts
without regard to the amount of income or loss actually recognized by the
Partnership for Federal income tax purposes. The Partnership Agreement provides
that items of income, deduction, gain, loss or credit actually recognized by the
Partnership for each fiscal year generally are to be allocated for income tax
purposes among the Partners pursuant to Regulations issued under Sections 704(b)
and 704(c) of the Code, based upon amounts of the Partnership's net capital
appreciation or net capital depreciation allocated to each Partner's capital
account for the current and prior fiscal years. A Partner that contributes
property other than cash, including amounts of accrued interest, to the
Partnership will be specifically allocated items of income, deduction, gain,
loss or credit attributable to such property to the extent of the difference, if
any, between the book value and the adjusted tax basis at the time of such
contribution.
Under the Partnership Agreement, the Manager has the discretion to
allocate specially an amount of the Partnership's net capital gains, including
short-term capital gain, for Federal income tax purposes to a withdrawing
Limited Partner to the extent that the Partner's capital account exceeds its
Federal income tax basis in its partnership interest. There can be no assurance
that, if the Manager makes such a special allocation, the Service will accept
such allocation. If such allocation is successfully challenged by the Service,
the Partnership's gains allocable to the remaining Partners would be increased.
A Limited Partner admitted to the Partnership other than as of January
1 of a fiscal year will be allocated its distributive share of Partnership tax
items at the end of its year of admission based on its pro rata share of the
Partnership's capital. Such allocation does not account for the possibility of a
subsequent reallocation in the following year to the Manager in respect of the
initial Incentive Allocation. The Manager, in its discretion, may attempt to
minimize any negative tax consequences which may result to a Partner from the
foregoing, including by utilizing special allocations of Partnership tax items.
However, there is no assurance that any such attempt will successfully minimize
any negative tax consequence resulting to a Partner from the initial Incentive
Allocation.
TAX ELECTIONS; RETURNS; TAX AUDITS. The Code provides for optional
adjustments to the basis of partnership property upon distributions of
partnership property to a partner and transfers of partnership interests,
including by reason of death, provided that a partnership election has been made
pursuant to Section 754. Under the Partnership Agreement, at the request of a
Partner, the Manager, in its sole discretion, may cause the Partnership to make
such an election. Any such election, once made, cannot be revoked without the
Service's consent. As a result of the complexity and added expense of the tax
accounting required to implement such an election, the Manager does not
presently intend to make such election.
The Manager decides how to report the partnership items on the
Partnership's tax returns, and all Partners are required under the Code to treat
the items consistently on their own returns, unless they file a statement with
the Service disclosing the inconsistency. In the event the income tax returns of
the Partnership are audited by the Service, the tax treatment of the
Partnership's income and deductions generally is determined at the partnership
level in a single proceeding rather than by individual audits of the Partners.
The Manager, designated as the "Tax Matters Partner," has considerable authority
to make decisions affecting the tax treatment and procedural rights of all
Partners. In addition, the Tax Matters Partner has the authority to bind certain
Partners to settlement agreements and the right on behalf of all Partners to
extend the statute of limitations relating to the Partners' tax liabilities with
respect to Partnership items.
TAX CONSEQUENCES TO A WITHDRAWING LIMITED PARTNER
A Limited Partner receiving a cash liquidating distribution from the
Partnership, in connection with a complete withdrawal from the Partnership
generally will recognize capital gain or loss to the extent of the difference
between the proceeds received by such Limited Partner and such Limited Partner's
adjusted tax basis in its partnership interest. Such capital gain or loss will
be short-term, mid-term or long-term depending upon the Limited Partner's
holding period for its interest in the Partnership. However, a withdrawing
Limited Partner will recognize ordinary income to the extent such Limited
Partner's allocable share of the Partnership's "unrealized receivables" exceeds
the Limited Partner's basis in such unrealized receivables, as determined
pursuant to the Regulations. For these purposes, accrued but untaxed market
discount, if any, on securities held by the Partnership will be treated as an
unrealized receivable, with respect to which a withdrawing Limited Partner would
recognize ordinary income. A Limited Partner receiving a cash nonliquidating
distribution will recognize income in a similar manner only to the extent that
the amount of the distribution exceeds such Limited Partner's adjusted tax basis
in its partnership interest.
As discussed above, the Partnership Agreement provides that the
Manager may specially allocate items of Partnership capital gain, including
short-term capital gain, to a withdrawing Limited Partner to the extent its
liquidating distribution would otherwise exceed its adjusted tax basis in its
Partnership interest. Such a special allocation may result in the withdrawing
Partner recognizing capital gain, which may include short-term gain, in the
Partner's last taxable year in the Partnership, thereby reducing the amount of
long-term or mid-term capital gain recognized during the tax year in which it
receives its liquidating distribution upon withdrawal.
Distributions of property other than cash, whether in complete or
partial liquidation of a Limited Partner's interest in the Partnership,
generally will not result in the recognition of taxable income or loss to the
Limited Partner, except to the extent such distribution is treated as made in
exchange for such Limited Partner's share of the Partnership's unrealized
receivables.1
- ---------------------------------
1 It should be noted, however, that gain generally must be recognized where
the distribution consists of marketable securities unless the distributing
partnership is an "investment partnership" and the recipient is an
"eligible partner" as defined in Section 731(c) of the Code. While there
can be no assurance, the Manager anticipates that the Partnership will
qualify as an "investment partnership." Thus, if a Limited Partner is an
"eligible partner", which term should include a Limited Partner whose sole
contributions to the Partnership consisted of cash, the nonrecognition rule
described above should apply.
<PAGE>
TAX TREATMENT OF PARTNERSHIP INVESTMENTS
IN GENERAL. The Partnership expects to act as a trader or investor,
and not as a dealer, with respect to its securities transactions. A trader and
an investor are persons who buy and sell securities for their own accounts. A
dealer, on the other hand, is a person who purchases securities for resale to
customers rather than for investment or speculation.
Generally, the gains and losses realized by a trader or investor on
the sale of securities are capital gains and losses. Thus, the subject to the
treatment of certain currency exchange gains as ordinary income, the Partnership
expects that its gains and losses from its securities transactions typically
will be capital gains and capital losses. See "Currency Fluctuations--'Section
988' Gains or Losses" below and certain other transactions described below.
These capital gains and losses may be long-term, mid-term or short-term
depending, in general, upon the length of time the Partnership maintains a
particular investment position and, in some cases, upon the nature of the
transaction. Property held for more than one year but less than 18 months
generally will be eligible for mid-term capital gain or loss treatment, and
property held for more than 18 months generally will be eligible for long-term
capital gain or loss treatment. The application of certain rules relating to
short sales, to so-called "straddle" and "wash sale" transactions and to
"Section 1256 contracts" may serve to alter the manner in which the
Partnership's holding period for a security is determined or may otherwise
affect the characterization as long-term, mid-term or short-term, and also the
timing of the realization, of certain gains or losses. Moreover, the straddle
rules and short sale rules may require the capitalization of certain related
expenses of the Partnership.
The maximum ordinary income tax rate for individuals is 39.6%, the
maximum individual income tax rate for long-term capital gains is 20% and the
maximum individual income tax rate for mid-term capital gains is 28%, unless the
taxpayer elects to be taxed at ordinary rates, although in any case the actual
rate may be higher due to the phase out of certain tax deductions and
exemptions. See "Limitation on Deductibility of Interest" below. The excess of
capital losses over capital gains may be offset against the ordinary income of
an individual taxpayer, subject to an annual deduction limitation of $3,000. For
corporate taxpayers, the maximum income tax rate is 35%. Capital losses of a
corporate taxpayer may be offset only against capital gains, but unused capital
losses may be carried back three years, subject to certain limitations, and
carried forward five years.
The Partnership may realize ordinary income from accruals of interest
and dividends on securities. The Partnership may hold debt obligations with
"original issue discount." In such case, the Partnership would be required to
include amounts in taxable income on a current basis even though receipt of such
amounts may occur in a subsequent year. The Partnership may also acquire debt
obligations with "market discount." Upon disposition of such an obligation, the
Partnership generally would be required to treat gain realized as interest
income to the extent of the market discount which accrued during the period the
debt obligation was held by the Partnership. The Partnership may realize
ordinary income or loss with respect to its investments in partnerships engaged
in a trade or business. Income or loss from transactions involving derivative
instruments, such as swap transactions, entered into by the Partnership also may
constitute ordinary income or loss. Moreover, gain recognized from certain
"conversion transactions" will be treated as ordinary income.2
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2 Generally, a conversion transaction is one of several enumerated
transactions where substantially all of the taxpayer's return is
attributable to the time value of the net investment in the transaction.
The enumerated transactions are (i) the holding of any property, whether or
not actively traded, and entering into a contract to sell such property, or
substantially identical property, at a price determined in accordance with
such contract, but only if such property was acquired and such contract was
entered into on a substantially contemporaneous basis, (ii) certain
straddles, (iii) generally any other transaction that is marketed or sold
on the basis that it would have the economic characteristics of a loan but
the interest-like return would be taxed as capital gain or (iv) any other
transaction specified in Regulations.
<PAGE>
CURRENCY FLUCTUATIONS--"SECTION 988" GAINS OR LOSSES. To the extent
that its investments are made in securities denominated in a foreign currency,
gain or loss realized by the Partnership frequently will be affected by the
fluctuation in the value of such foreign currencies relative to the value of the
dollar. Generally, gains or losses with respect to the Partnership's investments
in common stock of foreign issuers will be taxed as capital gains or losses at
the time of the disposition of such stock. However, under Section 988 of the
Code, gains and losses of the Partnership on the acquisition and disposition of
foreign currency (e.g., the purchase of foreign currency and subsequent use of
the currency to acquire stock) will be treated as ordinary income or loss.
Moreover, under Section 988, gains or losses on disposition of debt securities
denominated in a foreign currency to the extent attributable to fluctuation in
the value of the foreign currency between the date of acquisition of the debt
security and the date of disposition will be treated as ordinary income or loss.
Similarly, gains or losses attributable to fluctuations in exchange rates that
occur between the time the Partnership accrues interest or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time the Partnership actually collects such receivables or pays such liabilities
may be treated as ordinary income or ordinary loss.
The Partnership may acquire foreign currency forward contracts. See
"TYPES OF INVESTMENTS AND RELATED RISK FACTORS--Foreign Currency Transactions."
Generally, any gain or loss realized by the Partnership with respect to any
forward currency contracts will be ordinary, unless (i) the contract is a
capital asset in the hands of the Partnership and is not a part of a straddle
transaction and (ii) the Partnership makes an election, by the close of the day
the transaction is entered into, to treat the gain or loss attributable to such
contract as capital gain or loss.
SECTION 1256 CONTRACTS. In the case of "Section 1256 Contracts," the
Code generally applies a "mark to market" system of taxing unrealized gains and
losses on such contracts and otherwise provides for special rules of taxation.
Under these rules, Section 1256 Contracts, which include certain foreign
currency forward contracts and certain options contracts, held by the
Partnership at the end of each taxable year of the Partnership are treated for
Federal income tax purposes as if they were sold by the Partnership for their
fair market value on the last business day of such taxable year. The net gain or
loss, if any, resulting from such deemed sales, known as "marking to market,"
together with any gain or loss resulting from actual sales of Section 1256
Contracts, must be taken into account by the Partnership in computing its
taxable income for such year. If a Section 1256 Contract held by the Partnership
at the end of a taxable year is sold in the following year, the amount of any
gain or loss realized on such sale will be adjusted to reflect the gain or loss
previously taken into account under the "mark to market" rules.
Capital gains and losses from such Section 1256 contracts generally
are characterized as short-term capital gains or losses to the extent of 40%
thereof and as long-term capital gains or losses to the extent of 60% thereof.
Such gains and losses will be taxed under the general rules described above.
Gains and losses from certain foreign currency transactions will be treated as
ordinary income and losses. See "Currency Fluctuations--'Section 988' Gains or
Losses." If an individual taxpayer incurs a net capital loss for a year, the
portion thereof, if any, which consists of a net loss on "Section 1256
Contracts" may, at the election of the taxpayer, be carried back three years.
Losses so carried back may be deducted only against net capital gain to the
extent that such gain includes gains on "Section 1256 Contracts."
MIXED STRADDLE ELECTION. The Code allows a taxpayer to elect to offset
gains and losses from positions which are part of a "mixed straddle." A "mixed
straddle" is any straddle in which one or more but not all positions are Section
1256 Contracts.
Pursuant to Temporary Regulations, the Partnership may be eligible to
elect to establish one or more mixed straddle accounts for certain of its mixed
straddle trading positions. The mixed straddle account rules require a daily
"marking to market" of all open positions in the account and a daily netting of
gains and losses from positions in the account. At the end of a taxable year,
the annual net gains or losses from the mixed straddle account are recognized
for tax purposes. The application of the Temporary Regulations' mixed straddle
account rules is not entirely clear. Therefore, there is no assurance that a
mixed straddle account election by the Partnership will be accepted by the
Service.
SHORT SALES. Gain or loss from a short sale of property is generally
considered as capital gain or loss to the extent the property used to close the
short sale constitutes a capital asset in the Partnership's hands. Except with
respect to certain situations where the property used by the Partnership to
close a short sale has a long-term holding period on the date of the short sale,
special rules would generally treat the gains on short sales as short-term
capital gains. These rules may also terminate the running of the holding period
of "substantially identical property" held by the Partnership. Moreover, a loss
on a short sale will be treated as a long-term capital loss if, on the date of
the short sale, "substantially identical property" has been held by the
Partnership for more than one year.
The Taxpayer Relief Act of 1997 included constructive sale provisions
that generally will apply if the Partnership either holds an appreciated
financial position with respect to stock, certain debt obligations, or
partnership interests and then enters into a short sale respecting the same or
substantially identical property or holds an appreciated financial position that
is a short sale and then acquires property that is the same as or substantially
identical to the underlying property. In each instance, with certain exceptions,
the Partnership generally will recognize gain as if the appreciated financial
position were sold at its fair market value on the date the Partnership enters
into the short sale or acquires the property, respectively. The holding period
for any appreciated financial position that is subject to the constructive sale
rules will be determined as if such position were acquired on the date of the
constructive sale.
EFFECT OF STRADDLE RULES ON PARTNERS' SECURITIES POSITIONS. The
Service may treat certain positions in securities held, directly or indirectly,
by a Partner and its indirect interest in similar securities held by the
Partnership as "straddles" for Federal income tax purposes. The application of
the "straddle" rules in such a case could affect a Partner's holding period for
the securities involved and may defer the recognition of losses with respect to
such securities.
LIMITATION ON DEDUCTIBILITY OF INTEREST. For noncorporate taxpayers,
Section 163(d) of the Code limits the deduction for "investment interest" (i.e.,
interest or short sale expenses for "indebtedness incurred or continued to
purchase or carry property held for investment"). Investment interest is not
deductible in the current year to the extent that it exceeds the taxpayer's
"investment income," consisting of net gain and ordinary income derived from
investments in the current year. For this purpose, any long-term capital gain is
excluded from investment income unless the taxpayer elects to pay tax on such
amount at ordinary income tax rates.
For purposes of this provision, the Partnership's activities will be
treated as giving rise to investment income for a Limited Partner, and the
investment interest limitation would apply to a noncorporate Limited Partner's
share of the interest and short sale expenses attributable to the Partnership's
operation. In such case, a noncorporate Limited Partner would be denied a
deduction for all or part of that portion of its distributive share of the
Partnership's ordinary losses attributable to interest and short sale expenses
unless it had sufficient investment income from all sources including the
Partnership. A Limited Partner that could not deduct losses currently as a
result of the application of Section 163(d) would be entitled to carry forward
such losses to future years, subject to the same limitation. The investment
interest limitation would also apply to interest paid by a noncorporate Limited
Partner on money borrowed to finance its investment in the Partnership.
Potential investors are advised to consult with their own tax advisers with
respect to the application of the investment interest limitation in their
particular tax situations.
DEDUCTIBILITY OF PARTNERSHIP INVESTMENT EXPENDITURES BY NONCORPORATE
PARTNERS. Investment expenses (e.g., investment advisory fees) of an individual,
trust and estate are deductible only to the extent they exceed 2% of adjusted
gross income.3 In addition, the Code further restricts the ability of an
individual with an adjusted gross income in excess of a specified amount, for
1998, $124,500 or $62,250 for a married person filing a separate return, to
deduct such investment expenses. Under such provision, investment expenses in
excess of 2% of adjusted gross income may only be deducted to the extent such
excess expenses, along with certain other itemized deductions, exceed the lesser
of (i) 3% of the excess of the individual's adjusted gross income over the
specified amount or (ii) 80% of the amount of certain itemized deductions
otherwise allowable for the taxable year. Moreover, such investment expenses are
miscellaneous itemized deductions which are not deductible by a noncorporate
taxpayer in calculating its alternative minimum tax liability.
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3 However, Section 67(e) of the Code provides that, in the case of a trust or
an estate, such limitation does not apply to deductions or costs which are
paid or incurred in connection with the administration of the estate or
trust and would not have been incurred if the property were not held in
such trust or estate. The Federal Court of Appeals for the Sixth Circuit,
reversing a Tax Court decision, has held that the investment advisory fees
incurred by a trust were exempt under Section 67(e) from the 2% of adjusted
gross income floor on deductibility. The Service, however, has stated that
it will not follow this decision outside of the Sixth Circuit. Limited
Partners that are trusts or estates could consult their tax advisers as to
the applicability of this case to the investment expenses that are
allocated to them.
<PAGE>
Pursuant to Temporary Regulations issued by the Treasury Department,
these limitations on deductibility will apply to a noncorporate Limited
Partner's share of the expenses of the Partnership, including the Fee. Although
the Partnership intends to treat the Incentive Allocation, including the initial
Incentive Allocation, to the Manager as not being subject to the foregoing
limitations on deductibility, there can be no assurance that the Service may not
treat such allocations as an investment expense which is subject to the
limitations.
The consequences of these limitations will vary depending upon the
particular tax situation of each taxpayer. Accordingly, noncorporate Limited
Partners should consult their tax advisers with respect to the application of
these limitations.
APPLICATION OF RULES FOR INCOME AND LOSSES FROM PASSIVE ACTIVITIES.
The Code restricts the deductibility of losses from a "passive activity" against
certain income which is not derived from a passive activity. This restriction
applies to individuals, personal service corporations and certain closely held
corporations. Pursuant to Temporary Regulations issued by the Treasury
Department, income or loss from the Partnership's securities trading activity
generally will not constitute income or loss from a passive activity. Therefore,
passive losses from other sources generally could not be deducted against a
Limited Partner's share of income and gain from the Partnership. Income or loss
attributable to investments in partnerships engaged in a trade or business may
constitute passive activity income or loss.
"PHANTOM INCOME" FROM PARTNERSHIP INVESTMENTS. Pursuant to various
"anti-deferral" provisions of the Code (the "Subpart F," "passive foreign
investment company" and "foreign personal holding company" provisions),
investments, if any, by the Partnership in certain foreign corporations may
cause a Limited Partner to (i) recognize taxable income prior to the
Partnership's receipt of distributable proceeds, (ii) pay an interest charge on
receipts that are deemed as having been deferred or (iii) recognize ordinary
income that, but for the "anti-deferral" provisions, would have been treated as
long term capital gain.
FOREIGN TAXES
It is possible that certain dividends and interest received by the
Partnership from sources within foreign countries will be subject to withholding
taxes imposed by such countries. In addition, the Partnership may also be
subject to capital gains taxes in some of the foreign countries where it
purchases and sells securities. Tax treaties between certain countries and the
United States may reduce or eliminate such taxes. It is impossible to predict
the rate of foreign tax the Partnership will pay in advance since the amount of
the Partnership's assets to be invested in various countries is not known.
The Partnership will inform Partners of their proportionate share of
the foreign taxes paid or incurred by the Partnership that Partners will be
required to include in their income. The Partners generally will be entitled to
claim either a credit, subject to the limitations discussed below, or, if they
itemize their deductions, a deduction, subject to the limitations generally
applicable to deductions, for their share of such foreign taxes in computing
their Federal income taxes. A Partner that is tax exempt will not ordinarily
benefit from such credit or deduction.
Generally, a credit for foreign taxes is subject to the limitation
that it may not exceed the Partner's Federal tax, before the credit,
attributable to its total foreign source taxable income. A Partner's share of
the Partnership's dividends and interest from non-U.S. securities generally will
qualify as foreign source income. Generally, the source of income realized upon
the sale of personal property, such as securities, will be based on the
residence of the seller. In the case of a partnership, the determining factor is
the residence of the partner. Thus, absent a tax treaty to the contrary, the
gains from the sale of securities allocable to a Partner that is a U.S. resident
will be treated as derived from U.S. sources, even though the securities are
sold in foreign countries; and certain currency fluctuation gains, including
fluctuation gains from foreign currency denominated debt securities, receivables
and payables, will also be treated as ordinary income derived from U.S. sources.
The limitation on the foreign tax credit is applied separately to
foreign source passive income, such as dividends and interest. In addition, the
foreign tax credit is allowed to offset only 90% of the alternative minimum tax
imposed on corporations and individuals. Because of these limitations, Partners
may be unable to claim a credit for the full amount of their proportionate share
of the foreign taxes paid by the Partnership. The foregoing is only a general
description of the foreign tax credit under current law. Moreover, since the
availability of a credit or deduction depends on the particular circumstances of
each Partner, Partners are advised to consult their own tax advisers.
UNRELATED BUSINESS TAXABLE INCOME
Generally, an exempt organization is exempt from Federal income tax on
its passive investment income, such as dividends, interest and capital gains,
whether realized by the organization directly or indirectly through a
partnership in which it is a partner.4
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4 With certain exceptions, tax-exempt organizations which are private
foundations are subject to a 2% Federal excise tax on their "net investment
income." The rate of the excise tax for any taxable year may be reduced to
1% if the private foundation meets certain distribution requirements for
the taxable year. A private foundation will be required to make payments of
estimated tax with respect to this excise tax.
This general exemption from tax does not apply to the UBTI of an
exempt organization. Generally, except as noted above with respect to certain
categories of exempt trading activity, UBTI includes income or gain derived,
either directly or through partnerships, from a trade or business, the conduct
of which is substantially unrelated to the exercise or performance of the
organization's exempt purpose or function. UBTI also includes "unrelated
debt-financed income," which generally consists of (i) income derived by an
exempt organization, directly or through a partnership, from income-producing
property with respect to which there is "acquisition indebtedness" at any time
during the taxable year, and (ii) gains derived by an exempt organization,
directly or through a partnership, from the disposition of property with respect
to which there is "acquisition indebtedness" at any time during the 12-month
period ending with the date of such disposition. With respect to its investments
in partnerships engaged in a trade or business, the Partnership's income, or
loss, from these investments may constitute UBTI.
The Partnership may incur "acquisition indebtedness" with
respect to certain of its transactions, such as the purchase of securities on
margin.5 Based upon a published ruling issued by the Service which generally
holds that income and gain with respect to short sales of publicly traded stock
does not constitute income from debt financed property for purposes of computing
UBTI, the Partnership will treat its short sales of securities as not involving
"acquisition indebtedness" and therefore not resulting in UBTI. To the extent
the Partnership recognizes income (i.e., dividends and interest) from securities
with respect to which there is "acquisition indebtedness" during a taxable year,
the percentage of such income which will be treated as UBTI generally will be
based on the percentage which the "average acquisition indebtedness" incurred
with respect to such securities is of the "average amount of the adjusted basis"
of such securities during the taxable year.
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5 Income realized from option writing transactions generally would not
constitute UBTI.
To the extent the Partnership recognizes capital gain from securities
with respect to which there is "acquisition indebtedness" at any time during the
twelve-month period ending with the date of their disposition, the percentage of
such gain which will be treated as UBTI will be based on the percentage which
the highest amount of such "acquisition indebtedness" is of the "average amount
of the adjusted basis" of such securities during the taxable year. In
determining the unrelated debt-financed income of the Partnership, an allocable
portion of deductions directly connected with the Partnership's debt-financed
property is taken into account. Thus, for instance, a percentage of capital
losses from debt-financed securities, based on the debt/basis percentage
calculation described above, would offset gains treated as UBTI.
Since the calculation of the Partnership's "unrelated debt-financed
income" is complex and will depend in large part on the amount of leverage, if
any, used by the Partnership from time to time,6 it is impossible to predict
what percentage of the Partnership's income and gains will be treated as UBTI
for a Limited Partner which is an exempt organization. An exempt organization's
share of the income or gains of the Partnership which is treated as UBTI may not
be offset by losses of the exempt organization either from the Partnership or
otherwise, unless such losses are treated as attributable to an unrelated trade
or business (e.g., losses from securities for which there is acquisition
indebtedness).
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6 The calculation of a particular exempt organization's UBTI would also be
affected if it incurs indebtedness to finance its investment in the
Partnership. An exempt organization is required to make estimated tax
payments with respect to its UBTI.
To the extent that the Partnership generates UBTI, the applicable
Federal tax rate for such a Limited Partner generally would be either the
corporate or trust tax rate depending upon the nature of the particular exempt
organization. An exempt organization may be required to support, to the
satisfaction of the Service, the method used to calculate its UBTI. The
Partnership will be required to report to a Partner which is an exempt
organization information as to the portion, if any, of its income and gains from
the Partnership for each year which will be treated as UBTI. The calculation of
such amount with respect to transactions entered into by the Partnership is
highly complex, and there is no assurance that the Partnership's calculation of
UBTI will be accepted by the Service.
<PAGE>
In general, if UBTI is allocated to an exempt organization such as a
qualified retirement plan or a private foundation, the portion of the
Partnership's income and gains which is not treated as UBTI will continue to be
exempt from tax, as will the organization's income and gains from other
investments which are not treated as UBTI. Therefore, the possibility of
realizing UBTI from its investment in the Partnership generally should not
affect the tax-exempt status of such an exempt organization.7 However, a
charitable remainder trust will not be exempt from Federal income tax under
Section 664(c) of the Code for any year in which it has UBTI. A title-holding
company will not be exempt from tax if it has certain types of UBTI. Moreover,
the charitable contribution deduction for a trust under Section 642(c) of the
Code may be limited for any year in which the trust has UBTI. A prospective
investor should consult its tax adviser with respect to the tax consequences of
receiving UBTI from the Partnership. See, "ERISA CONSIDERATIONS."
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7 Certain exempt organizations which realize UBTI in a taxable year will not
constitute "qualified organizations" for purposes of Section
514(c)(9)(B)(vi)(I) of the Code, pursuant to which, in limited
circumstances, income from certain real estate partnerships in which such
organizations invest might be treated as exempt from UBTI. A prospective
tax-exempt Limited Partner should consult its tax adviser in this regard.
CERTAIN ISSUES PERTAINING TO SPECIFIC EXEMPT ORGANIZATIONS
PRIVATE FOUNDATIONS. Private foundations and their managers are
subject to excise taxes if they invest "any amount in such a manner as to
jeopardize the carrying out of any of the foundation's exempt purposes." This
rule requires a foundation manager, in making an investment, to exercise
"ordinary business care and prudence" under the facts and circumstances
prevailing at the time of making the investment, in providing for the short-
term and long-term needs of the foundation to carry out its exempt purposes. The
factors which a foundation manager may take into account in assessing an
investment include the expected rate of return, both income and capital
appreciation, the risks of rising and falling price levels, and the needs for
diversification within the foundation's portfolio.
In order to avoid the imposition of an excise tax, a private
foundation may be required to distribute on an annual basis its "distributable
amount," which includes, among other things, the private foundation's "minimum
investment return," defined as 5% of the excess of the fair market value of its
nonfunctionally related assets, assets not used or held for use in carrying out
the foundation's exempt purposes, over certain indebtedness incurred by the
foundation in connection with such assets. It appears that a foundation's
investment in the Partnership would most probably be classified as a
nonfunctionally related asset. A determination that an interest in the
Partnership is a nonfunctionally related asset could conceivably cause cash flow
problems for a prospective Limited Partner which is a private foundation. Such
an organization could be required to make distributions in an amount determined
by reference to unrealized appreciation in the value of its interest in the
Partnership. Of course, this factor would create less of a problem to the extent
that the value of the investment in the Partnership is not significant in
relation to the value of other assets held by a foundation.
In some instances, an investment in the Partnership by a private
foundation may be prohibited by the "excess business holdings" provisions of the
Code. For example, if a private foundation, either directly or together with a
"disqualified person," acquires more than 20% of the capital interest or profits
interest of the Partnership, the private foundation may be considered to have
"excess business holdings." If this occurs, such foundation may be required to
divest itself of its interest in the Partnership in order to avoid the
imposition of an excise tax.
A substantial percentage of investments of certain "private operating
foundations" may be restricted to assets directly devoted to their tax-exempt
purposes. Otherwise, generally, rules similar to those discussed above govern
their operations.
QUALIFIED RETIREMENT PLANS. Employee benefit plans subject to the
provisions of ERISA, Individual Retirement Accounts ("IRA's") and Keogh Plans
should consult their counsel as to the implications of such an investment under
ERISA. See, "ERISA CONSIDERATIONS."
ENDOWMENT FUNDS. Investment managers of endowment funds should
consider whether the acquisition of an Interest is legally permissible. This is
not a matter of Federal law, but is determined under state statutes. It should
be noted, however, that under the Uniform Management of Institutional Funds Act,
which has been adopted, in various forms, by a large number of states,
participation in investment partnerships or similar organizations in which funds
are commingled and investment determinations are made by persons other than the
governing board of the endowment fund is allowed.
STATE AND LOCAL TAXATION
In addition to the Federal income tax consequences described above,
prospective investors should consider potential state and local tax consequences
of an investment in the Partnership. State and local laws often differ from
Federal income tax laws with respect to the treatment of specific items of
income, gain, loss, deduction and credit. A Partner's distributive share of the
taxable income or loss of the Partnership generally will be required to be
included in determining its reportable income for state and local tax purposes
in the jurisdiction in which it is a resident.
A partnership in which the Partnership acquires an interest may
conduct business in a jurisdiction which will subject to tax a Limited Partner's
share of the Partnership's income from that business. Prospective investors
should consult their tax advisers with respect to the availability of a credit
for such tax in the jurisdiction in which that Limited Partner is a resident.
The Partnership should not be subject to the New York City
unincorporated business tax, which is not imposed on a partnership which
purchases and sells securities for its "own account." (This exemption may not be
applicable if a partnership in which the Partnership invests conducts a business
in New York City.) By reason of a similar "own account" exemption, it is also
expected that a nonresident individual Partner should not be subject to New York
State personal income tax with respect to his share of income or gain realized
directly by the Partnership. A nonresident individual Partner will not be
subject to New York City earnings tax on nonresidents with respect to his or her
investment in the Partnership.
Individual Limited Partners who are residents in New York State and
New York City should be aware that the New York State and New York City personal
income tax laws limit the deductibility of itemized deductions for individual
taxpayers at certain income levels. This limitation would likely apply to a
Limited Partner's share of some or all of the Partnership's expenses.
Prospective investors are urged to consult their tax advisers with respect to
the impact of these provisions and the Federal limitations on the deductibility
of certain itemized deductions and investment expenses on their New York State
and New York City tax liability.
For purposes of the New York State corporate franchise tax and the New
York City general corporation tax, a corporation generally is treated as doing
business in New York State and New York City, respectively, and is subject to
such corporate taxes as a result of the ownership of a limited partnership
interest in a partnership which does business in New York State and New York
City, respectively.8 Each of the New York State and New York City corporate
taxes are imposed, in part, on the corporation's taxable income or capital
allocable to the relevant jurisdiction by application of the appropriate
allocation percentages. Moreover, a non-New York corporation which does business
in New York State may be subject to a New York State license fee. A corporation
which is subject to New York State corporate franchise tax solely as a result of
being a limited partner in a New York partnership may, under certain
circumstances, elect to compute its New York State corporate franchise tax by
taking into account only its distributive share of such partnership's income and
loss. There is currently no similar provision in effect for purposes of the New
York City general corporation tax.
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8 New York State, but not New York City, generally exempts from corporate
franchise tax a non-New York corporation which (i) does not actually or
constructively own a 1% or greater limited partnership interest in a
partnership doing business in New York and (ii) has a tax basis in such
limited partnership interest not greater than $1 million.
Regulations under both the New York State corporate franchise tax and
the New York City general corporation tax, however, provide an exception to this
general rule in the case of a "portfolio investment partnership", which is
defined, generally, as a partnership which meets the gross income requirements
of Section 851(b)(2) of the Code. New York State (but not New York City) has
adopted regulations that also include income and gains from commodity
transactions described in Section 864(b)(2)(B)(iii) as qualifying gross income
for this purpose. The Partnership's qualification as such a portfolio investment
partnership must be determined on an annual basis and with respect to a taxable
year, the Partnership may not qualify as a portfolio investment partnership.
A trust or other unincorporated organization which by reason of its
purposes or activities is exempt from Federal income tax is also exempt from New
York State and New York City personal income tax. A nonstock corporation which
is exempt from Federal income tax is generally presumed to be exempt from New
York State corporate franchise tax and New York City general corporation tax.
New York State imposes a tax with respect to such exempt entities on UBTI,
including unrelated debt-financed income, at a rate which is currently equal to
the New York State corporate franchise tax rate, plus the corporate surtax.
There is no New York City tax on the UBTI of an otherwise exempt entity.
<PAGE>
ERISA CONSIDERATIONS
Persons who are fiduciaries with respect to an employee benefit plan
or other arrangement subject to the Employee Retirement Income Security Act of
1974, as amended (an "ERISA Plan" and "ERISA," respectively), and persons who
are fiduciaries with respect to an IRA or Keogh plan, which is not subject to
ERISA but is subject to the prohibited transaction rules of Section 4975 of the
Code (together with ERISA Plans, "Benefit Plans") should consider, among other
things, the matters described below before determining whether to invest in the
Partnership.
ERISA imposes certain general and specific responsibilities on persons
who are fiduciaries with respect to an ERISA Plan, including prudence,
diversification, an obligation not to engage in a prohibited transaction and
other standards. In determining whether a particular investment is appropriate
for an ERISA Plan, Department of Labor ("DOL") regulations provide that a
fiduciary of an ERISA Plan must give appropriate consideration to, among other
things, the role that the investment plays in the ERISA Plan's portfolio, taking
into consideration whether the investment is designed reasonably to further the
ERISA Plan's purposes, an examination of the risk and return factors, the
portfolio's composition with regard to diversification, the liquidity and
current return of the total portfolio relative to the anticipated cash flow
needs of the ERISA Plan, the income tax consequences of the investment (see "TAX
ASPECTS--Unrelated Business Taxable Income" and "--Certain Issues Pertaining to
Specific Exempt Organizations") and the projected return of the total portfolio
relative to the ERISA Plan's funding objectives. Before investing the assets of
an ERISA Plan in the Partnership, a fiduciary should determine whether such an
investment is consistent with its fiduciary responsibilities and the foregoing
regulations. For example, a fiduciary should consider whether an investment in
the Partnership may be too illiquid or too speculative for a particular ERISA
Plan, and whether the assets of the ERISA Plan would be sufficiently
diversified. If a fiduciary with respect to any such ERISA Plan breaches its or
his responsibilities with regard to selecting an investment or an investment
course of action for such ERISA Plan, the fiduciary itself or himself may be
held liable for losses incurred by the ERISA Plan as a result of such breach.
Because the Partnership will register as an investment company under
the 1940 Act, the underlying assets of the Partnership should not be considered
to be "plan assets" of the ERISA Plans investing in the Partnership for purposes
of ERISA's (or the Code's) fiduciary responsibility and prohibited transaction
rules. Thus, the Manager will not be a fiduciary within the meaning of ERISA by
reason of its authority with respect to the Partnership.
The Manager will require a Benefit Plan which proposes to invest in
the Partnership to represent that it, and any fiduciaries responsible for such
Plan's investments, are aware of and understand the Partnership's investment
objective, policies and strategies, that the decision to invest plan assets in
the Partnership was made with appropriate consideration of relevant investment
factors with regard to the Benefit Plan and is consistent with the duties and
responsibilities imposed upon fiduciaries with regard to their investment
decisions under ERISA and/or the Code.
Certain prospective Benefit Plan investors may currently maintain
relationships with the Manager or other entities which are affiliated with the
Manager. Each of such persons may be deemed to be a party in interest to and/or
a fiduciary of any Benefit Plan to which it provides investment management,
investment advisory or other services. ERISA prohibits (and the Code penalizes)
the use of ERISA and Benefit Plan assets for the benefit of a party in interest
and also prohibits (or penalizes) an ERISA or Benefit Plan fiduciary from using
its position to cause such Plan to make an investment from which it or certain
third parties in which such fiduciary has an interest would receive a fee or
other consideration. ERISA and Benefit Plan investors should consult with
counsel to determine if participation in the Partnership is a transaction which
is prohibited by ERISA or the Code. Fiduciaries of ERISA or Benefit Plan
investors will be required to represent that the decision to invest in the
Partnership was made by them as fiduciaries that are independent of such
affiliated persons, that such fiduciaries are duly authorized to make such
investment decision and that they have not relied on any individualized advice
or recommendation of such affiliated persons, as a primary basis for the
decision to invest in the Partnership.
The provisions of ERISA and the Code are subject to extensive and
continuing administrative and judicial interpretation and review. The discussion
of ERISA and the Code contained in this Memorandum, is general and may be
affected by future publication of regulations and rulings. Potential Benefit
Plan investors should consult their legal advisers regarding the consequences
under ERISA and the Code of the acquisition and ownership of interests.
ADDITIONAL INFORMATION AND SUMMARY OF
LIMITED PARTNERSHIP AGREEMENT
The following is a summary description of additional items and of
select provisions of the Partnership Agreement which are not described elsewhere
in this Memorandum. The description of such items and provisions is not
definitive and reference should be made to the complete text of the Partnership
Agreement.
LIABILITY OF LIMITED PARTNERS
Pursuant to applicable Delaware law, Limited Partners generally are
not personally liable for obligations of the Partnership unless, in addition to
the exercise of their rights and powers as Limited Partners, they participate in
the control of the business of the Partnership. Any such Limited Partner would
be liable only to persons who transact business with the Partnership reasonably
believing, based on such Limited Partner's conduct, that the Limited Partner is
a General Partner. Under the terms of the Partnership Agreement, the Limited
Partners do not have the right to take part in the control of the Partnership,
but they may exercise the right to vote on matters requiring approval under the
1940 Act and on certain other matters. Although such right to vote should not
constitute taking part in the control of the Partnership's business under
applicable Delaware law, there is no specific statutory or other authority for
the existence or exercise of some or all of these powers in some other
jurisdictions. To the extent that the Partnership is subject to the jurisdiction
of courts in jurisdictions other than the State of Delaware, it is possible that
these courts may not apply Delaware law to the question of the limited liability
of the Limited Partners.
Under Delaware law and the Partnership Agreement, each Limited Partner
may be liable up to the amount of any contributions to the capital of the
Partnership (plus any accretions in value thereto prior to withdrawal) and a
Limited Partner may be obligated to return to the Partnership amounts
distributed to him in accordance with the Partnership Agreement in certain
circumstances where, after giving effect to the distribution, certain
liabilities of the Partnership exceed the fair market value of the Partnership's
assets.
DUTY OF CARE OF THE GENERAL PARTNER
The Partnership Agreement provides that the General Partner shall not
be liable to the Partnership or any of the Limited Partners for any loss or
damage occasioned by any act or omission in the performance of the General
Partner's services as General Partner in the absence of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the General Partner's office. The Partnership Agreement also contains
provisions for the indemnification, to the extent permitted by law, of the
General Partner by the Partnership, but not by the Limited Partners
individually, against any liability and expense to which the General Partner may
be liable as General Partner which arise in connection with the performance of
its activities on behalf of the Partnership. The General Partner will not be
personally liable to any Limited Partner for the repayment of any positive
balance in such Limited Partner's capital account or for contributions by such
Limited Partner to the capital of the Partnership or by reason of any change in
the Federal or state income tax laws applicable to the Partnership or its
investors. The rights of indemnification and exculpation provided under the
Partnership Agreement do not provide for indemnification of the General Partner
for any liability, including liability under Federal securities laws which,
under certain circumstances, impose liability even on persons that act in good
faith, to the extent, but only to the extent, that such indemnification would be
in violation of applicable law.
AMENDMENT OF THE PARTNERSHIP AGREEMENT
The Partnership Agreement may be amended with the approval of (i) the
Directors, including a majority of the Independent Directors, if required by the
1940 Act, (ii) the Manager or (iii) a majority, as defined in the 1940 Act, of
the outstanding voting securities of the Partnership. Certain amendments
involving capital accounts and allocations thereto may not be made without the
consent of any Partners adversely affected thereby or unless each Limited
Partner has received notice of such amendment and any Limited Partner objecting
to such amendment has been allowed a reasonable opportunity to tender its entire
interest for repurchase by the Partnership. However, the Manager may at any time
without the consent of the other Partners of the Partnership amend the
Partnership Agreement to (i) reflect any change in the Partners or their
respective capital contributions, (ii) restate the Partnership Agreement, (iii)
effect compliance with any applicable law or regulation, or (iv) make such
changes as may be necessary to assure the Partnership's continuing eligibility
to be classified for U.S. Federal income tax purposes as a partnership which is
not treated as a corporation under Section 7704(a) of the Code, subject to the
requirement that any amendment of the Partnership Agreement made pursuant to
items (iii) or (iv) above be approved by the Directors.
POWER OF ATTORNEY
By subscribing for an interest in the Partnership, each Partner will
appoint the Manager his or her attorney-in-fact for purposes of filing required
certificates and documents relating to the formation and continuance of the
Partnership as a limited partnership under Delaware law or signing all
instruments effecting authorized changes in the Partnership or the Partnership
Agreement and conveyances and other instruments deemed necessary to effect the
dissolution or termination of the Partnership.
The power-of-attorney granted as part of each Partner's subscription
agreement is a special power-of-attorney coupled with an interest in favor of
the Manager and as such is irrevocable and continues in effect until all of such
Partner's interest in the Partnership has been withdrawn pursuant to a periodic
tender or transferred to one or more transferees that have been approved by the
Manager for admission to the Partnership as substitute Partners.
TERM, DISSOLUTION AND LIQUIDATION
The Partnership will be dissolved:
- upon the affirmative vote to dissolve the Partnership by both (1)
the Directors and (2) Partners holding at least two-thirds of the
total number of votes eligible to be cast by all Partners;
- upon either of (1) an election by the Manager to dissolve the
Partnership or (2) the termination of its status as manager,
unless as to either event both (A) the Directors, and (B)
Partners holding not less than two-thirds of the total number of
votes eligible to be cast by all Partners shall elect within 60
days after such event to continue the business of the Partnership
and either a person has been admitted to the Partnership as the
Manager or one or more General Partners have agreed to make such
contributions to the capital of the Partnership as are required
to be made by the Manager;
- upon the expiration of any two-year period which commences on the
date on which any Limited Partner has submitted to the
Partnership a written request, in accordance with the Partnership
Agreement, to tender its entire interest for repurchase by the
Partnership if such Limited Partner's interest has not been
repurchased during such period;
- upon the failure of Partners to elect successor Directors at a
meeting called by the Manager when no Director remains; or
- as required by operation of law.
Upon the occurrence of any event of dissolution, the General Partner,
or a liquidator, if the General Partner is unable to perform this function, is
charged with winding up the affairs of the Partnership and liquidating its
assets. Net profits or net loss during the fiscal period including the period of
liquidation will be allocated as described in the section titled "CAPITAL
ACCOUNTS AND ALLOCATIONS--Allocation of Net Profits and Net Losses."
Upon the liquidation of the Partnership, its assets are to be
distributed (1) first to satisfy the debts, liabilities and obligations of the
Partnership, other than debts to Partners, including actual or anticipated
liquidation expenses, (2) next to repay debts owing to the Partners, and (3)
finally to the Partners proportionately in accordance with the balances in their
respective capital accounts. Assets may be distributed in kind on a pro rata
basis if the General Partner or liquidator determines that such a distribution
would be in the interests of the Partners in facilitating an orderly
liquidation.
REPORTS TO PARTNERS
The Partnership will furnish to Partners as soon as practicable after
the end of each taxable year such information as is necessary for such Partners
to complete Federal and state income tax or information returns, along with any
other tax information required by law. The Partnership will send to Partners a
semi-annual and an audited annual report within 60 days after the close of the
period for which it is being made, or as otherwise required by the 1940 Act.
Quarterly reports from the Manager regarding the Partnership's operations during
such period will also be sent to Partners.
FISCAL YEAR
The Partnership's fiscal year is the 12-month period ending on
December 31st.
ACCOUNTANTS AND LEGAL COUNSEL
Ernst & Young LLP serves as the independent public accountants of the
Partnership. Its principal business address is located at 787 Seventh Avenue,
New York, New York 10019.
Stroock & Stroock & Lavan LLP, New York, New York, acts as legal
counsel to the Partnership.
Schulte Roth & Zabel LLP, New York, New York, acts as legal counsel to
the Manager.
CUSTODIAN
_____________________ ("Custodian") serves as the primary custodian of
the Partnership's assets, and may maintain custody of the Partnership's assets
with domestic and foreign subcustodians (which may be banks, trust companies,
securities depositories and clearing agencies), approved by the Directors.
Assets of the Partnership are not held by the Manager or commingled with the
assets of other accounts other than to the extent that securities are held in
the name of a custodian in a securities depository, clearing agency or omnibus
customer account of such custodian. The Custodian's principal business address
is __________________.
INQUIRIES
Inquiries concerning the Partnership and interests in the Partnership,
including information concerning subscription and withdrawal procedures, should
be directed to:
Congress Street Management, L.L.C.
1285 Avenue of the Americas
New York, New York 10019
Telephone: 212-713-2000
Telecopier: [To be Provided]
For additional information contact:
________________________________
________________________________
* * * * *
All potential investors in the Partnership are encouraged to consult
appropriate legal and tax counsel.
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
[TO COME]
<PAGE>
FORM N-2
CONGRESS STREET ASSOCIATES, L.P.
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements:
Because the Registrant has no assets, financial statements are
omitted.
(2) Exhibits:
(a) (1) Certificate of Limited Partnership.
(2) Agreement of Limited Partnership.
(3) Amended and Restated Limited Partnership
Agreement.*
(b) Not Applicable.
(c) Not Applicable.
(d) See Item 24(2)(a)(3).
(e) Not Applicable.
(f) Not Applicable.
(g) See Item 24(2)(a)(3).
(h) Not Applicable.
(i) Not Applicable.
(j) Custody Agreement.*
(k) (1) Management and Administration Agreement.*
(2) Administration, Accounting and Investor
Services Agreement.*
(l) Not Applicable.
(m) Not Applicable.
(n) Not Applicable.
(o) Not Applicable.
(p) Not Applicable.
(q) Not Applicable.
(r) Not Applicable.
--------------
* To be filed by Amendment.
ITEM 25. MARKETING ARRANGEMENTS
Not Applicable.
<PAGE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Blue Sky fees and expenses (including fees of
counsel) $
Legal and accounting fees and expenses
Printing and engraving
Offering expenses
Miscellaneous
-----------
$
===========
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
After completion of the private offering of interests, the Registrant
expects that no person will be directly or indirectly under common control with
the Registrant, except that the Registrant may be deemed to be controlled by
Congress Street Management, L.L.C. (the "Manager"), the general partner of the
Registrant, which, in turn, is controlled by PW Fund Advisor, L.L.C. Information
regarding the ownership of PW Fund Advisor, L.L.C. is set forth in its Form ADV,
as filed with the Commission (File No. 801-55537).
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Title of Class Number of Record Holders
- -------------- ------------------------
Limited Partnership 1 (The Registrant anticipates
Interests that as a result of the private
offering of interests there will
be more than 100 record holders
of such interests in the future.)
ITEM 29. INDEMNIFICATION
Reference is made to Section 3.9 of the Registrant's Amended and
Restated Limited Partnership Agreement (the "Partnership Agreement") to be filed
as Exhibit 2(a)(3) hereto. The Registrant hereby undertakes that it will apply
the indemnification provision of the Partnership Agreement in a manner
consistent with Release 40-11330 of the Securities and Exchange Commission under
the Investment Company Act of 1940, as amended (the "1940 Act"), so long as the
interpretation therein of Sections 17(h) and 17(i) of the 1940 Act remains in
effect.
The Registrant, in conjunction with the Manager, the Registrant's
directors and other registered investment management companies managed by the
Manager or its affiliates, maintains insurance on behalf of any person who is or
was an independent director, officer, employee, or agent of the Registrant, or
who is or was serving at the request of the Registrant as an, individual general
partner, director, officer, employee or agent of another managed investment
company, against certain liability asserted against and incurred by, or arising
out of, his or her position. However, in no event will the Registrant pay that
portion of the premium, if any, for insurance to indemnify any such person or
any act for which the Registrant itself is not permitted to indemnify.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
A description of any other business, profession, vocation, or
employment of a substantial nature in which the investment adviser of the
Registrant, and each member, director, executive officer, or partner of any such
investment adviser, is or has been, at any time during the past two fiscal
years, engaged in for his or her own account or in the capacity of member,
director, officer, employee, partner or trustee, is set forth in the
Registrant's Confidential Memorandum in the section entitled "THE MANAGER, PWFA
AND GRANUM." Information as to the members and officers of PW Fund Advisor,
L.L.C. is included in its Form ADV as filed with the Commission (File No.
801-55537), and is incorporated herein by reference. Information as to the
members and officers of Granum Capital Management, L.L.C. is included in its
Form ADV as filed with the Commission (File No. 801-53683), and is incorporated
herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Administrator maintains certain required accounting related and
financial books and records of the Registrant at _________________. The other
required books and records are maintained by the Manager c/o PW Fund Advisor,
L.L.C., 1285 Avenue of the Americas, New York, New York 10019.
ITEM 32. MANAGEMENT SERVICES
Not Applicable.
ITEM 33. UNDERTAKINGS
Not Applicable.
<PAGE>
FORM N-2
CONGRESS STREET ASSOCIATES, L.P.
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940,
the Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and State of New York, on the 5th day of June, 1998.
CONGRESS STREET ASSOCIATES, L.P.
By: Congress Street Management, L.L.C.
General Partner
By: PW Fund Advisor, L.L.C.
Managing Member
By: /S/ PETER ZURKOW
Name: Peter Zurkow
Title: Managing Director
<PAGE>
FORM N-2
CONGRESS STREET ASSOCIATES, L.P.
EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT DESCRIPTION
(a) (1) Certificate of Limited Partnership.
(2) Agreement of Limited Partnership.
(3) Amended and Restated Limited Partnership Agreement.*
(c) Not Applicable.
(d) See Exhibit (a)(3).
(e) Not Applicable.
(f) Not Applicable.
(g) See Exhibit (a)(3).
(h) Not Applicable.
(i) Not Applicable.
(j) Custodian Agreement.*
(k) (1) Management and Administration Agreement.*
(2) Administration, Accounting and Investor Services Agreement.*
(l) Not Applicable.
(m) Not Applicable.
(n) Not Applicable.
(o) Not Applicable.
(p) Not Applicable.
(q) Not Applicable.
- ----------------------
* To be filed by Amendment.
Exhibit 24(2)(a)(1)
CERTIFICATE OF LIMITED PARTNERSHIP
OF
CONGRESS STREET ASSOCIATES, L.P.
THIS Certificate of Limited Partnership of Congress Street Associates,
L.P. (the "Partnership"), dated as of June 5, 1998, is being duly executed and
filed by Congress Street Management, L.L.C., a Delaware limited liability
company, as general partner, to form a limited partnership under the Delaware
Revised Uniform Limited Partnership Act (6 DEL.C. ss.17-101, ET SEQ.).
1. NAME. The name of the limited partnership formed hereby is Congress
Street Associates, L.P.
2. REGISTERED OFFICE. The address of the registered office of the
Partnership in the State of Delaware is c/o The Corporation Service Company,
1013 Centre Road, Wilmington, New Castle County, Delaware 19805.
3. REGISTERED AGENT. The name and address of the registered agent for
service of process on the Partnership in the State of Delaware is The
Corporation Service Company, 1013 Centre Road, Wilmington, New Castle County,
Delaware 19805.
4. GENERAL PARTNER. The name and business address of the sole general
partner of the Partnership is Congress Street Management, L.L.C., 1285 Avenue of
the Americas, New York, New York 10019.
IN WITNESS WHEREOF, the undersigned has executed this Certificate of
Limited Partnership as of the date first-above written.
GENERAL PARTNER:
CONGRESS STREET MANAGEMENT, L.L.C.
By: PW Fund Advisor, L.L.C.
Managing Member
By: /S/ PETER ZURKOW
-------------------------
Name: Peter Zurkow
Title: Managing Director
Exhibit 24(2)(a)(2)
AGREEMENT OF LIMITED PARTNERSHIP
OF
CONGRESS STREET ASSOCIATES, L.P.
This Agreement of Limited Partnership of Congress Street Associates,
L.P. (this "Agreement"), is entered into by and between Congress Street
Management, L.L.C., as general partner (the "General Partner"), and Mark F.
Vassallo, as limited partner (the "Initial Limited Partner").
The General Partner and the Initial Limited Partner hereby form a
limited partnership pursuant to and in accordance with the Delaware Revised
Uniform Limited Partnership Act (6 DEL.C. ss.17-101, ET SEQ.), as amended from
time to time (the "Act"), and hereby agree as follows:
1. NAME. The name of the limited partnership formed hereby is Congress
Street Associates, L.P. (the "Partnership").
2. PURPOSE. The Partnership is formed for the object and purpose of,
and the nature of the business to be conducted and promoted by the Partnership
is, engaging in any lawful act or activity for which limited partnerships may be
formed under the Act and engaging in any and all activities necessary or
incidental to the foregoing.
3. REGISTERED OFFICE. The registered office of the Partnership in the
State of Delaware is c/o The Corporation Service Company, 1013 Centre Road,
Wilmington, New Castle County, Delaware 19805.
4. REGISTERED AGENT. The name and address of the registered agent of
the Partnership for service of process on the Partnership for service of process
on the Partnership in the State of Delaware is The Corporation Service Company,
1013 Centre Road, Wilmington, New Castle County, Delaware 19805.
5. PARTNERS. The names and the business, residence or mailing
addresses of the General Partner and the Initial Limited Partner are as follows:
GENERAL PARTNER:
Congress Street Management, L.L.C.
1285 Avenue of the Americas
New York, New York 10019
INITIAL LIMITED PARTNER:
Mark F. Vassallo
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
6. POWERS. The powers of the General Partner include all powers,
statutory and otherwise, possessed by general partners under the laws of the
State of Delaware.
7. DISSOLUTION. The Partnership shall dissolve, and its affairs shall
be wound up, at such time as (a) all of the partners of the Partnership approve
in writing, (b) an event of withdrawal of a general partner has occurred under
the Act, or (c) an entry of a decree of judicial dissolution has occurred under
ss.17-802 of the Act; PROVIDED, HOWEVER, the Partnership shall not be dissolved
or required to be wound up upon an event of withdrawal of a general partner
described in Section 7(b) if (i) at the time of such event of withdrawal, there
is at least one (1) other general partner of the Partnership who carries on the
business of the Partnership (any remaining general partner being hereby
authorized to carry on the business of the Partnership), or (ii) within ninety
days after the occurrence of such event of withdrawal, all remaining partners
agree in writing to continue the business of the Partnership and the
appointment, effective as of the date of the event of withdrawal, of one or more
additional general partners of the Partnership.
8. CAPITAL CONTRIBUTIONS. The partners of the Partnership have
contributed the following amounts, in cash, and no other property, to the
Partnership:
GENERAL PARTNER:
Congress Street Management, L.L.C. $99.00
INITIAL LIMITED PARTNER:
Mark F. Vassallo $1.00
9. ADDITIONAL CONTRIBUTIONS. No partner of the Partnership is required
to make any additional capital contribution to the Partnership.
10. ALLOCATION OF PROFITS AND LOSSES. The Partnership's profits and
losses shall be allocated in proportion to the capital contributions of the
partners of the Partnership.
11. DISTRIBUTIONS. Distributions shall be made to the partners of the
Partnership at the times and in the aggregate amounts determined by the General
Partner. Such distributions shall be allocated among the partners of the
Partnership in the same proportion as their then capital account balances.
12. ASSIGNMENTS.
(a) The Initial Limited Partner may assign all or any part of its
partnership interest in the Partnership and may withdraw from the Partnership
only with the consent of the General Partner.
(b) The General Partner may assign all or any part of its partnership
interest in the Partnership and may withdraw from the Partnership without the
consent of the Initial Limited Partner.
13. WITHDRAWAL. Except to the extent set forth in Section 12, no right
is given to any partner of the Partnership to withdraw from the Partnership.
14. ADMISSION OF ADDITIONAL OR SUBSTITUTE PARTNERS.
(a) One or more additional or substitute limited partners of the
Partnership may be admitted to the Partnership with only the consent of the
General Partner.
(b) One or more additional or substitute general partners of the
Partnership may be admitted to the Partnership with only the consent of the
General Partner.
15. LIABILITY OF INITIAL LIMITED PARTNER. The Initial Limited Partner
shall not have any liability for the obligations or liabilities of the
Partnership except to the extent provided in the Act.
16. GOVERNING LAW. This Agreement shall be governed by, and construed
under, the laws of the State of Delaware, all rights and remedies being governed
by said laws.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound
hereby, have duly executed this Agreement of Limited Partnership as of the 5th
day of June, 1998.
GENERAL PARTNER:
CONGRESS STREET MANAGEMENT, L.L.C.
By: PW Fund Advisor, L.L.C.
Managing Member
By: /S/ PETER ZURKOW
-------------------------
Name: Peter Zurkow
Title: Managing Director
INITIAL LIMITED PARTNER:
/S/ MARK F. VASSALLO
--------------------
Mark F. Vassallo
