As filed with the Securities and Exchange Commission on [_________, 2000]
Investment Company Act File No. 811-[_____]
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] Amendment No. 1
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EXCELSIOR HEDGE FUND OF FUNDS I, LLC
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(Exact name of Registrant as specified in Charter)
U.S. Trust Center
301 North Elm Street
Greensboro, North Carolina 274011
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code: (336) 273-8544
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c/o STEVEN C. HASSENFELT
Chairman and Chief Executive Officer
NCT Opportunities, Inc.
U.S. Trust Center
301 North Elm Street
Greensboro, North Carolina 274011
(Name and address of agent for service)
COPY TO:
KENNETH S. GERSTEIN, ESQ.
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
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This Registration Statement has been filed by Registrant pursuant to Section
8(b) of the Investment Company Act of 1940, as amended. Interests in the
Registrant are not being registered under the Securities Act of 1933, as amended
(the "1933 Act"), and will be issued solely in private placement transactions
that do not involve any "public offering" within the meaning of Section 4(2) of
the 1933 Act. Investments in Registrant may only be made by individuals or
entities that 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, interests in Registrant.
<PAGE>
PART A -- INFORMATION REQUIRED IN A PROSPECTUS
PART B -- INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
The information required to be included in this Registration Statement
by Part A and Part B of Form N-2 is contained in the Confidential Memorandum
which follows.
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Copy Number: ________________
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EXCELSIOR HEDGE FUND OF FUNDS I, LLC
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CONFIDENTIAL MEMORANDUM
AUGUST 2000
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NCT OPPORTUNITIES, INC.
INVESTMENT ADVISER
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U.S. TRUST CENTER
301 NORTH ELM STREET
GREENSBORO, NORTH CAROLINA 27401
(336) 273-8544
In making an investment decision, investors must rely upon their own examination
of Excelsior Hedge Fund of Funds I, LLC and the terms of the offering, including
the merits and risks involved. The limited liability company interests
("Interests") of Excelsior Hedge Fund of Funds I, LLC have not been registered
with or approved or disapproved by the Securities and Exchange Commission 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 or the merits of an
investment in the Interests offered hereby. Any representation to the contrary
is a criminal offense.
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TO ALL INVESTORS
Interests are not insured by the Federal Deposit Insurance Corporation or
any other governmental agency. Interests are not deposits or other obligations
of, and are not guaranteed by, U.S. Trust Corporation; U.S. Trust Company; U.S.
Trust Company, N.A.; United States Trust Company of New York; U.S. Trust Company
of Texas, N.A.; U.S. Trust Company of New Jersey; U.S. Trust Company of Florida,
Savings Bank; U.S. Trust Company of North Carolina; U.S. Trust Company of
Delaware; their affiliates or any bank. Interests are subject to investment
risks, including the possible loss of the full amount invested.
Interests in Excelsior Hedge Fund of Funds I, LLC which are described in
this confidential 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 state. The offering contemplated by this confidential memorandum will be
made in reliance upon an exemption from the registration requirements of the
1933 Act for offers and sales of securities that do not involve any public
offering, and analogous exemptions under state securities laws.
This confidential memorandum shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of 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 Excelsior
Hedge Fund of Funds I, LLC that are inconsistent with those contained in this
confidential memorandum. Prospective investors should not rely on any
information not contained in this confidential memorandum or the exhibits
hereto.
This confidential 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 interests described herein, and is not to be
reproduced or distributed to any other persons (other than professional advisors
of the prospective investor receiving this document).
Prospective investors should not construe the contents of this confidential
memorandum as legal, tax or financial advice. Each prospective investor should
consult his or her own professional advisors as to the legal, tax, financial or
other matters relevant to the suitability of an investment in Excelsior Hedge
Fund of Funds I, LLC 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 liability company agreement of Excelsior Hedge Fund of Funds I, LLC, 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 (2) years from the date
that a repurchase request has been made by an investor.
<PAGE>
FOR GEORGIA RESIDENTS ONLY
These securities have been issued or sold in reliance on paragraph (13) of
Code Section 10-5-9 of the Georgia Securities Act of 1973, and may not be sold
or transferred except in a transaction which is exempt under such act or
pursuant to an effective registration under such act.
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TABLE OF CONTENTS
Page
Summary of Terms..............................................................1
The Company..................................................................17
Use of Proceeds..............................................................17
Structure....................................................................17
Investment Program...........................................................18
Types of Investments and Related Risk Factors................................26
Additional Risk Factors......................................................42
Board of Managers............................................................44
The Advisor and U.S. Trust Corporation.......................................47
Investment Advisory Agreement................................................49
Voting.......................................................................50
Conflicts of Interest........................................................50
Brokerage....................................................................54
Fees and Expenses............................................................55
Administrator................................................................57
Consultants..................................................................58
Capital Accounts and Allocations.............................................59
Subscriptions for Interests..................................................62
Redemptions, Repurchases of Interests and Transfers..........................64
Tax Aspects..................................................................69
ERISA Considerations.........................................................83
Additional Information and Summary of Limited Liability Company Agreement....85
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SUMMARY OF TERMS
The following summary is qualified entirely by the detailed information
appearing elsewhere in this Confidential Memorandum and by the terms and
conditions of the Limited Liability Company Agreement of Excelsior Hedge Fund of
Funds I, LLC (the "Company Agreement"), each of which should be read carefully
and retained by any prospective investor.
The Company Excelsior Hedge Fund of Funds I, LLC (the "Company") is
a newly formed Delaware limited liability company which
is registered under the Investment Company Act of 1940
(the "1940 Act") as a closed-end, non-diversified,
management investment company.
The Company is a specialized investment vehicle that
may be referred to as a "registered private investment
fund." It is similar to an unregistered private
investment fund in that limited liability company
interests in the Company ("Interests") 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. (See
"Summary of Terms--Eligibility.") Unlike a private
investment fund but like other registered investment
companies, however, the Company has registered under
the 1940 Act to be able to offer Interests without
limiting the number of investors that can participate
in its investment program.
Investment Program The Company seeks capital appreciation. It pursues this
objective principally through a multi-manager
multi-strategy program of investment in a diverse group
of investment funds that primarily invest or trade in a
wide range of equity and debt securities.
The Company intends to allocate its assets among
investment managers (the "Investment Managers") that
utilize a variety of investment strategies, with the
objective of significantly lowering the risk
(volatility) of investing with any single Investment
Manager.
Investment Managers will be selected by NCT
Opportunities, Inc. (the "Advisor"), an indirect
wholly-owned subsidiary of U.S. Trust Corporation
("U.S. Trust"), based on their experience or expertise
in a particular investment strategy or investment
strategies. Stephen C. Hassenfelt, the Chairman
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and Chief Executive Officer of the Advisor, will be
primarily responsible for the day-to-day management of
the Company's portfolio, subject to such policies as
may be adopted by the board of managers of the Company
(the "Board of Managers"). Investment Managers will be
selected on the basis of various criteria, generally
including, among other things, an analysis of: the
Investment Manager's performance during various time
periods and market cycles; the Investment Manager's
reputation, experience and training; its articulation
of, and adherence to, its investment philosophy; the
presence and deemed effectiveness of the Investment
Manager's risk management discipline; the structure of
the Investment Manager's portfolio and the types of
securities or other instruments held; its fee
structure; on-site interviews of the Investment
Manager's personnel; the quality and stability of the
Investment Manager's organization, including internal
and external professional staff; and whether the
Investment Manager has a substantial personal
investment in the investment program it pursues. The
Advisor has entered into agreements with Praesideo
Asset Management, Inc. ("Praesideo") and CTC
Consulting, Inc. ("CTC"), companies that specialize in
assisting institutional and private clients in
identifying and evaluating private investment funds.
Pursuant to these agreements, Praesideo and CTC will
each provide the Advisor with investment research,
analytical data and due diligence services, which the
Advisor intends to use in evaluating prospective
Investment Managers being considered by the Advisor and
in monitoring the strategies and investment performance
of Investment Managers. Praesideo and CTC do not make
recommendations as to the selection of Investment Funds
for investment by the Company. The determinations of
the Investment Funds in which the Company invests are
made solely by the Advisor. CTC is a wholly-owned
subsidiary of U.S. Trust. Fees payable to Praesideo and
CTC are paid by the Advisor and are not borne by the
Company.
The Investment Managers selected by the Advisor
generally conduct their investment programs through
unregistered investment funds, which have investors
other than the Company, and in other registered
investment companies (collectively, "Investment
Funds"). The Company currently intends to invest its
assets primarily in Investment Funds. However, it also
may invest a portion of its assets directly pursuant to
investment advisory agreements, granting the Investment
Managers discretionary investment authority on a
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managed account basis. In addition, to facilitate the
efficient investment of the Company's assets, separate
Investment Funds, which would be managed by one or more
of the Investment Managers, may be created by the
Company. Generally, with respect to any such Investment
Fund, an Investment Manager will serve as general
partner and the Company will be the sole limited
partner. (Investment Managers for which such an
Investment Fund is formed and Investment Managers who
manage assets directly for the Company on a managed
account basis are collectively referred to as
"Subadvisors".)
The Company's investment in any other Investment Fund
(other than one organized by the Company) will be
limited to less than 5% of that Investment Fund's
voting securities. However, to enable the Company to
invest more of its assets in existing Investment Funds
deemed attractive by the Advisor, the Company may
purchase non-voting securities of Investment Funds that
are not advised by a Subadvisor. The Company may invest
a majority of its assets in non-voting securities of
Investment Funds. When acquiring the non-voting
securities of an Investment Fund not managed by a
Subadvisor, the Company will limit its investment to
less than 25% of such Investment Fund's outstanding
equity. Investments in equity securities made by an
Investment Fund or managed account managed by a
Subadvisor will be subject to similar limits on the
percentage of voting and non-voting securities that may
be acquired. (See "Additional Risk Factors--Special
Risks of Multi-Manager Structure" and "Types of
Investments and Related Risk Factors--Investment
Policies and Restrictions".)
The Advisor will evaluate regularly each Investment
Manager to determine whether its investment program is
consistent with the Company's investment objective and
whether its investment performance is satisfactory. In
conducting this review, the Advisor will consider
information regarding the Investment Manager that is
provided by Praesideo and CTC. The Company's assets may
be reallocated among Investment Managers, existing
Investment Managers may be terminated and additional
Investment Managers selected, subject to the condition
that retention of a Subadvisor will require approval of
the Board of Managers and of a majority (as defined in
the 1940 Act) of the Company's outstanding voting
securities, unless the Company receives an exemption
from certain
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provisions of the 1940 Act. (See "Summary of
Terms--Management.")
Unregistered investment funds typically provide greater
flexibility than traditional investment funds (e.g.,
registered investment companies) as to the types of
securities that may be owned, the types of trading
strategies that may be employed, and in some cases, the
amount of leverage that may be used. The Investment
Managers utilized by the Company may invest and trade
in a wide range of instruments and markets and may
pursue various investment strategies. Although the
Investment Managers will primarily invest and trade in
equity and debt securities (domestic and foreign), they
may also invest and trade in equity-related
instruments, currencies, financial futures, and fixed
income and other debt-related instruments. In addition,
the Investment Managers may sell securities short and
use a wide range of other investment techniques. The
Investment Managers are generally not limited in the
markets (either by location or type, such as large
capitalization, small capitalization or non-U.S.
markets) in which they invest or the investment
discipline that they may employ (such as value or
growth or bottom-up or top-down analysis).
The Investment Managers may use various investment
techniques for hedging and non-hedging purposes. For
example, an Investment Manager may sell securities
short and purchase and sell options and futures
contracts and engage in other derivative transactions,
subject to certain limitations described elsewhere in
this Confidential Memorandum. The use of these
techniques may be an integral part of an Investment
Manager's investment program, and may involve certain
risks. The Investment Managers may use leverage, which
also entails risk. (See "Types of Investments and
Related Risk Factors.") For purposes of the Company's
investment restrictions and certain investment
limitations under the 1940 Act, the Company will "look
through" to the underlying investments of any
Investment Funds it creates to facilitate management of
the Company's assets by a Subadvisor. However, other
Investment Funds in which the Company invests are not
subject to the Company's investment restrictions and,
unless registered under the 1940 Act, are generally not
subject to any investment limitations under the 1940
Act.
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The Company may invest temporarily in money market
instruments pending the investment of assets in
Investment Funds or to maintain the liquidity necessary
to effect repurchases of Interests or for other
purposes.
Potential Benefits
of Investing in
the Company An investment in the Company will enable investors to
invest with a group of Investment Managers whose
services generally are not available to the general
investing public, whose investment funds may be closed
from time to time to new investors or who otherwise may
place stringent restrictions on the number and type of
persons whose money they will manage. An investment in
the Company also will enable investors to invest with a
cross-section of Investment Managers without being
subject to the high minimum investment requirements
that Investment Managers typically would impose on
investors.
In addition to the potential benefits associated with
the Investment Managers' individual investment
strategies, the Company will offer the potential
benefit of diversification by allocating its assets
among a carefully selected group of Investment
Managers. The Advisor expects that by allocating the
Company's assets for investment by multiple Investment
Managers, the Company may reduce the volatility
inherent in a direct investment with any single
Investment Manager.
Allocation of Profit
and Loss The net profits or net losses of the Company
(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 members
of the Company ("Members") at the end of each fiscal
period in accordance with their respective investment
percentages for the period. Each Member's investment
percentage will be determined by dividing as of the
start of a fiscal period the balance of the Member's
capital account by the sum of the balances of the
capital accounts of all Members. (See "Capital Accounts
and Allocations -- Allocation of Net Profits and Net
Losses.")
Administrator The Company has retained J.D. Clark & Co. (the
"Administrator") to provide accounting and certain
administrative services to the Company. Fees payable to
the Administrator for these services will be paid by
the Company.
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Risk Factors The Company's investment program is speculative and
entails substantial risks. There can be no assurance
that the Company's investment objective will be
achieved. The Company's performance depends upon the
performance of the Investment Managers, and the
Advisor's ability to select, allocate and reallocate
effectively the Company's assets among them. Each
Investment Manager's use of leverage, short sales and
derivative transactions, in certain circumstances, can
result in significant losses. (See "Types of
Investments and Related Risk Factors.")
As a non-diversified investment company, there are no
percentage limitations imposed by the 1940 Act on the
portion of the Company's assets that may be invested in
the securities of any one issuer. As a result, the
Company'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.
Each Investment Manager generally will charge the
Company an asset-based fee, and some or all of the
Investment Managers will receive performance-based
allocations. The asset-based fees of the Investment
Managers are generally expected to range from 1% to 2%
annually of the net assets under their management and
the performance-based allocations to the Investment
Managers are generally expected to range from 15% to
25% of net profits.
The performance-based allocation received by an
Investment Manager may create an incentive for the
Investment Manager 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 a performance-based
allocation will generally be calculated on a basis that
includes unrealized appreciation of an Investment
Fund's assets, the allocation may be greater than if it
were based solely on realized gains.
There are special tax risks associated with an
investment in the Company. (See "Additional Risk
Factors--Distributions to Members and Payment of Tax
Liability.")
The Company is a newly formed entity and has no
operating history upon which investors can evaluate its
performance. However, the personnel of the Advisor
responsible for
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managing the Company's investment portfolio have
substantial experience in managing investments and
private investment funds, including NCT Opportunities
Equity Partners Limited Partnership, a private
investment fund that pursues an investment program that
is substantially similar to that of the Company. In
addition, as described above, the Company intends to
invest primarily with Investment Managers that have
established track records.
Interests will not be traded on any securities exchange
or other market and will be subject to substantial
restrictions on transfer. (See "Types of Investments
and Related Risk Factors," "Tax Aspects," and
"Redemptions, Repurchases of Interests and Transfers.")
INVESTING IN A MULTI-MANAGER FUND, SUCH AS THE COMPANY,
INVOLVES ADDITIONAL SPECIAL RISKS, INCLUDING THE
FOLLOWING:
The Investment Funds generally will not be registered
as investment companies under the 1940 Act and,
therefore, the Company, as an investor in these
Investment Funds, will not have the benefit of the
protections afforded by the 1940 Act to investors in
registered investment companies, such as mutual funds.
Although the Advisor will receive detailed information
from each Investment Manager regarding its investment
performance and investment strategy, the Advisor may
have little or no means of independently verifying this
information. An Investment Manager may use proprietary
investment strategies that are not fully disclosed to
the Advisor, which may involve risks under some market
conditions that are not anticipated by the Advisor.
An investor who meets the conditions imposed by the
Investment Managers, including minimum initial
investment requirements that may be substantially
higher than $250,000, could invest directly with the
Investment Managers. By investing in the Investment
Funds indirectly through the Company, an investor bears
a pro rata portion of the asset-based fee and other
expenses of the Company, and also indirectly bears a
pro rata portion of the asset-based fees,
performance-based allocations other expenses borne by
the Company as an investor in Investment Funds.
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Each Investment Manager will receive any
performance-based allocations to which it is entitled
irrespective of the performance of the other Investment
Managers and the Company generally. Accordingly, an
Investment Manager with positive performance may
receive compensation from the Company, and thus
indirectly from investors, even if the Company's
overall returns are negative.
Investment decisions of the Investment Funds are made
by the Investment Managers independently of each other.
As a result, at any particular time, one Investment
Fund may be purchasing shares of an issuer whose shares
are being sold by another Investment Fund.
Consequently, the Company could incur indirectly
certain transaction costs without accomplishing any net
investment result.
Because the Company may make additional investments in
or withdrawals from the Investment Funds only at
certain times pursuant to limitations set forth in the
governing documents of the Investment Funds, the
Company from time to time may have to invest some of
its assets temporarily in money market instruments.
To the extent the Company purchases non-voting
securities of an Investment Fund, it will not be able
to vote on matters that require the approval of the
investors in the Investment Fund, including matters
that could adversely affect the Company's investment in
the Investment Fund.
Investment Funds may be permitted to distribute
securities in kind to investors, including the Company,
which effect withdrawals of capital. Thus, upon the
Company's withdrawal of all or a portion of its
interest in an Investment Fund, the Company may receive
securities that are illiquid or difficult to value. In
such circumstances, the Advisor would seek to dispose
of these securities in a manner that is in the best
interests of the Company.
Management The Board of Managers has overall responsibility for
the management and supervision of the operations of the
Company. The initial Managers serving on the Board of
Managers have been elected by the organizational Member
of the Company. By signing the Company Agreement, each
Member will be deemed to have voted for the election of
each of the initial Managers. Any vacancy on the Board
of
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Managers may be filled by the remaining Managers,
except to the extent the 1940 Act requires the election
of Managers by Members. A majority of the Managers are
not "interested persons" (as defined by the 1940 Act)
of the Company or the Adviser. (See "Board of Managers"
and "Voting.")
The Advisor As noted above, NCT Opportunities, Inc., a North
Carolina corporation, serves as the investment adviser
of the Company. Stephen C. Hassenfelt, the Chairman and
Chief Executive Officer of the Advisor, will be
primarily responsible for the Company's day-to-day
portfolio management and short-term cash management,
subject to oversight by the Board of Managers.
The Advisor is a wholly-owned subsidiary of NCT
Holdings, Inc. ("NCT"), a North Carolina corporation,
which is a subsidiary of U.S. Trust. U.S. Trust, a
subsidiary of The Charles Schwab Corporation
("Schwab"), is a bank holding company registered under
Federal law and incorporated in New York. Through its
subsidiaries, U.S. Trust provides investment
management, fiduciary, financial planning and private
banking services to affluent individuals, families and
institutions nationwide. Headquartered in New York
City, U.S. Trust and its subsidiaries have 26 offices
in ten states and the District of Columbia. As of March
31, 2000, client assets under the management of U.S.
Trust totaled more than $90 billion. Schwab, though its
principal brokerage subsidiary, Charles Schwab & Co.,
Inc., is one of the nation's largest financial services
firms, serving investors through the Web, over 360
branch offices, four regional customer telephone
service centers and automated telephonic channels.
The Company has entered into an investment advisory
agreement (the "Investment Advisory Agreement") with
the Advisor which is effective for an initial term
expiring September 30, 2002, and may be continued in
effect from year to year thereafter if the continuance
is approved annually by the Board of Managers. The
Board of Managers may terminate the Investment Advisory
Agreement on 60 days' prior written notice to the
Advisor.
Fees and Expenses The Advisor will bear all of its own costs incurred in
providing investment advisory services to the company,
including travel and other expenses related to the
selection and monitoring of Investment Managers and
fees paid to consultants (including
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Praesideo and CTC). In addition, the Advisor will
provide, or will arrange for provision at the Advisor's
expense, certain management and administrative services
to the Company, including, among other things:
providing office space and other support services,
maintaining and preserving certain records, preparing
and filing various materials with state and Federal
regulators, providing legal and regulatory advice in
connection with administrative functions and reviewing
and arranging for payment of the Company's expenses.
The Advisor will also pay or assume all ordinary
operating expenses of the Company other than the fee
payable to the Advisor, investment related expenses and
certain other expenses described below. The expenses to
be assumed by the Advisor include offering expenses;
expenses of meetings of the Board of Managers and
Members (other than fees and travel expenses of
Mangers); expenses related to qualifying potential
investors, providing investor services to the Company,
preparing communications and quarterly reports to
Members and regulatory compliance; and organizational
and registration expenses.
The expenses the Company will bear are: all investment
related expenses (including, but not limited to, fees
paid directly or indirectly to Investment Managers, all
costs and expenses directly related to portfolio
transactions and positions for the Company's account
such as direct and indirect expenses associated with
the Company's investments, including its investments in
Investment Funds, transfer taxes and premiums, taxes
withheld on foreign dividends and, if applicable in the
event the Company utilizes a Subadvisor, brokerage
commissions, interest and commitment fees on loans and
debit balances, borrowing charges on securities sold
short, dividends on securities sold but not yet
purchased and margin fees); all costs and expenses
associated with the establishment of Investment Funds
managed by Subadvisors; any non-investment related
interest expense; attorneys' fees and disbursements
associated with updating the Company's Confidential
Memorandum and subscription documents; fees and
disbursements of any attorneys and accountants engaged
on behalf of the Company; expenses related to the
annual audit of the Company; fees paid to the Company's
administrator; custody and escrow fees and expenses;
the costs of an errors and omissions/directors and
officers liability insurance and a fidelity bond; the
fee payable to the Advisor; fees and travel expenses of
Managers; all costs and charges for equipment or
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services used in communicating information regarding
the Company's transactions among the Advisor and any
custodian or other agent engaged by the Company; and
any extraordinary expenses as may be approved from time
to time by the Board of Managers. (See "Fees and
Expenses.")
In consideration of the advisory and other services
provided by the Advisor to the Company, the Company
will pay the Advisor a quarterly fee of 0.375% (1.50%
on an annualized basis) of the Company's net assets
(the "Management Fee"). The Management Fee will be an
expense out of the Company's assets, and will be
reflected in each Member's capital account (including
the capital accounts of the Advisor and its affiliates,
if any) as a reduction to net profits or an increase to
net losses credited to or debited against each Member's
capital account. (See "Capital Accounts and
Allocations.")
Fees payable to Praesideo and CTC are paid by the
Advisor and are not borne by the Company.
Conflicts of Interest The investment activities of the Advisor, the
Investment Managers and their affiliates for their own
accounts and other accounts they manage may give rise
to conflicts of interest which may disadvantage the
Company. The Advisor, the Investment Managers and their
Investment Funds and affiliates may obtain brokerage,
banking and other services from Schwab, U.S. Trust and
their respective affiliates. In addition, the Advisor,
Schwab, U.S. Trust, NCT and their respective affiliates
are subject to regulation under the Bank Holding
Company Act of 1956, as amended (the "BHC Act") and to
restrictions imposed by the Board of Governors of the
Federal Reserve System on their transactions and
relationships with the Company and these restrictions
may affect the investments made by the Company. (See
"Conflicts of Interest.")
Subscription for
Interests The minimum initial investment in the Company is
$250,000 and the minimum additional investment in the
Company is $25,000. The minimum initial and additional
investments may be reduced by the Board of Managers.
The Board of Managers may accept initial and additional
subscriptions for Interests as of the first day of each
calendar quarter; provided, however, that upon delivery
to the Board of Managers of a letter from counsel to
the Advisor that the banking laws do not prevent the
Company from issuing
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Interests more often than quarterly, the Company may,
in the discretion of the Board of Managers, offer
Interests more frequently. All subscriptions are
subject to the receipt of cleared funds prior to the
applicable subscription date in the full amount of the
subscription plus the New Account Fee (described
below), although the Board of Managers may accept, in
its sole discretion, a subscription prior to receipt of
cleared funds. The investor must also submit a
completed subscription document before the applicable
subscription date. The Board of Managers reserves the
right to reject any subscription for Interests and the
Board of Managers may, in its sole discretion, suspend
subscriptions for Interests at any time.
Interests may not be purchased by nonresident aliens,
foreign corporations, foreign partnerships, foreign
trusts or foreign estates, all as defined in the
Internal Revenue Code of 1986, as amended (the "Code").
In addition, because the Company may generate
"unrelated business taxable income" ("UBTI"),
charitable remainder trusts may not want to purchase
Interests 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.
Upon admission to the Company, each Member will pay to
the Advisor a special one-time fee to offset the
Advisor's administrative costs of establishing accounts
for investors and reviewing subscription applications
and organizational costs (the "New Account Fee") in the
amount of $5,000. The Advisor may, in its sole
discretion, waive all or a portion of the New Account
Fee charged to any Member that has established multiple
related accounts.
Eligibility 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 Securities Act of 1933 and that the investor has a
net worth at the time of subscription of more than $1.5
million or such greater amount as may be required by
applicable law or by the Board of Managers, in its sole
discretion. Existing Members who subscribe for
additional Interests will be required to meet the
foregoing eligibility criteria at the time of the
additional subscription. The relevant investor
qualifications will be set forth in a subscription
agreement that must be completed by each prospective
investor.
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Initial Closing Date The initial closing date for subscriptions for
Interests is September 30, 2000. However, the Company,
in its sole discretion, may postpone the initial
closing date for up to 90 days. The Company will
commence operations following the initial closing.
Transfer Restrictions Interests held by Members may be transferred only (i)
by operation of law pursuant to the death, divorce,
bankruptcy, insolvency or dissolution of a Member or
(ii) under certain limited circumstances, with the
written consent of the Board of Managers (which may be
withheld in its sole discretion and is expected to be
granted, if at all, only under extenuating
circumstances). The Board of Managers generally may not
consent to a transfer unless the following conditions
are met: (i) the transferring Member has been a Member
for at least six months; (ii) the proposed transfer is
to be made on the effective date of an offer by the
Company to repurchase Interests; and (iii) the transfer
is (x) one in which the tax basis of the Interest in
the hands of the transferee is determined, in whole or
in part, by reference to its tax basis in the hands of
the transferring Member (e.g., certain transfers to
affiliates, gifts and contributions to family
entities), (y) to members of the transferring Member's
immediate family (siblings, spouse, parents and
children), or (z) a distribution from a qualified
retirement plan or an individual retirement account,
unless the Company consults with counsel to the Company
and such counsel confirms that the transfer will not
cause the Company to be treated as a "publicly traded
partnership" taxable as a corporation. The foregoing
permitted transferees will not be allowed to become
substituted Members without the consent of the Board of
Managers, which may be withheld in its sole discretion.
A Member who transfers an Interest may be charged
reasonable expenses, including attorneys' and
accountants' fees, incurred by the Company in
connection with the transfer. (See "Redemptions,
Repurchases of Interests and Transfers -- Transfers of
Interests.")
Withdrawals and
Repurchases of Interests
by the Company No Member will have the right to require the Company to
redeem its Interest. The Company may from time to time
offer to repurchase Interests pursuant to written
tenders by Members. Repurchases will be made at such
times and on such terms as may be determined by the
Board of Managers, in its sole discretion. In
determining whether the Company should offer to
repurchase Interests or portions thereof from Members,
the Board of Managers will consider the recommendations
of the
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Advisor. The Advisor expects that it will recommend to
the Board of Managers that the Company offer to
repurchase Interests from Members on June 30, 2001.
Thereafter, the Advisor expects that generally it will
recommend to the Board of Managers that the Company
offer to repurchase Interests from Members twice each
year, effective June 30 and December 31. The Board of
Managers will also consider the following factors,
among others, in making this determination: (i) whether
any Members have requested to tender Interests or
portions thereof to the Company; (ii) the liquidity of
the Company's assets; (iii) the investment plans and
working capital requirements of the Company; (iv) the
relative economies of scale with respect to the size of
the Company; (v) the history of the Company in
repurchasing Interests or portions thereof; (vi) the
economic condition of the securities markets; and (vii)
the anticipated tax consequences of any proposed
repurchases of Interests or portions thereof. (See
"Redemptions, Repurchases of Interests and Transfers --
No Right of Redemption" and "-- Repurchases of
Interests.")
The Company Agreement provides that the Company shall
be dissolved if the Interest of any Member that has
submitted a written request for the repurchase of its
entire Interest by the Company, in accordance with the
terms of the Company Agreement, is not repurchased by
the Company within a period of two years of the date of
the repurchase request.
Summary of Taxation The Company intends to operate as a partnership and not
as an association or a publicly traded partnership
taxable as a corporation for Federal income tax
purposes. Accordingly, the Company should not be
subject to Federal income tax, and each Member will be
required to report on its own annual tax return such
Member's distributive share of the Company's taxable
income or loss.
If it were determined that the Company should be
treated as an association or a publicly traded
partnership taxable as a corporation, the taxable
income of the Company would be subject to corporate
income tax and any distributions of profits from the
Company would be treated as dividends. (See "Tax
Aspects.")
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 Company. The Investment
Managers may utilize leverage
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in connection with their trading activities. Therefore,
a tax-exempt entity that is a Member may incur income
tax liability with respect to its share of the net
profits from these leveraged transactions to the extent
they are treated as giving rise to "unrelated business
taxable income." The Company will provide to tax-exempt
entities that are Members such accounting information
as is available to the Company to assist the Members in
reporting "unrelated business taxable income" for
income tax purposes.
Investment in the Company by tax-exempt entities
requires special consideration. Trustees or
administrators of these entities are urged to carefully
review the matters discussed in this Confidential
Memorandum. (See "ERISA Considerations.")
Term The Company's term is perpetual unless the Company is
otherwise terminated under the terms of the Company
Agreement.
Reports to Members The Company will furnish to Members as soon as
practicable after the end of each taxable year such
information as is necessary for them to complete
Federal and state income tax or information returns,
along with any other tax information required by law.
However, an Investment Manager's delay in providing
this information could delay the Company's preparation
of tax information for investors, which might require
Members to seek extensions on the time to file their
tax returns, or could delay the preparation of the
Company's annual report. (See "Additional Risk Factors
--Special Risks of Multi-Manager Structure.") The
Company anticipates sending Members an unaudited
semi-annual and an audited annual report within 60 days
after the close of the period for which the report is
being made, or as otherwise required by the 1940 Act.
Members also will be sent quarterly reports regarding
the Company's operations during each quarter. Any
Member may request from the Advisor an estimate, based
on unaudited data, of the net asset value of the
Company as of the end of any calendar month.
Fiscal Year For accounting purposes, the Company's fiscal year is
the 12-month period ending on March 31. The first
fiscal year of the Company will commence on the initial
closing date and will end on March 31, 2001. The
12-month period ending
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December 31 of each year will be the taxable year of
the Company.
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SUMMARY OF FUND EXPENSES
The following table illustrates the expenses and fees that the Company
expects to incur and that Members can expect to bear.
MEMBER TRANSACTION EXPENSES
Sales load.......................................................... None
New Account Fee* ................................................... $5,000
ANNUAL EXPENSES (as a percentage of net assets of the Company)
Management Fee (to the Advisor)..................................... 1.50%
Other expenses...................................................... .24%
Total annual expenses .............................................. 1.74%
The purpose of the table above is to assist prospective investors in
understanding the various costs and expenses Members will bear directly or
indirectly. "Other expenses," as shown above, is an estimate based on
anticipated expenses for the first year of the Company's operations, and
includes professional fees and other expenses that the Company will bear
directly, including fees paid to the Company's administrator and custody fees
and expenses. For a more complete description of the various fees and expenses
of the Company, see "Fees and Expenses," "Administrator," "Additional
Information and Summary of Limited Liability Company Agreement - Custodian" and
"Subscriptions For Interests."
Example
------- 1 year 3 years 5 years
------ ------- -------
You would pay the following expenses
on a $250,000** investment, assuming
a 5% annual return: $9,465 $18,307 $27,474
----------
* The New Account Fee, which is payable to the Advisor, is charged at the
time of an investor's initial investment in the Company and does not apply
to subsequent investments. The fee represents 2% of the minimum initial
required investment in the Company. The Advisor may, in its sole
discretion, waive all or a portion of the New Account Fee charged to any
Member that establishes multiple related accounts.
** On an investment of $1,000, the Example would be as follows:
Example
-------
1 year 3 years 5 years
------ ------- -------
You would pay the following expenses
on a $1,000 investment, assuming $38 $75 $115
a 5% annual return:
For purposes of these calculations, since the $1,000 investment is .4% of
the $250,000 minimum initial investment in the Company, the New Account Fee
has been reduced to $20, which is .4% of the $5,000 New Account Fee.
The Example is based on the expenses set forth above and should not be
considered a representation of future expenses. Actual expenses may be greater
or less than those shown. Moreover, the Company's actual rate of return may be
greater or less than the hypothetical 5% return shown in the Example.
"Annual Expenses," as set forth above, does not reflect the expenses or
annual performance based incentive allocations that the Company will bear as an
investor in the Investment Funds in which it will invest its assets (see
"Summary of Terms - Risk Factors" and "Additional Risk Factors - Incentive
Allocation). These expenses and allocation will reduce the investment
performance of the Company's investments.
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<PAGE>
THE COMPANY
Excelsior Hedge Fund of Funds I, LLC (the "Company") is registered under
the Investment Company Act of 1940 (the "1940 Act") as a closed-end,
non-diversified, management investment company. The Company was organized as a
limited liability company under the laws of Delaware on July 6, 2000 and has no
operating history. The Company's principal office is located at U.S. Trust
Center, 301 North Elm Street, Greensboro, North Carolina 27401, and its
telephone number is (336) 273-8544. Investment advisory services are provided to
the Company by NCT Opportunities, Inc. (the "Advisor"), a North Carolina
corporation, pursuant to an investment advisory agreement. Responsibility for
the overall management and supervision of the operations of the Company is
vested in the individuals who serve on the Board of Managers of the Company (the
"Board of Managers"). (See "Board of Managers.") Investors who acquire interests
in the Company ("Interests") in the offering being made hereby, will become
members of the Company ("Members").
USE OF PROCEEDS
The proceeds from the sale of Interests (not including the amount of the
fee paid to the Advisor upon admission to the Company (the "New Account Fee")
(See "Fees and Expenses.")), net of the Company's fees and expenses, will be
invested by the Company to pursue its investment program and objectives as soon
as practicable, consistent with market conditions, after receipt of such
proceeds by the Company.
STRUCTURE
The Company is a specialized investment vehicle that combines many of the
features of a private investment fund with those of a closed-end investment
company. Private investment funds are unregistered, commingled asset pools that
are often aggressively managed 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 investment advisers of these
funds are typically 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 funds, 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 are
typically compensated through asset-based (but not performance-based) fees.
The Company is similar to private investment funds in that the investment
portfolios of the investment funds in which the Company invests may be actively
managed and Interests will be sold in large minimum denominations ($250,000) in
private placements solely to high net worth individual and institutional
investors. In addition, the managers of the investment funds in which the
Company invests are typically entitled to receive performance-based
compensation. Like other closed-end investment companies, however, the Company
has registered under the 1940 Act to be able to offer Interests without limiting
the number of investors that can participate in its investment program.
Accordingly the structure of the
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Company is designed to permit 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 funds.
INVESTMENT PROGRAM
INVESTMENT OBJECTIVE
The Company seeks capital appreciation. It pursues this objective
principally through a multi-manager multi-strategy program of investment in a
diverse group of investment funds that primarily invest or trade in a wide range
of equity and debt securities. The Company intends to allocate its assets among
investment managers ("Investment Managers") that utilize a variety of investment
strategies, with the objective of significantly lowering the risk (volatility)
of investing with any single Investment Manager.
INVESTMENT STRATEGY
Investment Managers will be selected by the Advisor based on their
experience or expertise in a particular investment strategy or investment
strategies. The Investment Managers selected by the Advisor generally conduct
their investment programs through unregistered investment funds, which have
investors other than the Company, and in other registered investment companies
(collectively, "Investment Funds").
Certain Investment Managers have shown a consistent ability to achieve
above-average results within their particular investment strategies and
investment styles. However, history shows that no one particular investment
strategy or investment style produces consistent or above-average total return
results, either on an absolute or relative basis, over all phases of a market
cycle. For example, there are periods of time when fixed-income securities
outperform equities and vice versa. There are also periods of time when equities
with particular characteristics outperform other types of equities. Although
these cycles tend to repeat themselves, they do so with no regularity. While a
particular investment strategy or investment style within an investment strategy
may not achieve above-average performance over any given period within a cycle,
the blending of investment strategies and investment styles within those
strategies can be used to seek more consistent returns with a reduction of risk
and volatility.
Consistent with these concepts, the assets of the Company will be allocated
to a diverse group of Investment Managers that use a variety of investment
strategies and styles and that have demonstrated the ability to achieve superior
investment results as compared to others using the same strategy or style. This
investment allocation strategy is intended to permit the Company to achieve more
consistent investment returns, with significantly lower risk, than could be
achieved by investing in any one investment strategy or with any one Investment
Manager.
The Advisor is responsible for the allocation of assets to various
Investment Funds, subject to such policies as may be adopted by the Board of
Managers. It is also responsible for the selection of Investment Managers for
which separate Investment Funds are formed and who manage assets directly for
the Company on a managed account basis, subject to
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the approval of the Board of Managers and, to the extent required by the 1940
Act, by investors in the Company. (Investment Managers for which such an
Investment Fund is formed and Investment Managers who manage assets directly for
the Company on a managed account basis are collectively referred to as
"Subadvisors.") Stephen C. Hassenfelt, the Chairman and Chief Executive Officer
of the Advisor, will be primarily responsible for the day-to-day management of
the Company's portfolio, subject to such policies as may be adopted by the Board
of Managers. Other than for the selection and management of money market
instruments and money market funds for the investment of the Company's
uninvested cash, the Advisor will generally not directly manage any of the
Company's assets.
Investment Managers will be selected on the basis of various criteria,
generally including, among other things, an analysis of: the Investment
Manager's performance during various time periods and market cycles; the
Investment Manager's reputation, experience and training; its articulation of,
and adherence to, its investment philosophy; the presence and deemed
effectiveness of the Investment Manager's risk management discipline; the
structure of the Investment Manager's portfolio and the types of securities or
other instruments held; its fee structure; on-site interviews of the Investment
Manager's personnel; the quality and stability of the Investment Manager's
organization, including internal and external professional staff; and whether
the Investment Manager has a substantial personal investment in the investment
program it pursues. The Advisor has entered into agreements with Praesideo Asset
Management, Inc. ("Praesideo") and CTC Consulting, Inc. ("CTC"), pursuant to
which Praesideo and CTC will each provide the Advisor with investment research,
analytical data and due diligence services, which the Advisor intends to use in
evaluating prospective Investment Managers being considered by the Advisor and
in monitoring the strategies and investment performance of Investment Managers.
Praesideo and CTC do not make recommendations as to the selection of Investment
Funds for investment by the Company. The determinations of the Investment Funds
in which the Company invests are made solely by the Advisor. Fees payable to
Praesideo and CTC are paid by the Advisor and are not borne by the Company.
Unregistered investment funds typically provide greater flexibility than
traditional investment funds (e.g., registered investment companies) as to the
types of securities that may be owned, the types of trading strategies that may
be employed, and in some cases, the amount of leverage that may be used. The
Investment Managers utilized by the Company may invest and trade in a wide range
of instruments and markets and may pursue various investment strategies.
Although the Investment Managers will primarily invest and trade in equity and
debt securities (domestic and foreign), they may also invest and trade in
equity-related instruments, currencies, financial futures, and fixed income and
other debt-related instruments. In addition, the Investment Managers may sell
securities short and use a wide range of other investment techniques. The
Investment Managers are generally not limited in the markets (either by location
or type, such as large capitalization, small capitalization or non-U.S. markets)
in which they invest or the investment discipline that they may employ (such as
value or growth or bottom-up or top-down analysis).
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<PAGE>
The Investment Managers may use various investment techniques for hedging
and non-hedging purposes. For example, an Investment Manager may sell securities
short and purchase and sell options and futures contracts and engage in other
derivative transactions, subject to certain limitations described elsewhere in
this Confidential Memorandum. The use of these techniques may be an integral
part of the investment program of an Investment Manager, and may involve certain
risks. The Investment Managers may use leverage, which also entails risk. (See
"Types of Investments and Related Risk Factors.") For purposes of the Company's
investment restrictions and certain investment limitations under the 1940 Act,
the Company will "look through" to the underlying investments of any Investment
Funds it creates to facilitate management of the Company's assets by a
Subadvisor. However, other Investment Funds in which the Company invests are not
subject to the Company's investment restrictions and, unless registered under
the 1940 Act, are generally not subject to any investment limitations under the
1940 Act.
The Company may invest temporarily in money market instruments and money
market funds pending the investment of assets in Investment Funds or to maintain
the liquidity necessary to effect repurchases of Interests or for other
purposes.
Investment Managers have complete discretion to purchase and sell
securities and other investments for their respective Investment Funds
consistent with the relevant investment advisory agreements, partnership
agreements or other governing documents. They may invest in a wide range of
securities and other financial instruments and use a broad array of investment
techniques for hedging and non-hedging purposes. In circumstances deemed
appropriate by an Investment Manager, an Investment Fund may: (i) make
substantial investments in bonds or other fixed income securities of the United
States Government and of domestic and foreign issuers or make investments in
stocks or other equity securities of domestic and foreign issuers or make
investments in stocks or other equity securities of domestic and foreign
issuers; (ii) make substantial hedged investments in bonds or other fixed-income
securities of the United States Government and of domestic and foreign issuers
or make hedged investments in stocks or other equity securities of domestic and
foreign issuers; (iii) engage in hedging in related equity, convertible and
interest rate securities; (iv) engage in risk arbitrage involving the purchase
of securities of companies already in bankruptcy; (v) invest in instruments of
failing companies or companies already in bankruptcy; (vi) engage in strategic
block investing, leveraged buy outs and acquisitions; (vii) utilize short sales
and leverage, repurchase agreements and options; (viii) invest with asset
allocators who utilize a variety of the strategies delineated above; and (ix)
effect transactions in commodities and futures contracts (and, when available,
options thereon).
The strategies employed by the Investment Managers on behalf of their
respective Investment Funds and the types of Investment Funds in which the
Company may invest may include, but are not limited to those described below.
The Advisor will concentrate primarily on Hedged Equity Funds and
Arbitrage/Distressed Funds for Company investments.
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<PAGE>
1. Hedged Equity Funds - Funds where the managers construct portfolios
consisting of long and short equity positions, with leverage commonly
employed. The manager's stock picking ability, on both the long and the
short side, is key to the success of these funds. The short positions may
be opportunistic or instituted solely for hedging purposes. Individual
stock options may be used in place of a short equity position and equity
index options may be used as a portfolio hedge. This classification is very
broad, including the primary categories described below. These types of
funds may range from:
o Conservative funds that seek to mitigate market risk by maintaining
market exposure from zero to 100%; to
o Classic hedge funds (or "Jones style") maintaining market exposure
within a fairly narrow band (e.g., between 30% net short and 30% net
long); to
o More aggressive funds that may magnify market risk by consistently
exceeding 100% exposure (net) and, in some instances, maintaining a
net short exposure.
Certain of these funds may invest a percentage of their assets outside the
U.S. or may concentrate their investments in a particular region or sector,
or in companies of a specific market capitalization size. Managers may lean
toward or utilize exclusively a growth or value orientation, while others
may employ a combination of growth and value orientation in selecting
securities.
The hedged equity categories, as defined by and used by the Advisor in
constructing the Company's portfolio of Investment Funds, are as follows:
o HEDGED LONG/SHORT - Funds that seek to profit by exploiting pricing
inefficiencies between related equities by combining long and short
positions to neutralize market exposure. Typically, this strategy is
based on methods for selecting and ranking specific stocks with equal
dollar amounts or equal market beta correlations allocated to the long
and short sides of the portfolio. The strictest adherents to this
strategy seek to neutralize, as many risks as possible, by holding
offsetting equal allocations by sector, geography and capitalization
size. For example, long positions in the stocks of the strongest
companies in several industries are "neutralized" by taking
corresponding short positions in the stocks of those companies showing
signs of weakness in the same industries.
o OPPORTUNISTIC LONG/SHORT EQUITY - Funds investing in a portfolio of
long and short equity positions, with leverage commonly employed.
Funds in this category include those with no regular sector bias, but
may employ either style or capitalization bias. Managers of these
funds opportunistically vary the gross long and short exposures, as
well as the resultant net long or short exposures. In other words,
there is more defined market exposure than that found in equity market
neutral strategies. Trading and concentrated positions in certain
stocks or industries often becomes an important
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element in these strategies. There is typically some degree of market
timing involved in the strategy that drives the long and short
exposures, derived from either top-down themes or bottom-up stock
selection criteria.
o HEDGED SECTOR FUNDS - Funds investing in stocks of companies in one or
two sectors of the economy, such as financial institutions,
technology, healthcare, biotech, utilities or energy. The strategy
implementation varies widely. These funds may invest long only, long
and short, long-biased or vary net long and net short positioning
based on current perceived opportunities. However, these funds are
typically long-biased, capitalizing on the growth or expansion of the
particular sector. Put options on sector indices may be used to
mitigate the effect of a sector decline.
2. Arbitrage/Distressed Funds - This category includes funds employing
strategies that involve investing in opportunities created by significant
transactional events, such as spin-offs, mergers and acquisitions,
bankruptcy reorganizations, recapitalizations and share buybacks. In
addition, positions may be taken in related securities of different
companies or in different securities of the same issuer for the purpose of
arbitraging differences in share prices. Managers may allocate capital to
more than one strategy, with certain managers maintaining a relatively
fixed allocation to particular strategies, while others allow one or two
strategies to opportunistically dominate the portfolio. These combinations
are designed to decrease the volatility associated with reliance on a
single arbitrage strategy that may perform poorly in some market
environments. Noted below are certain strategies that may be employed by
funds in this category.
o MERGER ARBITRAGE - Sometimes called "Risk Arbitrage," involves fund
managers that invest in event-driven situations such as leveraged
buy-outs, mergers and hostile takeovers. Normally the stock of an
acquisition target appreciates while the acquiring company's stock
decreases in value. These strategies generate returns by purchasing
stock of the company being acquired and, in stock for stock deals,
selling short the stock of the acquiring company. Managers may employ
the use of equity options as a low-risk alternative to the outright
purchase or sale of common stock. These funds may hedge against market
risk by purchasing S&P put options or put option spreads.
o DISTRESSED INVESTMENT - These funds invest in, and occasionally sell
short, the securities of companies where the security's price has been
affected (or is expected to be affected) by a distressed financial
situation. These situations may involve reorganizations, bankruptcies,
distressed sales and other corporate restructurings. Depending on the
manager's style, investments may be made in bank debt, corporate debt,
trade claims, common stock, preferred stock, warrants and
post-distressed equities. Leverage may be used by certain managers,
but it is not typical in this strategy. In its most traditional form,
managers invest only in secured debt high in the capital structure and
only in late-stage situations. Other managers invest solely in
post-distressed equities or in high-yield bonds. A third category,
"opportunistic distressed," may hold very diversified portfolios of
senior secured, subordinated debt, distressed sovereign debt,
post-bankruptcy equity, trade claims and high yield bonds.
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o CONVERTIBLE ARBITRAGE - Managers who purchase a portfolio of
convertible securities, generally convertible bonds, and hedge a
portion of the equity risk by selling short the underlying common
stock. Certain managers may also seek to hedge interest rate exposure.
Most managers employ some degree of leverage, ranging from zero to
5:1. The equity hedge ratio may range from 30% to 100%. As the default
risk of the company is hedged by shorting the underlying common stock,
the risk is considerably better than the credit rating of the unhedged
bond. The funds can be run with a directional bias (the manager makes
bets on the direction of the equity market) or as market neutral (the
direction of the market does not have a major impact on returns).
o RELATIVE VALUE ARBITRAGE - These funds seek to take advantage of
relative pricing discrepancies between instruments including equities,
debt, options and futures. The managers of the funds may use
mathematical, fundamental or technical analysis to determine unequal
valuations. Securities may be mispriced relative to the underlying
security, related securities, groups of securities or the overall
market. Many funds use leverage and seek opportunities globally.
Arbitrage strategies include dividend arbitrage, pairs trading,
capital structure arbitrage, options arbitrage and yield curve
trading. This category encompasses very highly leveraged strategies
with aggressive return goals as well as conservative, low volatility
varieties.
o MULTI-STRATEGY ARBITRAGE - Funds where the manager allocates capital
to more than one strategy. The most common elements are convertible
arbitrage, merger arbitrage, equity pairs trading, fixed-income
arbitrage, and distressed investing. Some maintain a relatively fixed
allocation to the various strategies, but others allow one or two
strategies to opportunistically dominate the portfolio. The
combinations are designed to decrease the volatility associated with
reliance on a single arbitrage strategy that may perform poorly in
some market environments.
3. Equity Non-Hedge Funds - Includes funds that are predominantly long
equities, although they have the ability to hedge with short sales of
stocks and stock index options. This strategy is commonly referred to as
"stock-picking." Leverage may be used to enhance returns. Managers may
implement a hedge in the portfolio when they believe market conditions
warrant a defensive stance. These funds may also occasionally and
opportunistically short individual stocks. The important distinction
between equity non-hedge funds and equity hedge funds is that equity
non-hedge funds do not maintain a constant hedge. An important sub-category
is concentrated equity funds, which may hold as few as 5 to 10 positions at
a time. Certain managers in this category become active investors in their
portfolio companies.
4. Macro Hedge Funds - This category includes funds that typically make
leveraged bets on anticipated price movements of stock markets, interest
rates, foreign exchange currencies and physical commodities. Macro managers
employ a "top-down" global approach and may invest in any market, using any
instrument to participate in expected market movements. These movements may
result from forecasted shifts in world economics,
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political fortunes or global supply and demand for resources, both physical
and financial. Macro managers generally create their investment positions
by investing in stocks, bonds, futures, options, swaps, currencies and
over-the-counter derivatives.
5. Market Timing Funds - Funds that allocate assets among investments by
switching into investments that appear to be beginning an uptrend and
switching out of investments that appear to be beginning a downtrend. This
primarily consists of switching between stock indices and money markets.
Typically, technical trend-following indicators are used to determine the
direction of a fund and to identify buy and sell signals. In an up move
"buy signal," money is transferred from a money market fund to an equity
index in an attempt to capture a capital gain. In a down move "sell
signal," the assets are moved back into the money market for safe keeping
until the next up move. The goal is to avoid having market exposure during
a market decline.
6. Short Selling - Funds where the manager sells a security not owned by the
seller. Short selling is a technique used to take advantage of an
anticipated price decline. To effect a short sale, the seller borrows
securities from a third party in order to make delivery to the purchaser.
The seller returns the borrowed securities to the lender by purchasing the
securities in the open market. If the seller can buy that stock back at a
lower price, a profit results. If the price rises, however, a loss results.
A short seller must generally pledge other securities or cash with the
lender in an amount equal to the market price of the borrowed securities.
This deposit may be increased or decreased in response to changes in the
market price of the borrowed securities.
7. International and Global Funds - This category includes funds employing
strategies with a country or region of emphasis. Although this category
excludes the macro-style hedge funds, many of these funds do, in fact, make
macro bets of one sort or another; the difference is that they tend to be
built primarily from the bottom up rather than the top down. These funds
may be oriented toward growth or value criteria or capitalization size.
8. Fixed Income Arbitrage - This is a hedging strategy that seeks profit by
exploiting pricing inefficiencies between related fixed income securities
while neutralizing exposure to interest rate risk. Fixed income arbitrage
is a generic description of a variety of strategies involving investment in
fixed income instruments with the strategies employed in an attempt to
eliminate or reduce exposure to changes in the yield curve. Managers
attempt to exploit relative mispricings between related sets of fixed
income securities. The generic types of fixed income hedging trades
include: yield-curve arbitrage, corporate versus Treasury yield spreads,
municipal bond versus Treasury yield spreads and cash versus futures.
Each of the above described activities entails risk. (See "Types of
Investments and Related Risk Factors--Leverage," "--Short Sales" and "--Special
Investment Instruments and Techniques.")
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As noted above, the Investment Managers with which the Company invests may
use leverage. In addition, the Company may borrow funds on a secured or
unsecured basis, primarily to provide liquidity as further described below.
The Company currently intends to invest its assets primarily in Investment
Funds. Under normal market conditions, the Company will invest at least 65% of
its total assets in Investment Funds. However, it also may invest a portion of
its assets directly pursuant to investment advisory agreements, granting the
Investment Managers discretionary investment authority on a managed account
basis. In addition, to facilitate the efficient investment of the Company's
assets, separate Investment Funds, which would be managed by one or more
Subadvisors, may be created by the Company. Generally, with respect to any such
Investment Fund, the Subadvisor will serve as general partner and the Company
will be the sole limited partner.
The Company's investment in any Investment Fund (other than one organized
by the Company) will be limited to less than 5% of that Investment Fund's voting
securities. However, to enable the Company to invest more of its assets in
existing Investment Funds deemed attractive by the Advisor, the Company may
purchase non-voting securities of Investment Funds that are not advised by a
Subadvisor. The Company may invest a majority of its assets in non-voting
securities of Investment Funds. When acquiring the non-voting securities of an
Investment Fund not managed by a Subadvisor, the Company will limit its
investment to less than 25% of such Investment Fund's outstanding equity.
Investments in equity securities made by an Investment Fund managed by a
Subadvisor or a managed account that is managed by a Subadvisor will be subject
to similar limits on the percentage of voting and non-voting securities of any
issuer that may be acquired. (See "Additional Risk Factors--Special Risks of
Multi-Manager Structure.")
The Advisor will evaluate regularly each Investment Manager to determine
whether its investment program is consistent with the Company's investment
objective and whether its investment performance is satisfactory. In conducting
this review, the Advisor will consider information regarding the Investment
Manager that is provided by Praesideo and CTC. The Company's assets may be
reallocated among Investment Managers, existing Investment Managers may be
terminated and additional Investment Managers selected, subject to the condition
that retention of a Subadvisor will require approval of a the Board of Managers
and of a majority (as defined in the 1940 Act) of the Company's outstanding
voting securities, unless the Company receives an exemption from certain
provisions of the 1940 Act.
Each Investment Manager 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
Investment Manager deems appropriate under the circumstances. Pending allocation
of the offering proceeds, and thereafter, from time to time, the Company also
may invest in these instruments. (See "Types of Investments and Related Risk
Factors--Money Market Instruments.")
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The Company does not presently intend to invest in Investment Funds managed
by the Advisor or any of its affiliates; however, it may do so in the future,
subject to obtaining such exemptions from the 1940 Act as may be necessary.
Additional information about the types of investments that are expected to
be made by the Investment Managers, their investment practices and related risk
factors is provided below. Except as otherwise indicated, the Company's
investment policies and restrictions are not fundamental and may be changed
without a vote of Members. (See "Types of Investments and Related Risk
Factors--Investment Restrictions.")
THE COMPANY'S INVESTMENT PROGRAM IS SPECULATIVE AND ENTAILS SUBSTANTIAL
RISKS. THERE CAN BE NO ASSURANCE THAT THE COMPANY'S OR THE INVESTMENT FUNDS'
INVESTMENT OBJECTIVES WILL BE ACHIEVED OR THAT THEIR INVESTMENT PROGRAMS WILL BE
SUCCESSFUL. IN PARTICULAR, EACH INVESTMENT MANAGER'S USE OF LEVERAGE, SHORT
SALES AND DERIVATIVE TRANSACTIONS, AND LIMITED DIVERSIFICATION CAN, IN CERTAIN
CIRCUMSTANCES, RESULT IN SIGNIFICANT LOSSES TO THE COMPANY. INVESTORS SHOULD
CONSIDER THE COMPANY AS A SUPPLEMENT TO AN OVERALL INVESTMENT PROGRAM AND SHOULD
INVEST ONLY IF THEY ARE WILLING TO UNDERTAKE THE RISKS INVOLVED. INVESTORS COULD
LOSE SOME OR ALL OF THEIR INVESTMENT.
TYPES OF INVESTMENTS AND RELATED RISK FACTORS
GENERAL
This section discusses the types of investments generally made by the
Investment Managers and the related risk factors with respect to such
investments. The impact of a particular risk on an Investment Fund managed by an
Investment Manager will, in turn, have a corresponding impact on the Company.
For purposes of the Company's investment restrictions and certain investment
limitations under the 1940 Act, the Company will look through the Investment
Funds managed by the Subadvisors, if any, to their underlying securities.
All securities investments risk the loss of capital. The value of the
Company's total net assets should be expected to fluctuate based on the
fluctuation in the value of the Investment Funds in which it invests. To the
extent that the portfolio of an Investment Manager is concentrated in securities
of a single issuer or issuers in a single industry, the risk of any investment
decision is increased. An Investment Manager's use of leverage is likely to
cause the value of the Investment Manager's portfolio to appreciate or
depreciate at a greater rate than if leverage were not used.
EQUITY SECURITIES
Investment Managers' investment portfolios may include long and short
positions in common stocks, preferred stocks and convertible securities of U.S.
and foreign issuers. Investment Managers also may invest in depository receipts
relating to foreign securities. (See "Foreign Securities" below.) 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.
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Investment Managers 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
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. Investment Managers may purchase securities in all
available securities trading markets.
COMMON STOCKS. Common stocks are shares of a corporation or other entity
that entitle the holder to a pro rata share of the profits, if any, of the
entity without preference over any other shareholder or claim of shareholders,
after making required payments to holders of the entity's preferred stock and
other senior equity. Common stock usually carries with it the right to vote and
frequently an exclusive right to do so.
PREFERRED STOCKS. Preferred stock generally has a preference as to
dividends and upon the event of liquidation, over an issuer's common stock, but
it ranks junior to debt securities in an issuer's capital structure. Preferred
stock generally pays dividends in cash (or additional shares of preferred stock)
at a defined rate, but unlike interest payments on debt securities, preferred
stock dividends are payable only if declared by the issuer's board of directors.
Dividends on preferred stock may be cumulative, meaning that, in the event the
issuer fails to make one or more dividend payments on the preferred stock, no
dividends may be paid on the issuer's common stock until all unpaid preferred
stock dividends have been paid. Preferred stock may also be subject to optional
or mandatory redemption provisions.
CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures,
notes, preferred stocks or other securities that may be converted into or
exchanged for a specified amount of common stock of the same or different issuer
within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest that is generally
paid or accrued on debt or a dividend that is paid or accrued on preferred stock
until the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have unique investment characteristics, in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying common stock due to their fixed-income characteristics
and (3) provide the potential for capital appreciation if the market price of
the underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors may also have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
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convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed-income security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by an Investment Fund is called for
redemption, the Investment Fund will be required to permit the issuer to redeem
the security, convert it into the underlying common stock or sell it to a third
party. Any of these actions could have an adverse effect on an Investment Fund's
ability to achieve its investment objective, which, in turn, could result in
losses to the Company.
BONDS AND OTHER FIXED-INCOME SECURITIES
Investment Managers may invest in bonds and other fixed-income securities.
Investment Managers will invest in these securities when they offer
opportunities for capital appreciation and may also invest in these securities
for temporary defensive purposes and to maintain liquidity.
Fixed-income securities include, among other securities: 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") or by a foreign government; 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 price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (i.e., market risk).
Investment Managers 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 Advisor to be of comparable
quality. Non-investment grade debt securities (typically called "junk bonds")
are securities that have received a rating from a NRSRO of below investment
grade or have been given no rating, and 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. An economic downturn
affecting an issuer of
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non-investment grade debt securities may result in an increased incidence of
default. In addition, the market for lower grade debt securities may be thinner
and less active than for higher grade debt securities.
FOREIGN SECURITIES
Investment Managers may invest in securities of foreign issuers and in
depository receipts, such as American Depository Receipts ("ADRs"), that
represent indirect interests in securities of foreign issuers. Foreign
securities in which Investment Managers may invest may be listed on foreign
securities exchanges or traded in foreign over-the-counter markets. Investments
in foreign securities are affected by risk factors generally not thought to be
present in the U.S. These factors include, but are not limited to, the
following: varying custody, brokerage and settlement practices; difficulty in
pricing; less public information about issuers of foreign securities; less
governmental regulation and supervision over the issuance and trading of
securities than in the U.S.; the unavailability of financial information
regarding the foreign issuer or the difficulty of interpreting financial
information prepared under foreign accounting standards; less liquidity and more
volatility in foreign securities markets; the possibility of expropriation or
nationalization; the imposition of withholding and other taxes; adverse
political, social or diplomatic developments; limitations on the movement of
funds or other assets of an Investment Fund between different countries;
difficulties in invoking legal process abroad and enforcing contractual
obligations; and the difficulty of assessing economic trends in foreign
countries. Moreover, governmental issuers of foreign securities may be unwilling
to repay principal and interest due, and may require that the conditions for
payment be renegotiated. Investment in foreign countries also involves higher
brokerage and custodian expenses than does investment in domestic securities.
Other risks of investing in foreign securities include changes in currency
exchange rates (in the case of securities that are not denominated in U.S.
dollars) and currency exchange control regulations or other foreign or U.S. laws
or restrictions, or devaluations of foreign currencies. A decline in the
exchange rate would reduce the value of certain of an Investment Fund's foreign
currency denominated portfolio securities irrespective of the performance of the
underlying investment. In addition, an Investment Fund may incur costs in
connection with conversion between various currencies. The foregoing risks may
be greater in emerging industrialized and less developed countries.
An Investment Manager may enter into forward currency exchange contracts
("forward contracts") for hedging purposes and non-hedging purposes to pursue
its investment objective. Forward contracts are transactions involving an
Investment Fund's obligation to purchase or sell a specific currency at a future
date at a specified price. Forward contracts may be used by an Investment Fund
for hedging purposes to protect against uncertainty in the level of future
foreign currency exchange rates, such as when an Investment Fund anticipates
purchasing or selling a foreign security. This technique would allow the
Investment Fund to "lock in" the U.S. dollar price of the security. Forward
contracts may also be used to attempt to protect the value of an Investment
Fund's existing holdings of foreign securities. There may be, however, imperfect
correlation between an Investment Fund's foreign securities holdings and the
forward
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contracts entered into with respect to those holdings. Forward contracts may
also be used for non-hedging purposes to pursue an Investment Fund's investment
objective, such as when an Investment Manager anticipates that particular
foreign currencies will appreciate or depreciate in value, even though
securities denominated in those currencies are not then held in the Investment
Fund's investment portfolio. There is no requirement that the Investment Funds
hedge all or any portion of their exposure to foreign currency risks.
NON-DIVERSIFIED STATUS
The Company is a "non-diversified" investment company. Thus, there are no
percentage limitations imposed by the 1940 Act on the percentage of the
Company's assets that may be invested in the securities of any one issuer.
However, the Company generally will not invest more than 10% of the value of its
total assets (measured at the time of purchase) in the securities of a single
company or in a single Investment Fund. The Advisor believes that this approach
helps to reduce overall investment risk.
LEVERAGE
Some or all of the Investment Managers may make margin purchases of
securities and, in that regard, borrow money from brokers and banks for
investment purposes. This practice, which is known as "leverage," is speculative
and involves certain risks. The Company may also borrow money for temporary or
emergency purposes or in connection with the repurchase of Interests.
Trading equity securities on margin involves an initial cash requirement
representing at least 50% of the underlying security's value with respect to
transactions in U.S. markets and varying (typically lower) percentages with
respect to transactions in foreign markets. Borrowings to purchase equity
securities typically will be secured by the pledge of those securities. The
financing of securities purchases may also be effected through reverse
repurchase agreements with banks, brokers and other financial institutions.
Although leverage will increase investment return if an Investment Fund
earns a greater return on the investments purchased with borrowed funds than it
pays for the use of those funds, the use of leverage will decrease investment
return if an Investment Fund fails to earn as much on investments purchased with
borrowed funds as it pays for the use of those funds. The use of leverage will
therefore magnify the volatility of changes in the value of an investment in the
Investment Funds. In the event that an Investment Fund's equity or debt
instruments decline in value, the Investment Fund could be subject to a "margin
call" or "collateral call," pursuant to which the Investment Fund must either
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 an Investment Fund's assets, the Investment
Manager 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
Investment Manager also may be required to maintain
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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 requires an investment company to satisfy 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 investment company's total
indebtedness may not exceed one-third the value of its total assets (including
such indebtedness). These limits do not apply to Investment Funds that are not
managed by a Subadvisor and, therefore, the Company's portfolio may be exposed
to the risk of highly leveraged investment programs of certain Investment Funds
and the volatility of the value of Interests may be great.
In order to obtain "leveraged" market exposure in certain investments and
to increase overall returns, an Investment Manager may purchase options and
other synthetic instruments that do not constitute "indebtedness" for purposes
of the Asset Coverage Requirement. These instruments may nevertheless involve
significant economic leverage and therefore may, in some cases, involve
significant risks of loss.
SHORT SALES
Some or all of the Investment Managers may attempt to limit an Investment
Fund's exposure to a possible market decline in the value of its portfolio
securities through short sales of securities that the Investment Manager
believes possess volatility characteristics similar to those being hedged. In
addition, the Investment Managers may use short sales for non-hedging purposes
to pursue their investment objectives. For example, an Investment Fund may
"short" a security of a company if, in the Investment Manager's view, the
security is over-valued in relation to the issuer's prospects for earnings
growth.
To effect a short sale, the Investment Manager will borrow a security from
a brokerage firm to make delivery to the buyer. The Investment Fund is then
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 Investment Manager, 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 an Investment Fund'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 a short position will be available for purchase.
An Investment Fund may also make short sales against-the-box, in which it
sells short securities it owns or has the right to obtain without payment of
additional consideration. If an Investment Fund makes a short sale
against-the-box, it will be required to set aside securities equivalent in kind
and amount to the securities sold short (or securities convertible or
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exchangeable into those securities) and will be required to hold those
securities while the short sale is outstanding. An Investment Fund will incur
transaction costs, including interest expenses, in connection with opening,
maintaining and closing short sales against-the-box.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements involve a sale of a security by an Investment
Fund to a bank or securities dealer and the Investment Fund's simultaneous
agreement to repurchase that 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
Investment Fund. Reverse repurchase transactions are a form of leverage which
may also increase the volatility of an Investment Fund's investment portfolio.
FOREIGN CURRENCY TRANSACTIONS
The Investment Managers 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 an Investment Fund has agreed to buy or
sell, or to hedge the U.S. dollar value of securities the Investment Fund
already owns, particularly if the Investment Manager expects a decrease in the
value of the currency in which the foreign security is denominated.
Foreign currency transactions may involve, for example, the purchase of
foreign currencies for U.S. dollars or the maintenance of short positions in
foreign currencies, which would involve an Investment Fund 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 Investment Fund contracted to receive in the
exchange. An Investment Manager's success in these transactions will depend
principally on its ability to predict accurately the future exchange rates
between foreign currencies and the U.S. dollar.
MONEY MARKET INSTRUMENTS
Each Investment Manager may invest, for defensive purposes or otherwise,
some or all of an Investment Fund's assets in high qualify fixed-income
securities, money market instruments, and money market mutual funds, or hold
cash or cash equivalents in such amounts as the Investment Manager deems
appropriate under the circumstances. Pending allocation of the offering proceeds
and thereafter, from time to time, the Company also may invest in these
instruments. 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.
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PURCHASING INITIAL PUBLIC OFFERINGS
The Investment Managers may purchase securities of companies in initial
public offerings or shortly thereafter. Special risks associated with these
securities may include a limited number of shares available for trading,
unseasoned trading, lack of investor knowledge of the issuer, and limited
operating history. These factors may contribute to substantial price volatility
for the shares of these companies and, thus, for Interests. The limited number
of shares available for trading in some initial public offerings may make it
more difficult for an Investment Fund to buy or sell significant amounts of
shares without an unfavorable impact on prevailing market prices. In addition,
some companies in initial public offerings are involved in relatively new
industries or lines of business, which may not be widely understood by
investors. Some of these companies may be undercapitalized or regarded as
developmental stage companies, without revenues or operating income, or the
near-term prospectus of achieving them.
SPECIAL INVESTMENT INSTRUMENTS AND TECHNIQUES
The Investment Managers may utilize a variety of special investment
instruments and techniques (described below) to hedge the portfolios of the
Investment Funds against various risks (such as changes in interest rates or
other factors that affect security values) or for non-hedging purposes to pursue
an Investment Fund's investment objective. These strategies may be executed
through derivative transactions. The instruments the Investment Managers may use
and the particular manner in which they may be used may change over time as new
instruments and techniques are developed or regulatory changes occur. Certain of
the special investment instruments and techniques that the Investment Managers
may use are speculative and involve a high degree of risk, particularly in the
context of non-hedging transactions.
DERIVATIVES. Some or all of the Investment Managers 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 an Investment
Manager to increase or decrease the level of risk of an investment portfolio, or
change the character of the risk, to which an investment portfolio is exposed in
much the same way as the Investment Manager can increase or decrease the level
of risk, or change the character of the risk, of an investment 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 an Investment Fund's performance.
If an Investment Manager invests in Derivatives at inopportune times or
judges market conditions incorrectly, such investments may lower the Investment
Fund's return or result in a loss. An Investment Fund also could experience
losses if Derivatives are poorly correlated with its other investments, or if an
Investment Manager is unable to liquidate its position because
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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 AND FUTURES. The Investment Managers may utilize options and
futures contracts. They also may use so-called "synthetic" options or other
derivative instruments written by broker-dealers or other permissible financial
intermediaries. Options transactions may be effected on securities exchanges or
in the over-the-counter market. When options are purchased over-the-counter, the
Investment Fund's portfolio bears the risk that the counterparty that wrote the
option will be unable or unwilling to perform its obligations under the option
contract. Such options may also be illiquid and, in such cases, an Investment
Manager may have difficulty closing out its position. Over-the-counter options
purchased and sold by the Investment Managers also may include options on
baskets of specific securities.
The Investment Managers may purchase call and put options on specific
securities, and may write and sell covered or uncovered call and put options for
hedging purposes and non-hedging purposes to pursue their investment objectives.
A put option gives the purchaser of the option the right to sell, and obligates
the writer to buy, the underlying security at a stated exercise price at any
time prior to the expiration of the option. Similarly, a call option gives the
purchaser of the option the right to buy, and obligates the writer to sell, the
underlying security at a stated exercise price at any time prior to the
expiration of the option. A covered call option is a call option with respect to
which an Investment Fund owns the underlying security. The sale of such an
option exposes an Investment Fund 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 is a put option with respect to which cash or
liquid securities have been placed in a segregated account on an Investment
Fund's books or with the Investment Fund's custodian to fulfill the obligation
undertaken. The sale of such an option exposes an Investment Fund during the
term of the option to a decline in price of the underlying security while
depriving the Investment Fund of the opportunity to invest the segregated
assets.
An Investment Manager 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 the security. An
Investment Fund 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, an Investment
Manager would ordinarily make a similar "closing sale transaction," which
involves liquidating the Investment Fund's position by selling the option
previously purchased, although the Investment Manager would be entitled to
exercise the option should it deem it advantageous to do so.
The use of Derivatives that are subject to regulation by the Commodity
Futures Trading Commission (the "CFTC") by Investment Funds could cause the
Company to be a commodity pool, which would require the Company to comply with
certain rules of the CFTC.
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However, the Company intends to conduct its operations to avoid regulation as a
commodity pool. In this regard, the Company's pro rata share of the sum of the
amount of initial margin deposits on futures contracts entered into by the
Investment Funds and premiums paid for unexpired options with respect to such
contracts, other than for bona fide hedging purposes, may not exceed 5% of the
liquidation value of the Company's assets, after taking into account unrealized
profits and unrealized losses on such contracts and options; provided, however,
that in the case of an option that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
Company intends to monitor use of futures and related options by Investment
Funds to help assure compliance with this limitation. If applicable CFTC rules
change, such percentage limitations may change or different conditions may be
applied to the Company's use of certain Derivatives.
The Investment Managers may enter into futures contracts in U.S. domestic
markets or on exchanges located outside the United States. Foreign markets may
offer advantages such as trading opportunities or arbitrage possibilities not
available in the United States. Foreign markets, however, may have greater risk
potential than domestic markets. For example, some foreign exchanges are
principal markets so that no common clearing facility exists and an investor may
look only to the broker for performance of the contract. In addition, any
profits an Investment Manager might realize in trading could be eliminated by
adverse changes in the exchange rate, or an Investment Fund could incur losses
as a result of those changes. Transactions on foreign exchanges may include both
commodities which are traded on domestic exchanges and those which are not.
Unlike trading on domestic commodity exchanges, trading on foreign commodity
exchanges is not regulated by the CFTC.
Engaging in these transactions involves risk of loss to the Investment
Funds which could adversely affect the value of the Company's net assets. No
assurance can be given that a liquid market will exist for any particular
futures contract at any particular time. Many futures exchanges and boards of
trade limit the amount of fluctuation permitted in futures contract prices
during a single trading day. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that limit
or trading may be suspended for specified periods during the trading day.
Futures contract prices could move to the limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of futures
positions and potentially subjecting the Investment Funds to substantial losses.
Successful use of futures also is subject to the Investment Manager's
ability to predict correctly movements in the direction of the relevant market,
and, to the extent the transaction is entered into for hedging purposes, to
ascertain the appropriate correlation between the transaction being hedged and
the price movements of the futures contract.
Pursuant to regulations or published positions of the Securities and
Exchange Commission (the "SEC"), a Subadvisor may be required to segregate
permissible liquid assets in connection with its commodities transactions in an
amount generally equal to the value of the underlying commodity. The segregation
of such assets will have the effect of limiting the Subadvisor's ability
otherwise to invest those assets.
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Some or all of the Investment Managers may purchase and sell stock index
futures contracts for the Investment Funds. A stock index future obligates an
Investment Fund to pay or receive an amount of cash equal to a fixed dollar
amount specified in the futures contract multiplied by the difference between
the settlement price of the contract on the contract's last trading day and the
value of the index based on the stock prices of the securities that comprise it
at the opening of trading in such securities on the next business day.
Some or all of the Investment Managers may purchase and sell interest rate
futures contracts for the Investment Funds. An interest rate future obligates an
Investment Fund to purchase or sell an amount of a specific debt security at a
future date at a specific price.
Some or all of the Investment Managers may purchase and sell currency
futures. A currency future obligates an Investment Fund to purchase or sell an
amount of a specific currency at a future date at a specific price.
CALL AND PUT OPTIONS ON SECURITIES INDICES. Some or all of the Investment
Managers may purchase and sell for the Investment Funds call and put options on
stock indices listed on national securities exchanges or traded in the
over-the-counter market for hedging purposes and non-hedging purposes to pursue
its investment objective. A stock index fluctuates with changes in the market
values of the stocks included in the index. Accordingly, successful use by the
Investment Manager of options on stock indexes will be subject to the Investment
Manager's ability to predict correctly movements in the direction of the stock
market generally or of a particular industry or market segment. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
WARRANTS AND RIGHTS. Warrants are derivative instruments that permit, but
do not obligate, the holder to subscribe for other securities or commodities.
Rights are similar to warrants, but normally have a shorter duration and are
offered or distributed to shareholders of a company. Warrants and rights 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 and rights may be
considered more speculative than certain other types of equity-like securities.
In addition, the values of warrants and rights do not necessarily change with
the values of the underlying securities or commodities and these instruments
cease to have value if they are not exercised prior to their expiration dates.
SWAP AGREEMENTS. Some or all of the Investment Managers may enter into
equity, interest rate, index and currency rate swap agreements on behalf of the
Investment Funds. These transactions are entered into in an attempt to obtain a
particular return when it is considered desirable to do so, possibly at a lower
cost than if an Investment Fund had invested directly in the asset that yielded
the desired return. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than a year. In a standard swap transaction, two parties agree to exchange
the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments, which may be adjusted for
an interest factor. The gross returns to be exchanged or "swapped" between the
parties are generally calculated with respect to a "notional amount," i.e.,
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the return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. Forms of swap agreements include
interest rate caps, under which, in return for a premium, one party agrees to
make payments to the other to the extent interest rates exceed a specified rate
or "cap"; interest rate floors, under which, in return for a premium, one party
agrees to make payments to the other to the extent interest rates fall below a
specified level or "floor"; and interest rate collars, under which a party sells
a cap and purchases a floor or vice versa in an attempt to protect itself
against interest rate movements exceeding given minimum or maximum levels.
Most swap agreements entered into by the Investment Fund would require the
calculation of the obligations of the parties to the agreements on a "net
basis." Consequently, an Investment Fund's current obligations (or rights) under
a swap agreement generally will be equal only to the net amount to be paid or
received under the agreement based on the relative values of the positions held
by each party to the agreement (the "net amount"). The risk of loss with respect
to swaps is limited to the net amount of interest payments that an Investment
Fund is contractually obligated to make. If the other party to a swap defaults,
an Investment Fund's risk of loss consists of the net amount of payments that
the Investment Fund contractually is entitled to receive.
To achieve investment returns equivalent to those achieved by an investment
adviser in whose investment vehicles the Company could not invest directly,
perhaps because of its investment minimum or its unavailability for direct
investment, the Company may enter into swap agreements under which the Company
may agree, on a net basis, to pay a return based on a floating interest rate,
such as LIBOR, and to receive the total return of the reference investment
vehicle over a stated time period. The Company may seek to achieve the same
investment result through the use of other derivatives in similar circumstances.
The Federal income tax treatment of swap agreements and other derivatives used
in the above manner is unclear. Until the Federal income tax treatment of
derivatives on hedge funds is clarified, the Company will not invest in such
derivatives.
LENDING PORTFOLIO SECURITIES
Some or all of the Investment Managers may lend securities from their
portfolios to brokers, dealers and other financial institutions needing to
borrow securities to complete certain transactions. The lending portfolio
continues to be entitled to payments in amounts equal to the interest, dividends
or other distributions payable on the loaned securities which affords it an
opportunity to earn interest on the amount of the loan and on the loaned
securities' collateral. Loans of portfolio securities by a Subadvisor may not
exceed 33-1/3% of the value of an Investment Fund's total assets, and, in
respect of such transactions, the Investment Fund 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. An Investment Fund might
experience loss if the institution with which the Investment Fund has engaged in
a portfolio loan transaction breaches its agreement with the Investment Fund.
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WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
Some or all of the Investment Managers may purchase securities on a
"when-issued" basis and may purchase or sell securities on a "forward
commitment" basis in order to hedge against anticipated changes in interest
rates and prices. These transactions involve a commitment by an Investment Fund
to purchase or sell securities at a future date (ordinarily one or two months
later). The price of the underlying securities, which is generally expressed in
terms of yield, is fixed at the time the commitment is made, but delivery and
payment for the securities takes place at a later date. No income accrues on
securities that have been purchased pursuant to a forward commitment or on a
when-issued basis prior to delivery to the Investment Fund. When-issued
securities and forward commitments may be sold prior to the settlement date. If
an Investment Fund disposes of the right to acquire a when-issued security prior
to its acquisition or disposes of its right to deliver or receive against a
forward commitment, it may incur a gain or loss. These transactions, when
effected by the Company and by an Investment Fund managed by a Subadvisor, will
be subject to the Company's limitation on indebtedness unless, at the time the
transaction is entered into, a segregated account consisting of cash, U.S.
Government Securities or liquid securities equal to the value of the when-issued
or forward commitment securities is established and maintained. There is a risk
that securities purchased on a when-issued basis may not be delivered and that
the purchaser of securities sold by an Investment Manager on a forward basis
will not honor its purchase obligation. In such cases, an Investment Fund may
incur a loss.
RESTRICTED AND ILLIQUID INVESTMENTS
Although it is anticipated that most Investment Funds will invest primarily
in publicly traded securities, they generally may invest a portion of the value
of their total 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 Securities Act of
1933 ("1933 Act") or, if they are unregistered, may be sold only in a privately
negotiated transaction or pursuant to an exemption from registration.
Where registration is required to sell a security, the Company or an
Investment Fund 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 Investment Manager may be permitted to sell a security under an
effective registration statement. If, during such period, adverse market
conditions were to develop, the Company or an Investment Fund might obtain a
less favorable price than prevailed when it decided to sell. For Investment
Funds which are managed by a Subadvisor, 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 Board of Managers. Investment Managers may be unable to sell restricted and
other illiquid securities at the most opportune times or at prices approximating
the value at which they purchased such securities.
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In addition, the Company's interests in unregistered Investment Funds are
themselves illiquid and subject to substantial restrictions on transfer. The
Company may liquidate an interest and withdraw from an unregistered Investment
Fund pursuant to limited withdrawal rights. The illiquidity of these interests
may adversely affect the Company were it to have to sell interests at an
inopportune time.
INVESTMENT POLICIES AND RESTRICTIONS
The Company has adopted certain fundamental investment restrictions, which
cannot be changed without the vote of a majority of the Company's outstanding
voting securities (as defined by the 1940 Act). In applying these restrictions,
the Company will aggregate its investments and transactions with those of each
Investment Fund, if any, that is advised by a Subadvisor. The Company's
fundamental investment restrictions are as follows:
(1) The Company will not invest 25% or more of the value of its total
assets in the securities (other than U.S. Government Securities) of
issuers engaged in any single industry. (This restriction does not
apply to the Company's investments in Investment Funds.)
(2) The Company will not issue senior securities representing stock,
except that, to the extent permitted by the 1940 Act, (a) the Company
may borrow money from banks, brokers and other lenders, to finance
portfolio transactions and engage in other transactions involving the
issuance by the Company of "senior securities" representing
indebtedness, and (b) the Company may borrow money from banks for
temporary or emergency purposes or in connection with repurchases of,
or tenders for, Interests.
(3) The Company will not underwrite securities of other issuers, except
insofar as the Company may be deemed an underwriter under the 1933 Act
in connection with the disposition of its portfolio securities.
(4) The Company will not make loans of money or securities to other
persons, except through purchasing fixed-income securities, lending
portfolio securities or entering into repurchase agreements in a
manner consistent with the Company's investment policies.
(5) The Company will not purchase or sell commodities or commodity
contracts, except that it may purchase and sell foreign currency,
options, futures and forward contracts, including those related to
indexes, and options on indices, and may invest in commodity pools and
other entities that purchase and sell commodities and commodity
contracts.
(6) The Company will not purchase, hold or deal in real estate, except
that it may invest in securities that are secured by real estate or
that are issued by companies that invest or deal in real estate.
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<PAGE>
The investment objective of the Company is also fundamental and may not be
changed without a vote of a majority of the Company's outstanding voting
securities.
Under the 1940 Act, the vote of a majority of the outstanding voting
securities of an investment company, such as the Company, means the vote, at an
annual or a special meeting of the security holders of the Company duly called,
(A) of 67% or more of the voting securities present at the meeting, if the
holders of more than 50% of the outstanding voting securities of the Company are
present or represented by proxy or (B) of more than 50% of the outstanding
voting securities of the company, whichever is less.
With respect to these investment restrictions, and other policies described
in this Confidential Memorandum, the Company will not look through the
Investment Funds not managed by Subadvisors to their underlying securities. 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 Company's total assets, unless otherwise
stated, will not constitute a violation of such restriction or policy.
The Bank Holding Company Act of 1956, as amended (the "BHC Act"), together
with the rules and regulations of the Board of Governors of the Federal Reserve
System (the "Federal Reserve"), currently impose certain restrictions on the
ability of bank holding companies and their subsidiaries to own equity
securities of certain issuers. The parent company of the Advisor is NCT
Holdings, Inc. ("NCT"), a wholly-owned subsidiary of U.S. Trust Corp. ("U.S.
Trust"), which in turn is a wholly-owned subsidiary of The Charles Schwab
Corporation ("Schwab"). Each of U.S. Trust, Schwab and their respective
affiliates are subject to the BHC Act.
In particular, U.S. Trust generally may not own or control, directly or
indirectly, 5% or more of the outstanding shares of any class of voting
securities or 25% or more of the outstanding equity (including subordinated
debt) of certain issuers (the "Equity Limit"). Because U.S. Trust may be deemed
to control the Company within the meaning of the BHC Act, the Company's holdings
of securities will be aggregated with those of U.S. Trust and its subsidiaries
for purposes of calculating the Equity Limit. Consequently, the Company
generally will be unable to purchase equity securities that, when taken together
with the equity securities of an issuer owned or controlled by U.S. Trust and
its subsidiaries, would cause the Equity Limit to be exceeded. The Equity Limit
will apply to investment by the Company in an Investment Fund not managed by a
Subadvisor and, in the case of an Investment Fund or managed account managed by
a Subadvisor, to the investments made by such Investment Fund or managed
account. In addition, U.S. Trust and its subsidiaries generally will be
precluded under the BHC Act from exerting a "controlling influence over the
management or policies" of a company with business activities in the United
States. Consequently, activities in relation to companies in which the Company
may invest will need to be conducted so as not to result in a determination of
"control" within the meaning of the BHC Act.
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The BHC Act authorizes a bank holding company, if it meets certain
criteria, to become a financial holding company ("FHC"), which can engage
through subsidiaries in a full range of banking, securities, merchant banking
and insurance activities. Schwab became an FHC in May, 2000. As an FHC, Schwab
may in the future elect to treat the Company as part of its merchant banking
activities and may deliver a notice to such effect to the Board of Managers. If
Schwab were to elect to treat the Company as part of its merchant banking
activities, the Equity Limit would no longer apply and the Company would become
subject to the provisions of the BHC Act governing merchant banking activities
by affiliates of FHCs. In that event, it may be necessary to modify certain
features of the Company's structure or to amend the organizational documents of
the Company to comply with applicable regulations.
The Federal Reserve and the U.S. Department of Treasury have issued an
interim regulation governing the merchant banking activities of FHCs (the
"Interim Regulation") that would become applicable to the Company if Schwab made
the election to treat the Company as part of its merchant banking activities.
The Interim Regulation would impose: limitations on the involvement of the
Company and Schwab (and its subsidiaries and affiliates) in the routine
management and operations of an Investment Fund; possible limitations on lending
to and other transactions by the depository institution subsidiaries of Schwab
(the "Banking Subsidiaries") with the Company and an Investment Fund; possible
limitations on cross-marketing by the Banking Subsidiaries with the Company and
an Investment Fund; and limitations on the duration of the Company's investment
in an Investment Fund (as well as possible limitations on the duration of any
investment by Schwab in the Company). Certain recordkeeping, reporting and risk
management requirements (including diversification policies) mandated by the
Interim Regulation also may become applicable to the Company. The regulators
have solicited comments on the Interim Regulation and may issue an amended
regulation that would, when issued, also be applicable to the Company.
The Equity Limit would also no longer apply if U.S. Trust were no longer
deemed to control the Company within the meaning of the BHC Act and the Company
were operated so as to ensure the Company would not be viewed as controlled by
U.S. Trust under the BHC Act.
The Advisor does not expect that the restrictions currently imposed by the
BHC Act will adversely impact the investment operations of the Company.
The Advisor will not cause the Company to make loans to or receive loans
from the Advisor or its affiliates, except to the extent permitted by the 1940
Act or as otherwise permitted by applicable law. The Company may effect
brokerage transactions through affiliates of the Advisor, subject to compliance
with the 1940 Act. (See "Conflicts Of Interest--Schwab and U.S. Trust" and
"Brokerage.")
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ADDITIONAL RISK FACTORS
INCENTIVE ALLOCATION
Each Investment Manager generally will receive performance-based
allocations, expected to range from 15% to 25% of net profits. The
performance-based allocation that will be received by an Investment Manager may
create an incentive for the Investment Manager 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 will be calculated on a basis that includes realized and unrealized
appreciation of an Investment Fund's assets, the performance-based allocation
may be greater than if it were based solely on realized gains.
LACK OF OPERATING HISTORY
The Company is a recently formed entity and has no operating history upon
which investors can evaluate its performance. As discussed below, the personnel
of the Advisor responsible for managing the Company's investment portfolio have
substantial experience in managing investments and private investment funds,
including NCT Opportunities Equity Partners Limited Partnership ("Equity
Partners"), a private investment fund that utilizes an investment program
similar to that of the Company. In addition, the Company intends to invest
primarily with Investment Managers that have established track records and the
Advisor will utilize the services of consultants with substantial experience in
providing investment research, analytical data and due diligence services
relating to investments in private investment funds. (See "The Advisor" and
"Conflicts of Interest--Participation in Investment Opportunities.")
LIQUIDITY RISKS
Interests will not be traded on any securities exchange or other market and
will be subject to substantial restrictions on transfer. Although the Company
may offer to repurchase Interests from time to time, a Member may not be able to
liquidate its Interest for up to two years. The Advisor expects that it will
recommend to the Board of Managers that the Company offer to repurchase
Interests from Members on June 30, 2001, and, thereafter, twice each year,
effective at the end of June and December. (See "Redemptions, Repurchases of
Interests and Transfers.")
DISTRIBUTIONS TO MEMBERS AND PAYMENT OF TAX LIABILITY
The Company does not intend to make periodic distributions of its net
income or gains, if any, to Members. Whether or not distributions are made,
Members will be required each year to pay applicable Federal and state income
taxes on their respective shares of the Company'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 Board of
Managers.
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SPECIAL RISKS OF MULTI-MANAGER STRUCTURE
The Investment Funds generally will not be registered as investment
companies under the 1940 Act and, therefore, the Company, as an investor in
these Investment Funds, will not have the benefit of the protections afforded by
the 1940 Act to investors in registered investment companies, such as mutual
funds. Although the Advisor will receive detailed information from each
Investment Manager regarding its investment performance and investment strategy,
the Advisor may have little or no means of independently verifying this
information. An Investment Manager may use proprietary investment strategies
that are not fully disclosed to the Advisor, which may involve risks under some
market conditions that are not anticipated by the Advisor.
For the Company to complete its tax reporting requirements and to provide
an audited annual report to Members, it must receive information on a timely
basis from the Investment Managers. An Investment Manager's delay in providing
this information could delay the Company's preparation of tax information for
investors, which might require Members to seek extensions on the time to file
their tax returns, or could delay the preparation of the Company's annual
report.
An investor who meets the conditions imposed by the Investment Managers,
including minimum initial investment requirements that may be substantially
higher than those imposed by the Company, could invest directly with the
Investment Managers. By investing in the Investment Funds indirectly through the
Company, an investor bears a pro rata portion of the asset-based fee and other
expenses of the Company, and also indirectly bears a pro rata portion of the
asset-based fees, performance-based allocations other expenses borne by the
Company as an investor in Investment Funds.
Each Investment Manager will receive any performance-based allocations to
which it is entitled irrespective of the performance of the other Investment
Managers and the Company generally. Accordingly, an Investment Manager with
positive performance may receive compensation from the Company, and thus
indirectly from investors, even if the Company's overall returns are negative.
Investment decisions of the Investment Funds are made by the Investment Managers
independently of each other. As a result, at any particular time, one Investment
Fund may be purchasing shares of an issuer whose shares are being sold by
another Investment Fund. Consequently, the Company could directly or indirectly
incur certain transaction costs without accomplishing any net investment result.
Since the Company may make additional investments in or withdrawals from
Investment Funds only at certain times pursuant to limitations set forth in the
governing documents of the Investment Funds, the Company from time to time may
have to invest some of its assets temporarily in money market securities or,
subject to the limitations of the 1940 Act, money market funds.
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To the extent the Company holds non-voting securities of an Investment
Fund, it will not be able to vote on matters that require the approval of the
investors in the Investment Fund, including a matter that could adversely affect
the Company's investment in the Investment Fund.
Investment Funds may be permitted to redeem their interests in kind. Thus,
upon the Company's withdrawal of all or a portion of its interest in an
Investment Fund, the Company may receive securities that are illiquid or
difficult to value. In such circumstances, the Advisor would seek to dispose of
these securities in a manner that is in the best interests of the Company.
The New Account Fee paid by a noncorporate investor and such investor's
share of the Company's investment expenses (including (i) asset-based fees at
the Company level and the Investment Fund level, and (ii) performance-based
allocations at the Investment Fund level) may be subject to certain limitations
on deductibility for regular Federal income tax purposes and may be completely
disallowed for purposes of determining the noncorporate investor's alternative
minimum tax liability.
The Company may agree to indemnify certain of the Investment Funds and
their Investment Managers from any liability, damage, cost or expense arising
out of, among other things, certain acts or omissions relating to the offer or
sale of the Interests.
BOARD OF MANAGERS
The Board of Managers has overall responsibility for the management and
supervision of the operations of the Company and has approved the Company's
investment program. It exercises the same powers, authority and responsibilities
on behalf of the Company as are customarily exercised by the board of directors
of a registered investment company organized as a corporation, and has complete
and exclusive authority to oversee and to establish policies regarding the
management, conduct and operation of the Company's business. The persons
comprising the Board of Managers ("Managers") will not contribute to the capital
of the Company in their capacity as Managers, but may subscribe for Interests,
subject to the eligibility requirements described in this Confidential
Memorandum.
The identity of the members of the Board of Managers, and brief
biographical information regarding each Manager, is set forth below.
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<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE WITH THE COMPANY DURING PAST 5 YEARS
----------------------------------- -------------------- ---------------------------------------------------
<S> <C> <C>
Gene M. Bernstein Manager Dean, Skodnek Business Development Center at Hofstra
Dean University (Beginning September, 2000); Principal,
Skodnek Business Development Center Northville Industries (1993 to present); President,
Hofstra University Javelin Blue Golf Clubs (1994 to 1998). Mr.
145 Hofstra University Bernstein also is a Director of UST Private Equity
Hempstead, NY 11549 Investors Fund, Inc., Excelsior Private Equity Fund
Age 53 II, Inc. and Excelsior Venture Partners III, L.L.C.
Stephen V. Murphy Manager President, S.V. Murphy & Co., Inc. (1991 to
S.V. Murphy & Co., Inc. present). Mr. Murphy also is a Director of UST
1155 Avenue of the Americas Private Equity Investors Fund, Inc., Excelsior
11th Floor Private Equity Fund II, Inc. and Excelsior Venture
New York, NY 10036 Partners III, L.L.C.
Age 54
Victor F. Imbimbo, Jr. Manager Founder, President and Chief Executive Officer,
c/o Continuation Investments Bedrock Communications, Inc. (1996 to present);
1251 Avenue of the Americas Founder, President and Chief Executive Officer,
44th Floor Hadley Group (1985 to 1996). Mr. Imbimbo also is a
New York, NY 10020 Director of UST Private Equity Investors Fund, Inc.,
Age 48 Excelsior Private Equity Fund II, Inc. and Excelsior
Venture Partners III, L.L.C.
Stephen C. Hassenfelt* Manager Chairman of the Board and Chief Executive Officer,
NCT Opportunities, Inc. NCT Holdings, Inc. (1998 to present); Chairman of
U.S. Trust Center the Board and Chief Executive Officer, U.S. Trust
301 North Elm Street Company of North Carolina (and its predecessor,
Greensboro, NC 27401 North Carolina Trust Company) (1998 to present);
Age 50 President, NCT Holdings, Inc. (1992 to 1998);
President, North Carolina Trust Company (1983 to
1998).
</TABLE>
* Manager who is an "interested person" (as defined by the 1940 Act) of the
Company.
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<PAGE>
Each of the Managers was elected to the Board of Managers by the
organizational Member of the Company. By signing the limited liability company
agreement (the "Company Agreement") of the Company, each Member will be deemed
to have voted for the election of each of the Managers.
The Managers serve on the Board of Managers for terms of indefinite
duration. A Manager's position in that capacity will terminate if the Manager is
removed, resigns or is subject to various disabling events such as death,
incapacity or bankruptcy. A Manager may resign, subject to giving 90 days' prior
written notice to the other Managers if such resignation is likely to affect
adversely the tax status of the Company, and may be removed either by vote of
two-thirds (2/3) of the Managers not subject to the removal vote or by a vote of
Members holding not less than two-thirds (2/3) of the total number of votes
eligible to be cast by all Members. In the event of any vacancy in the position
of a Manager, the remaining Managers may appoint an individual to serve as a
Manager so long as immediately after the appointment at least two-thirds (2/3)
of the Managers then serving have been elected by the Members. The Board of
Managers may call a meeting of Members to fill any vacancy in the position of a
Manager, and must do so within 60 days after any date on which Managers who were
elected by the Members cease to constitute a majority of the Managers then
serving.
The following table sets forth certain information regarding the
compensation expected to be received by the Managers who are not "interested
persons" (as defined by the 1940 Act) of the Company or the Advisor (the
"Independent Managers") from the Company and from all registered investment
companies for which the Advisor or its affiliates serve as investment adviser
for the calendar year ending December 31, 2000. No compensation is paid by the
Company to Managers who are "interested persons" (as defined by the 1940 Act),
if any, of the Company or the Advisor. A majority of the Managers are
Independent Managers.
<TABLE>
COMPENSATION TABLE FOR CALENDAR YEAR
ENDING DECEMBER 31, 2000
<CAPTION>
Pension or Total Compensation
Retirement Benefits Estimated from U.S. Trust
Compensation Accrued as Part of Annual Benefits Affiliated
Name of Person from Company Company Expenses Upon Retirement Registered Funds
-------------- ------------ ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Gene M. Bernstein $6,250 0 0 $59,750
Stephen V. Murphy $6,250 0 0 $59,750
Victor F. Imbimbo, Jr. $6,250 0 0 $55,250
</TABLE>
Currently, the Independent Managers are each paid an annual retainer of
$7,000 ($3,500 for the first partial year) and per meeting fees of $2,000 (or
$1,000 in the case of telephonic quarterly meetings and $500 in the case of
telephonic special meetings) by the Company, and are reimbursed by the Company
for their reasonable out-of-pocket expenses. The Managers do not receive any
pension or retirement benefits from the Company.
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The Board of Managers has formed an Audit Committee, comprised of the
Independent Managers, the functions of which are: (i) to oversee the Company's
accounting and financial reporting policies and practices, its internal controls
and, as the Audit Committee may deem necessary or appropriate, the internal
controls of certain service providers; (ii) to oversee the quality and
objectivity of the Company's financial statements and the independent audit
thereof; and (iii) to the extent there are Managers who are not members of the
Audit Committee, to act as a liaison between the Company's independent auditors
and the Board of Managers. Managers that serve as members of the Audit Committee
receive an attendance fee of $750 for each Audit Committee meeting they attend.
THE ADVISOR AND U.S. TRUST CORPORATION
NCT Opportunities, Inc. serves as the Company's investment adviser and has
been given the responsibility to manage the investment portfolio of the Company,
subject to the ultimate supervision of and subject to any policies established
by the Board of Managers, pursuant to the terms of an investment advisory
agreement entered into between the Company and the Advisor dated as of September
30, 2000 (the "Investment Advisory Agreement"). The Advisor will initially
allocate the Company's assets and, thereafter, will evaluate regularly each
Investment Manager to determine whether its investment program is consistent
with the Company's investment objective and whether its investment performance
is satisfactory. The Advisor may reallocate the Company's assets among the
Investment Managers, terminate existing Investment Managers and select
additional Investment Managers, subject in each case to the ultimate supervision
of and subject to any policies established by the Board of Managers and to the
condition that retention of any Subadvisor will require approval of a majority
of the Independent Managers and, unless the Company receives an exemption from
certain provisions of the 1940 Act, of a majority (as defined in the 1940 Act)
of the Company's outstanding voting securities.
The Advisor was formed as a North Carolina corporation on December 6, 1994
and has filed an application to register as an investment adviser under the
Investment Advisers Act of 1940 (the "Advisers Act") The Company will not
commence operations until such registration is effective. The Advisor also
serves as the general partner of Equity Partners, a private investment fund that
utilizes an investment program similar to that of the Company, and may in the
future serve as an investment adviser or General Partner of other registered and
private investment companies. The offices of the Advisor are located at U.S.
Trust Center, 301 North Elm Street, Greensboro, North Carolina 27401, and its
telephone number is (336) 273-8544.
The Advisor is a wholly-owned subsidiary of NCT Holdings, Inc. ("NCT"), a
North Carolina corporation, which is a subsidiary of U.S Trust. The Advisor and
companies controlling the Advisor (including (i) NCT; (ii) U.S. Trust and (iii)
Schwab) may be deemed to "control" the Company, as such term is defined by the
1940 Act. U.S. Trust and its affiliates (including Schwab, NCT Holdings, Inc.
and the Advisor) are subject to the BHC Act and the rules and regulations of the
Federal Reserve. Because U.S. Trust may be deemed to control the Company for
purposes of the BHC Act, certain activities of the Company may be restricted by
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the BHC Act and the rules and regulations of the Federal Reserve thereunder, as
described elsewhere in this Confidential Memorandum.
U.S. Trust, a subsidiary of Schwab, is a bank holding company registered
under Federal law and incorporated in New York. Through its subsidiaries, U.S.
Trust provides investment management, fiduciary, financial planning and private
banking services to affluent individuals, families and institutions nationwide.
Headquartered in New York City, U.S. Trust and its subsidiaries have 26 offices
in ten states and the District of Columbia. As of March 31, 2000, client assets
under the management of U.S. Trust totaled more than $90 billion. Schwab, though
its principal brokerage subsidiary, Charles Schwab & Co., Inc., is one of the
nation's largest financial services firms, serving investors through the Web,
over 360 branch offices, four regional customer telephone service centers and
automated telephonic channels.
Schwab's principal brokerage subsidiary, Charles Schwab & Co. Inc., is a
member of the New York Stock Exchange and other principal securities exchanges.
As a registered broker-dealer, Charles Schwab & Co. is subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith files reports with the SEC.
The Adviser has selected Mr. Stephen C. Hassenfelt to serve as portfolio
manager to the Company. As portfolio manager, Mr. Hassenfelt will be primarily
responsible for the day-to-day management of the Company's portfolio, subject to
such policies as may be adopted by the Board of Managers. Mr. Hassenfelt, who is
50, is a Director and Chairman and Chief Executive Officer of the Advisor. He
currently serves as Chairman of the Board of Directors and Chief Executive
Officer of the Advisor's parent, NCT, and of U.S Trust Company of North Carolina
(a wholly-owned bank subsidiary of NCT), which he founded as North Carolina
Trust Company in 1983. He also served as President of NCT from 1992 to 1998 and
as President of North Carolina Trust Company from 1983 to 1998. Prior to
founding North Carolina Trust Company, he was an attorney with Livingston &
Hassenfelt (1981 to 1983) and Smith Moore Smith Schell & Hunter (1977 to 1981).
He was formerly with the accounting firms of Ernst & Whinney (1972 to 1973,
1975) and Peat Marwick & Mitchell (1976 to 1977). Mr. Hassenfelt graduated from
the University of North Carolina at Chapel Hill in 1972 with a B.S. in Business
Administration and received a J.D. (cum laude) from Wake Forest University Law
School in 1976 where he also served as Editor-in-Chief of the Wake Forest Law
Review. He is a member of the American and North Carolina Bar Associations and
is a Chartered Life Underwriter (CLU).
Since 1995, NCT has served as the general partner of Equity Partners, a
private investment partnership that is not registered under the 1940 Act and
that pursues an investment program that is substantially similar to that of the
Company. Mr. Hassenfelt has been primarily responsible for the day-to-day
management of the portfolio of Equity Partners since its inception. Similar to
the role he will play as portfolio manager of the Company, Mr. Hassenfelt's
responsibilities with respect to Equity Partners include the allocation of its
assets among a variety of investment managers.
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Mr. Hassenfelt has been active in professional and civic groups, including
leadership roles as Chairman of the Salvation Army Advisory Board, and Chairman
of the Board of Trustees of Greensboro Day School and Wesley Long Community
Hospital. He has also served on numerous other community and educational
advisory boards. In addition, he is a Director of Guilford Mills, Inc. and The
Tanner Companies.
INVESTMENT ADVISORY AGREEMENT
Pursuant to the Investment Advisory Agreement, the Advisor is responsible,
subject to the supervision of the Board of Managers, for formulating a
continuing investment program for the Company. It makes all decisions regarding
the Company's purchases and withdrawals of interests in Investment Funds and
also advises the Board of Managers regarding the selection of Subadvisors. The
Investment Advisory Agreement was approved by the Board of Managers (including a
majority of the Independent Managers), at a meeting held in person on August,
23, 2000, and was also approved on such date by Stephen C. Hassenfelt, the then
sole Member of the Company. The Investment Advisory Agreement is terminable
without penalty, on 60 days' prior written notice: by the Board of Managers; by
vote of a majority (as defined by the 1940 Act) of the outstanding voting
securities of the Company; or by the Advisor. The initial term of the Investment
Advisory Agreement expires on September 30, 2002. However, the agreement may be
continued in effect from year to year thereafter if such continuance is approved
annually by either the Board of Managers or the vote of a majority (as defined
by the 1940 Act) of the outstanding voting securities of the Company; provided
that in either event the continuance is also approved by a majority of the
Independent Managers by vote cast in person at a meeting called for the purpose
of voting on such approval. The Investment Advisory Agreement also provides that
it will terminate automatically in the event of its "assignment," as defined by
the 1940 Act and the rules thereunder.
The Investment Advisory Agreement provides that, in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations to the Company, the Advisor and any member, director, officer or
employee thereof, or any of their affiliates, executors, heirs, assigns,
successors or other legal representative, will not be liable to the Company for
any error of judgment, for any mistake of law or for any act or omission by such
person in connection with the performance of services to the Company. The
Investment Advisory Agreement also provides for indemnification, to the fullest
extent permitted by law, by the Company of the Advisor, or any member, director,
officer or employee thereof, and any of their affiliates, executors, heirs,
assigns, successors or other legal representatives, against any liability or
expense to which such person may be liable which arise in connection with the
performance of services to the Company, provided that the liability or expense
is not incurred by reason of the person's willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations to the Company.
The Advisor will be entitled to charge a one-time administrative fee in an
amount, as approved by the Board, not to exceed $10,000 to each person who
becomes a member as compensation for the services of the Advisor and costs
incurred by the Advisor in reviewing
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subscription documents submitted by and establishing an account for such member.
(See "Subscriptions for Interests.")
VOTING
Each Member has the right to cast a number of votes based on the value of
the Member's respective capital account at a meeting of Members called by the
Board of Managers or by Members holding 25% or more of the total number of votes
eligible to be cast. Members will be entitled to vote on any matter on which
shareholders of a registered investment company organized as a corporation would
normally be entitled to vote, including election of Managers, approval of the
agreement with the investment adviser of the Company, and approval of the
Company's auditors, and on certain other matters. Except for the exercise of
their voting privileges, Members in their capacity as such are not entitled to
participate in the management or control of the Company's business, and may not
act for or bind the Company.
CONFLICTS OF INTEREST
The Advisor, U.S. Trust and their respective affiliates (collectively, the
"U.S. Trust Affiliates") and their members, partners, officers and employees
carry on substantial investment activities for their own accounts and for other
registered investment companies, private investment funds, institutions and
individual clients (collectively, "U.S. Trust Clients"). The Company has no
interest in these activities. The Advisor and its officers will be engaged in
substantial activities other than on behalf of the Company and may have
conflicts of interest in allocating their time and activity between the Company
and such other activities. The Advisor and its officers and employees will
devote so much time to the affairs of the Company as in their judgment is
necessary and appropriate.
The Advisor or another U.S. Trust Affiliate may determine that an
investment opportunity in a particular investment vehicle is appropriate for a
particular U.S. Trust Client or for itself or its officers, directors, partners,
members or employees, but the Advisor may determine that such investment
opportunity is not appropriate for the Company. Situations also may arise in
which U.S. Trust Affiliates or U.S. Trust Clients have made investments which
would have been suitable for investment by the Company but, for various reasons,
were not pursued by, or available to, the Company. The investment activities of
the U.S. Trust Affiliates and any of their respective officers, directors,
partners, members or employees may disadvantage the Company in certain
situations, if among other reasons, the investment activities limit the
Company's ability to invest in a particular investment vehicle or investment.
Furthermore, the U.S. Trust Affiliates will not have to divest any interest in
an investment vehicle or company even though, because the U.S. Trust Affiliates
invested in the investment vehicle or company, such investment will be
prohibited to the Company because of the BHC Act. (See "Types of Investments and
Related Risk Factors--Investment Policies and Restrictions.")
Certain U.S. Trust Affiliates or affiliates of Schwab may provide brokerage
and other services from time to time to one or more accounts or entities managed
by the Investment Managers or their affiliates, including the Investment Funds.
(All Investment Funds and other
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accounts managed by the Investment Managers or their affiliates, excluding the
Company are referred to collectively as the "Investment Manager Accounts.")
The U.S. Trust Affiliates or U.S. Trust Clients may have an interest in an
account managed by, or enter into relationships with, an Investment Manager or
its affiliates on terms different than an interest in the Company. In addition,
the Investment Managers may receive research products and services in connection
with the brokerage services that U.S. Trust Affiliates or affiliates of Schwab
may provide from time to time to one or more Investment Manager Accounts or to
the Company.
Schwab, U.S. Trust and their respective affiliates, including their
directors, officers or employees, may have banking and investment banking
relationships with the issuers of securities that are held by the Investment
Funds or by the Company. They may also own the securities of these issuers.
However, in making investment decisions for the Company and the Investment
Funds, the Advisor and the Investment Managers, respectively, do not obtain or
use material inside information acquired by any division, department or
affiliate of Schwab or U.S. Trust in the course of those relationships. In
addition, the subsidiaries of either Schwab or U.S. Trust may have made loans
which are currently outstanding that could be repaid with proceeds of securities
purchased by the Company or an Investment Fund.
INVESTMENT MANAGERS
It is anticipated that Investment Managers which are Subadvisors will
follow practices substantially similar to those described below. Although it is
anticipated that Investment Managers that are not Subadvisors will follow
practices similar to those described below, no guarantee or assurances can be
made that similar practices will be followed or that an Investment Manager
(including a Subadvisor) will adhere to, and comply with, its stated practices.
PARTICIPATION IN INVESTMENT OPPORTUNITIES. The Advisor anticipates that
each Investment Manager will consider participation by the Company or the
relevant Investment Fund in all appropriate investment opportunities that are
also under consideration for investment by the Investment Manager for its
Investment Manager Accounts that pursue similar investment programs. There may
be circumstances, however, under which an Investment Manager will cause its
Investment Manager Accounts to commit a larger percentage of their respective
assets to an investment opportunity than to which the Investment Manager will
commit the Company's or the relevant Investment Fund's assets. There also may be
circumstances under which an Investment Manager will consider participation by
its Investment Manager Accounts in investment opportunities in which the
Investment Manager does not intend to invest on behalf of the Company or the
relevant Investment Fund, or vice versa.
It is expected that each Investment Manager will evaluate a variety of
factors in determining whether a particular investment opportunity or strategy
is appropriate and feasible for the Company or the relevant Investment Fund and
Investment Manager Accounts at a particular time. These factors may include 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
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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. However, particular Investment
Managers may consider other factors. Because the relevant considerations may
differ for the Company, the Investment Fund and relevant Investment Manager
Accounts in the context of any particular investment opportunity, the investment
activities of the Company or Investment Fund, on the one hand, and Investment
Manager Accounts, on the other, may differ considerably from time to time. In
addition, the fees and expenses of the Investment Fund will differ from those of
the Investment Manager Accounts and the Company. Accordingly, prospective
Members should note that the future performance of an Investment Manager's
Investment Fund and its Investment Manager Accounts will vary.
It is expected that when an Investment Manager determines that it would be
appropriate for the Company or its respective Investment Fund and one or more of
its Investment Manager Accounts to participate in an investment opportunity at
the same time, it will attempt to aggregate, place and allocate orders on a
basis that the Investment 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 Company or any
Investment Fund participate, or participate to the same extent as the Investment
Manager Accounts, in all trades. Although no assurances can be made, it is
generally expected that no participating entity or account will receive
preferential treatment over any other and that each Investment Manager 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 Company could be disadvantaged
because of the investment activities conducted by the Investment Manager for the
Investment Manager 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 Company, the Investment Funds and the Investment
Manager Accounts, thereby limiting the size of the Company's or an Investment
Fund's position; (2) the difficulty of liquidating an investment for the
Company, an Investment Fund and the Investment Manager 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 addition, a Subadvisor may be legally restricted from entering
into "joint transactions" (as defined in the 1940 Act) in which the Company or
an Investment Fund it has organized participates with affiliates of the
Subadvisor, including its Investment Manager Accounts, without first obtaining
exemptive relief from the SEC. (See "Conflicts of Interest--Other Matters.")
Each Investment Manager and its principals, officers, employees and
affiliates, 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 Company or an Investment Fund. As a result of
differing trading and investment strategies or constraints,
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positions may be taken by principals, officers, employees and affiliates of the
Investment Manager that are the same, different or made at a different time than
positions taken for the Company.
Investment Managers or their affiliates may from time to time provide
investment advisory or other services to private investment funds and other
entities or accounts managed by U.S. Trust Affiliates. In addition, Investment
Managers or their affiliates may from time to time receive research products and
services in connection with the brokerage services that U.S. Trust Affiliates
may provide either (i) to one or more Investment Manager Accounts or (ii) to the
Company.
OTHER MATTERS. It is expected that, except as may be permitted by
applicable law, an Investment Manager and its affiliates will not buy securities
or other property from, or sell securities or other property to, the Investment
Fund it manages. In this regard, an Investment Fund may effect certain principal
transactions in securities with one or more Investment Manager Accounts, subject
to certain conditions. Such transactions would be made in circumstances where
the Investment Manager has determined it would be appropriate for the Investment
Fund to purchase and an Investment Manager Account to sell, or the Investment
Fund to sell and an Investment Manager Account to purchase, the same security or
instrument on the same day. Future investment activities of the Investment
Managers, or their affiliates, and the principals, partners, directors, officers
or employees of the foregoing may give rise to additional conflicts of interest.
U.S. Trust Affiliates and their 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 by
the Advisor on behalf of the Company. As a result of differing trading and
investment strategies or constraints, positions may be taken by directors,
officers and employees of U.S. Trust Affiliates (including personnel of the
Advisor) that are the same, different or made at a different time than positions
taken for the Company. In order to mitigate the possibility that the Company
will be adversely affected by this personal trading, the Company and the Advisor
have adopted a joint code of ethics (the "Code of Ethics") in compliance with
Section 17(j) of the 1940 Act that restricts securities trading in the personal
accounts of investment professionals and others who normally come into
possession of information regarding the Company's portfolio transactions. The
Code of Ethics can be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. Information on the operation of the Public Reference Room may
be obtained by calling the SEC at 1-202-942-8090. The Code of Ethics is also
available on the EDGAR Database on the SEC's Internet site at
http://www.sec.gov, and copies of the Code of Ethics may be obtained, after
paying a duplicating fee, by E-mail at [email protected] or by writing the
SEC's Public Reference Section, Washington, D.C. 20549-0102.
U.S. Trust Affiliates will not purchase securities or other property from,
or sell securities or other property to, the Company, except that the Company
may engage in transactions with accounts which are affiliated with the Company
solely because they are advised by a U.S. Trust Affiliate or because they have
common officers, directors or managing members.
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Such transactions would be effected in circumstances where the Advisor has
determined that it would be appropriate for the Company to purchase and another
U.S. Trust Client to sell, or the Company to sell and another U.S. Trust Client
to purchase, the same security or instrument on the same day. All such purchases
and sales would be made pursuant to procedures that would be adopted by the
Company pursuant to Rule 17a-7 under the 1940 Act. Among other things, those
procedures would be intended to ensure that (1) each such transaction will be
effected for cash consideration at the current market price of the particular
securities, (2) no such transaction will involve restricted securities or
securities for which market quotations are not readily available and (3) no
brokerage commissions, fees (except for customary transfer fees) or other
remuneration will be paid in connection with any such transaction. Affiliated
broker-dealers of Schwab and U.S. Trust may act as broker for the Company or the
Investment Funds in effecting securities transactions. (See "Brokerage.")
Under the BHC Act, and other U.S. banking laws, and the rules, regulations,
guidelines and policies of the regulatory agencies and the staff thereof, U.S.
Trust, Schwab and their respective affiliates are subject to restrictions on the
transactions that they may make with the Company, and these restrictions may
affect the investments made by the Company.
Future investment activities of U.S. Trust Affiliates and their principals,
partners, directors, officers or employees may give rise to additional conflicts
of interest.
BROKERAGE
Each Investment Manager is directly responsible for placing orders for the
execution of portfolio transactions and the allocation of brokerage for the
Investment Fund it manages. 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.
The Advisor expects that each Investment Manger will generally select
brokers and dealers to effect transactions on behalf of its Investment Fund
substantially in the manner set forth below. However, no guarantee or assurance
can be made that an Investment Manager (including a Subadvisor) will adhere to,
and comply with, its stated practices. The Advisor generally expects that, in
selecting brokers and dealers to effect transactions on behalf of its Investment
Fund, each Investment Manager will seek to obtain the best price and execution
for the transactions, taking into account factors such as price, size of order,
difficulty of execution and operational facilities of a brokerage firm and the
firm's risk in positioning a block of securities. However, subject to
appropriate disclosure, Investment Managers of Investment Funds that are not
investment companies registered under the 1940 Act may select brokers on a basis
other than that outlined above and may receive benefits other than research or
that benefit the Investment Manager rather than its Investment Fund. The Advisor
considers the broker selection process employed by an Investment Manager in
determining whether to invest in its
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Investment Fund. Each Investment Manager generally will seek reasonably
competitive commission rates. However, Investment Managers will not necessarily
pay the lowest commission available on each transaction.
Consistent with the principle of seeking best price and execution, an
Investment Manager may place brokerage orders with brokers (including affiliates
of Schwab and U.S. Trust) that provide the Investment Manager and its affiliates
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 an Investment Manager are not
necessarily reduced as a result of the receipt of this supplemental information,
which may be useful to the Investment Manager or its affiliates in providing
services to clients other than an Investment Fund. In addition, not all of the
supplemental information is used by the Investment Manager in connection with an
Investment Fund in which the Company invests. Conversely, the information
provided to the Investment Manager by brokers and dealers through which other
clients of the Investment Manager and its affiliates effect securities
transactions may be useful to the Investment Manager in providing services to an
Investment Fund.
Transactions for any Investment Fund organized by the Company will not be
effected on a principal basis with any U.S. Trust Affiliate. However, U.S. Trust
Affiliates may effect brokerage transactions for such an Investment Fund. These
transactions would be effected in accordance with procedures adopted by the
Company pursuant to Section 17(e) of the 1940 Act and Rule 17e-1 thereunder.
Among other things, Section 17(e) and those procedures provide that when acting
as broker for the Company in connection with the sale of securities to or by the
Company, U.S. Trust Affiliates may receive compensation not exceeding the
following limits: (1) if the sale is effected on a securities exchange, the
compensation may not exceed the "usual and customary broker's commission" (as
defined in Rule 17e-1 under the 1940 Act); (2) if the sale is effected in
connection with a secondary distribution of securities, the compensation cannot
exceed 2% of the sale price; and (3) the compensation for sales otherwise
effected cannot exceed 1% of the sales price. Rule 17e-1 defines a "usual and
customary broker's commission" as one that is fair compared to the commission
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on an exchange during a comparable
period of time.
FEES AND EXPENSES
The Advisor will bear all of its own costs incurred in providing investment
advisory services to the Company, including travel and other expenses related to
the selection and monitoring of Investment Managers and fees paid to consultants
(including Praesideo and CTC). In addition the Advisor will provide, or will
arrange for provision at the Advisor's expense, certain management and
administrative services to the Company, including, among other things: providing
office space and other support services, maintaining and preserving certain
records, preparing and filing various materials with state and Federal
regulators,
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providing legal and regulatory advice in connection with administrative
functions and reviewing and arranging for payment of the Company's expenses. The
Advisor will also pay or assume all ordinary operating expenses of the Company
other than the fee payable to the Advisor, investment related expenses and
certain other expenses described below. The expenses to be assumed by the
Advisor include offering expenses; expenses of meetings of the Board of Managers
and Members (other than fees and travel expenses of Managers); expenses related
to qualifying potential investors, providing investor services to the Company,
preparing communications and quarterly reports to Members and regulatory
compliance; and organizational and registration expenses.
In consideration of the advisory and other services provided by the Advisor
to the Company, the Company will pay the Advisor a quarterly fee of 0.375%
(1.50% on an annualized basis) of the Company's net assets (the "Management
Fee"). The Management Fee will be an expense out of the Company's assets, and
will be reflected in each Member's capital account (including the capital
accounts of the Advisor and its affiliates, if any) as a reduction to net
profits or an increase to net losses credited to or debited against each
Member's capital account. (See "Capital Accounts and Allocations.")
Net assets means the total value of all assets of the Company, less an
amount equal to all accrued debts, liabilities and obligations of the Company.
The Management Fee will be computed based on the net assets of the Company as of
the start of business on the first business day of each quarter, after
adjustment for any subscriptions effective on that date, and will be due and
payable in arrears within five business days after the end of that quarter.
The expenses the Company will bear are:
o all investment related expenses, including, but not limited to, fees
paid directly or indirectly to Investment Managers, all costs and
expenses directly related to portfolio transactions and positions for
the Company's account such as direct and indirect expenses associated
with the Company's investments, including its investments in
Investment Funds, transfer taxes and premiums, taxes withheld on
foreign dividends and , if applicable in the event the Company
utilizes a Subadvisor, brokerage commissions, interest and commitment
fees on loans and debit balances, borrowing charges on securities sold
short, dividends on securities sold but not yet purchased and margin
fees;
o all costs and expenses associated with the establishment of Investment
Funds managed by Subadvisors;
o any non-investment related interest expense;
o attorneys' fees and disbursements associated with updating the
Company's Confidential Memorandum and subscription documents (the
"Offering Materials");
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o fees and disbursements of any attorneys and accountants engaged by the
Company; and expenses related to the annual audit of the Company;
o fees paid to the Company's administrator;
o custody and escrow fees and expenses;
o the costs of an errors and omissions/directors and officers liability
insurance policy and a fidelity bond;
o the Management Fee;
o fees and travel expenses of Managers;
o all costs and charges for equipment or services used in communicating
information regarding the Company's transactions among the Advisor and
any custodian or other agent engaged by the Company; and
o any extraordinary expenses.
The Advisor will be reimbursed by the Company for any of the above expenses
that it pays on behalf of the Company.
The Investment Funds will bear various expenses in connection with their
operations. These expenses are similar to those incurred by the Company. The
Investment Managers generally will charge asset-based fees to and receive
performance-based allocations from the Investment Funds, which effectively will
reduce the investment returns of the Investment Funds. These expenses, fees and
allocations will be in addition to those incurred by the Company itself. As an
investor in Investment Funds, the Company will bear its pro rata share of the
expenses and fees of the Investment Funds and will also be subject to
performance allocations to the Investment Managers.
ADMINISTRATOR
The Company has retained J.D. Clark & Co. (the "Administrator") to provide
accounting and certain administrative and investor services to the Company. The
Administrator exclusively provides administrative and accounting services to
private investment funds and funds of funds. Currently, it provides
administrative and accounting services to 45 funds of funds, with aggregate
assets of approximately $1.6 billion, and 13 private investment funds, with
aggregate assets of approximately $400 million. Jeffrey D. Clark, the founder of
the Administrator, has over 15 years of experience in accounting and operating
matters for multi-strategy private investment funds and funds of funds. The
Administrator's staff includes seven professionals, three of whom are Certified
Public Accountants. Fees payable to the Administrator will be paid by the
Company.
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CONSULTANTS
The Advisor has retained Praesideo and CTC (collectively, the
"Consultants") to provide the Advisor with investment research, analytical data
and due diligence services, which the Advisor intends to use in evaluating
prospective Investment Managers being considered by the Advisor and in
monitoring the services and investment performance of Investment Managers. The
Advisor will pay the fees of the Consultants for these services. The Consultants
have extensive experience in the private investment fund consulting business, as
described below:
PRAESIDEO ASSET MANAGEMENT, INC.
Founded in 1994, Praesideo is registered as an investment adviser under the
Advisers Act. Praesideo specializes in assisting a limited number institutional
and private clients in the construction of proprietary portfolios of private
investment funds (i.e., funds of funds). Since 1995, Praesideo has served as a
consultant to NCT in NCT's capacity as general partner of Equity Partners.
Praesideo's expertise lies in its qualitative approach to private investment
fund research backed up by traditional qualitative research methods. Jeffrey D.
Clark, the Chairman & Chief Executive Officer of Praesideo, is also the general
partner of three fund of funds partnerships; Praesideo Equity Partners,
Praesideo -- ULQ International Investors, and Praesideo Discovery Partners. He
is also the Chairman and Chief Executive Officer of the Administrator
Mr. Clark was the Chief Financial Officer and a founder of Genesee
Partners, a large, multi-manager, multi-strategy fund of funds, from its
inception in August 1986 until August 1990, and of Genesee Balanced Fund,
Genesee Short Sellers Fund, Genesee Opportunity Fund and Genesee Offshore
Limited. Prior to that, he was the Vice President of Finance for Ranier Partners
and the Cascade Funds, each a group of investment partnerships specializing in
risk arbitrage. He is a Certified Public Accountant and holds a B.A. in
accounting and business from Utah State University. Upon graduation from
college, he joined KPMG Peat Marwick where, from 1982 through 1984, he was a
member of their audit and small business advisory staff.
CTC CONSULTING, INC.
CTC is a full service investment consulting firm providing advice and
analysis on investment policy, asset allocation, manager selection and
performance monitoring. CTC is a wholly-owned subsidiary of U.S. Trust and is
registered as an investment adviser under the Advisers Act. It maintains offices
in Portland, Oregon, Tacoma, Washington and New York City. CTC's clients include
wealthy family groups, corporate pension and profit sharing trusts, endowments,
and foundations, and its clients' portfolios range in size from $10 million to
over $1 billion. Ralph C. Rittenour, Jr. (co-founder of the firm) and Holly F.
D'Annunzio direct CTC's consulting activities.
CTC has extensive experience in alternative investments and employs
qualitative and quantitative analytical processes to identify and monitor
non-traditional managers. To that end, CTC has a research department dedicated
to locating, recommending and monitoring
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nontraditional investment activities. The nontraditional investment research
department is currently comprised of six research professionals; the senior
members of the group have been researching and investing clients' assets in
hedge funds since the early 1990s. Today, CTC's clients have invested
approximately $500 million of their assets with 70 private investment fund
managers that have been selected and monitored by CTC. In addition, CTC's
clients have commitments totaling approximately $500 million to private equity
portfolios.
CAPITAL ACCOUNTS AND ALLOCATIONS
CAPITAL ACCOUNTS
The Company will maintain a separate capital account for each Member
(including the Advisor or its affiliates in respect of any capital contribution
to the Company by the Advisor or an affiliate, as a Member), which will have an
opening balance equal to the Member's initial contribution to the capital of the
Company. Each Member's capital account will be increased by the sum of the
amount of cash and the value of any securities constituting additional
contributions by the Member to the capital of the Company, plus any amounts
credited to the Member's capital account as described above with respect to
organization expenses or as described below. Similarly, each Member's capital
account will be reduced by the sum of the amount of any repurchase by the
Company of the Interest, or portion thereof, of the Member, plus the amount of
any distributions to the Member which are not reinvested, plus any amounts
debited against the Member's capital account as described below.
Capital accounts of Members 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 the first
to occur of the following: (1) the last day of a fiscal year; (2) the last day
of a taxable year; (3) the day preceding any day on which a contribution to the
capital of the Company is made; (4) any day on which the Company repurchases any
Interest or portion of an Interest of any Member; or (5) any day on which any
amount is credited to or debited against the capital account of any Member other
than an amount to be credited to or debited against the capital accounts of all
Members in accordance with their respective investment percentages. An
investment percentage will be determined for each Member as of the start of each
fiscal period by dividing the balance of the Member's capital account as of the
commencement of the period by the sum of the balances of all capital accounts of
all Members as of that date.
ALLOCATION OF NET PROFITS AND NET LOSSES
Net profits or net losses of the Company for each fiscal period will be
allocated among and credited to or debited against the capital accounts of all
Members as of the last day of the fiscal period in accordance with Members'
respective investment percentages for the fiscal period. Net profits or net
losses will be measured as the net change in the value of the net assets of the
Company (including any net change in unrealized appreciation or depreciation of
investments and realized income and gains or losses and accrued expenses),
before giving effect
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to any repurchases by the Company of Interests or portions thereof, and
excluding the amount of any items to be allocated among the capital accounts of
the Members other than in accordance with the Members' respective investment
percentages.
Allocations for Federal income tax purposes generally will be made among
the Members so as to reflect equitably amounts credited or debited to each
Member's capital account for the current and prior fiscal years. (See "Tax
Aspects--Allocation of Profits and Losses.")
ALLOCATION OF SPECIAL ITEMS - CERTAIN WITHHOLDING TAXES AND OTHER EXPENDITURES
Withholding taxes or other tax obligations incurred by the Company which
are attributable to any Member will be debited against the capital account of
that Member as of the close of the fiscal period during which the Company paid
those obligations, and any amounts then or thereafter distributable to the
Member will be reduced by the amount of those taxes. If the amount of those
taxes is greater than the distributable amounts, then the Member and any
successor to the Member's Interest is required to pay upon demand to the
Company, as a contribution to the capital of the Company, the amount of the
excess. The Company is not obligated to apply for or obtain a reduction of or
exemption from withholding tax on behalf of any Member, although in the event
that the Company determines that a Member is eligible for a refund of any
withholding tax, it may, at the request and expense of that Member, assist the
Member in applying for the refund.
Generally, any expenditures payable by the Company, to the extent paid or
withheld on behalf of, or by reason of particular circumstances applicable to,
one or more, but fewer than all of the Members, will be charged to only those
Members on whose behalf the payments are made or whose particular circumstances
gave rise to the payments. These charges will be debited to the capital accounts
of the applicable Members as of the close of the fiscal period during which the
items were paid or accrued by the Company.
RESERVES
Appropriate reserves may be created, accrued and charged against net assets
and proportionately against the capital accounts of the Members for contingent
liabilities as of the date the contingent liabilities become known to the
Company. Reserves will be in such amounts (subject to increase or reduction)
which the Company 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
Members at the time when the reserve is created, increased or decreased, as the
case may be; provided, however, that if the 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 those Members, the amount of the reserve, increase, or
decrease shall instead be charged or credited to those investors who were
Members at the time, as determined by the Company, 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.
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NET ASSET VALUATION
The value of the net assets of the Company will be determined as of the
close of business at the end of any fiscal period in accordance with the
procedures set forth below or as may be determined from time to time pursuant to
policies established by the Board of Managers.
The Company will value interests in Investment Funds not managed by the
Subadvisors at fair value, which ordinarily will be the value determined by
their Investment Managers in accordance with the policies established by the
relevant Investment Fund.
If Subadvisors are engaged to manage the Company's assets, or if the
Company holds any securities other than interests in Investment Funds, the
Company will value the portfolio securities of the Investments Funds managed by
the Subadvisors or held by the Company as follows:
Domestic exchange traded and NASDAQ listed equity securities (other than
options) will be valued at their last composite sale prices as reported on the
exchanges where those securities are traded. If no sales of those 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 those exchanges. Securities traded on a
foreign securities exchange will be valued at their last sale prices on the
exchange where the 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 that exchange. Listed options will be valued at their bid prices (or
ask prices in the case of listed options held short) 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 those 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 Board of
Managers.
Debt securities (other than convertible debt securities) will be valued in
accordance with the procedures described above, which with respect to these
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 Board of Managers will periodically monitor the
reasonableness of valuations provided by the pricing service. Such debt
securities with remaining maturities of 60 days or less will, absent unusual
circumstances, be valued at amortized cost, so long as this method of valuation
is determined by the Board of Managers to represent fair value.
If in the view of the Advisor, the bid price of a listed option or debt
security (or ask price in the case of any such security held short) does not
fairly reflect the market value of the security, the Advisor may request a
valuation committee comprised of two Managers to instead adopt procedures to
value the security at fair value. In any such situation, the valuation
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committee will consider the recommendation of the Advisor, and, if it determines
in good faith that an override of the value assigned to the security under the
procedures described above is warranted, will adopt procedures for purposes of
determining the fair value of the security.
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 foreign 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 foreign securities and exchange rates may be affected by events occurring
between the time as of which determination of values or exchange rates are made
and the time as of which the net asset value of the Company is determined. When
an event materially affects the values of securities held by the Company 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 Board of Managers.
Prospective investors should be aware that situations involving
uncertainties as to the valuation of portfolio positions could have an adverse
effect on the Company's net assets if the Board's judgments regarding
appropriate valuations should prove incorrect.
SUBSCRIPTIONS FOR INTERESTS
SUBSCRIPTION TERMS
The Board of Managers may accept initial and additional subscriptions for
Interests as of the first day of each calendar quarter; provided, however, that
upon delivery to the Board of Managers of a letter from counsel to the Advisor
that the banking laws do not prevent the Company from issuing Interests more
often than quarterly, the Company may, in the discretion of the Board of
Managers, offer Interests more frequently. All subscriptions are subject to the
receipt of cleared funds prior to the applicable subscription date in the full
amount of the subscription plus the New Account Fee (described below), although
the Board of Managers may accept, in its sole discretion, a subscription prior
to receipt of cleared funds. The investor must also submit a completed
subscription document before the applicable subscription date. The Company
reserves the right to reject any subscription for Interests and the Board of
Managers may, in its sole discretion, suspend subscriptions for Interests at any
time.
The minimum initial investment in the Company from each investor is
$250,000, and the minimum additional investment in the Company is $25,000. The
minimum initial and additional investments may be reduced by the Board of
Managers. Interests may not be purchased by nonresident aliens, foreign
corporations, foreign partnerships, foreign trusts or foreign estates, all as
defined in the Internal Revenue Code of 1986, as amended (the "Code"). In
addition, because the Company may generate "unrelated business taxable income"
("UBTI"), charitable remainder trusts may not want to purchase Interests 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.
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Except as otherwise permitted by the Board of Managers, initial and any
additional contributions to the capital of the Company by any Member will be
payable in cash, and all contributions must be transmitted by the time and in
the manner that is specified in the subscription documents of the Company.
Initial and any additional contributions to the capital of the Company will be
payable in one installment. Although the Fund may accept contributions of
securities in the sole discretion of the Board of Managers, the Company has no
present intention of accepting contributions of securities. If the Company were
to accept a contribution of securities, the securities would be valued in the
same manner as the Company values its other assets. (See "Capital Accounts and
Allocations--Net Asset Valuation.")
Upon admission to the Company, each Member will pay to the Advisor a
special one-time New Account Fee to offset the Advisor's administrative costs of
establishing accounts for investors and reviewing subscription applications and
organizational costs in the amount of $5,000. The Advisor may, in its sole
discretion, waive all or a portion of the New Account Fee charged to any Member
that has established multiple related accounts.
Each new Member must agree to be bound by all of the terms of the Company
Agreement. Each potential investor must also represent and warrant in a
subscription agreement, among other things, that the investor is purchasing an
Interest for its own account, and not with a view to the distribution,
assignment, transfer or other disposition of the Interest.
ELIGIBLE INVESTORS
Each prospective investor will be required to certify that the Interest
subscribed for is being acquired for the account of an "accredited investor" as
defined in Regulation D under the 1933 Act, and that the investor (as well as
each of the investor's beneficial owners under certain circumstances) has a net
worth of at least $1.5 million or such greater amount as may be required by
applicable law or by the Board of Managers, in its sole discretion. To qualify
as an accredited investor, an individual investor must have (i) a net worth (or
joint net worth with the investor's spouse) immediately prior to the time of
subscription in excess of $1 million or (ii) had an income in excess of $200,000
(or joint income with the investor's spouse in excess of $300,000) in each of
the two preceding years and has a reasonable expectation of reaching the same
income level in the current year. Corporations, partnerships, trusts and other
entities will generally be required to have total assets in excess of $5
million. Existing Members who subscribe for additional Interests will be
required to meet the foregoing eligibility criteria at the time of the
additional subscription. The relevant investor qualifications are set forth in
the subscription agreement that must be completed by each prospective investor.
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REDEMPTIONS, REPURCHASES OF
INTERESTS AND TRANSFERS
NO RIGHT OF REDEMPTION
No Member or other person holding an Interest or a portion of an Interest
acquired from a Member will have the right to require the Company to redeem that
Interest or portion thereof. There is no public market for Interests, 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
Company, as described below.
REPURCHASES OF INTERESTS
The Board of Managers may, from time to time and in its sole discretion,
determine to cause the Company to repurchase Interests or portions thereof from
Members pursuant to written tenders by Members at such times and on such terms
and conditions as it may determine. In determining whether the Company should
offer to repurchase Interests or portions thereof from Members, the Board of
Managers will consider the recommendation of the Advisor. The Advisor expects
that it will recommend to the Board of Managers that the Company offer to
repurchase Interests from Members on June 30, 2001. Thereafter, the Advisor
expects that generally it will recommend to the Board of Managers that the
Company offer to repurchase Interests from Members twice each year, effective
June 30 and December 31. The Board of Managers will also consider the following
factors, among others, in making this determination:
o whether any Members have requested to tender Interests or portions
thereof to the Company;
o the liquidity of the Company's assets;
o the investment plans and working capital requirements of the Company;
o the relative economies of scale with respect to the size of the
Company;
o the history of the Company in repurchasing Interests or portions
thereof;
o the economic condition of the securities markets; and
o the anticipated tax consequences of any proposed repurchases of
Interests or portions thereof.
The Company will repurchase Interests or portions thereof from Members
pursuant to written tenders on terms and conditions that the Board of Managers
determines to be fair to the Company and to all Members or persons holding
Interests acquired from Members, or to one or more classes of Members, as
applicable. The value of a Member's Interest (or the portion thereof) that is
being repurchased is equal to the value of the Member's capital account
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(or the portion thereof being repurchased) as of the Valuation Date, after
giving effect to all allocations that are made as of such date. When the Board
of Managers determines that the Company shall repurchase Interests or portions
thereof, notice will be provided to Members describing the terms thereof,
containing information Members should consider in deciding whether to
participate in the repurchase opportunity and containing information on how to
participate. Members 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 Interests by contacting the Advisor during the
period.
The Company Agreement provides that the Company shall be dissolved if the
Interest of any Member that has submitted a written request for the repurchase
of its entire Interest by the Company, in accordance with the terms of the
Company Agreement, is not repurchased by the Company within a period of two
years of the date of the request.
Repurchases of Interests or portions thereof from Members by the Company
may be made, in the discretion of the Company, and may be paid in cash or by the
distribution of securities in kind or partly in cash and partly in kind.
However, the Company does not expect to distribute securities in-kind except in
the unlikely event that making a cash payment would result in a material adverse
effect on the Company or on Members not tendering Interests for repurchase.
Repurchases will be effective after receipt and acceptance by the Company of all
eligible written tenders of Interests or portions thereof from Members. Any
in-kind distribution of securities will consist of marketable securities traded
on an established securities exchange (valued in accordance with the Company
Agreement), which will be distributed to all tendering Members on a pari passu
basis. The Company does not impose any charges in connection with repurchases of
Interests or portion of Interests.
Due to liquidity restraints associated with the Company's investments in
Investment Funds and the fact that the Company may have to effect withdrawals
from those funds to pay for Interests being repurchased, the Company presently
expects to employ the following repurchase procedures:
1. A Member choosing to tender an Interest (or a portion thereof) for
repurchase must do so by the date specified in the notice describing
the terms of the offer (the "Expiration Date") which generally will be
one month before the date as of which Interests are to be repurchased.
The Interests (or portions thereof) will be valued as of the date on
which Interests are to be repurchased (the "Valuation Date"), which is
generally expected to be either June 30 or December 31;
2. Promptly after the Expiration Date, the Company will give to each
Member whose Interest (or portion thereof) has been accepted for
repurchase a promissory note (the "Promissory Note") entitling the
Member to be paid an amount equal to the value, determined as of the
Valuation Date, of the repurchased Interest (or portion thereof). The
determination of the value of Interests as of the Valuation Date is
subject to adjustment based upon the results of next annual audit of
the Company's financial statements).
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3. The Promissory Note, which will be non-interest bearing and
non-transferable, is expected to contain terms providing for payment
at two separate times.
The first payment (the "Initial Payment") will be in an amount
equal to at least 90% of the estimated value of the repurchased
Interest (or portion thereof), determined as of the Valuation
Date. The Initial Payment will be made as of the later of (a)
within 30 days after the Valuation Date, or (b) if the Company
has requested withdrawals of its capital from any Investment
Funds in order to fund the repurchase of Interests, within 10
business days after the Company has received at least 90% of the
aggregate amount withdrawn by the Company from such Investment
Funds.
The second and final payment (the "Contingent Payment") is
expected to be in an amount equal to the excess, if any, of (a)
the value of the repurchased Interest (or portion thereof),
determined as of the Valuation Date and based upon the results of
the annual audit of the Company's financial statements for the
year in which the Valuation Date falls, over (b) Initial Payment.
It is anticipated that the annual audit of the Company's
financial statements will be completed within 60 days after the
end of each fiscal year of the Company and that the Contingent
Payment will be made promptly after the completion of the audit.
4. Although the amounts required to be paid by the Company under the
Promissory Note will generally be paid in cash, the Company may under
certain limited circumstances noted above pay all or a portion of the
amounts due by the in-kind distribution of marketable securities.
Repurchases of Interests by the Company are subject to certain regulatory
requirements imposed by SEC rules. The Company believes that the repurchase
procedures described above comply with these requirements. However, if
modification of the Company's repurchase procedures is deemed necessary to
comply with regulatory requirements, the Board of Managers will adopt revised
procedures designed to provide Members substantially the same liquidity for
Interests as would be available under the procedures described above.
Upon its acceptance of tendered Interests for repurchase, the Company will
maintain daily on its books a segregated account consisting of (i) cash, (ii)
liquid securities or (iii) interests in Investment Funds that the Company has
requested be withdrawn (or any combination of the foregoing), in an amount equal
to the aggregate estimated unpaid dollar amount of the promissory notes issued
to Members tendering Interests.
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Payment for repurchased Interests may require the Company to liquidate
portfolio holdings earlier than the Advisor would otherwise liquidate these
holdings, potentially resulting in losses, and may increase the Company's
portfolio turnover. The Advisor intends to take measures (subject to such
policies as may be established by the Board of Managers) to attempt to avoid or
minimize potential losses and turnover resulting from the repurchase of
Interests.
A Member who tenders for repurchase only a portion of such Member's
Interest will be required to maintain a capital account balance of at least
$250,000. If a Member tenders an amount that would cause the Member's capital
account balance to fall below the required minimum, the Company reserves the
right to reduce the amount to be purchased from such Member so that the required
minimum balance is maintained.
The Company may repurchase an Interest or portion thereof of a Member or
any person acquiring an Interest or portion thereof from or through a Member in
the event that:
o the Interest or a portion thereof has been transferred or the Interest
or a portion thereof has vested in any person by operation of law as
the result of the death, divorce, dissolution, bankruptcy or
incompetency of a Member;
o ownership of the Interest by a Member or other person will cause the
Company to be in violation of, or require registration of any Interest
or portion thereof under, or subject the Company to additional
registration or regulation under, the securities, commodities or other
laws of the United States or any other relevant jurisdiction;
o continued ownership of the Interest may be harmful or injurious to the
business or reputation of the Company, the Board of Managers or the
Advisor, or may subject the Company or any Members to an undue risk of
adverse tax or other fiscal consequences;
o any of the representations and warranties made by a Member in
connection with the acquisition of an Interest or portion thereof was
not true when made or has ceased to be true; or
o it would be in the best interests of the Company for the Company to
repurchase the Interest or a portion thereof.
In the event that the Advisor or another U.S. Trust Affiliate holds an
Interest in its capacity as a Member, such Interest or a portion thereof may be
tendered for repurchase in connection with any repurchase offer made by the
Company.
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TRANSFERS OF INTERESTS
Except as otherwise described below, no person shall become a substituted
Member without the written consent of the Board of Managers, which consent may
be withheld for any reason in its sole discretion. Interests held by Members may
be transferred only (i) by operation of law pursuant to the death, divorce,
bankruptcy, insolvency or dissolution of a Member or (ii) under certain limited
circumstances, with the written consent of the Board of Managers (which may be
withheld in its sole discretion and is expected to be granted, if at all, only
under extenuating circumstances). The Board of Managers generally may not
consent to a transfer unless the following conditions are met: (i) the
transferring Member has been a Member for at least six months; (ii) the proposed
transfer is to be made on the effective date of an offer by the Company to
repurchase Interests; and (iii) the transfer is (x) one in which the tax basis
of the Interest in the hands of the transferee is determined, in whole or in
part, by reference to its tax basis in the hands of the transferring Member
(e.g., certain transfers to affiliates, gifts and contributions to family
entities), (y) to members of the transferring Member's immediate family
(siblings, spouse, parents and children), or (z) a distribution from a qualified
retirement plan or an individual retirement account, unless the Company consults
with counsel to the Company and such counsel confirms that the transfer will not
cause the Company to be treated as a "publicly traded partnership" taxable as a
corporation. Notice to the Company of any proposed transfer must include
evidence satisfactory to the Board of Managers that the proposed transfer is
exempt from registration under the 1933 Act, that the proposed transferee meets
any requirements imposed by the Company 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 $1.5 million, and must be accompanied by a
properly completed subscription agreement. The Board of Managers may not consent
to a transfer of an Interest by a Member unless such transfer is to a single
transferee or after the transfer of a portion of the Interest, the balance of
the capital account of each of the transferee and transferor is not less than
$250,000. A Member who transfers an Interest may be charged reasonable expenses,
including attorneys' and accountants' fees, incurred by the Company in
connection with the transfer.
Any transferee that acquires an Interest or portion thereof in the Company
by operation of law as the result of the death, divorce, dissolution, bankruptcy
or incompetency of a Member or otherwise, shall be entitled to the allocations
and distributions allocable to the Interest so acquired, to transfer the
Interest in accordance with the terms of the Company Agreement and to tender the
Interest for repurchase by the Company, but shall not be entitled to the other
rights of a Member unless and until the transferee becomes a substituted Member
as provided in the Company Agreement. If a Member transfers an Interest or
portion thereof with the approval of the Board of Managers, the Company shall
promptly take all necessary actions so that each transferee or successor to whom
the Interest or portion thereof is transferred is admitted to the Company as a
Member.
By subscribing for an Interest, each Member agrees to indemnify and hold
harmless the Company, the Board of Managers, the Advisor, each other Member and
any affiliate of the foregoing against all losses, claims, damages, liabilities,
costs and expenses (including
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legal or other expenses incurred in investigating or defending against any
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 that Member in
violation of these provisions or any misrepresentation made by that Member in
connection with any such transfer.
TAX ASPECTS
The following is a summary of certain aspects of the income taxation of the
Company and its Members which should be considered by a prospective Member. The
Company 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 Company, nor has it obtained an opinion of counsel
with respect to any tax issues.
This summary of certain aspects of the Federal income tax treatment of the
Company 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 Company. 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 MEMBER SHOULD CONSULT WITH ITS OWN TAX ADVISOR IN ORDER
FULLY TO UNDERSTAND THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN THE COMPANY.
In addition to the particular matters set forth in this section, tax-exempt
organizations should review carefully those sections of the Memorandum regarding
liquidity and other financial matters to ascertain whether the investment
objectives of the Company are consistent with their overall investment plans.
Each prospective tax-exempt Member is urged to consult its own counsel regarding
the acquisition of Interests.
Tax Treatment of Company Operations
Classification of the Company. The Company will receive an opinion of
Schulte Roth & Zabel LLP, counsel to the Company, that under the provisions of
the Code and the Regulations, as in effect on the date of the opinion, as well
as under the relevant authority interpreting the Code and the Regulations, and
based upon certain representations of the Board of Managers, the Company 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
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Company will not be traded on an established securities market. Regulations
concerning the classification of partnerships as publicly traded partnerships
(the "Section 7704 Regulations") 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 Company may 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 Section 7704 Regulations if
the Company has more than 100 Members.
The Section 7704 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 Section 7704 Regulations. Schulte Roth & Zabel LLP also
will render its opinion that, under this "facts and circumstances" test, and
based upon the anticipated operations of the Company as well as the legislative
history to Section 7704, the text of the Section 7704 Regulations and certain
representations of the Board of Managers, the interests in the Company will not
be readily tradable on a secondary market (or the substantial equivalent
thereof) and, therefore, that the Company 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 Company 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 Company would be subject to corporate
income tax when recognized by the Company; distributions of such income, other
than in certain redemptions of Interests, would be treated as dividend income
when received by the Members to the extent of the current or accumulated
earnings and profits of the Company; and Members would not be entitled to report
profits or losses realized by the Company.
UNLESS OTHERWISE INDICATED, REFERENCES IN THE FOLLOWING DISCUSSION OF THE
TAX CONSEQUENCES OF COMPANY INVESTMENTS, ACTIVITIES, INCOME, GAIN AND LOSS,
INCLUDE THE DIRECT INVESTMENTS, ACTIVITIES, INCOME, GAIN AND LOSS OF THE
COMPANY, AND THOSE INDIRECTLY ATTRIBUTABLE TO THE COMPANY AS A RESULT OF IT
BEING AN INVESTOR IN AN "INVESTMENT FUND".
As an entity taxed as a partnership, the Company is not itself subject to
Federal income tax. The Company files an annual partnership information return
with the Service which reports the results of operations. Each Member is
required to report separately on its income tax return its distributive share of
the Company's net long-term capital gain or loss, net short-term capital gain or
loss and all other items of ordinary income or loss. Each Member is taxed on its
distributive share of the Company's taxable income and gain regardless of
whether it has received or will receive a distribution from the Company.
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Certain partnerships such as the Company with 100 or more partners may
elect to have a special set of rules and procedures apply that are intended to
simplify the calculation and reporting of certain partnership items, and the
handling of partnership audits. Among the items that would be affected by the
election are the calculation of long-term capital gains and the tax treatment of
expenses, if any, that are treated as itemized deductions by the partners. If
the Company is eligible, the Board of Managers may elect to have such rules and
procedures apply to the Company if it believes that they may be beneficial to a
majority of the Members. Once the election is made, it cannot be revoked without
the consent of the Service. There can be no assurance that, if such an election
is made, the anticipated benefits will be realized. Furthermore, in certain
cases, it is possible that the election would have an adverse effect on the
Members.
Allocation of Profits and Losses. Under the Company Agreement, the
Company's net capital appreciation or net capital depreciation for each
accounting period is allocated among the Members and to their capital accounts
without regard to the amount of income or loss actually recognized by the
Company for Federal income tax purposes. The Company Agreement provides that
items of income, deduction, gain, loss or credit actually recognized by the
Company for each fiscal year generally are to be allocated for income tax
purposes among the Members pursuant to Regulations issued under Sections 704(b)
and 704(c) of the Code, based upon amounts of the Company's net capital
appreciation or net capital depreciation allocated to each Member's capital
account for the current and prior fiscal years.
Under the Company Agreement, the Board of Managers has the discretion to
allocate specially an amount of the Company's capital gain (including short-term
capital gain) for Federal income tax purposes to a withdrawing Member to the
extent that the Member's capital account exceeds its Federal income tax basis in
its partnership interest. There can be no assurance that, if the Board of
Managers makes such a special allocation, the Service will accept such
allocation. If such allocation is successfully challenged by the Service, the
Company's gains allocable to the remaining Members would be increased.
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 Company Agreement, at the request of a
Member, the Board of Managers, in its sole discretion, may cause the Company to
make such an election. Any such election, once made, cannot be revoked without
the Service's consent. The actual effect of any such election may depend upon
whether any Investment Fund also makes such an election. As a result of the
complexity and added expense of the tax accounting required to implement such an
election, the Board of Managers presently does not intend to make such election.
The Board of Managers decides how to report the partnership items on the
Company's tax returns, and all Members 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. Given the uncertainty and complexity of
the tax laws, it is possible that the
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Service may not agree with the manner in which the Company's items have been
reported. In the event the income tax returns of the Company are audited by the
Service, the tax treatment of the Company's income and deductions generally is
determined at the limited liability company level in a single proceeding rather
than by individual audits of the Members. A Member designated by the Board of
Managers as the "Tax Matters Partner" will have considerable authority to make
decisions affecting the tax treatment and procedural rights of all Members. In
addition, the Tax Matters Partner will have the authority to bind certain
Members to settlement agreements and the right on behalf of all Members to
extend the statute of limitations relating to the Members' tax liabilities with
respect to Company items.
Tax Consequences to a Withdrawing Member
A Member receiving a cash liquidating distribution from the Company, in
connection with a complete withdrawal from the Company, generally will recognize
capital gain or loss to the extent of the difference between the proceeds
received by such Member and such Member's adjusted tax basis in its partnership
interest. Such capital gain or loss will be short-term or long-term depending
upon the Member's holding period for its interest in the Company. However, a
withdrawing Member will recognize ordinary income to the extent such Member's
allocable share of the Company's "unrealized receivables" exceeds the Member'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 Company will be treated as an unrealized receivable,
with respect to which a withdrawing Member would recognize ordinary income. A
Member receiving a cash nonliquidating distribution will recognize income in a
similar manner only to the extent that the amount of the distribution exceeds
such Member's adjusted tax basis in its partnership interest.
As discussed above, the Company Agreement provides that the Board of
Managers may specially allocate items of Company capital gain (including
short-term capital gain) to a withdrawing Member to the extent its capital
account would otherwise exceed its adjusted tax basis in its partnership
interest. Such a special allocation may result in the withdrawing Member
recognizing capital gain, which may include short-term gain, in the Member's
last taxable year in the Company, thereby reducing the amount of long-term
capital gain recognized during the tax year in which it receives its liquidating
distribution upon withdrawal.
Distributions of Property. A partner's receipt of a distribution of
property from a partnership is generally not taxable. However, under Section 731
of the Code, a distribution consisting of marketable securities generally is
treated as a distribution of cash (rather than property) unless the distributing
partnership is an "investment partnership" within the meaning of Section
731(c)(3)(C)(i) and the recipient is an "eligible partner" within the meaning of
Section 731(c)(3)(C)(iii). The Company will determine at the appropriate time
whether it qualifies as an "investment partnership." Assuming it so qualifies,
if a Member is an "eligible partner", which term should include a Member whose
contributions to the Company consisted solely of cash, the recharacterization
rule described above would not apply.
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Tax Treatment of Company Investments
In General. The Company 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 an investor on the
sale of securities are capital gains and losses. Thus, subject to the treatment
of certain currency exchange gains as ordinary income (See "Currency
Fluctuations--'Section 988' Gains or Losses" below) and certain other
transactions described below, the Company expects that its gains and losses from
its securities transactions typically will be capital gains and capital losses.
These capital gains and losses may be long-term or short-term depending, in
general, upon the length of time the Company maintains a particular investment
position and, in some cases, upon the nature of the transaction. Property held
for more than one year 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
(defined below) may serve to alter the manner in which the Company's holding
period for a security is determined or may otherwise affect the characterization
as short-term or long-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 Company.(1)
The maximum ordinary income tax rate for individuals is 39.6% and, in
general, the maximum individual income tax rate for long-term capital gains is
20% (unless the taxpayer elects to be taxed at ordinary rates--See "Limitation
on Deductibility of Interest" below), although in all cases the actual rates may
be higher due to the phase out of certain tax deductions, exemptions and
credits. 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 Company may realize ordinary income from dividends and accruals of
interest on securities. The Company may hold debt obligations with "original
issue discount." In such case, the Company 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 Company may also acquire debt obligations with
"market discount." Upon disposition of such an obligation, the Company 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 Company. The Company may realize ordinary income or loss with respect to its
investments in partnerships
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(1) Generally, in the absence of Regulations requiring it, the Company will not
treat positions held through different investment advisory agreements or
Investment Funds as offsetting positions for purposes of the straddle
rules.
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engaged in a trade or business. Income or loss from transactions involving
certain derivative instruments, such as swap transactions, will also generally
constitute ordinary income or loss. In addition, amounts, if any, payable by the
Company in connection with equity swaps, interest rate swaps, caps, floors and
collars likely would be considered "miscellaneous itemized deductions" which,
for a noncorporate, non-managing member may be subject to restrictions on their
deductibility. See "Deductibility of Company Investment Expenditures by
Noncorporate Members" below. Moreover, gain recognized from certain "conversion
transactions" will be treated as ordinary income.(2)
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 Company 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 Company'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 Company 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 Company accrues interest or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the Company
actually collects such receivables or pays such liabilities may be treated as
ordinary income or ordinary loss.
As indicated above (See "Types of Investments and Related Risk Factors"),
the Company may acquire foreign currency forward contracts, enter into foreign
currency futures contracts and acquire put and call options on foreign
currencies. Generally, foreign currency regulated futures contracts and option
contracts that qualify as "Section 1256 Contracts" (See "Section 1256 Contracts"
below), will not be subject to ordinary income or loss treatment under Section
988. However, if the Company acquires currency futures contracts or option
contracts that are not Section 1256 Contracts, or any currency forward
contracts, any gain or loss realized by the Company with respect to such
instruments will be ordinary, unless (i) the contract is a capital asset in the
hands of the Company and is not a part of a straddle transaction and (ii) an
election is made (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.
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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.
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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. A
Section 1256 Contract includes certain regulated futures contracts, certain
foreign currency forward contracts, and certain options contracts. Under these
rules, Section 1256 Contracts held by the Company at the end of each taxable
year of the Company are treated for Federal income tax purposes as if they were
sold by the Company 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
Company in computing its taxable income for such year. If a Section 1256
Contract held by the Company 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 Company (and any
Investment Fund) 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
Company 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 Company's hands. Except with
respect to certain situations where the property used to close a short sale has
a long-term holding period on the date the short sale is entered into, gains on
short sales generally are short-term capital gains. 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 Company for more than
one year. In addition, these rules may also terminate the running of the holding
period of "substantially identical property" held by the Company.
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Gain or loss on a short sale will generally not be realized until such time
that the short sale is closed. However, if the Company holds a short sale
position with respect to stock, certain debt obligations or partnership
interests that has appreciated in value and then acquires property that is the
same as or substantially identical to the property sold short, the Company
generally will recognize gain on the date it acquires such property as if the
short sale were closed on such date with such property. Similarly, if the
Company holds an appreciated financial position with respect to stock, certain
debt obligations, or partnership interests and then enters into a short sale
with respect to the same or substantially identical property, the Company
generally will recognize gain as if the appreciated financial position were sold
at its fair market value on the date it enters into the short sale. The
subsequent holding period for any appreciated financial position that is subject
to these constructive sale rules will be determined as if such position were
acquired on the date of the constructive sale.
Effect of Straddle Rules on Members' Securities Positions. The Service may
treat certain positions in securities held (directly or indirectly) by a Member
and its indirect interest in similar securities held by the Company as
"straddles" for Federal income tax purposes. The application of the "straddle"
rules in such a case could affect a Member's holding period for the securities
involved and may defer the recognition of losses with respect to such
securities.(3)
Limitation on Deductibility of Interest and Short Sale Expenses. For
noncorporate taxpayers, Section 163(d) of the Code limits the deduction for
"investment interest" (i.e., interest or short sale expenses for "indebtedness
properly allocable to property held for investment"). Investment interest is not
deductible in the current year to the extent that it exceeds the taxpayer's "net
investment income," consisting of net gain and ordinary income derived from
investments in the current year less certain directly connected expenses (other
than interest or short sale expenses). For this purpose, any long-term capital
gain is excluded from net investment income unless the taxpayer elects to pay
tax on such amount at ordinary income tax rates.
For purposes of this provision, the Company's activities will be treated as
giving rise to investment income for a Member, and the investment interest
limitation would apply to a noncorporate Member's share of the interest and
short sale expenses attributable to the Company's operation. In such case, a
noncorporate Member would be denied a deduction for all or part of that portion
of its distributive share of the Company's ordinary losses attributable to
interest and short sale expenses unless it had sufficient investment income from
all sources including the Company. A Member 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
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(3) The Company will not generally be in a position to furnish to Members
information regarding the securities positions of its Investment Funds
which would permit a Member to determine whether its tranactions in
securities, which are also held by such Investment Funds, should be treated
as offsetting positions for purposes of the straddle rules.
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paid by a noncorporate Member on money borrowed to finance its investment in the
Company. Potential investors are advised to consult with their own tax advisors
with respect to the application of the investment interest limitation in their
particular tax situations.
Deductibility of Company Investment Expenditures by Noncorporate Members.
Investment expenses (e.g., investment advisory fees) of an individual, trust or
estate are deductible only to the extent they exceed 2% of adjusted gross
income.(4) In addition, the Code further restricts the ability of an individual
with an adjusted gross income in excess of a specified amount (for 2000,
$128,950 or $64,475 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.
Pursuant to Temporary Regulations issued by the Treasury Department, these
limitations on deductibility should not apply to a noncorporate Member's share
of the trade or business expenses of the Company. These limitations will apply,
however, to a noncorporate Member's share of the investment expenses of the
Company (including the Advisor's Fee, and any fee payable to an Investment
Manager, to the extent such expenses are allocable to an Investment Fund that is
not in a trade or business within the meaning of the Code or to the investment
activity of the Company. The Company intends to treat its expenses attributable
to an Investment Fund that is engaged in trade or business within the meaning of
the Code or to the trading activity of the Company as not being subject to such
limitations, although there can be no assurance that the Service will agree.
The consequences of these limitations will vary depending upon the
particular tax situation of each taxpayer. Accordingly, noncorporate Members
should consult their tax advisors 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 Company's securities investment and trading
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(4) 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.
Members that are trusts or estates should consult their tax advisors as to
the applicability of this case to the investment expenses that are
allocated to them.
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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 non-managing member's share of such income and gain from the Company.
Income or loss attributable to the Company's investment in a partnership engaged
in a non-securities trade or business may constitute passive activity income or
loss.
"Phantom Income" From Company 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 Company in certain foreign corporations may cause a
Member to (i) recognize taxable income prior to the Company'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 or short-term
capital gain.
Foreign Taxes
It is possible that certain dividends and interest directly or indirectly
received by the Company from sources within foreign countries will be subject to
withholding taxes imposed by such countries. In addition, the Company or an
Investment Fund may also be subject to capital gains taxes in some of the
foreign countries where they purchase and sell securities. Tax treaties between
certain countries and the United States may reduce or eliminate such taxes. It
is impossible to predict in advance the rate of foreign tax the Company will
directly or indirectly pay since the amount of the Company's assets to be
invested in various countries is not known.
The Members will be informed by the Company as to their proportionate share
of the foreign taxes paid by the Company or an Investment Fund, which they will
be required to include in their income. The Members generally will be entitled
to claim either a credit (subject, however, to various limitations on foreign
tax credits) 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 Member that is tax exempt will
not ordinarily benefit from such credit or deduction.
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.(5) This type of income is exempt even if
it is realized from securities trading activity which constitutes a trade or
business.
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5 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.
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This general exemption from tax does not apply to the "unrelated business
taxable income" ("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 twelve-month period ending with the date of such disposition. With
respect to its investments in partnerships engaged in a trade or business, the
Company's income (or loss) from these investments may constitute UBTI.
The Company may incur "acquisition indebtedness" with respect to certain of
its transactions, such as the purchase of securities on margin. 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 Company
will treat its short sales of securities as not involving "acquisition
indebtedness" and therefore not resulting in UBTI.(6) To the extent the Company
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.
To the extent the Company recognizes 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 Company, an allocable portion of
deductions directly connected with the Company's debt-financed property is taken
into account. Thus, for instance, a percentage of 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 Company's "unrelated debt-financed income" is
complex and will depend in large part on the amount of leverage used by the
Company from time to time,(7) it is impossible to predict what percentage of the
Company's income and gains will be
----------
(6) Moreover, income realized from option writing and futures contract
transactions generally would not constitute UBTI.
(7) The calculation of a particular exempt organization's UBTI would also be
affected if it incurs indebtedness to finance its investment in the
Company. An exempt organization is required to make estimated tax payments
with respect to its UBTI.
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treated as UBTI for a Member which is an exempt organization. An exempt
organization's share of the income or gains of the Company which is treated as
UBTI may not be offset by losses of the exempt organization either from the
Company 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).
To the extent that the Company generates UBTI, the applicable Federal tax
rate for such a Member 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 Company will be required to report to a
Member which is an exempt organization information as to the portion of its
income and gains from the Company for each year which will be treated as UBTI.
The calculation of such amount with respect to transactions entered into by the
Company is highly complex, and there is no assurance that the Company's
calculation of UBTI will be accepted by the Service.
In general, if UBTI is allocated to an exempt organization such as a
qualified retirement plan or a private foundation, the portion of the Company'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 Company generally should not affect the tax-exempt status of
such an exempt organization.(8) 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 advisor with
respect to the tax consequences of receiving UBTI from the Company. (See "ERISA
Considerations.")
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 need for diversification within the foundation's
portfolio.
----------
(8) 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 Member should consult its tax adviser in this regard.
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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 Company would most probably be classified as a nonfunctionally
related asset. A determination that an interest in the Company is a
nonfunctionally related asset could conceivably cause cash flow problems for a
prospective Member 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 Company. Of course,
this factor would create less of a problem to the extent that the value of the
investment in the Company is not significant in relation to the value of other
assets held by a foundation.
In some instances, an investment in the Company 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 Company, 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 Company in order to avoid the imposition of
an excise tax. However, the excise tax will not apply if at least 95% of the
gross income from the Company is "passive" within the applicable provisions of
the Code and Regulations. Although there can be no assurance, the Board of
Managers believes that the Company will meet such 95% gross income test.
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 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.
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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 Company. State and local tax laws differ in the
treatment of limited liability companies such as the Company. A few
jurisdictions may impose entity level taxes on a limited liability company if it
is found to have sufficient contact with that jurisdiction. Such taxes are
frequently based on the income and capital of the entity that is allocated to
the jurisdiction. Although there can be no assurance, the Company intends to
conduct its activities so that it will not be subject to entity level taxation
by any state or local jurisdiction.
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 Member's distributive share of the taxable income or loss of the Company
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 Company acquires an interest may conduct business in
a jurisdiction which will subject to tax a Member's share of the partnership's
income from that business. Prospective investors should consult their tax
advisors with respect to the availability of a credit for such tax in the
jurisdiction in which that Member is a resident.
North Carolina Tax Disclosure
The Fund's North Carolina counsel has advised that under North Carolina
law, limited liability companies are subject to taxation based on their
classification for Federal income tax purposes. Accordingly, if a limited
liability company is classified as a partnership for Federal income tax purpose
and is "doing business" in North Carolina, then the limited liability company is
required to file a North Carolina partnership return, and the company and its
members are subject to tax in North Carolina to the same extent as a partnership
and its partners.
When a limited liability company "doing business" in North Carolina has one
or more nonresident members, the managing member is responsible for reporting
each nonresident member's share of income and, except in the case of certain
corporations, partnerships, trusts and estates, is required to compute and pay
the tax due for each nonresident member. The tax rate is the same as the tax
rate for single individuals. The managing member is authorized to withhold the
tax due from each nonresident member's share of limited liability company
income. If the nonresident member is a corporation, partnership, trust or
estate, the managing member is not required to pay the tax on that member's
share of limited liability income if the member signs an affirmation that the
member will pay the tax with its corporation, partnership, trust or estate
income tax return.
In determining whether a limited liability company whose principal business
activity is "investments" is "doing business" in North Carolina, all facts and
circumstances are considered. Determining factors include (a) the extent of the
company's business operations in North Carolina, including maintaining an
office, number of employees, property, bank transactions in North Carolina,
etc.; (b) the source of the company's principal income (interest
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and dividends versus gain from the sale of securities); (c) the length of time
securities are held (long-term holding of securities for capital appreciation
versus short-term trading for profit); and (d) the volume of transactions and
value of securities bought and sold.
If a limited liability company's only activities in North Carolina are in
the nature of an investment account in which securities are held for capital
appreciation and income, the receipt of dividends and interest and the
occasional sale of stocks and bonds does not constitute "doing business" and a
nonresident member does not include his or her distributive share of limited
liability company income in determining North Carolina taxable income (if any).
If the activities of the limited liability company are extensive, including
sales of securities with reasonable frequency, the limited liability company is
deemed to be "doing business" and a nonresident member must include his or her
distributive share of the company's income in North Carolina taxable income.
The Company does not believe it will be "doing business" in North Carolina
under the rules described above. However, that determination will be reviewed
periodically based on the Company's investment activities and other relevant
facts and circumstances.
ERISA CONSIDERATIONS
Persons who are fiduciaries with respect to an employee benefit plan, IRA,
Keogh plan or other arrangement subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or the Code (an "ERISA Plan") should
consider, among other things, the matters described below before determining
whether to invest in the Company.
ERISA imposes certain general and specific responsibilities on persons who
are fiduciaries with respect to an ERISA Plan, including prudence,
diversification, 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 Company, 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 Company
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 his responsibilities with regard to
selecting an investment or an investment course of action for such ERISA Plan,
the fiduciary may be held personally liable for losses incurred by the ERISA
Plan as a result of such breach.
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Because the Company will register as an investment company under the 1940
Act, the underlying assets of the Company should not be considered to be "plan
assets" of the ERISA Plans investing in the Company for purposes of ERISA's
fiduciary responsibility and prohibited transaction rules. Thus, neither the
Advisor nor any of the Investment Managers will be fiduciaries within the
meaning of ERISA.
The Board of Managers will require an ERISA Plan proposing to invest in the
Company to represent that it, and any fiduciaries responsible for the Plan's
investments, are aware of and understand the Company's investment objective,
policies and strategies, that the decision to invest plan assets in the Company
was made with appropriate consideration of relevant investment factors with
regard to the ERISA Plan and is consistent with the duties and responsibilities
imposed upon fiduciaries with regard to their investment decisions under ERISA.
Certain prospective Plan investors may currently maintain relationships
with the Advisor or the Investment Managers, or with other entities which are
affiliated with the Advisor or the Investment Managers. Each of such persons may
be deemed to be a party in interest to and/or a fiduciary of any ERISA Plan to
which it provides investment management, investment advisory or other services.
ERISA prohibits ERISA Plan assets to be used for the benefit of a party in
interest and also prohibits an ERISA Plan fiduciary from using its position to
cause the ERISA 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 Plan investors should consult with counsel to determine if
participation in the Company 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 Company was made by them as
fiduciaries that are independent of such affiliated persons, that are duly
authorized to make such investment decision and that have not relied on any
individualized advice or recommendation of such affiliated persons, as a primary
basis for the decision to invest in the Company.
The provisions of ERISA are subject to extensive and continuing
administrative and judicial interpretation and review. The discussion of ERISA
contained in this Confidential Memorandum, is, of necessity, general and may be
affected by future publication of regulations and rulings. Potential investors
should consult with their legal advisors regarding the consequences under ERISA
of the acquisition and ownership of Interests.
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ADDITIONAL INFORMATION AND SUMMARY OF LIMITED LIABILITY COMPANY AGREEMENT
The following is a summary description of additional items and of select
provisions of the Company Agreement which may not be described elsewhere in this
Confidential Memorandum. The description of such items and provisions is not
definitive and reference should be made to the complete text of the Company
Agreement, which is attached hereto as Appendix A.
MEMBER INTERESTS
Persons who purchase Interests in the offering being made hereby will be
Members. The Advisor and its affiliates may contribute capital to and maintain
an investment in the Company, and to that extent will be Members of the Company.
LIABILITY OF MEMBERS
Under Delaware law and the Company Agreement, each Member will be liable
for the debts and obligations of the Company only to the extent of any
contributions to the capital of the Company (plus any accretions in value
thereto prior to withdrawal) and a Member, in the sole discretion of the Board
of Managers, may be obligated to return to the Company amounts distributed to
the Member in accordance with the Company Agreement in certain circumstances
where after giving effect to the distribution, certain liabilities of the
Company exceed the fair market value of the Company's assets.
DUTY OF CARE OF THE MEMBER MANAGERS
The Company Agreement provides that a Manager shall not be liable to the
Company or any of the Members for any loss or damage occasioned by any act or
omission in the performance of the Manager's services as such in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the Manager's office. The Company Agreement
also contains provisions for the indemnification, to the extent permitted by
law, of a Manager by the Company (but not by the Members individually) against
any liability and expense to which the Manager may be liable which arise in
connection with the performance of the Manager's activities on behalf of the
Company. Managers shall not be personally liable to any Member for the repayment
of any positive balance in the Member's capital account or for contributions by
the Member to the capital of the Company or by reason of any change in the
Federal or state income tax laws applicable to the Company or its investors. The
rights of indemnification and exculpation provided under the Company Agreement
shall not be construed so as to provide for indemnification of a Manager 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, but shall be construed so as to effectuate the
applicable provisions of the Company Agreement to the fullest extent permitted
by law.
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AMENDMENT OF THE COMPANY AGREEMENT
The Company Agreement may generally be amended, in whole or in part, with
the approval of the Board of Managers (including a majority of the Independent
Managers, if required by the 1940 Act) and without the approval of the Members
unless the approval of Members is required by the 1940 Act. However, certain
amendments to the Company Agreement involving capital accounts and allocations
thereto may not be made without the written consent of any Member adversely
affected thereby or unless each Member has received written notice of the
amendment and any Member objecting to the amendment has been allowed a
reasonable opportunity (pursuant to any procedures as may be prescribed by the
Board of Managers) to tender its entire Interest for repurchase by the Company.
POWER OF ATTORNEY
By subscribing for an Interest, each Member will appoint each of the
Managers his or her attorney-in-fact for purposes of filing required
certificates and documents relating to the formation and maintenance of the
Company as a limited liability company under Delaware law or signing all
instruments effecting authorized changes in the Company or the Company Agreement
and conveyances and other instruments deemed necessary to effect the dissolution
or termination of the Company.
The power-of-attorney granted as part of each Member's subscription
agreement is a special power-of-attorney and is coupled with an interest in
favor of the Board of Managers and as such shall be irrevocable and will
continue in full force and effect notwithstanding the subsequent death or
incapacity of any Member granting the power-of-attorney, and shall survive the
delivery of a transfer by a Member of all or any portion of an Interest, except
that where the transferee thereof has been approved by the Board of Managers for
admission to the Company as a substitute Member, or upon the withdrawal of a
Member from the Company pursuant to a periodic tender or otherwise this
power-of-attorney given by the transferor shall terminate.
TERM, DISSOLUTION AND LIQUIDATION
The Company shall be dissolved:
o upon the affirmative vote to dissolve the Company by: (1) the Board of
Managers or (2) Members holding at least two-thirds (2/3) of the total
number of votes eligible to be cast by all Members;
o upon the expiration of any two year period which commences on the date
on which any Member has submitted a written notice to the Company
requesting the repurchase of its entire Interest by the Company if
that Interest has not been repurchased by the Company;
o upon the failure of Members to elect successor Managers at a meeting
called by the Advisor when no Manager remains to continue the business
of the Company; or
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o as required by operation of law.
Upon the occurrence of any event of dissolution, the Board of Managers or
the Advisor, acting as liquidator under appointment by the Board of Managers (or
another liquidator, if the Board of Managers does not appoint the Advisor to act
as liquidator or is unable to perform this function) is charged with winding up
the affairs of the Company 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 Loss."
Upon the liquidation of the Company, its assets will be distributed (1)
first to satisfy the debts, liabilities and obligations of the Company (other
than debts to Members) including actual or anticipated liquidation expenses, (2)
next to repay debts owing to the Members, and (3) finally to the Members
proportionately in accordance with the balances in their respective capital
accounts. Assets may be distributed in kind on a pro rata basis if the Board of
Managers or liquidator determines that the distribution of assets in kind would
be in the interests of the Members in facilitating an orderly liquidation.
REPORTS TO MEMBERS
The Company will furnish to Members as soon as practicable after the end of
each taxable year such information as is necessary for them to complete Federal
and state income tax or information returns, along with any other tax
information required by law. However, an Investment Manager's delay in providing
this information could delay the Company's preparation of tax information for
investors, which might require Members to seek extensions on the time to file
their tax returns, or could delay the preparation of the Company's annual
report. (See "Additional Risk Factors--Special Risks of Multi-Manager
Structure.") The Company anticipates sending to Members an unaudited semi-annual
and an audited annual report within 60 days after the close of the period for
which the report is being made, or as otherwise required by the 1940 Act.
Members also will be sent quarterly reports regarding the Company's operations
during each quarter. Any Member may request from the Advisor an estimate, based
on unaudited data, of the net asset value of the Company as of the end of any
calendar month.
FISCAL YEAR
For accounting purposes, the Company's fiscal year is the 12-month period
ending on March 31. The first fiscal year of the Company will commence on the
initial closing date and will end on March 31, 2001. The 12-month period ending
December 31 of each year will be the taxable year of the Company.
ACCOUNTANTS AND LEGAL COUNSEL
The Board of Managers has selected Ernst & Young LLP as the independent
public accountants of the Company. Ernst & Young LLP's principal business
address is located at 787 Seventh Avenue, 15th Floor, New York, New York.
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Schulte Roth & Zabel LLP, New York, New York, serves as legal counsel to
the Company. The firm also acts as legal counsel to the Advisor, Schwab, U.S.
Trust and their affiliates with respect to certain other matters. Stroock &
Stroock & Lavan LLP, New York, New York, acts as legal counsel to the
Independent Managers.
CUSTODIAN
U.S. Trust Company of North Carolina (the "Custodian") serves as the
custodian of the assets of the Company, and may maintain custody of such assets
with domestic and foreign subcustodians (which may be banks, trust companies,
securities depositories and clearing agencies), approved by the Board of
Managers of the Company in accordance with the requirements set forth in Section
17(f) of the 1940 Act and the rules adopted thereunder. Assets of the Company
are not held by the Advisor or commingled with the assets of other accounts,
except to the extent that securities may be held in the name of the Custodian or
a subcustodian in a securities depository, clearing agency or omnibus customer
account. The Custodian's principal business address is U.S. Trust Center, 301
North Elm Street, Greensboro, North Carolina 27401.
INQUIRIES
Inquiries concerning the Company and Interests (including information
concerning subscription and withdrawal procedures) should be directed to:
NCT Opportunities, Inc.
U.S. Trust Center
301 North Elm Street
Greensboro, North Carolina 27401
Telephone: (336) 273-8544
Telecopier: (336) 378-4436
For additional information contact:
Stephen C. Hassenfelt
Chairman and Chief Executive Officer
NCT Opportunities, Inc.
U.S. Trust Center
301 North Elm Street
Greensboro, North Carolina 27401
Telephone: (336) 273-8544
Telecopier: (336) 378-4436
* * * * *
All potential investors in the Company are encouraged to consult
appropriate legal and tax counsel.
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APPENDIX A
------------------------------------
EXCELSIOR HEDGE FUND OF FUNDS I, LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
------------------------------------
LIMITED LIABILITY COMPANY AGREEMENT
DATED AS OF JULY 6, 2000
------------------------------------
U.S. TRUST CENTER
301 NORTH ELM STREET
GREENSBORO, NORTH CAROLINA 27401
(336) 272-5100
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I DEFINITIONS........................................................1
ARTICLE II ORGANIZATION; ADMISSION OF MEMBERS................................6
2.1 Formation of Limited Liability Company................................6
2.2 Name..................................................................6
2.3 Principal and Registered Office.......................................6
2.4 Duration..............................................................6
2.5 Objective and Business of the Company.................................7
2.6 Board of Managers.....................................................7
2.7 Members...............................................................8
2.8 Organizational Member.................................................8
2.9 Both Managers and Members.............................................8
2.10 Limited Liability.....................................................8
ARTICLE III MANAGEMENT.......................................................9
3.1 Management and Control................................................9
3.2 Actions by the Board of Managers......................................9
3.3 Meetings of Members..................................................10
3.4 Custody of Assets of the Company.....................................11
3.5 Other Activities of Members and Managers.............................11
3.6 Duty of Care.........................................................11
3.7 Indemnification......................................................12
3.8 Fees, Expenses and Reimbursement.....................................14
ARTICLE IV TERMINATION OF STATUS OF ADVISER AND MANAGERS,
TRANSFERS AND REPURCHASES......................................14
4.1 Termination of Status of the Adviser.................................14
4.2 Termination of Status of a Manager...................................14
4.3 Removal of the Managers..............................................15
4.4 Transfer of Interests of Members.....................................15
4.5 Repurchase of Interests..............................................16
ARTICLE V CAPITAL...........................................................18
5.1 Contributions to Capital.............................................18
5.2 Rights of Members to Capital.........................................19
5.3 Capital Accounts.....................................................19
5.4 Allocation of Net Profit and Net Loss................................20
5.5 Allocation of Certain Expenditures...................................20
5.6 Reserves.............................................................20
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5.7 Tax Allocations......................................................21
5.8 Distributions........................................................22
5.9 Withholding..........................................................22
ARTICLE VI DISSOLUTION AND LIQUIDATION......................................23
6.1 Dissolution..........................................................23
6.2 Liquidation of Assets................................................23
ARTICLE VII ACCOUNTING, VALUATIONS AND BOOKS AND RECORDS....................24
7.1 Accounting and Reports...............................................24
7.2 Determinations by the Board of Managers..............................25
7.3 Valuation of Assets..................................................25
ARTICLE VIII MISCELLANEOUS PROVISIONS.......................................26
8.1 Amendment of Limited Liability Company Agreement.....................26
8.2 Special Power of Attorney............................................27
8.3 Notices..............................................................28
8.4 Agreement Binding Upon Successors and Assigns........................28
8.5 Applicability of 1940 Act and Form N-2...............................29
8.6 Choice of Law; Arbitration...........................................29
8.7 Not for Benefit of Creditors.........................................30
8.8 Consents.............................................................30
8.9 Merger and Consolidation.............................................30
8.10 Pronouns.............................................................31
8.11 Confidentiality......................................................31
8.12 Certification of Non-Foreign Status..................................31
8.13 Severability.........................................................32
8.14 Filing of Returns....................................................32
8.15 Tax Matters Partner..................................................32
8.16 Section 754 Election.................................................33
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EXCELSIOR HEDGE FUND OF FUNDS I, L.L.C
LIMITED LIABILITY COMPANY AGREEMENT
THIS LIMITED LIABILITY COMPANY AGREEMENT of Excelsior Hedge Fund of Funds
I, LLC (the "Company") is dated as of July 6, 2000 by and among Gene M.
Bernstein, Stephen V. Murphy, Victor F. Imbimbo, Jr. and Stephen C. Hassenfelt
as the Managers, Stephen C. Hassenfelt as the Organizational Member, and those
persons hereinafter admitted as Members.
W I T N E S S E T H :
WHEREAS, the Company has heretofore been formed as a limited liability
company under the Delaware Limited Liability Company Act pursuant to an initial
Certificate of Formation (the "Certificate") dated and filed with the Secretary
of State of Delaware on July 6, 2000;
NOW, THEREFORE, for and in consideration of the foregoing and the mutual
covenants hereinafter set forth, it is hereby agreed as follows:
----------------------
ARTICLE I
DEFINITIONS
----------------------
For purposes of this Agreement:
ADMINISTRATOR The person who provides administrative services to
the Company pursuant to an administrative services
agreement.
ADVISOR The person who at any particular time serves as
the investment adviser to the Company pursuant to
an Investment Advisory Agreement.
ADVISERS ACT The Investment Advisers Act of 1940 and the rules,
regulations and orders thereunder, as amended from
time to time, or any successor law.
AFFILIATE An affiliated person of a person as such term is
defined in the 1940 Act.
AGREEMENT This Limited Liability Company Agreement, as
amended from time to time.
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BOARD OF MANAGERS The Board of Managers established pursuant to
Section 2.6.
CAPITAL ACCOUNT With respect to each Member, the capital account
established and maintained on behalf of each
Member pursuant to Section 5.3 hereof.
CERTIFICATE The Certificate of Formation of the Company and
any amendments thereto as filed with the office of
the Secretary of State of Delaware.
CLOSING DATE The first date on or as of which a Member other
than the Organizational Member is admitted to the
Company.
CODE The United States Internal Revenue Code of 1986,
as amended from time to time, or any successor
law.
COMPANY The limited liability company governed hereby, as
such limited liability company may from time to
time be constituted.
DELAWARE ACT The Delaware Limited Liability Company Act as in
effect on the date hereof and as amended from time
to time, or any successor law.
FISCAL PERIOD The period commencing on the Closing Date, and
thereafter each period commencing on the day
immediately following the last day of the
preceding Fiscal Period, and ending at the close
of business on the first to occur of the following
dates:
(1) the last day of a Fiscal Year;
(2) the last day of a Taxable Year;
(3) the day preceding any day as of which
a contribution to the capital of the
Company is made pursuant to Section
5.1; or
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(4) any day (other than one specified in
clause (2) above) as of which this
Agreement provides for any amount to
be credited to or debited against the
Capital Account of any Member, other
than an amount to be credited to or
debited against the Capital Accounts
of all Members in accordance with
their respective Investment
Percentages.
FISCAL YEAR The period commencing on the Closing Date and
ending on March 31, 2001, and thereafter each
period commencing on April 1 of each year and
ending on March 31 of each year (or on the date of
a final distribution pursuant to Section 6.2
hereof), unless the Board of Managers shall elect
another fiscal year for the Company.
FORM N-2 The Company's Registration Statement on Form N-2
filed with the Securities and Exchange Commission,
as amended from time to time.
INDEPENDENT MANAGERS Those Managers who are not "interested persons"
of the Company as such term is defined in the
1940 Act.
INSURANCE One or more "key man" insurance policies on the
life of any principal of a member of the Advisor,
the benefits of which are payable to the Company.
INTEREST The entire ownership interest in the Company at
any particular time of a Member, or other person
to whom an Interest of a Member or portion thereof
has been transferred pursuant to Section 4.4
hereof, including the rights and obligations of
such Member or other person under this Agreement
and the Delaware Act.
INVESTMENT ADVISORY A separate written agreement entered into by the
AGREEMENT Company pursuant to which the Advisor provides
Management Services to the Company.
INVESTMENT FUNDS Unregistered investment funds and registered
investment companies.
INVESTMENT MANAGERS Investment advisers (which may include the
Advisor) who enter into advisory agreements to
manage a designated portfolio of investments for
the Company or who manage Investment Funds in
which the Company has invested.
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INVESTMENT PERCENTAGE A percentage established for each Member on the
Company's books as of the first day of each Fiscal
Period. The Investment Percentage of a Member for
a Fiscal Period shall be determined by dividing
the balance of the Member's Capital Account as of
the commencement of such Fiscal Period by the sum
of the Capital Accounts of all of the Members as
of the commencement of such Fiscal Period. The sum
of the Investment Percentages of all Members for
each Fiscal Period shall equal 100%.
MANAGEMENT SERVICES Such investment advisory and other services as the
Advisor is required to provide to the Company
pursuant to the Investment Advisory Agreement as
contemplated by Section 3.8(a).
MANAGER An individual designated as a manager of the
Company pursuant to the provisions of Section 2.6
of the Agreement and who serves on the Board of
Managers of the Company.
MEMBER Any person who shall have been admitted to the
Company as a member (including any Manager in such
person's capacity as a member of the Company but
excluding any Manager in such person's capacity as
a Manager of the Company) until the Company
repurchases the entire Interest of such person as
a member pursuant to Section 4.5 hereof or a
substituted Member or Members are admitted with
respect to any such person's entire Interest as a
member pursuant to Section 4.4 hereof; such term
includes the Advisor to the extent the Advisor
makes a capital contribution to the Company and
shall have been admitted to the Company as a
member.
NET ASSETS The total value of all assets of the Company, less
an amount equal to all accrued debts, liabilities
and obligations of the Company, calculated before
giving effect to any repurchases of Interests.
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NET PROFIT OR NET LOSS The amount by which the Net Assets as of the close
of business on the last day of a Fiscal Period
exceed (in the case of Net Profit) or are less
than (in the case of Net Loss) the Net Assets as
of the commencement of the same Fiscal Period (or,
with respect to the initial Fiscal Period of the
Company, at the close of business on the Closing
Date), such amount to be adjusted to exclude any
items to be allocated among the Capital Accounts
of the Members on a basis which is not in
accordance with the respective Investment
Percentages of all Members as of the commencement
of such Fiscal Period pursuant to Sections 5.5 and
5.6 hereof.
1940 ACT The Investment Company Act of 1940 and the rules,
regulations and orders thereunder, as amended from
time to time, or any successor law.
ORGANIZATIONAL MEMBER Stephen C. Hassenfelt
SECURITIES Securities (including, without limitation,
equities, debt obligations, options, and other
"securities" as that term is defined in Section
2(a)(36) of the 1940 Act) and any contracts for
forward or future delivery of any security, debt
obligation or currency, or commodity, all manner
of derivative instruments and any contracts based
on any index or group of securities, debt
obligations or currencies, or commodities, and any
options thereon, as well as investments in
registered investment companies and private
investment funds.
SUBADVISORS Those Investment Managers for which a separate
investment vehicle has been created in which the
Investment Manager serves as general partner and
the Company is the sole limited partner and those
Investment Managers who manage the Company's
assets directly through a separate managed
account.
TAXABLE YEAR The 12-month period ending December 31 of each
year.
TRANSFER The assignment, transfer, sale, encumbrance,
pledge or other disposition of all or any portion
of an Interest, including any right to receive any
allocations and distributions attributable to an
Interest.
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-------------------------
ARTICLE II
ORGANIZATION; ADMISSION OF MEMBERS
-------------------------
2.1 FORMATION OF LIMITED LIABILITY COMPANY.
The Board of Managers shall execute and file in accordance with the
Delaware Act any amendment to the Certificate and shall execute and file with
applicable governmental authorities any other instruments, documents and
certificates which, in the opinion of the Company's legal counsel, may from time
to time be required by the laws of the United States of America, the State of
Delaware or any other jurisdiction in which the Company shall determine to do
business, or any political subdivision or agency thereof, or which such legal
counsel may deem necessary or appropriate to effectuate, implement and continue
the valid existence and business of the Company.
2.2 NAME.
The name of the Company shall be "Excelsior Hedge Fund of Funds I,
LLC" or such other name as the Board of Managers may hereafter adopt upon (i)
causing an appropriate amendment to the Certificate to be filed in accordance
with the Delaware Act and (ii) sending notice thereof to each Member.
2.3 PRINCIPAL AND REGISTERED OFFICE.
The Company shall have its principal office at U.S. Trust Center, 301
North Elm Street, Greensboro, North Carolina 27401, or at such other place
designated from time to time by the Board of Managers.
The Company shall have its registered office in Delaware at 1013
Center Road, Wilmington, Delaware 19805-1297, and shall have Corporation Service
Company as its registered agent for service of process in Delaware, unless a
different registered office or agent is designated from time to time by the
Board of Managers.
2.4 DURATION.
The term of the Company commenced on the filing of the Certificate
with the Secretary of State of Delaware and shall continue until the Company is
dissolved pursuant to Section 6.1 hereof.
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2.5 OBJECTIVE AND BUSINESS OF THE COMPANY.
(a) The objective and business of the Company is to purchase, sell
(including short sales), invest and trade in Securities, on margin or otherwise,
and to engage in any financial or derivative transactions relating thereto or
otherwise. The Company may execute, deliver and perform all contracts,
agreements, subscription documents and other undertakings and engage in all
activities and transactions as may in the opinion of the Board of Managers be
necessary or advisable to carry out its objective or business. The Company shall
be operated subject to any applicable restrictions of the Bank Holding Company
Act of 1956, as amended.
(b) The Company shall operate as a closed-end, non-diversified,
management investment company in accordance with the 1940 Act and subject to any
fundamental policies and investment restrictions set forth in the Form N-2.
2.6 BOARD OF MANAGERS.
(a) Prior to the Closing Date, the Organizational Member may designate
such persons who shall agree to be bound by all of the terms of this Agreement
to serve as the initial Managers on the Board of Managers, subject to the
election of such persons prior to the Closing Date by the Organizational Member.
By signing this Agreement or the signature page of the Company's subscription
agreement, a Member admitted on the Closing Date shall be deemed to have voted
for the election of each of the initial Managers to the Board of Managers. After
the Closing Date, the Board of Managers may, subject to the provisions of
paragraphs (a) and (b) of this Section 2.6 with respect to the number of and
vacancies in the position of Manager of and the provisions of Section 3.3 hereof
with respect to the election of Managers to the Board of Managers by Members,
designate any person who shall agree to be bound by all of the terms of this
Agreement as a Manager. The names and mailing addresses of the Managers shall be
set forth in the books and records of the Company. The number of Managers shall
be fixed from time to time by the Board of Managers.
(b) Each Manager shall serve on the Board of Managers for the duration
of the term of the Company, unless his or her status as a Manager shall be
sooner terminated pursuant to Section 4.2 hereof. In the event of any vacancy in
the position of Manager, the remaining Managers may appoint an individual to
serve in such capacity, so long as immediately after such appointment at least
two-thirds (2/3) of the Managers then serving would have been elected by the
Members. The Board of Managers may call a meeting of Members to fill any vacancy
in the position of Manager, and shall do so within 60 days after any date on
which Managers who were elected by the Members cease to constitute a majority of
the Managers then serving on the Board of Managers.
(c) In the event that no Manager remains to continue the business of
the Company, the Advisor shall promptly call a meeting of the Members, to be
held within 60 days after the date on which the last Manager ceased to act in
that capacity, for the purpose of determining whether to continue the business
of the Company and, if the business shall be continued, of electing the required
number of Managers to the Board of Managers. If the Members shall determine at
such meeting not to continue the business of the Company or if the required
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number of Managers is not elected within 60 days after the date on which the
last Manager ceased to act in that capacity, then the Company shall be dissolved
pursuant to Section 6.1 hereof and the assets of the Company shall be liquidated
and distributed pursuant to Section 6.2 hereof.
2.7 MEMBERS.
The Board of Managers may admit one or more Members as of the first
day of each calendar quarter; provided, however, that upon delivery to the Board
of Managers of a letter of advice from counsel to the Advisor that the banking
laws do not prevent the Company from admitting Members more often than
quarterly, the Company may, in the discretion of the Board of Managers, admit
Members more frequently. Subject to the foregoing terms, Members may be admitted
to the Company subject to the condition that each such Member shall execute an
appropriate signature page of this Agreement or of the Company's subscription
agreement pursuant to which such Member agrees to be bound by all the terms and
provisions hereof. The Board of Managers may in its absolute discretion reject
any subscription for Interests. The admission of any person as a Member shall be
effective upon the revision of the books and records of the Company to reflect
the name and the contribution to the capital of the Company of such additional
Member.
2.8 ORGANIZATIONAL MEMBER.
Upon the admission of any Member, the Organizational Member shall
withdraw from the Company as the Organizational Member and shall be entitled to
the return of his or her Capital Contribution, if any, without interest or
deduction.
2.9 BOTH MANAGERS AND MEMBERS.
A Member may at the same time be a Manager and a Member, in which
event such Member's rights and obligations in each capacity shall be determined
separately in accordance with the terms and provisions hereof or as provided in
the Delaware Act.
2.10 LIMITED LIABILITY.
Except as provided under applicable law, a Member shall not be liable
for the Company's debts, obligations and liabilities in any amount in excess of
the capital account balance of such Member, plus such Member's share of
undistributed profits and assets. Except as provided under applicable law, a
Manager shall not be liable for the Company's debts, obligations and
liabilities.
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--------------------------
ARTICLE III
MANAGEMENT
--------------------------
3.1 MANAGEMENT AND CONTROL.
(a) Management and control of the business of the Company shall be
vested in the Board of Managers, which shall have the right, power and
authority, on behalf of the Company and in its name, to exercise all rights,
powers and authority of Managers under the Delaware Act and to do all things
necessary and proper to carry out the objective and business of the Company and
their duties hereunder. No Manager shall have the authority individually to act
on behalf of or to bind the Company except within the scope of such Manager's
authority as delegated by the Board of Managers. The parties hereto intend that,
except to the extent otherwise expressly provided herein, (i) each Manager shall
be vested with the same powers, authority and responsibilities on behalf of the
Company as are customarily vested in each director of a Delaware corporation and
(ii) each Independent Manager shall be vested with the same powers, authority
and responsibilities on behalf of the Company as are customarily vested in each
director of a closed-end management investment company registered under the 1940
Act that is organized as a Delaware corporation who is not an "interested
person" of such company as such term is defined in the 1940 Act. During any
period in which the Company shall have no Managers, the Advisor shall continue
to serve as the Advisor to the Company and to provide the Management Services to
the Company.
(b) Each Member agrees not to treat, on his personal income tax return
or in any claim for a tax refund, any item of income, gain, loss, deduction or
credit in a manner inconsistent with the treatment of such item by the Company.
The Board of Managers shall have the exclusive authority and discretion to make
any elections required or permitted to be made by the Company under any
provisions of the Code or any other revenue laws.
(c) Members shall have no right to participate in and shall take no
part in the management or control of the Company's business and shall have no
right, power or authority to act for or bind the Company. Members shall have the
right to vote on any matters only as provided in this Agreement or on any
matters that require the approval of the holders of voting securities under the
1940 Act or as otherwise required in the Delaware Act.
(d) The Board of Managers may delegate to any other person any rights,
power and authority vested by this Agreement in the Board of Managers to the
extent permissible under applicable law.
3.2 ACTIONS BY THE BOARD OF MANAGERS.
(a) Unless provided otherwise in this Agreement, the Board of Managers
shall act only: (i) by the affirmative vote of a majority of the Managers
(including the vote of a majority of the Independent Managers if required by the
1940 Act) present at a meeting duly called at which
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a quorum of the Managers shall be present (in person or, if in person attendance
is not required by the 1940 Act, by telephone) or (ii) by unanimous written
consent of all of the Managers without a meeting, if permissible under the 1940
Act.
(b) The Board of Managers may designate from time to time a Principal
Manager who shall preside at all meetings. Meetings of the Board of Managers may
be called by the Principal Manager or by any two Managers, and may be held on
such date and at such time and place as the Board of Managers shall determine.
Each Manager shall be entitled to receive written notice of the date, time and
place of such meeting within a reasonable time in advance of the meeting. Notice
need not be given to any Manager who shall attend a meeting without objecting to
the lack of notice or who shall execute a written waiver of notice with respect
to the meeting. Managers may attend and participate in any meeting by telephone
except where in person attendance at a meeting is required by the 1940 Act. A
majority of the Managers shall constitute a quorum at any meeting.
3.3 MEETINGS OF MEMBERS.
(a) Actions requiring the vote of the Members may be taken at any duly
constituted meeting of the Members at which a quorum is present. Meetings of the
Members may be called by the Board of Managers or by Members holding 25% or more
of the total number of votes eligible to be cast by all Members, and may be held
at such time, date and place as the Board of Managers shall determine. The Board
of Managers shall arrange to provide written notice of the meeting, stating the
date, time and place of the meeting and the record date therefor, to each Member
entitled to vote at the meeting within a reasonable time prior thereto. Failure
to receive notice of a meeting on the part of any Member shall not affect the
validity of any act or proceeding of the meeting, so long as a quorum shall be
present at the meeting, except as otherwise required by applicable law. Only
matters set forth in the notice of a meeting may be voted on by the Members at a
meeting. The presence in person or by proxy of Members holding a majority of the
total number of votes eligible to be cast by all Members as of the record date
shall constitute a quorum at any meeting. In the absence of a quorum, a meeting
of the Members may be adjourned by action of a majority of the Members present
in person or by proxy without additional notice to the Members. Except as
otherwise required by any provision of this Agreement or of the 1940 Act, (i)
those candidates receiving a plurality of the votes cast at any meeting of
Members shall be elected as Managers and (ii) all other actions of the Members
taken at a meeting shall require the affirmative vote of Members holding a
majority of the total number of votes eligible to be cast by those Members who
are present in person or by proxy at such meeting.
(b) Each Member shall be entitled to cast at any meeting of Members a
number of votes equivalent to such Member's Investment Percentage as of the
record date for such meeting. The Board of Managers shall establish a record
date not less than 10 nor more than 60 days prior to the date of any meeting of
Members to determine eligibility to vote at such meeting and the number of votes
that each Member will be entitled to cast thereat, and shall maintain for each
such record date a list setting forth the name of each Member and the number of
votes that each Member will be entitled to cast at the meeting.
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(c) A Member may vote at any meeting of Members by a proxy properly
executed in writing by the Member and filed with the Company before or at the
time of the meeting. A proxy may be suspended or revoked, as the case may be, by
the Member executing the proxy by a later writing delivered to the Company at
any time prior to exercise of the proxy or if the Member executing the proxy
shall be present at the meeting and decide to vote in person. Any action of the
Members that is permitted to be taken at a meeting of the Members may be taken
without a meeting if consents in writing, setting forth the action taken, are
signed by Members holding a majority of the total number of votes eligible to be
cast or such greater percentage as may be required in order to approve such
action.
3.4 CUSTODY OF ASSETS OF THE COMPANY.
The physical possession of all funds, Securities or other properties
of the Company shall at all times, be held, controlled and administered by one
or more custodians retained by the Company in accordance with the requirements
of the 1940 Act and the rules thereunder.
3.5 OTHER ACTIVITIES OF MEMBERS AND MANAGERS.
(a) The Managers shall not be required to devote full time to the
affairs of the Company, but shall devote such time as may reasonably be required
to perform their obligations under this Agreement.
(b) Any Member or Manager, and any Affiliate of any Member or Manager,
may engage in or possess an interest in other business ventures or commercial
dealings of every kind and description, independently or with others, including,
but not limited to, acquisition and disposition of Securities, provision of
investment advisory or brokerage services, serving as directors, officers,
employees, advisors or agents of other companies, partners of any partnership,
members of any limited liability company, or trustees of any trust, or entering
into any other commercial arrangements. No Member or Manager shall have any
rights in or to such activities of any other Member or Manager, or any profits
derived therefrom.
3.6 DUTY OF CARE.
(a) A Manager shall not be liable to the Company or to any of its
Members for any loss or damage occasioned by any act or omission in the
performance of his or her services under this Agreement, unless it shall be
determined by final judicial decision on the merits from which there is no
further right to appeal that such loss is due to an act or omission of such
Manager constituting willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of such Manager's
office.
(b) Members not in breach of any obligation hereunder or under any
agreement pursuant to which the Member subscribed for an Interest shall be
liable to the Company, any Member or third parties only as provided under the
Delaware Act.
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3.7 INDEMNIFICATION.
(a) To the fullest extent permitted by law, the Company shall, subject
to Section 3.7(b) hereof, indemnify each Manager (including for this purpose his
or her executors, heirs, assigns, successors or other legal representatives),
against all losses, claims, damages, liabilities, costs and expenses, including,
but not limited to, amounts paid in satisfaction of judgments, in compromise, or
as fines or penalties, and reasonable counsel fees, incurred in connection with
the defense or disposition of any action, suit, investigation or other
proceeding, whether civil or criminal, before any judicial, arbitral,
administrative or legislative body, in which such indemnitee may be or may have
been involved as a party or otherwise, or with which such indemnitee may be or
may have been threatened, while in office or thereafter, by reason of being or
having been a Manager of the Company or the past or present performance of
services to the Company by such indemnitee, except to the extent such loss,
claim, damage, liability, cost or expense shall have been finally determined in
a decision on the merits in any such action, suit, investigation or other
proceeding to have been incurred or suffered by such indemnitee by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of the
duties involved in the conduct of such indemnitee's office. The rights of
indemnification provided under this Section 3.7 shall not be construed so as to
provide for indemnification of a Manager 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, but
shall be construed so as to effectuate the applicable provisions of this Section
3.7 to the fullest extent permitted by law.
(b) Expenses, including reasonable counsel fees, so incurred by any
such indemnitee (but excluding amounts paid in satisfaction of judgments, in
compromise, or as fines or penalties), may be paid from time to time by the
Company in advance of the final disposition of any such action, suit,
investigation or proceeding upon receipt of an undertaking by or on behalf of
such indemnitee to repay to the Company amounts so paid if it shall ultimately
be determined that indemnification of such expenses is not authorized under
Section 3.7(a) hereof; provided, however, that (i) such indemnitee shall provide
security for such undertaking, (ii) the Company shall be insured by or on behalf
of such indemnitee against losses arising by reason of such indemnitee's failure
to fulfill such undertaking, or (iii) a majority of the Managers (excluding any
Manager who is either seeking advancement of expenses hereunder or is or has
been a party to any other action, suit, investigation or proceeding involving
claims similar to those involved in the action, suit, investigation or
proceeding giving rise to a claim for advancement of expenses hereunder) or
independent legal counsel in a written opinion shall determine based on a review
of readily available facts (as opposed to a full trial-type inquiry) that there
is reason to believe such indemnitee ultimately will be entitled to
indemnification.
(c) As to the disposition of any action, suit, investigation or
proceeding (whether by a compromise payment, pursuant to a consent decree or
otherwise) without an adjudication or a decision on the merits by a court, or by
any other body before which the proceeding shall have been brought, that an
indemnitee is liable to the Company or its Members by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of such indemnitee's office, indemnification shall be
provided pursuant to
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Section 3.7(a) hereof if (i) approved as in the best interests of the Company by
a majority of the Managers (excluding any Manager who is either seeking
indemnification hereunder or is or has been a party to any other action, suit,
investigation or proceeding involving claims similar to those involved in the
action, suit, investigation or proceeding giving rise to a claim for
indemnification hereunder) upon a determination based upon a review of readily
available facts (as opposed to a full trial-type inquiry) that such indemnitee
acted in good faith and in the reasonable belief that such actions were in the
best interests of the Company and that such indemnitee is not liable to the
Company or its Members by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of such
indemnitee's office, or (ii) the Board of Managers secures a written opinion of
independent legal counsel based upon a review of readily available facts (as
opposed to a full trial-type inquiry) to the effect that such indemnification
would not protect such indemnitee against any liability to the Company or its
Members to which such indemnitee would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of such indemnitee's office.
(d) Any indemnification or advancement of expenses made pursuant to
this Section 3.7 shall not prevent the recovery from any indemnitee of any such
amount if such indemnitee subsequently shall be determined in a decision on the
merits in any action, suit, investigation or proceeding involving the liability
or expense that gave rise to such indemnification or advancement of expenses to
be liable to the Company or its Members by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of such indemnitee's office. In (i) any suit brought by a Manager (or
other person entitled to indemnification hereunder) to enforce a right to
indemnification under this Section 3.7 it shall be a defense that, and (ii) in
any suit in the name of the Company to recover any indemnification or
advancement of expenses made pursuant to this Section 3.7 the Company shall be
entitled to recover such expenses upon a final adjudication that, the Manager or
other person claiming a right to indemnification under this Section 3.7 has not
met the applicable standard of conduct set forth in this Section 3.7. In any
such suit brought to enforce a right to indemnification or to recover any
indemnification or advancement of expenses made pursuant to this Section 3.7,
the burden of proving that the Manager or other person claiming a right to
indemnification is not entitled to be indemnified, or to any indemnification or
advancement of expenses, under this Section 3.7 shall be on the Company (or any
Member acting derivatively or otherwise on behalf of the Company or its
Members).
(e) An indemnitee may not satisfy any right of indemnification or
advancement of expenses granted in this Section 3.7 or to which such indemnitee
may otherwise be entitled except out of the assets of the Company, and no Member
shall be personally liable with respect to any such claim for indemnification or
advancement of expenses.
(f) The rights of indemnification provided hereunder shall not be
exclusive of or affect any other rights to which any person may be entitled by
contract or otherwise under law. Nothing contained in this Section 3.7 shall
affect the power of the Company to purchase and maintain liability insurance on
behalf of any Manager or other person.
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3.8 FEES, EXPENSES AND REIMBURSEMENT.
(a) So long as the Advisor provides Management Services to the
Company, it shall be entitled to receive fees for such services as may be agreed
to by the Advisor and the Company pursuant to the Investment Advisory Agreement.
(b) The Board of Managers may cause the Company to compensate each
Manager for his or her services as such. In addition, the Managers shall be
reimbursed by the Company for reasonable out-of-pocket expenses incurred by them
in performing their duties under this Agreement.
(c) The Company shall bear all of its own operating expenses other
than those specifically required to be borne by the Advisor or another party
pursuant to the Investment Advisory Agreement or another agreement with the
Company. The Advisor shall be entitled to reimbursement from the Company for any
expenses that it pays on behalf of the Company.
(d) Subject to procuring any required regulatory approvals, from time
to time the Company may, alone or in conjunction with other accounts for which
the Advisor, or any Affiliate of the Advisor, acts as general partner or
investment adviser, purchase Insurance in such amounts, from such insurers and
on such terms as the Board of Managers shall determine.
---------------------------------
ARTICLE IV
TERMINATION OF STATUS OF ADVISOR
AND MANAGERS, TRANSFERS AND REPURCHASES
---------------------------------
4.1 TERMINATION OF STATUS OF THE ADVISOR.
The status of the Advisor shall terminate if the Investment Advisory
Agreement with the Advisor terminates and the Company does not enter into a new
Investment Advisory Agreement with the Advisor, effective as of the date of such
termination.
4.2 TERMINATION OF STATUS OF A MANAGER.
The status of a Manager shall terminate if the Manager (i) shall die;
(ii) shall be adjudicated incompetent; (iii) shall voluntarily withdraw as a
Manager (upon not less than 90 days' prior written notice to the other
Managers); (iv) shall be removed; (v) shall be certified by a physician to be
mentally or physically unable to perform his duties hereunder; (vi) shall be
declared bankrupt by a court with appropriate jurisdiction, file a petition
commencing a voluntary case under any bankruptcy law or make an assignment for
the benefit of creditors; (vii) shall have a receiver appointed to administer
the property or affairs of such Manager; or (viii) shall otherwise cease to be a
Manager of the Company under the Delaware Act.
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4.3 REMOVAL OF THE MANAGERS.
Any Manager may be removed either by (a) the vote or written consent
of at least two-thirds (2/3) of the Managers not subject to the removal vote or
(b) the vote or written consent of Members holding not less than two-thirds
(2/3) of the total number of votes eligible to be cast by all Members.
4.4 TRANSFER OF INTERESTS OF MEMBERS.
(a) An Interest of a Member may be Transferred only (i) by operation
of law pursuant to the death, divorce, bankruptcy, insolvency or dissolution of
such Member or (ii) with the written consent of the Board of Managers (which may
be withheld in its sole discretion); provided, however, that the Board of
Managers may not consent to any Transfer other than a Transfer (i) in which the
tax basis of the Interest in the hands of the transferee is determined, in whole
or in part, by reference to its tax basis in the hands of the transferor (e.g.,
certain Transfers to affiliates, gifts and contributions to family
partnerships), (ii) to members of the Member's immediate family (brothers,
sisters, spouse, parents and children), or (iii) a distribution from a qualified
retirement plan or an individual retirement account, unless it consults with
counsel to the Company and counsel to the Company confirms that such Transfer
will not cause the Company to be treated as a "publicly traded partnership"
taxable as a corporation.
(b) The Board of Managers may not consent to a Transfer of an Interest
or a portion thereof of a Member unless: (i) the person to whom such Interest is
Transferred is a person whom the Company believes is an accredited investor, as
such term is defined in Regulation D under the Securities Act of 1933 or any
successor thereto; (ii) the person to whom such Interest is Transferred (or each
of such person's beneficial owners if such person is a "private investment
company" as defined in paragraph (d)(3) of Rule 205-3 under the Advisers Act) is
a person whom the Company believes meets the requirements of paragraph (d)(1) of
Rule 205-3 under the Advisers Act; and (iii) the entire Interest of the Member
is Transferred to a single transferee or, after the Transfer of a portion of an
Interest, the balance of the Capital Account of each of the transferee and
transferor is not less than $250,000. Any transferee that acquires an Interest
by operation of law as the result of the death, divorce, bankruptcy, insolvency
or dissolution of a Member or otherwise, shall be entitled to the allocations
and distributions allocable to the Interest so acquired and to Transfer such
Interest in accordance with the terms of this Agreement, but shall not be
entitled to the other rights of a Member unless and until such transferee
becomes a substituted Member. If a Member transfers an Interest with the
approval of the Board of Managers, the Board of Managers shall promptly take all
necessary actions so that the transferee to whom such Interest is transferred is
admitted to the Company as a Member. Each Member effecting a Transfer and its
transferee agree to pay all expenses, including attorneys' and accountants'
fees, incurred by the Company in connection with such Transfer.
(c) Each Member shall indemnify and hold harmless the Company, the
Managers, the Advisor, each other Member 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
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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 (i) any
Transfer made by such Member in violation of this Section 4.4 and (ii) any
misrepresentation by such Member in connection with any such Transfer.
4.5 REPURCHASE OF INTERESTS.
(a) Except as otherwise provided in this Agreement, no Member or other
person holding an Interest or portion thereof shall have the right to withdraw
or tender to the Company for repurchase that Interest or portion thereof. The
Board of Managers from time to time, in its complete and exclusive discretion
and on such terms and conditions as it may determine, may cause the Company to
repurchase Interests or portions thereof pursuant to written tenders. However,
the Company shall not offer to repurchase Interests on more than two occasions
during any one Fiscal Year unless it has been advised by counsel to the Company
to the effect that such more frequent offers would not cause any adverse tax
consequences to the Company or the Members. In determining whether to cause the
Company to repurchase Interests or portions thereof pursuant to written tenders,
the Board of Managers shall consider the recommendation of the Advisor, and
shall also consider the following factors, among others:
(1) whether any Members have requested to tender Interests or
portions thereof to the Company;
(2) the liquidity of the Company's assets;
(3) the investment plans and working capital requirements of the
Company;
(4) the relative economies of scale with respect to the size of the
Company;
(5) the history of the Company in repurchasing Interests or portions
thereof;
(6) the economic condition of the securities markets; and
(7) the anticipated tax consequences of any proposed repurchases of
Interests or portions thereof.
The Board of Managers shall cause the Company to repurchase Interests or
portions thereof pursuant to written tenders only on terms fair to the Company
and to all Members or one or more classes of Members (including persons holding
Interests acquired from Members), as applicable.
(b) A Member who tenders for repurchase only a portion of such
Member's Interest shall be required to maintain a Capital Account balance at
least equal to $250,000.
(c) The Advisor may tender its Interest or a portion thereof as a
Member under Section 4.5(a) hereof.
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(d) The Board of Managers may cause the Company to repurchase an
Interest or portion thereof of a Member or any person acquiring an Interest or
portion thereof from or through a Member in the event that the Board of Managers
determines or has reason to believe that:
(1) such an Interest or portion thereof has been transferred in
violation of Section 4.4 hereof, or such an Interest or portion
thereof has vested in any person by operation of law as the
result of the death, divorce, dissolution, bankruptcy or
incompetence of a Member;
(2) ownership of such an Interest by a Member or other person will
cause the Company to be in violation of, or require registration
of any Interest or portion thereof under, or subject the Company
to additional registration or regulation under, the securities
laws of the United States or any other relevant jurisdiction;
(3) continued ownership of such an Interest may be harmful or
injurious to the business or reputation of the Company, the
Managers or the Advisor, or may subject the Company or any of the
Members to an undue risk of adverse tax or other fiscal
consequences;
(4) any of the representations and warranties made by a Member in
connection with the acquisition of an Interest or portion thereof
was not true when made or has ceased to be true; or
(5) it would be in the best interests of the Company, as determined
by the Board of Managers in its absolute discretion, for the
Company to repurchase such an Interest or portion thereof.
(e) Repurchases of Interests or portions thereof by the Company shall
be payable promptly after the date of each such repurchase or, in the case of an
offer by the Company to repurchase Interests, promptly after the expiration date
of such repurchase offer in accordance with the terms of the Company's
repurchase offer. Payment of the purchase price for an Interest (or portion
thereof) shall consist of: (i) cash or a promissory note, which need not bear
interest, in an amount equal to such percentage, as may be determined by the
Board of Managers, of the estimated unaudited net asset value of the Interest
(or portion thereof) repurchased by the Company determined as of the date of
such repurchase (the "Initial Payment"); and, if determined to be appropriate by
the Board of Managers or if the Initial Payment is less than 100% of the
estimated unaudited net asset value, (ii) a promissory note entitling the holder
thereof to a contingent payment equal to the excess, if any, of (x) the net
asset value of the Interest (or portion thereof) repurchased by the Company as
of the date of such repurchase, determined based on the audited financial
statements of the Company for the Fiscal Year in which such repurchase was
effective, over (y) the Initial Payment. Notwithstanding anything in the
foregoing to the contrary, the Board of Managers, in its discretion, may pay all
or any portion of the repurchase price in marketable Securities (or any
combination of marketable Securities and cash) having a value, determined as of
the date of repurchase, equal to the amount to be repurchased. Any promissory
note given to satisfy the Initial Payment shall be due and payable not more than
45 days after the date of repurchase or, if the
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Company has requested withdrawal of its capital form any Investment Funds in
order to fund the repurchase of Interests, 10 business days after the Company
has received at least 90% of the aggregate amount withdrawn by the Company from
such Investment Funds. All repurchases of Interests shall be subject to any and
all conditions as the Board of Managers may impose in its sole discretion. The
amount due to any Member whose Interest or portion thereof is repurchased shall
be equal to the value of such Member's Capital Account or portion thereof, as
applicable, as of the effective date of repurchase, after giving effect to all
allocations to be made to such Member's Capital Account as of such date.
------------------------------------
ARTICLE V
CAPITAL
------------------------------------
5.1 CONTRIBUTIONS TO CAPITAL.
(a) The minimum initial contribution of each Member to the capital of
the Company shall be such amount as the Board of Managers, in its discretion,
may determine from time to time, but in no event shall be less than $250,000.
The amount of the initial contribution of each Member shall be recorded on the
books and records of the Company upon acceptance as a contribution to the
capital of the Company. The Managers shall not be entitled to make voluntary
contributions of capital to the Company as Managers of the Company, but may make
voluntary contributions to the capital of the Company as Members. The Advisor
may make voluntary contributions to the capital of the Company as a Member.
(b) The Members and the Advisor, as a Member, may make additional
contributions to the capital of the Company of at least $25,000, effective as of
such times as the Board of Managers in its discretion may permit, subject to the
limitations applicable to the admission of Members pursuant to Section 2.7
hereof, but no Member shall be obligated to make any additional contribution to
the capital of the Company except to the extent provided in Section 5.6 hereof.
(c) Except as otherwise permitted by the Board of Managers, (i)
initial and any additional contributions to the capital of the Company by any
Member shall be payable in cash or in such Securities that the Board of
Managers, in its absolute discretion, may agree to accept on behalf of the
Company, and (ii) initial and any additional contributions in cash shall be
payable in readily available funds at the date of the proposed acceptance of the
contribution. The Company shall charge each Member making a contribution in
Securities to the capital of the Company such amount as may be determined by the
Board of Managers not exceeding 2% of the value of such contribution in order to
reimburse the Company for any costs incurred by the Company by reason of
accepting such Securities, and any such charge shall be due and payable by the
contributing Member in full at the time the contribution to the capital of the
Company to which such charges relate is due. The value of contributed Securities
shall be determined in accordance with Section 7.3 hereof as of the date of
contribution.
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(d) The minimum initial and additional contributions set forth in (a)
and (b) of this Section 5.1 may be reduced by the Board of Managers in
accordance with such schedule of reductions as may be adopted by the Board of
Managers in its sole discretion.
5.2 RIGHTS OF MEMBERS TO CAPITAL.
No Member shall be entitled to interest on any contribution to the
capital of the Company, nor shall any Member be entitled to the return of any
capital of the Company except (i) upon the repurchase by the Company of a part
or all of such Member's Interest pursuant to Section 4.5 hereof, (ii) pursuant
to the provisions of Section 5.6(c) hereof or (iii) upon the liquidation of the
Company's assets pursuant to Section 6.2 hereof. No Member shall be liable for
the return of any such amounts. No Member shall have the right to require
partition of the Company's property or to compel any sale or appraisal of the
Company's assets.
5.3 CAPITAL ACCOUNTS.
(a) The Company shall maintain a separate Capital Account for each
Member.
(b) Each Member's Capital Account shall have an initial balance equal
to the amount of cash and the value of any Securities (determined in accordance
with Section 7.3 hereof) (net of any liabilities secured by such Securities that
the Company is considered to assume or take subject to Section 752 of the Code)
constituting such Member's initial contribution to the capital of the Company.
(c) Each Member's Capital Account shall be increased by the sum of (i)
the amount of cash and the value of any Securities (determined in accordance
with Section 7.3 hereof) (net of any liabilities secured by such Securities that
the Company is considered to assume or take subject to Section 752 of the Code)
constituting additional contributions by such Member to the capital of the
Company permitted pursuant to Section 5.1 hereof, plus (ii) all amounts credited
to such Member's Capital Account pursuant to Sections 5.4 through 5.6.
(d) Each Member's Capital Account shall be reduced by the sum of (i)
the amount of any repurchase of the Interest, or portion thereof, of such Member
or distributions to such Member pursuant to Sections 4.5, 5.8 or 6.2 hereof
which are not reinvested (net of any liabilities secured by any asset
distributed that such Member is deemed to assume or take subject to Section 752
of the Code), plus (ii) any amounts debited against such Capital Account
pursuant to Sections 5.4 through 5.6 hereof.
5.4 ALLOCATION OF NET PROFIT AND NET LOSS.
As of the last day of each Fiscal Period, any Net Profit or Net Loss
for the Fiscal Period shall be allocated among and credited to or debited
against the Capital Accounts of the Members in accordance with their respective
Investment Percentages for such Fiscal Period.
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5.5 ALLOCATION OF CERTAIN EXPENDITURES.
Except as otherwise provided for in this Agreement and unless
prohibited by the 1940 Act, any expenditures payable by the Company, to the
extent determined by the Board of Managers to have been paid or withheld on
behalf of, or by reason of particular circumstances applicable to, one or more
but fewer than all of the Members, shall be charged to only those Members on
whose behalf such payments are made or whose particular circumstances gave rise
to such payments. Such charges shall be debited from the Capital Accounts of
such Members as of the close of the Fiscal Period during which any such items
were paid or accrued by the Company.
5.6 RESERVES.
(a) Appropriate reserves may be created, accrued and charged against
Net Assets and proportionately against the Capital Accounts of the Members for
contingent liabilities, if any, as of the date any such contingent liability
becomes known to the Advisor or the Board of Managers, such reserves to be in
the amounts that the Board of Managers in its sole discretion deems necessary or
appropriate. The Board of Managers may increase or reduce any such reserves from
time to time by such amounts as the Board of Managers in its sole discretion
deems necessary or appropriate. The amount of any such reserve, or any increase
or decrease therein, shall be proportionately charged or credited, as
appropriate, to the Capital Accounts of those parties who are Members at the
time when such reserve is created, increased or decreased, as the case may be;
provided, however, that if any such individual reserve item, adjusted by any
increase therein, exceeds the lesser of $500,000 or 1% of the aggregate value of
the Capital Accounts of all such Members, the amount of such reserve, increase,
or decrease shall instead be charged or credited to those parties who were
Members at the time, as determined by the Board of Managers in its sole
discretion, 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.
(b) If at any time an amount is paid or received by the Company (other
than contributions to the capital of the Company, distributions or repurchases
of Interests or portions thereof) and such amount exceeds the lesser of $500,000
or 1% of the aggregate value of the Capital Accounts of all Members at the time
of payment or receipt and such amount was not accrued or reserved for but would
nevertheless, in accordance with the Company's accounting practices, be treated
as applicable to one or more prior Fiscal Periods, then such amount shall be
proportionately charged or credited, as appropriate, to those parties who were
Members during such prior Fiscal Period or Periods.
(c) If any amount is required by paragraph (a) or (b) of this Section
5.6 to be charged or credited to a party who is no longer a Member, such amount
shall be paid by or to such party, as the case may be, in cash, with interest
from the date on which the Board of Managers determines that such charge or
credit is required. In the case of a charge, the former Member shall be
obligated to pay the amount of the charge, plus interest as provided above, to
the Company on demand; provided, however, that (i) in no event shall a former
Member be obligated to make a payment exceeding the amount of such Member's
Capital Account at the time to which the charge relates; and (ii) no such demand
shall be made after the expiration of three years since the date on
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which such party ceased to be a Member. To the extent that a former Member fails
to pay to the Company, in full, any amount required to be charged to such former
Member pursuant to paragraph (a) or (b), whether due to the expiration of the
applicable limitation period or for any other reason whatsoever, the deficiency
shall be charged proportionately to the Capital Accounts of the Members at the
time of the act or omission giving rise to the charge to the extent feasible,
and otherwise proportionately to the Capital Accounts of the current Members.
5.7 TAX ALLOCATIONS.
For each fiscal year, items of income, deduction, gain, loss or credit
shall be allocated for income tax purposes among the Members in such manner as
to reflect equitably amounts credited or debited to each Member's Capital
Account for the current and prior fiscal years (or relevant portions thereof).
Allocations under this Section 5.7 shall be made pursuant to the principles of
Sections 704(b) and 704(c) of the Code and in conformity with Regulations
Sections 1.704-1(b)(2)(iv)(f), 1.704-1(b)(4)(i) and 1.704-3(e) promulgated
thereunder, as applicable, or the successor provisions to such Section and
Regulations. Notwithstanding anything to the contrary in this Agreement, there
shall be allocated to the Members such gains or income as shall be necessary to
satisfy the "qualified income offset" requirement of Treasury Regulation ss.
1.704-1(b)(2)(ii)(d).
If the Company realizes capital gains (including short-term capital
gains) for Federal income tax purposes ("gains") for any fiscal year during or
as of the end of which all the Interests of one or more Positive Basis Members
(as hereinafter defined) are repurchased by the Company pursuant to Article IV,
the Board of Managers, in its sole discretion, may allocate such gains as
follows: (i) to allocate such gains among such Positive Basis Members, pro rata
in proportion to the respective Positive Basis (as hereinafter defined) of each
such Positive Basis Member, until either the full amount of such gains shall
have been so allocated or the Positive Basis of each such Positive Basis Member
shall have been eliminated and (ii) to allocate any gains not so allocated to
Positive Basis Members to the other Members in such manner as shall equitably
reflect the amounts allocated to such Members' Capital Accounts pursuant to
Section 5.4.
As used herein, (i) the term "Positive Basis" shall mean, with respect
to any Member and as of any time of calculation, the amount by which its
Interest as of such time exceeds its "adjusted tax basis," for Federal income
tax purposes, in its Interest as of such time (determined without regard to any
adjustments made to such "adjusted tax basis" by reason of any transfer or
assignment of such Interest, including by reason of death, and without regard to
such Member's share of the liabilities of the Company under Section 752 of the
Code), and (ii) the term "Positive Basis Member" shall mean any Member whose
Interest is repurchased by the Company and who has Positive Basis as of the
effective date of its withdrawal, but such Member shall cease to be a Positive
Basis Member at such time as it shall have received allocations pursuant to
clause (i) of the second paragraph of this Section 5.7 equal to its Positive
Basis as of the effective date of such repurchase.
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5.8 DISTRIBUTIONS.
The Board of Managers, in its sole discretion, may authorize the
Company to make distributions in cash at any time to all of the Members on a pro
rata basis in accordance with the Members' Investment Percentages.
5.9 WITHHOLDING.
(a) The Board of Managers may withhold and pay over to the Internal
Revenue Service (or any other relevant taxing authority) taxes from any
distribution to any Member to the extent required by the Code or any other
applicable law.
(b) For purposes of this Agreement, any taxes so withheld by the
Company with respect to any amount distributed by the Company to any Member
shall be deemed to be a distribution or payment to such Member, reducing the
amount otherwise distributable to such Member pursuant to this Agreement and
reducing the Capital Account of such Member. If the amount of such taxes is
greater than any such distributable amounts, then such Member and any successor
to such Member's Interest shall pay to the Company as a contribution to the
capital of the Company, upon demand of the Board of Managers, the amount of such
excess.
(c) The Board of Managers shall not be obligated to apply for or
obtain a reduction of or exemption from withholding tax on behalf of any Member
that may be eligible for such reduction or exemption. To the extent that a
Member claims to be entitled to a reduced rate of, or exemption from, a
withholding tax pursuant to an applicable income tax treaty, or otherwise, the
Member shall furnish the Board of Managers with such information and forms as
such Member may be required to complete where necessary to comply with any and
all laws and regulations governing the obligations of withholding tax agents.
Each Member represents and warrants that any such information and forms
furnished by such Member shall be true and accurate and agrees to indemnify the
Company and each of the Members from any and all damages, costs and expenses
resulting from the filing of inaccurate or incomplete information or forms
relating to such withholding taxes.
--------------------------
ARTICLE VI
DISSOLUTION AND LIQUIDATION
---------------------------
6.1 DISSOLUTION.
The Company shall be dissolved:
(1) upon the affirmative vote to dissolve the Company by: (i)
the Board of Managers or (ii) Members holding at least
two-thirds (2/3) of the total number of votes eligible to be
cast by all Members;
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(2) upon the failure of Members to elect a successor Manager at
a meeting called by the Advisor in accordance with Section
2.6(c) hereof when no Manager remains to continue the
business of the Company;
(3) upon the expiration of any two year period that commences on
the date on which any Member has submitted a written notice
to the Company requesting to tender its entire Interest for
repurchase by the Company if such Interest has not been
repurchased by the Company; or
(4) as required by operation of law.
Dissolution of the Company shall be effective on the later of the day on which
the event giving rise to the dissolution shall occur or the conclusion of any
applicable 60 day period during which the Board of Managers and Members may
elect to continue the business of the Company as provided above, but the Company
shall not terminate until the assets of the Company have been liquidated in
accordance with Section 6.2 hereof and the Certificate has been canceled.
6.2 LIQUIDATION OF ASSETS.
(a) Upon the dissolution of the Company as provided in Section 6.1
hereof, the Board of Managers shall promptly appoint the Administrator as the
liquidator and the Administrator shall liquidate the business and administrative
affairs of the Company, except that if the Board of Managers does not appoint
the Administrator as the liquidator or the Administrator is unable to perform
this function, a liquidator elected by Members holding a majority of the total
number of votes eligible to be cast by all Members shall promptly liquidate the
business and administrative affairs of the Company. Net Profit and Net Loss
during the period of liquidation shall be allocated pursuant to Section 5.4
hereof. The proceeds from liquidation (after establishment of appropriate
reserves for contingencies in such amount as the Board of Managers or liquidator
shall deem appropriate in its sole discretion as applicable) shall be
distributed in the following manner:
(1) the debts of the Company, other than debts, liabilities or
obligations to Members, and the expenses of liquidation
(including legal and accounting expenses incurred in
connection therewith), up to and including the date that
distribution of the Company's assets to the Members has been
completed, shall first be paid on a pro rata basis;
(2) such debts, liabilities or obligations as are owing to the
Members shall next be paid in their order of seniority and
on a pro rata basis; and
(3) the Members shall next be paid on a pro rata basis in
accordance with their respective Capital Accounts after
giving effect to all allocations to be made to such Members'
Capital Accounts for the
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Fiscal Period ending on the date of the distributions under
this Section 6.2(a)(3).
(b) Anything in this Section 6.2 to the contrary notwithstanding, upon
dissolution of the Company, the Board of Managers or other liquidator may
distribute ratably in kind any assets of the Company; provided, however, that if
any in-kind distribution is to be made (i) the assets distributed in kind shall
be valued pursuant to Section 7.3 hereof as of the actual date of their
distribution and charged as so valued and distributed against amounts to be paid
under Section 6.2(a) above, and (ii) any profit or loss attributable to property
distributed in-kind shall be included in the Net Profit or Net Loss for the
Fiscal Period ending on the date of such distribution.
-----------------------------
ARTICLE VII
ACCOUNTING, VALUATIONS AND BOOKS AND RECORDS
-----------------------------
7.1 ACCOUNTING AND REPORTS.
(a) The Company shall adopt for tax accounting purposes any accounting
method that the Board of Managers shall decide in its sole discretion is in the
best interests of the Company. The Company's accounts shall be maintained in
U.S. currency.
(b) After the end of each Taxable Year, the Company shall furnish to
each Member such information regarding the operation of the Company and such
Member's Interest as is necessary for Members to complete Federal, state and
local income tax or information returns and any other tax information required
by Federal, state or local law.
(c) Except as otherwise required by the 1940 Act, or as may otherwise
be permitted by rule, regulation or order, within 60 days after the close of the
period for which a report required under this Section 7.1(c) is being made, the
Company shall furnish to each Member a semi-annual report and an annual report
containing the information required by such Act. The Company shall cause
financial statements contained in each annual report furnished hereunder to be
accompanied by a certificate of independent public accountants based upon an
audit performed in accordance with generally accepted accounting principles. The
Company may furnish to each Member such other periodic reports as it deems
necessary or appropriate in its discretion.
7.2 DETERMINATIONS BY THE BOARD OF MANAGERS.
(a) All matters concerning the determination and allocation among the
Members of the amounts to be determined and allocated pursuant to Article V
hereof, including any taxes thereon and accounting procedures applicable
thereto, shall be determined by the Board of Managers unless specifically and
expressly otherwise provided for by the provisions of this Agreement or required
by law, and such determinations and allocations shall be final and binding on
all the Members.
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(b) The Board of Managers may make such adjustments to the computation
of Net Profit, Net Loss or any components comprising either of the foregoing as
it considers appropriate to reflect fairly and accurately the financial results
of the Company and the intended allocation thereof among the Members.
7.3 VALUATION OF ASSETS
(a) Except as may be required by the 1940 Act, the Board of Managers
shall value or have valued any Securities or other assets and liabilities of the
Company as of the close of business on the last day of each Fiscal Period in
accordance with such valuation procedures as shall be established from time to
time by the Board of Managers and which conform to the requirements of the 1940
Act. In determining the value of the assets of the Company, no value shall be
placed on the goodwill or name of the Company, or the office records, files,
statistical data or any similar intangible assets of the Company not normally
reflected in the Company's accounting records, but there shall be taken into
consideration any items of income earned but not received, expenses incurred but
not yet paid, liabilities, fixed or contingent, and any other prepaid expenses
to the extent not otherwise reflected in the books of account, and the value of
options or commitments to purchase or sell Securities or commodities pursuant to
agreements entered into prior to such valuation date.
(b) The Company will value interests in Investment Funds not managed
by the Subadvisors at fair value, which ordinarily will be the value determined
by their Investment Managers in accordance with the policies established by the
relevant Investment Fund.
(c) The value of Securities and other assets of the Company and the
net worth of the Company as a whole determined pursuant to this Section 7.3
shall be conclusive and binding on all of the Members and all parties claiming
through or under them.
---------------------------
ARTICLE VIII
MISCELLANEOUS PROVISIONS
-----------------------------
8.1 AMENDMENT OF LIMITED LIABILITY COMPANY AGREEMENT.
(a) Except as otherwise provided in this Section 8.1, this Agreement
may be amended, in whole or in part, with: (i) the approval of the Board of
Managers (including the vote of a majority of the Independent Managers, if
required by the 1940 Act) and (ii) if required by the 1940 Act, the approval of
the Members by such vote as is required by the 1940 Act.
(b) Any amendment that would:
(1) increase the obligation of a Member to make any contribution
to the capital of the Company;
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(2) reduce the Capital Account of a Member other than in
accordance with Article V; or
(3) modify the events causing the dissolution of the Company;
may be made only if (i) the written consent of each Member adversely affected
thereby is obtained prior to the effectiveness thereof or (ii) such amendment
does not become effective until (A) each Member has received written notice of
such amendment and (B) any Member objecting to such amendment has been afforded
a reasonable opportunity (pursuant to such procedures as may be prescribed by
the Board of Managers) to tender its entire Interest for repurchase by the
Company.
(c) The power of the Board of Managers to amend this Agreement at any
time without the consent of the other Members as set forth in paragraph (a) of
this Section 8.01 shall specifically include the power to:
(1) restate this Agreement together with any amendments hereto
that have been duly adopted in accordance herewith to
incorporate such amendments in a single, integrated
document;
(2) amend this Agreement (other than with respect to the matters
set forth in Section 8.1(b) hereof) to effect compliance
with any applicable law or regulation, including but not
limited to, to satisfy the requirements, or to reflect any
relaxation of such requirements in the future, of the Bank
Holding Company Act of 1956, as amended, or other U.S.
banking laws, or any regulations, guidelines or policies or
interpretations of the banking regulatory agencies or the
staff thereof, or to cure any ambiguity or to correct or
supplement any provision hereof that may be inconsistent
with any other provision hereof; and
(3) amend this Agreement to make such changes as may be
necessary or advisable to ensure that the Company will not
be treated as an association or as a publicly traded
partnership taxable as a corporation as defined in Section
7704(b) of the Code.
(d) The Board of Managers shall cause written notice to be given of
any amendment to this Agreement (other than any amendment of the type
contemplated by clause (1) of Section 8.1(c) hereof) to each Member, which
notice shall set forth (i) the text of the amendment or (ii) a summary thereof
and a statement that the text thereof will be furnished to any Member upon
request.
8.2 SPECIAL POWER OF ATTORNEY.
(a) Each Member hereby irrevocably makes, constitutes and appoints
each Manager, acting severally, and any liquidator of the Company's assets
appointed pursuant to Section 6.2 hereof with full power of substitution, the
true and lawful representatives and
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attorneys-in-fact of, and in the name, place and stead of, such Member, with the
power from time to time to make, execute, sign, acknowledge, swear to, verify,
deliver, record, file and/or publish:
(1) any amendment to this Agreement that complies with the
provisions of this Agreement (including the provisions of
Section 8.1 hereof);
(2) any amendment to the Certificate required because this
Agreement is amended, including, without limitation, an
amendment to effectuate any change in the membership of the
Company; and
(3) all such other instruments, documents and certificates that,
in the opinion of legal counsel to the Company, may from
time to time be required by the laws of the United States of
America, the State of Delaware or any other jurisdiction in
which the Company shall determine to do business, or any
political subdivision or agency thereof, or that such legal
counsel may deem necessary or appropriate to effectuate,
implement and continue the valid existence and business of
the Company as a limited liability company under the
Delaware Act.
(b) Each Member is aware that the terms of this Agreement permit
certain amendments to this Agreement to be effected and certain other actions to
be taken or omitted by or with respect to the Company without such Member's
consent. If an amendment to the Certificate or this Agreement or any action by
or with respect to the Company is taken in the manner contemplated by this
Agreement, each Member agrees that, notwithstanding any objection that such
Member may assert with respect to such action, the attorneys-in-fact appointed
hereby are authorized and empowered, with full power of substitution, to
exercise the authority granted above in any manner that may be necessary or
appropriate to permit such amendment to be made or action lawfully taken or
omitted. Each Member is fully aware that each Member will rely on the
effectiveness of this special power-of-attorney with a view to the orderly
administration of the affairs of the Company.
(c) This power-of-attorney is a special power-of-attorney and is
coupled with an interest in favor of each of the Managers and as such:
(1) shall be irrevocable and continue in full force and effect
notwithstanding the subsequent death or incapacity of any
party granting this power-of-attorney, regardless of whether
the Company or Board of Managers shall have had notice
thereof; and
(2) shall survive the delivery of a Transfer by a Member of the
whole or any portion of such Member's Interest, except that
where the transferee thereof has been approved by the Board
of Managers for admission to the Company as a substituted
Member, this power-of-attorney given by the transferor shall
survive the delivery of such assignment for the sole purpose
of enabling the Board of Managers
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to execute, acknowledge and file any instrument necessary to
effect such substitution.
8.3 NOTICES.
Notices that may be or are required to be provided under this
Agreement shall be made, if to a Member, by regular mail, or if to the Board of
Managers or the Advisor, by hand delivery, registered or certified mail return
receipt requested, commercial courier service, telex or telecopier, and shall be
addressed to the respective parties hereto at their addresses as set forth in
the books and records of the Company. Notices shall be deemed to have been
provided when delivered by hand, on the date indicated as the date of receipt on
a return receipt or when received if sent by regular mail, commercial courier
service, telex or telecopier. A document that is not a notice and that is
required to be provided under this Agreement by any party to another party may
be delivered by any reasonable means.
8.4 AGREEMENT BINDING UPON SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, successors, assigns, executors,
trustees or other legal representatives, but the rights and obligations of the
parties hereunder may not be Transferred or delegated except as provided in this
Agreement and any attempted Transfer or delegation thereof that is not made
pursuant to the terms of this Agreement shall be void.
8.5 APPLICABILITY OF 1940 ACT AND FORM N-2.
The parties hereto acknowledge that this Agreement is not intended to,
and does not, set forth the substantive provisions contained in the 1940 Act and
the Form N-2 that affect numerous aspects of the conduct of the Company's
business and of the rights, privileges and obligations of the Members. Each
provision of this Agreement shall be subject to and interpreted in a manner
consistent with the applicable provisions of the 1940 Act and the Form N-2.
8.6 CHOICE OF LAW; ARBITRATION.
(a) Notwithstanding the place where this Agreement may be executed by
any of the parties hereto, the parties expressly agree that all the terms and
provisions hereof shall be construed under the laws of the State of Delaware,
including the Delaware Act without regard to the conflict of law principles of
such State.
(B) UNLESS OTHERWISE AGREED IN WRITING, EACH MEMBER AGREES TO SUBMIT
ALL CONTROVERSIES ARISING BETWEEN MEMBERS OR ONE OR MORE MEMBERS AND THE COMPANY
TO ARBITRATION IN ACCORDANCE WITH THE PROVISIONS SET FORTH BELOW AND UNDERSTANDS
THAT:
(1) ARBITRATION IS FINAL AND BINDING ON THE PARTIES;
(2) THEY ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT,
INCLUDING THE RIGHT TO A JURY TRIAL;
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(3) PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED AND
DIFFERENT FROM COURT PROCEEDINGS;
(4) THE ARBITRATOR'S AWARD IS NOT REQUIRED TO INCLUDE FACTUAL
FINDINGS OR LEGAL REASONING AND A PARTY'S RIGHT TO APPEAL OR
TO SEEK MODIFICATION OF RULINGS BY ARBITRATORS IS STRICTLY
LIMITED; AND
(5) THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY
OF ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE
SECURITIES INDUSTRY.
(C) ALL CONTROVERSIES THAT MAY ARISE AMONG MEMBERS AND ONE OR MORE
MEMBERS AND THE COMPANY CONCERNING THIS AGREEMENT SHALL BE DETERMINED BY
ARBITRATION IN NEW YORK CITY IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT, TO
THE FULLEST EXTENT PERMITTED BY LAW. ANY ARBITRATION UNDER THIS AGREEMENT SHALL
BE DETERMINED BEFORE AND IN ACCORDANCE WITH THE RULES THEN OBTAINING OF EITHER
THE NEW YORK STOCK EXCHANGE, INC. (THE "NYSE") OR THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC. (THE "NASD"), AS THE MEMBER OR ENTITY INSTITUTING THE
ARBITRATION MAY ELECT. IF THE NYSE OR NASD DOES NOT ACCEPT THE ARBITRATION FOR
CONSIDERATION, THE ARBITRATION SHALL BE SUBMITTED TO, AND DETERMINED IN
ACCORDANCE WITH THE RULES THEN OBTAINING OF, THE CENTER FOR PUBLIC RESOURCES,
INC. IN NEW YORK CITY. JUDGMENT ON ANY AWARD OF ANY SUCH ARBITRATION MAY BE
ENTERED IN THE SUPREME COURT OF THE STATE OF NEW YORK OR IN ANY OTHER COURT
HAVING JURISDICTION OF THE PERSON OR PERSONS AGAINST WHOM SUCH AWARD IS
RENDERED. ANY NOTICE OF SUCH ARBITRATION OR FOR THE CONFIRMATION OF ANY AWARD IN
ANY ARBITRATION SHALL BE SUFFICIENT IF GIVEN IN ACCORDANCE WITH THE PROVISIONS
OF THIS AGREEMENT. EACH MEMBER AGREES THAT THE DETERMINATION OF THE ARBITRATORS
SHALL BE BINDING AND CONCLUSIVE UPON THEM.
(D) NO MEMBER SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO
ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT AGAINST
ANY PERSON WHO HAS INITIATED IN COURT A PUTATIVE CLASS ACTION; OR WHO IS A
MEMBER OF A PUTATIVE CLASS WHO HAS NOT OPTED OUT OF THE CLASS WITH RESPECT TO
ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNTIL: (I) THE CLASS
CERTIFICATION IS DENIED; OR (II) THE CLASS IS DECERTIFIED; OR (III) THE MEMBER
IS EXCLUDED FROM THE CLASS BY THE COURT. SUCH FORBEARANCE TO ENFORCE AN
AGREEMENT TO ARBITRATE SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS
AGREEMENT EXCEPT TO THE EXTENT STATED HEREIN.
8.7 NOT FOR BENEFIT OF CREDITORS.
The provisions of this Agreement are intended only for the regulation
of relations among past, present and future Members, Managers and the Company.
This Agreement is not intended for the benefit of non-Member creditors and no
rights are granted to non-Member creditors under this Agreement.
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8.8 CONSENTS.
Any and all consents, agreements or approvals provided for or
permitted by this Agreement shall be in writing and a signed copy thereof shall
be filed and kept with the books of the Company.
8.9 MERGER AND CONSOLIDATION.
(a) The Company may merge or consolidate with or into one or more
limited liability companies formed under the Delaware Act or other business
entities pursuant to an agreement of merger or consolidation that has been
approved in the manner contemplated by Section 18-209(b) of the Delaware Act.
(b) Notwithstanding anything to the contrary contained elsewhere in
this Agreement, an agreement of merger or consolidation approved in accordance
with Section 18-209(b) of the Delaware Act may, to the extent permitted by
Section 18-209(f) of the Delaware Act, (i) effect any amendment to this
Agreement, (ii) effect the adoption of a new limited liability company agreement
for the Company if it is the surviving or resulting limited liability company in
the merger or consolidation, or (iii) provide that the limited liability company
agreement of any other constituent limited liability company to the merger or
consolidation (including a limited liability company formed for the purpose of
consummating the merger or consolidation) shall be the limited liability company
agreement of the surviving or resulting limited liability company.
` 8.10 PRONOUNS.
All pronouns shall be deemed to refer to the masculine, feminine,
neuter, singular or plural, as the identity of the person or persons, firm or
corporation may require in the context thereof.
8.11 CONFIDENTIALITY.
(a) A Member may obtain from the Company such information regarding
the affairs of the Company as is just and reasonable under the Delaware Act,
subject to reasonable standards (including standards governing what information
and documents are to be furnished, at what time and location and at whose
expense) established by the Board of Managers.
(b) Each Member covenants that, except as required by applicable law
or any regulatory body, it will not divulge, furnish or make accessible to any
other person the name and/or address (whether business, residence or mailing) of
any Member (collectively, "Confidential Information") without the prior written
consent of the Board of Managers, which consent may be withheld in its sole
discretion.
(c) Each Member recognizes that in the event that this Section 8.11 is
breached by any Member or any of its principals, partners, members, directors,
officers, employees or agents or any of its affiliates, including any of such
affiliates' principals, partners, members, directors, officers, employees or
agents, irreparable injury may result to the non-breaching Members and the
Company. Accordingly, in addition to any and all other remedies at law or in
equity to which the non-breaching Members and the
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Company may be entitled, such Members shall also have the right to obtain
equitable relief, including, without limitation, injunctive relief, to prevent
any disclosure of Confidential Information, plus reasonable attorneys' fees and
other litigation expenses incurred in connection therewith. In the event that
any non-breaching Member or the Company determines that any of the other Members
or any of its principals, partners, members, directors, officers, employees or
agents or any of its affiliates, including any of such affiliates' principals,
partners, members, directors, officers, employees or agents should be enjoined
from or required to take any action to prevent the disclosure of Confidential
Information, each of the other non-breaching Members agrees to pursue in a court
of appropriate jurisdiction such injunctive relief.
8.12 CERTIFICATION OF NON-FOREIGN STATUS.
Each Member or transferee of an Interest from a Member shall certify,
upon admission to the Company and at such other times thereafter as the Board of
Managers may request, whether such Member is a "United States Person" within the
meaning of Section 7701(a)(30) of the Code on forms to be provided by the
Company, and shall notify the Company within 30 days of any change in such
Member's status. Any Member who shall fail to provide such certification when
requested to do so by the Board of Managers may be treated as a non-United
States Person for purposes of U.S. federal tax withholding.
8.13 SEVERABILITY.
If any provision of this Agreement is determined by a court of
competent jurisdiction not to be enforceable in the manner set forth in this
Agreement, each Member agrees that it is the intention of the Members that such
provision should be enforceable to the maximum extent possible under applicable
law. If any provisions of this Agreement are held to be invalid or
unenforceable, such invalidation or unenforceability shall not affect the
validity or enforceability of any other provision of this Agreement (or portion
thereof).
8.14 FILING OF RETURNS.
The Board of Managers or its designated agent shall prepare and file,
or cause the Administrator or accountants of the Company to prepare and file, a
Federal information tax return in compliance with Section 6031 of the Code and
any required state and local income tax and information returns for each tax
year of the Company.
8.15 TAX MATTERS PARTNER.
(a) A Manager who is a Member shall be designated on the Company's
annual Federal income tax return, and have full powers and responsibilities, as
the Tax Matters Partner of the Company for purposes of Section 6231(a)(7) of the
Code. In the event that no Manager is a Member, a Member shall be so designated.
Should any Member be designated as the Tax Matters Partner for the Company
pursuant to Section 6231(a)(7) of the Code, it shall, and each Member hereby
does, to the fullest extent permitted by law, delegate to a Manager selected by
the Board of Managers all of its rights, powers and authority to act as such Tax
Matters Partner
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and hereby constitutes and appoints such Manager as its true and lawful
attorney-in-fact, with power to act in its name and on its behalf, including the
power to act through such agents or attorneys as it shall elect or appoint, to
receive notices, to make, execute and deliver, swear to, acknowledge and file
any and all reports, responses and notices and to do any and all things required
or advisable, in the Manager's judgment, to be done by such a Tax Matters
Partner. Any Member designated as the Tax Matters Partner for the Company under
Section 6231(a)(7) of the Code shall be indemnified and held harmless by the
Company from any and all liabilities and obligations that arise from or by
reason of such designation.
(b) Each person (for purposes of this Section 8.15, called a
"Pass-Thru Member") that holds or controls an interest as a Member on behalf of,
or for the benefit of, another person or persons, or which Pass-Thru Member is
beneficially owned (directly or indirectly) by another person or persons, shall,
within 30 days following receipt from the Tax Matters Partner of any notice,
demand, request for information or similar document, convey such notice or other
document in writing to all holders of beneficial interests in the Company
holding such interests through such Pass-Thru Member. In the event the Company
shall be the subject of an income tax audit by any Federal, state or local
authority, to the extent the Company is treated as an entity for purposes of
such audit, including administrative settlement and judicial review, the Tax
Matters Partner shall be authorized to act for, and its decision shall be final
and binding upon, the Company and each Member thereof. All expenses incurred in
connection with any such audit, investigation, settlement or review shall be
borne by the Company.
8.16 SECTION 754 ELECTION.
In the event of a distribution of Company property to a Member or an
assignment or other transfer (including by reason of death) of all or part of
the interest of a Member in the Company, the Board of Managers, in its
discretion, may cause the Company to elect, pursuant to Section 754 of the Code,
or the corresponding provision of subsequent law, to adjust the basis of the
Company property as provided by Sections 734 and 743 of the Code.
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EACH OF THE UNDERSIGNED ACKNOWLEDGES HAVING READ THIS AGREEMENT IN ITS
ENTIRETY BEFORE SIGNING, INCLUDING THE PRE-DISPUTE ARBITRATION CLAUSE SET FORTH
IN SECTION 8.6 AND THE CONFIDENTIALITY CLAUSE SET FORTH IN SECTION 8.11.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
MANAGERS:
/s/
----------------------------------
Name: Gene M. Bernstein
/s/
----------------------------------
Name: Stephen V. Murphy
/s/
----------------------------------
Name: Victor F. Imbimbo, Jr.
/s/
----------------------------------
Name: Stephen C. Hassenfelt
ORGANIZATIONAL MEMBER:
/s/
----------------------------------
Name: Stephen C. Hassenfelt
MEMBERS:
Each person who shall sign a Member
Signature Page and who shall be accepted by
the Board of Managers to the Company as a
Member.
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PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements:
As Registrant has no assets, financial statements
are omitted.
(2) Exhibits:
(a) (1) Certificate of Formation of Limited
Liability Company.
(2) Certificate of Amendment of Certificate of
Formation of Limited Liability Company.
(3) Limited Liability Company Agreement. See
Appendix A of Registrant's Confidential Memorandum,
which is included in this Registration Statement.
(b) Not Applicable.
(c) Not Applicable.
(d) See Item 24(2)(a)(3).
(e) Not Applicable.
(f) Not Applicable.
(g) Investment Advisory Agreement.
(h) Not Applicable.
(i) Not Applicable.
(j) Custody Agreement.
(k) Administration and Accounting Services Agreement.
(l) Not Applicable.
(m) Not Applicable.
(n) Not Applicable.
(o) Not Applicable.
(p) Not Applicable.
(q) Not Applicable.
(r) Code of Ethics.
ITEM 25. MARKETING ARRANGEMENTS
Not Applicable.
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ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
All figures are estimates:
Blue Sky Fees and Expenses (including fees
of counsel) .............................. $ 10,000
Transfer Agent fees ........................ N/A
Accounting fees and expenses ............... 10,000
Legal fees and expenses .................... 125,000
Printing and engraving ..................... N/A
Offering Expenses .......................... N/A
Miscellaneous .............................. 5,000
--------
$150,000
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
After completion of the private offering of interests, Registrant expects
that no person will be directly or indirectly under common control with
Registrant.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Title of Class Number of Record Holders
-------------- ------------------------
Limited Liability
Company Interests 1 (Registrant anticipates that
as a result of the initial private
offering of interests there will be
more than 100 record holders of such
interests.)
ITEM 29. INDEMNIFICATION
Reference is made to Section 3.7 of Registrant's Form of Limited Liability
Company Agreement (the "Company Agreement") filed as Exhibit 2(a)(3) hereto.
Registrant hereby undertakes that it will apply the indemnification provision of
the Company Agreement in a manner consistent with Release 40-11330 of the
Securities and Exchange Commission under the Investment Company Act of 1940, so
long as the interpretation therein of Sections 17(h) and 17(i) of such Act
remains in effect.
Registrant, in conjunction with the NCT Opportunities, Inc. (the "Adviser")
and Registrant's Managers, maintains insurance on behalf of any person who is or
was an Independent Manager, officer, employee, or agent of Registrant, against
certain liability asserted against him or her and incurred by him or her or
arising out of his or her position. However, in no event will Registrant pay
that portion of the premium, if any, for insurance to indemnify any such person
or any act for which Registrant itself is not permitted to indemnify.
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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 Adviser, and each director, executive officer,
managing member or partner of the 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 director, officer, employee, managing member, partner or trustee, is
set forth in Registrant's Confidential Memorandum in the section entitled "THE
ADVISOR AND U.S. TRUST CORPORATION."
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Administrator maintains certain required accounting related and
financial books and records of Registrant at J.D. Clark & Co., One Praesideo
Place, Suite 200, 1590 West Park Circle, Pleasant View, Utah 84404. The other
required books and records are maintained by the Adviser at U.S. Trust Center,
301 North Elm Street, Greensboro, North Carolina 27402.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
Not Applicable.
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FORM N-2
EXCELSIOR HEDGE FUND OF FUNDS I, LLC
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 Greensboro,
and State of North Carolina, on the 16th day of September, 2000.
EXCELSIOR HEDGE FUND OF FUNDS I, LLC
By: /s/
----------------------------
Name: Stephen C. Hassenfelt
Title: Principal Manager
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FORM N-2
EXCELSIOR HEDGE FUND OF FUNDS I, LLC
EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT DESCRIPTION
(a) (1) Certificate of Formation of Limited Liability Company
(2) Certificate of Amendment of Certificate of Formation of
Limited Liability Company
(3) Limited Liability Company Agreement. See Appendix A of
Registrant's Confidential Memorandum, which is included
in this Registration Statement
(b) Not Applicable
(c) Not Applicable
(d) Limited Liability Company Agreement. See Appendix A of
Registrant's Confidential Memorandum, which is included
in this Registration Statement
(e) Not Applicable
(f) Not Applicable
(g) Investment Advisory Agreement
(h) Not Applicable
(i) Not Applicable
(j) Custody Agreement
(k) Administration and Accounting Services Agreement
(l) Not Applicable
(m) Not Applicable
(n) Not Applicable
(o) Not Applicable
(p) Not Applicable
(q) Not Applicable
(r) Code of Ethics
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