As filed with the U.S. Securities and Exchange Commission on
August 22, 2000
Investment Company Act File No. 811-_____
-----------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
|X| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
| | Amendment No. __
-------------------------
PW REDWOOD FUND, L.L.C.
(Exact name of Registrant as specified in Charter)
1285 Avenue of the Americas
New York, New York 10019-6028
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code:
(212) 713-2000
-------------------------
MARK D. GOLDSTEIN, ESQ.
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019-6028
(Name and address of agent for service)
Copy to:
STUART H. COLEMAN, ESQ.
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038-4982
-------------------------
<PAGE>
This Registration Statement has been filed by Registrant pursuant to Section
8(b) of the Investment Company Act of 1940, as amended. However, interests in
the Registrant are not being registered under the Securities Act of 1933, as
amended (the "1933 Act"), since such interests will be issued solely in private
placement transactions which do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the Registrant may be
made only by individuals or entities which are "accredited investors" within the
meaning of Regulation D under the 1933 Act. This Registration Statement does not
constitute an offer to sell, or the solicitation of an offer to buy, any
interests in the Registrant.
<PAGE>
PW SEQUOIA FUND, L.L.C.
PW REDWOOD FUND, L.L.C.
PAINEWEBBER
<PAGE>
THE INTERESTS IN PW SEQUOIA FUND, L.L.C. (THE "SEQUOIA FUND") AND PW REDWOOD
FUND, L.L.C. (THE " REDWOOD FUND") (EACH, A FUND AND COLLECTIVELY, THE "FUNDS")
WHICH ARE DESCRIBED IN THIS CONFIDENTIAL MEMORANDUM ("MEMORANDUM") HAVE NOT BEEN
AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"1933 ACT"), OR THE SECURITIES LAWS OF ANY OF THE STATES OF THE UNITED STATES.
THE OFFERINGS CONTEMPLATED BY THIS MEMORANDUM WILL BE MADE IN RELIANCE UPON AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT FOR OFFERS AND
SALES OF SECURITIES WHICH DO NOT INVOLVE ANY PUBLIC OFFERING, AND ANALOGOUS
EXEMPTIONS UNDER STATE SECURITIES LAWS.
THIS MEMORANDUM SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY NOR SHALL THERE BE ANY SALE OF INTERESTS IN THE FUNDS IN ANY
JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE IS NOT AUTHORIZED OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OR SALE. NO
PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATIONS CONCERNING THE FUNDS THAT
ARE INCONSISTENT WITH THOSE CONTAINED IN THIS MEMORANDUM. PROSPECTIVE INVESTORS
SHOULD NOT RELY ON ANY INFORMATION NOT CONTAINED IN THIS MEMORANDUM OR THE
APPENDICES HERETO.
THIS MEMORANDUM IS INTENDED SOLELY FOR THE USE OF THE PERSON TO WHOM IT HAS BEEN
DELIVERED FOR THE PURPOSE OF EVALUATING A POSSIBLE INVESTMENT BY THE RECIPIENT
IN THE INTERESTS IN THE FUNDS DESCRIBED HEREIN, AND IS NOT TO BE REPRODUCED OR
DISTRIBUTED TO ANY OTHER PERSONS (OTHER THAN PROFESSIONAL ADVISERS OF THE
PROSPECTIVE INVESTOR RECEIVING THIS DOCUMENT).
PROSPECTIVE INVESTORS SHOULD NOT CONSTRUE THE CONTENTS OF THIS MEMORANDUM AS
LEGAL, TAX OR FINANCIAL ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT HIS OR
HER OWN PROFESSIONAL ADVISERS AS TO THE LEGAL, TAX, FINANCIAL OR OTHER MATTERS
RELEVANT TO THE SUITABILITY OF AN INVESTMENT IN THE FUNDS 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
RESPECTIVE FUND'S LIMITED LIABILITY COMPANY AGREEMENT, THE 1933 ACT AND
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY UPON THEIR OWN EXAMINATION
OF THE FUNDS AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS
INVOLVED. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE FUNDS' INTERESTS OR PASSED
UPON THE ADEQUACY OF THE DISCLOSURE IN THIS MEMORANDUM. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
AUGUST 2000
<PAGE>
TABLE OF CONTENTS
PAGE
INTRODUCTION..............................................................1
SUMMARY OF TERMS..........................................................1
THE FUNDS................................................................12
STRUCTURE................................................................12
INVESTMENT PROGRAMS......................................................12
TYPES OF INVESTMENTS AND RELATED RISK FACTORS............................13
ADDITIONAL RISK FACTORS..................................................23
PERFORMANCE INFORMATION..................................................24
THE DIRECTORS............................................................24
THE MANAGER, PWFA AND FRONTIER...........................................26
VOTING...................................................................28
CONFLICTS OF INTEREST....................................................28
BROKERAGE................................................................31
FEES AND EXPENSES........................................................32
CAPITAL ACCOUNTS AND ALLOCATIONS.........................................34
ALLOCATION OF SPECIAL ITEMS--CERTAIN WITHHOLDING TAXES AND
OTHER EXPENDITURES.......................................................36
APPLICATION FOR INTERESTS................................................37
REDEMPTIONS, REPURCHASES OF INTERESTS AND TRANSFERS......................39
SUMMARY OF LLC AGREEMENT.................................................42
TAX ASPECTS..............................................................44
ERISA CONSIDERATIONS.....................................................56
ADDITIONAL INFORMATION...................................................57
APPENDIX A -- LIMITED LIABILITY COMPANY AGREEMENT.......................A-1
APPENDIX B -- PERFORMANCE INFORMATION...................................B-1
<PAGE>
INTRODUCTION
This Memorandum relates to the simultaneous offering of two separate
Funds:
o PW Sequoia Fund, L.L.C. (the "Sequoia Fund")
o PW Redwood Fund, L.L.C. (the "Redwood Fund")
Each Fund's investment program is speculative and entails substantial risks.
These risks are summarized below in "SUMMARY OF TERMS--RISK FACTORS," TYPES OF
INVESTMENTS AND RELATED RISK FACTORS" AND "ADDITIONAL RISK FACTORS." Potential
investors should review these sections of this Memorandum, together with the
other portions of this Memorandum, carefully before investing.
SUMMARY OF TERMS
The following summary is qualified entirely by the detailed information
appearing elsewhere in this Memorandum and by the terms and conditions of the
Fund's respective Limited Liability Company Agreement (an "LLC Agreement"), each
of which should be read carefully and retained for future reference.
THE FUNDS: Each Fund is a newly formed Delaware limited
liability company, registered under the Investment
Company Act of 1940, as amended (the "1940 Act"),
as a closed-end, non-diversified, management
investment company.
Each Fund 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 (i) its portfolio
may be more aggressively managed than other
investment companies, (ii) interests in the Fund
will be sold in large minimum denominations in
private placements solely to high net worth
individual and institutional investors
("Investors"), and will be restricted as to
transfer, and (iii) the Investors' capital
accounts in the Fund will be subject to both an
asset-based fee and an incentive-based allocation.
INVESTMENT PROGRAMS: Each Fund's investment objective is to maximize
total return.
THE SEQUOIA FUND will seek to achieve its
investment objective by investing primarily in
equity securities of companies the Fund's
investment adviser, PW Redwood/Sequoia Management,
L.L.C. (the "Manager"), believes have
above-average earnings growth potential that is
not fully reflected in the price of the
securities. The Fund expects to invest
principally in small- to mid-sized capitalization
companies.
THE REDWOOD FUND will seek to achieve its
investment objective by investing primarily in
equity securities of companies with above-average
earnings growth potential that is not fully
reflected in the price of the securities. The Fund
generally will focus on companies of all sizes
that provide products or services to, or operate
in, the science and technology sectors in the
United States. Technology companies will include,
but are not limited to, companies that specialize
in developing, distributing or providing products
and services relating to software,
telecommunications, semiconductors and the
Internet. Science companies will include, but are
not limited to, pharmaceutical, health science and
biotechnology companies.
Each Fund may sell short the securities of
companies that the Manager believes have
deteriorating fundamentals or valuations.
In selecting equity securities, each Fund will
have a "bottom-up" focus that emphasizes valuation
and earnings potential. The investment process
will use research driven analysis to identify
areas of investment opportunity.
Each Fund generally will not invest in securities
that are principally traded outside the United
States. Each Fund may invest in securities of
foreign issuers listed on a U.S. national
securities exchange.
To a limited extent, each Fund may purchase
fixed-income securities in furtherance of its
investment objective. Each Fund may invest, from
time to time, in money market instruments and
certain tax-exempt obligations.
Each Fund may use various investment techniques to
hedge a portion of its investment portfolio
against certain risks or to pursue its investment
objective. In this regard, a Fund may use
leverage, sell securities short and purchase and
sell options on securities and stock indexes and
other derivatives, subject to certain limitations
described elsewhere in this Memorandum. The use of
some of these investment techniques and
instruments will be an integral part of each
Fund's investment program, and involves certain
risks. See "TYPES OF INVESTMENTS AND RELATED RISK
FACTORS."
EACH FUND'S INVESTMENT PROGRAM IS SPECULATIVE AND
ENTAILS SUBSTANTIAL RISKS. An investment in a Fund
should be viewed only as part of an overall
investment program. No assurance can be given that
each Fund's investment objective will be achieved.
Each Fund's limited diversification, use of
leverage, short sales, derivative transactions
and, in respect of the Redwood Fund, sector
concentration, in certain circumstances, can
result in significant losses to the Fund.
Investments in illiquid securities and foreign
securities also involve certain risks. See "TYPES
OF INVESTMENTS AND RELATED RISK FACTORS."
As a non-diversified investment company, there are
no percentage limitations on the portion of each
Fund's assets that may be invested in the
securities of any one issuer. In addition, each
Fund may hold a significant portion of its assets
in securities in a single industry or in related
industries. As a result, each Fund'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.
Because the Sequoia Fund invest principally in
small- to mid-sized capitalization companies, an
investment in a Fund may be more volatile and more
susceptible to loss than an investment in a fund
which invests principally in larger capitalization
companies. The prices of the securities of some of
these smaller companies may be subject to more
abrupt or erratic market movements than larger,
more established companies, because they typically
are traded in lower volume (and thus may be
significantly less liquid than securities of
larger companies) and the issuers typically are
more subject to changes in earnings and prospects.
See "TYPES OF INVESTMENTS AND RELATED RISK
FACTORS-Equity Securities."
The Redwood Fund's emphasis on securities of
science and technology-related companies presents
certain risks that may not exist to the same
degree as in other types of investments. Science
and technology stocks, in general, tend to be
highly volatile as compared to other types of
investments. Accordingly, the investment risk is
greater than if the Fund were invested in a more
diversified manner among various sectors.
The Manager will receive an incentive-based
allocation. The incentive-based allocation that
may be credited to the capital account of the
Manager may create an incentive for the Manager to
cause each Fund to make investments that are
riskier or more speculative than those that might
have been made in the absence of the
incentive-based allocation. In addition, because
the incentive-based allocation is calculated on a
basis that includes unrealized appreciation of a
Fund's assets, the allocation may be greater than
if it were based solely on realized gains. See
"SUMMARY OF TERMS--Fees and Expenses" and
"--Incentive Allocation."
An investment in each Fund entails special tax
risks. See "SUMMARY OF TERMS--Summary of
Taxation."
Each Fund and the Manager are newly formed
entities and have no operating histories upon
which investors can evaluate the performance of a
Fund. However, the personnel of the Manager who
are responsible for managing the Sequoia Fund's
investment portfolio have substantial experience
in managing client accounts that have investment
programs that are similar to the Sequoia Fund's
investment program. Past performance is not
necessarily indicative of future results.
Interests in each Fund will not be traded on any
securities exchange or other market and are
subject to substantial restrictions on transfer.
Although a Fund may offer to repurchase interests
from time to time, an Investor may not be able to
liquidate its interest in the Fund for up to two
years. The Manager expects that it will recommend
to the Directors (as hereinafter defined) that
each Fund offer to repurchase interests from
Investors in December 2001 and, thereafter, twice
each year, near mid-year and year-end. See
"SUMMARY OF TERMS--Transfer Restrictions" and
"--Repurchases of Interests by the Funds."
MANAGEMENT: The Board of Directors (the "Board" and its
members, the "Directors") of each Fund has overall
responsibility to manage and control the business
affairs of the Fund, including the exclusive
authority to oversee and to establish policies
regarding the management, conduct and operation of
the Fund's business. See "THE DIRECTORS."
The Board has engaged the Manager to provide
investment advice to, and day-to-day management
of, each Fund. The Manager is a joint venture
between PW Fund Advisor, L.L.C. ("PWFA") and each
of Frontier Capital Management Company, LLC
("FCM") and Frontier Performance Advisers, L.P.
("FPA") (collectively, "Frontier"). Investment
professionals employed by FCM will manage the
Redwood Fund's investment portfolio and investment
professionals employed by FPA will manage the
Sequoia Fund's portfolio, each on behalf of the
Manager under the oversight of PWFA's personnel.
PWFA is an indirect, wholly-owned subsidiary of
Paine Webber Group Inc. ("PW Group"), and is
registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the
"Advisers Act"). On July 12, 2000, PW Group and
UBS AG ("UBS") announced that they had entered
into an agreement and plan of merger pursuant to
which PW Group will merge into a wholly-owned
subsidiary of UBS. If all required approvals and
conditions of the agreement are obtained and
satisfied, PW Group and UBS expect to complete the
transaction in the fourth quarter of 2000. UBS,
with headquarters in Zurich, Switzerland, is an
internationally diversified organization with
operations in many areas of the financial services
industry.
PWFA and its affiliates provide investment
advisory services to registered investment
companies, private investment funds and individual
accounts, and, as of June 30, 2000, have
approximately $484 billion of client assets and
approximately $73 billion of assets under
management. FCM, a registered investment adviser
under the Advisers Act, has as its manager member
a wholly-owned subsidiary of Affiliated Managers
Group, Inc., a publicly traded company ("AMG")
and is owned by AMG, and its affiliates, as well
as, certain management personnel of FCM. FCM
serves as the sole general partner of
FPA, which is also a registered investment adviser
under the Advisers Act. As of June 30, 2000,
Frontier had approximately $5.4 billion of assets
under management.
PLACEMENT AGENT: PaineWebber Incorporated acts as the placement
agent for each Fund, without special compensation
from the Funds, and will bear its own costs
associated with its activities as placement agent.
PWFA and PaineWebber Incorporated intend to
compensate PaineWebber Incorporated's or its
affiliates' financial advisors and others for
their ongoing servicing of clients with whom they
have placed interests in the Funds. See "CONFLICTS
OF INTEREST--PWFA."
CONFLICTS OF INTEREST: The investment activities of the Manager and its
affiliates for their own accounts and the other
accounts they manage may give rise to conflicts of
interest which may disadvantage each Fund. Each
Fund's operations may give rise to other conflicts
of interest. See "CONFLICTS OF INTEREST."
FEES AND EXPENSES: PWFA provides certain management and
administrative services to each Fund, including,
among other things, providing office space and
other support services to the Fund. In
consideration for such services, each Fund will
pay PWFA a management fee generally on a monthly
basis at the annual rate of 1.25% of its net
assets for the month, excluding assets
attributable to the Manager's capital account (the
"Fee"). The Fee will be paid to PWFA out of the
relevant Fund's assets, and debited against the
Investors' capital accounts. A portion of the Fee
will be paid by PWFA to Frontier.
PFPC Inc. (the "Administrator") performs certain
administration, accounting and investor services
for each Fund and other investment funds sponsored
or advised by PW Group or its affiliates. In
consideration for these services, each Fund and
the other investment funds will pay the
Administrator an annual fee calculated based upon
their aggregate average net assets, subject to a
minimum monthly fee, and will reimburse the
Administrator for certain of the Administrator's
expenses.
Each Fund will bear all expenses incurred in its
business, including, but not limited to, the
following: all costs and expenses related to
portfolio transactions and positions for the
Fund's account; legal fees; accounting fees; costs
of computing the Fund's net asset value, including
valuation services provided by third parties;
costs of insurance; organizational and
registration expenses; certain offering costs; and
expenses of meetings of the Board and Investors.
See "FEES AND EXPENSES."
PLACEMENT FEE: Investors purchasing interests in a Fund may be
charged a placement fee of up to 2% of the
Investor's capital contribution. The placement fee
will not constitute assets of the relevant Fund.
See "FEES AND EXPENSES--Placement Fee."
ALLOCATION OF PROFIT
AND LOSS As to each Fund, the net profits or net losses of
the Fund (including, without limitation, net
realized gain or loss and the net change in
unrealized appreciation or depreciation of
securities positions) will be credited to or
debited against the capital accounts of the
Investors at the end of each fiscal period in
accordance with their respective Fund percentages
for such period. Each Investor's Fund percentage
will be determined by dividing as of the start of
a fiscal period the balance of the Investor's
capital account by the sum of the balances of the
capital accounts of all Investors of the Fund. See
"CAPITAL ACCOUNTS AND ALLOCATIONS--Allocation of
Net Profits and Net Losses."
INCENTIVE ALLOCATION: As to each Fund, generally, at the end of the
12-month period following the admission of an
Investor to the Fund, and at the end of each
fiscal year thereafter, an amount equal to 20% of
the net profits, if any, that would otherwise be
credited to the Investor's account for such period
will instead be credited to the account of the
Manager. This allocation (the "Incentive
Allocation") will be made only with respect to net
profits that exceed any net losses previously
debited to the account of such Investor which have
not been offset by any net profits subsequently
credited to the account of the Investor. See
"CAPITAL ACCOUNTS AND ALLOCATIONS--Incentive
Allocation."
APPLICATION FOR INTERESTS: Both initial and additional applications for
interests of a Fund by eligible investors may be
accepted at such times as the Fund may determine,
subject to the receipt of cleared funds on or
before the acceptance date set by the Fund. After
the initial closing, initial applications and
additional capital contributions will generally be
accepted monthly. Each Fund reserves the right to
reject any application for interests in the Fund.
Generally, the minimum initial investment in a
Fund is $250,000. For employees or directors of
the Manager and its affiliates, and members of
their immediate families, and, in the sole
discretion of the Board, attorneys or other
professional advisors engaged on behalf of each
Fund, and members of their immediate families, the
minimum initial investment is $25,000. Each Fund
may vary the investment minimums from time to
time. Each Fund, in its discretion, may suspend
applications for interests at any time. See
"APPLICATION FOR INTERESTS--Eligible Investors."
INITIAL CLOSING DATE: The initial closing date for applications of
interests in each Fund is September 29, 2000. Each
Fund, in its sole discretion, may accelerate or
postpone the closing date.
TRANSFER RESTRICTIONS: Interests in a Fund may be transferred only (i) by
operation of law pursuant to the death,
bankruptcy, insolvency or dissolution of an
Investor or (ii) with the written consent of the
Manager, which may be withheld in its sole and
absolute discretion and is expected to be granted,
if at all, only under extenuating circumstances,
in connection with a transfer to an entity that
does not result in a change of beneficial
ownership. The foregoing permitted transferees
will not be allowed to become substituted
Investors without the consent of the Manager,
which may be withheld in its sole and absolute
discretion. See "REDEMPTIONS, REPURCHASES OF
INTERESTS AND TRANSFERS--Transfers of Interests."
REPURCHASES OF INTERESTS No Investor will have the right to require a Fund
BY THE FUNDS: to redeem the Investor's interest in the Fund.
Each Fund from time to time may offer to
repurchase interests pursuant to written tenders
by Investors. These repurchases will be made at
such times and on such terms as may be determined
by the Board of the relevant Fund, in its complete
and exclusive discretion. The Manager expects that
it will recommend to the Board of each Fund that
the Fund offer to repurchase interests from
Investors in December 2001 and, thereafter, twice
each year, near mid-year and year-end. In
addition, each Fund may repurchase an interest in
the Fund or portion thereof of an Investor or any
person acquiring an interest or portion thereof
from or through an Investor if, among other
reasons, the Manager determines that it would be
in the best interests of the Fund for the Fund to
repurchase such an interest or portion thereof.
See "REDEMPTIONS, REPURCHASES OF INTERESTS AND
TRANSFERS--No Right of Redemption" and
"--Repurchases of Interests."
Each LLC Agreement provides that the Fund shall be
dissolved if the interest of any Investor that has
submitted a written request, in accordance with
the terms of the LLC Agreement, to tender its
entire interest for repurchase by the Fund has not
been repurchased within a period of two years of
such request.
SUMMARY OF TAXATION: Counsel to each Fund has rendered an opinion that
each Fund will be treated as a partnership and not
as an association taxable as a corporation for
Federal income tax purposes. Counsel to the Funds
has rendered its opinion that, under a "facts and
circumstances" test set forth in regulations
adopted by the U.S. Treasury Department, each Fund
will not be treated as a "publicly traded
partnership" taxable as a corporation.
Accordingly, each Fund should not be subject to
Federal income tax, and each Investor will be
required to report on its own annual tax return
its distributive share of the relevant Fund's
taxable income or loss.
If it were determined that a Fund should be
treated as an association or a publicly traded
partnership taxable as a corporation, as a result
of a successful challenge to the opinions rendered
by counsel to the Funds or otherwise, the taxable
income of the Fund would be subject to corporate
income tax and any distributions of profits from
the Fund would be treated as dividends.
ERISA PLANS AND OTHER Investors subject to the Employee Retirement
TAX-EXEMPT ENTITIES: Income Security Act of 1974, as amended ("ERISA"),
and other tax-exempt entities, including employee
benefit plans, Individual Retirement Accounts and
401(k) and Keogh Plans (each a "tax-exempt"
entity), may purchase interests in a Fund. Each
Fund's assets should not be considered to be "plan
assets" for purposes of ERISA's fiduciary
responsibility and prohibited transaction rules or
similar provisions of the Internal Revenue Code of
1986, as amended (the "Code"). Each Fund may use
leverage in connection with its trading
activities. Therefore, a tax-exempt Investor may
incur income tax liability with respect to its
share of the net profits from such leveraged
transactions to the extent they are treated as
giving rise to "unrelated business taxable income"
("UBTI"). In addition, an Investor that is a
charitable remainder trust will not be exempt from
Federal tax for any year in which it has UBTI.
Each Fund will provide to its tax-exempt Investors
such accounting information as such Investors
require to report their UBTI for income tax
purposes. See "TAX ASPECTS" and "ERISA
CONSIDERATIONS."
Investment in a Fund by tax-exempt entities
requires special consideration. Trustees or
administrators of such entities are urged to
review carefully the matters discussed in this
Memorandum.
TERM: Each Fund's term is perpetual unless it is
otherwise dissolved under the terms of the LLC
Agreement. See "ADDITIONAL INFORMATION AND SUMMARY
OF LIMITED LIABILITY COMPANY AGREEMENT--Term,
Dissolution and Liquidation."
REPORTS TO INVESTORS: Each Fund will furnish to its Investors as soon as
practicable after the end of each taxable year
such information as is necessary for Investors to
complete Federal and state income tax or
information returns, along with any other tax
information required by law. Each Fund also will
send to its Investors a semi-annual and an audited
annual report generally within 60 days after the
close of the period for which the report is being
made, or as otherwise required by the 1940 Act.
Quarterly reports from the Manager regarding each
Fund's operations during each quarter also will be
sent to its Investors.
<PAGE>
THE FUNDS
---------
Each Fund is registered under the 1940 Act as a closed-end, non-diversified,
management investment company. Each Fund was formed as a limited liability
company under the laws of Delaware on July 26, 2000 and has no operating
history. Each Fund's principal office is located at 1285 Avenue of the Americas,
New York, New York 10019, and its telephone number is (800) 486-2608. Investment
advisory services are provided to each Fund by the Manager.
STRUCTURE
---------
Each Fund 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 may be
leveraged, managed aggressively and offered in large minimum denominations,
often over $1 million, through private placements to a limited number of high
net worth individual and institutional investors. The general partners or
managing members of these entities typically are compensated through asset-based
fees and incentive-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 typically are compensated through asset-based, but not
incentive-based, fees.
Each Fund is similar to a private investment fund in that its investment
portfolio may be actively managed and Fund interests will be sold in
comparatively large minimum denominations in private placements solely to high
net worth individual and institutional investors whose capital accounts will be
subject to both an asset-based fee and an incentive-based allocation.
INVESTMENT PROGRAMS
-------------------
Each Fund's investment objective is to maximize total return.
The SEQUOIA FUND will seek to achieve its investment objective by investing
primarily in equity securities of companies the Manager believes have
above-average earnings growth potential that is not fully reflected in the price
of the securities. The Fund may overweight those sectors considered by the
Manager to be growth industries; examples of these sectors currently include
technology, healthcare, consumer discretionary and consumer durables. The Fund
expects to invest principally in small- to mid-sized capitalization companies.
The REDWOOD FUND will seek to achieve its investment objective by investing
primarily in equity securities of companies with above-average earnings growth
potential that is not fully reflected in the price of the securities. The Fund
generally will focus on companies of all sizes that provide products and
services to, or operate in, the science and technology sectors in the United
States. Technology companies will include, but are not limited to, companies
that specialize in developing, distributing or providing products and services
relating to software, telecommunications, semiconductors and the Internet.
Science companies will include, but are not limited to, pharmaceutical, health
science and biotechnology companies.
Each Fund will seek to lessen downside volatility by selling short or selling
short market indices traded on major exchanges. Each Fund may sell short stocks
with deteriorating business fundamentals and/or excessive valuations.
In selecting equity securities, each Fund will have a "bottom-up" focus that
emphasizes valuation and earnings potential. The investment process will use
research driven analysis to identify areas of investment opportunity.
Each Fund generally will not invest in securities that are principally traded
outside the United States. Each Fund may invest in securities of foreign issues
listed on a U.S. national securities exchange.
To a limited extent, each Fund may purchase fixed-income securities in
furtherance of its investment objective. Each Fund may invest, from time to
time, in money market instruments and certain tax-exempt obligations.
The Manager may attempt to reduce the effect of Federal income taxes on a Fund's
returns by, for example, minimizing sales of securities that result in capital
gains, selling higher cost securities to reduce capital gains, and preferring
the sale of securities that produce long-term capital gains to those that
produce short-term capital gains.
TYPES OF INVESTMENTS AND RELATED RISK FACTORS
----------------------------------------------
GENERAL
All securities investments risk the loss of capital. To the extent a Fund holds
the securities of a limited number of issuers, and emphasizes the securities of
issuers in a limited number of industries or market segments, the risk of an
investment in the Fund is increased. The value of each Fund's total net assets
should be expected to fluctuate. Each Fund's use of leverage is likely to cause
its net assets to appreciate or depreciate at a greater rate than if leverage
were not used.
SECTOR RISK
The Redwood Fund's emphasis on securities of science and technology-related
companies presents certain risks that may not exist to the same degree as in
other types of investments. Science and technology stocks, in general, tend to
be highly volatile as compared to other types of investments. Accordingly, the
investment risk is greater than if the Fund were invested in a more diversified
manner among various sectors.
While the Redwood Fund will invest in the securities of entities in several
different industries considered to be technology related, many of those entities
share common characteristics which may affect the Fund's investment. For
example, industries throughout the science and technology fields include many
smaller and less seasoned companies. These types of companies may present
greater opportunities for capital appreciation, but also may involve greater
risks. Such companies may have limited product lines, markets, or financial
resources, or may depend on a limited management group. In addition, the
securities of smaller companies may be subject to more volatile market movements
than the securities of larger, more established companies. These companies also
are strongly affected by worldwide scientific or technological developments, and
their products and services may not be economically successful or may quickly
become outdated. Certain of these companies also offer products or services that
are subject to governmental regulation and, therefore, may be affected adversely
by governmental policies.
To the extent the Sequoia Fund invests in securities of companies in the
technology or science sectors, these risks also will apply.
EQUITY SECURITIES
Each Fund's investment portfolio may include long and short positions in common
stocks, preferred stocks and convertible securities of U.S. companies and
foreign companies whose securities are traded on a U.S. national securities
exchange. Each Fund also may invest in depositary receipts relating to foreign
securities. See "Foreign Securities" below. The value of a Fund's equity
securities will vary in response to many factors, including the activities and
financial condition of individual companies, the business market in which
individual companies compete and general market and economic conditions.
The Funds may purchase securities of companies that have no earnings or have
experienced losses. The Manager generally will make these investments based on a
belief that actual or anticipated products or services will produce future
earnings. If the anticipated event is delayed or does not occur, or if investor
perceptions about the company change, the company's stock price may decline
sharply and its securities may become less liquid.
Each Fund's investments in equity securities of U.S. companies will include
securities that are listed on U.S. securities exchanges as well as unlisted
securities that are traded over-the-counter. Equity securities of companies
traded over-the-counter and those with smaller market capitalizations may not be
traded in the volumes typically found on a national securities exchange.
Consequently, a Fund may be required to dispose of such securities over a longer
(and potentially less favorable) period of time than is required to dispose of
the securities of listed companies. From time to time, previously liquid markets
for securities, including those of smaller capitalization companies, may become
more illiquid. In these circumstances, a Fund may not be able to sell securities
in desired amounts, which might increase the market risk to the Fund's
portfolio.
SMALL- AND MID-CAP SECURITIES. Each Fund may invest in equity securities without
restriction as to market capitalization, such as those issued by smaller
capitalization companies, including micro cap companies. Because the Sequoia
Fund invests principally in small- to mid-sized capitalization companies, an
investment in the Fund may be more volatile and more susceptible to loss than an
investment in a fund which invests principally in larger capitalization
companies. The prices of the securities of some of these smaller companies may
be subject to more abrupt or erratic market movements than larger, more
established companies, because they typically are traded in lower volume (and
thus may be significantly less liquid than securities of larger companies) and
the issuers typically are more subject to changes in earnings and prospects. To
the extent the Redwood Fund invests in securities of small- and mid-sized
capitalization companies, these risks also will apply.
PURCHASING INITIAL PUBLIC OFFERINGS. Each Fund may purchase securities in all
available securities trading markets, including initial public offerings and the
aftermarket. Special risks associated with these securities may include a
limited number of shares available for trading, unseasoned trading, lack of
investor knowledge of the company, and limited operating history. These factors
may contribute to substantial price volatility for the shares of these companies
and, thus, for the Fund's interest. The limited number of shares available for
trading in some initial public offerings may make it more difficult for a 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 prospects of achieving them.
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 such 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 liquidation over an issuer's common stock, but 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 also may be subject to optional or mandatory
redemption provisions.
CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures, notes,
preferred stock 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 also may 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
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 a Fund is called for redemption, the 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 the Fund's ability to achieve its investment
objective.
LEVERAGE
Each Fund may borrow money from brokers and banks for investment purposes.
Borrowing for investment purposes, which is known as "leverage," is a
speculative investment technique and involves certain risks.
Although leverage will increase investment return if a Fund earns a greater
return on the investments purchased with borrowed funds than it pays for the use
of such funds, using leverage will decrease investment return if the Fund fails
to earn as much on such investments as it pays for the use of such funds. Using
leverage, therefore, will magnify the volatility of the value of a Fund's
investment portfolio. If a Fund's equity or debt instruments decline in value,
the Fund could be required to deposit additional collateral with the lender or
suffer mandatory liquidation of the pledged securities to compensate for the
decline in value. In the event of a sudden, precipitous drop in value of a
Fund's assets, whether resulting from changes in market value or from
redemptions, the Fund 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.
Each Fund also may be required to maintain minimum average balances in
connection with its borrowings or to pay a commitment or other fee to maintain a
line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate.
The 1940 Act limits the amount an investment company can borrow by imposing an
asset coverage requirement of 300% of its indebtedness, including amounts
borrowed, measured at the time the investment company incurs the indebtedness
(the "Asset Coverage Requirement"). This means that the value of a Fund's total
indebtedness may not exceed one-third the value of its total assets, including
such indebtedness, measured at the time the Fund incurs the indebtedness.
To obtain "leveraged" market exposure in certain investments and in an effort to
increase the overall return to the Fund of various investments, each Fund may
purchase options and other instruments that do not constitute "indebtedness" for
purposes of the Asset Coverage Requirement. These instruments nevertheless may
involve significant economic leverage and therefore involve the risks of loss
described herein. In some cases, the leverage may be significant with an
associated significant risk of loss.
SHORT SALES
Short selling is a speculative investment technique which involves expenses to
the Fund and, in certain circumstances, can substantially increase the impact of
adverse price movements on the Fund's portfolio. To effect a short sale, a Fund
will borrow the security from a brokerage firm, or other permissible financial
intermediary, and make delivery to the buyer. The Fund then is obligated to
replace the borrowed security by purchasing it at the market price at the time
of replacement. The price at such time may be more or less than the price at
which the security was sold by the Fund, which would result in a loss or gain,
respectively. A Fund may not always be able to borrow a security it wants to
sell short and thus will not have the opportunity to benefit from that strategy.
A Fund also may be unable to close out a short position at any particular time
or at the desired price. If a Fund is required to replace the borrowed security
at a time when other short sellers of the same security also are required to
replace it, a "short squeeze" can occur, wherein the Fund might be compelled, at
a disadvantageous time, to replace the borrowed security, possibly at prices
significantly in excess of the proceeds received from the short sale. From time
to time, previously liquid markets for securities, including those of smaller
capitalization companies, may become less liquid. In these circumstances, a Fund
may not be able to obtain securities to cover short positions, which might
increase the market risk to the Fund's portfolio. Although a Fund's gain on a
short sale is limited to the amount at which it sold the security short, its
potential loss can increase rapidly and is limited only by the maximum
attainable price of the security less the price at which the security was sold.
SPECIAL INVESTMENT TECHNIQUES
Each Fund may use a variety of special investment techniques to hedge a portion
of its investment portfolio against various risks or other factors that
generally affect the values of securities and for non-hedging purposes to pursue
the Fund's investment objective. These techniques may involve the use of
derivative transactions. The techniques a Fund may employ may change over time
as new instruments and techniques are introduced or as a result of regulatory
developments. Certain of the special investment techniques that a Fund may use
are speculative and involve a high degree of risk, particularly when used for
non-hedging purposes. It is possible that any hedging transaction may not
perform as anticipated and that a Fund may suffer losses as a result of its
hedging activities.
DERIVATIVES. Each Fund may purchase derivatives or enter into derivative
transactions ("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 a Fund to increase
or decrease the level of risk, or change the character of the risk, to which its
portfolio is exposed in much the same way as the Fund can increase or decrease
the level of risk, or change the character of the risk, of its portfolio by
making investments in specific securities.
Derivatives may entail investment exposures that are greater than their cost
would suggest, meaning that a small investment in Derivatives could have a large
potential impact on a Fund's performance.
If a Fund invests in Derivatives at inopportune times or judges market
conditions incorrectly, such investments may lower the Fund's return or result
in a loss. A Fund also could experience losses if its Derivatives were poorly
correlated with its other investments, or if the Fund were unable to liquidate
its position because of an illiquid secondary market. The market for many
Derivatives is, or suddenly can become, illiquid. Changes in liquidity may
result in significant, rapid and unpredictable changes in the prices for
Derivatives. The Funds may need to sell a derivative, or meet obligations
under the terms of a derivative, at times that they would otherwise prefer not
to enter the market due to the prevailing prices.
OPTIONS. Each Fund may engage in options transactions. Each Fund also may invest
in 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, a Fund bears the risk that
the counterparty that wrote the option will be unable or unwilling to perform
its obligations under the option contract. These options also may be illiquid
and, in such cases, a Fund may have difficulty closing out its position.
Over-the-counter options purchased and sold by a Fund also may include options
on baskets of specific securities.
Each Fund may purchase and sell call and put options in respect of specific
securities and securities indices, and may write and sell covered or uncovered
call and put options.
A covered call option, which is a call option with respect to which a Fund owns
the underlying security, that is sold by the Fund exposes the 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, which is a put option
with respect to which a Fund has segregated cash or liquid securities to fulfill
the obligation undertaken, that is sold by the Fund exposes the Fund during the
term of the option to a decline in price of the underlying security while
depriving the Fund of the opportunity to invest the segregated assets.
Each Fund may close out a position when writing options by purchasing an option
on the same security with the same exercise price and expiration date as the
option that it has previously written on such security. A 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, a Fund would ordinarily make a similar
"closing sale transaction," which involves liquidating the Fund's position by
selling the option previously purchased, although the Fund would be entitled to
exercise the option should it deem it advantageous to do so.
WARRANTS. Warrants are derivative instruments that permit, but do not obligate,
the holder to subscribe for other securities. Warrants do not carry with them
the right to dividends or voting rights with respect to the securities that they
entitle the holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying securities or
commodities, and a warrant ceases to have value if it is not exercised prior to
its expiration date.
CALL AND PUT OPTIONS ON SECURITIES INDEXES. Each Fund may purchase and sell call
and put options on stock indexes, such as the Russell 2000 Index, listed on
national securities exchanges or traded in the over-the-counter market for
hedging purposes and to pursue its investment objective. A stock index
fluctuates with changes in the market values of the stocks that comprise the
index. Accordingly, successful use by a Fund of options on stock indexes will be
subject to the Manager's ability to predict correctly movements in the direction
of the stock market generally or segments thereof. This requires different
skills and techniques than forecasting changes in the price of individual
stocks.
NON-DIVERSIFIED STATUS
The classification of each Fund as a "non-diversified" investment company means
that the percentage of the Fund's assets that may be invested in the securities
of a single issuer is not limited by the 1940 Act. A "diversified" investment
company is required by the 1940 Act generally, with respect to 75% of its total
assets, to invest not more than 5% of such assets in the securities of a single
issuer. Since a relatively high percentage of each Fund's assets may be invested
in the securities of a limited number of issuers, some of which may be within
the same industry, the Fund's portfolio securities may be more sensitive to
changes in the market value of a single issuer and to events affecting a
particular industry or market segment.
Generally, each Fund intends to invest no more than 10% of the value of its
total assets in the securities of any one issuer, measured at the time of
purchase. However, while seeking desirable investments, a Fund may exceed this
limitation and U.S. Government Securities are not subject to this limitation.
Neither Fund currently contemplates attempting to influence the management
companies in which it invests; however, if the Manager deems it advisable, the
Fund may acquire a controlling interest in a company or attempt to influence its
management.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements involve the sale of a security to a bank or
securities dealer and the simultaneous agreement to repurchase the security for
a fixed price, reflecting a market rate of interest, on a specific date. These
transactions involve a risk that the other party to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as scheduled,
which may result in losses to a Fund. Reverse repurchase agreements are a form
of leverage which also may increase the volatility of a Fund's investment
portfolio.
FIXED-INCOME SECURITIES
Each Fund may invest in fixed-income securities. The Manager will invest in
these securities on a limited basis when it considers their yield and potential
for capital appreciation to be sufficiently attractive and also may invest in
these securities for defensive purposes and to maintain liquidity. Fixed-income
securities include bonds, notes and debentures issued by corporations; U.S.
Government Securities; municipal securities; and mortgage-backed and
asset-backed securities. These securities may pay fixed, variable or floating
rates of interest, and may include zero coupon obligations. Fixed-income
securities are subject to the risk of the issuer's inability to meet principal
and interest payments on its obligations (i.e., credit risk) and are subject to
the risk of price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness or financial condition of the issuer
and general market liquidity (i.e., market risk). Certain portfolio securities,
such as those with interest rates that fluctuate directly or indirectly based on
multiples of a stated index, are designed to be highly sensitive to changes in
interest rates and can subject the holders thereof to extreme reductions of
yield and possibly loss of principal.
Each Fund 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
(a "Rating Agency") in one of the four highest rating categories or, if not
rated by any Rating Agency, have been determined by the Manager to be of
comparable quality. See "TYPES OF INVESTMENTS AND RELATED RISK
FACTORS--High-Yield, Lower-Rated Securities."
HIGH-YIELD, LOWER-RATED SECURITIES
Each Fund's investments in non-investment grade debt securities, including
convertible debt securities, are considered by the Rating Agencies to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal. Non-investment grade 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 securities to make principal and interest
payments than is the case for higher grade securities. In addition, the market
for lower grade securities may be thinner and less liquid than for higher grade
securities.
FOREIGN SECURITIES
Each Fund may invest in equity securities of foreign issuers that are traded on
a U.S. national securities exchange and in depositary receipts, such as American
Depositary Receipts ("ADRs"), that represent indirect interests in securities of
foreign issuers. Investments in foreign securities are affected by risk factors
generally not thought to be present in the U.S. These factors include: less
public information about issuers of foreign securities; the unavailability of
financial information regarding the foreign issuer or the difficulty of
interpreting financial information prepared under foreign accounting standards;
the possibility of expropriation or nationalization; the imposition of
withholding and other taxes; adverse political, social or diplomatic
developments; difficulties in invoking legal process abroad and enforcing
contractual obligations; and the difficulty of assessing economic trends in
foreign countries.
MONEY MARKET INSTRUMENTS
Each Fund may invest, for defensive purposes or otherwise, some or all of its
assets in high quality fixed-income securities, money market instruments, and
money market mutual funds, or hold cash or cash equivalents in such amounts as
the Manager deems appropriate under the circumstances. Each Fund also may invest
in these instruments pending allocation of the offering proceeds. Money market
instruments are high quality, short-term fixed-income obligations, which
generally have remaining maturities of one year or less, and may include U.S.
Government Securities, commercial paper, certificates of deposit and bankers'
acceptances issued by domestic branches of United States banks that are members
of the Federal Deposit Insurance Corporation, and repurchase agreements.
LENDING PORTFOLIO SECURITIES
Each Fund may lend securities from its portfolio to brokers, dealers and other
financial institutions needing to borrow securities to complete certain
transactions. The Fund continues to be entitled to payments in amounts equal to
the interest, dividends or other distributions payable on the loaned securities
which affords the Fund an opportunity to earn interest on the amount of the loan
and on the loaned securities' collateral. Loans of portfolio securities may not
exceed 33-1/3% of the value of a Fund's total assets, and, in respect of such
transactions, the 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. A Fund might experience risk of loss if the institution
with which it has engaged in a portfolio loan transaction breaches its agreement
with the Fund.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT SECURITIES
To reduce the risk of changes in securities prices and interest rates, each Fund
may purchase securities on a forward commitment, when-issued or delayed delivery
basis, which means delivery and payment take place a number of days after the
date of the commitment to purchase. The payment obligation and the interest rate
receivable with respect to such purchases are fixed when a Fund enters into the
commitment, but the Fund does not make payment until it receives delivery from
the counterparty. A Fund will commit to purchase such securities only with the
intention of actually acquiring the securities, but the Fund may sell these
securities before the settlement date if it is deemed advisable.
Securities purchased on a forward commitment or when-issued or delayed delivery
basis are subject to changes in value, generally changing in the same way, i.e.,
appreciating when interest rates decline and depreciating when interest rates
rise, based upon the public's perception of the creditworthiness of the issuer
and changes, real or anticipated, in the level of interest rates. Securities so
purchased may expose a Fund to risks because they may experience such
fluctuations prior to their actual delivery. Purchasing securities on a
when-issued or delayed delivery basis can involve the additional risk that the
yield available in the market when the delivery takes place actually may be
higher than that obtained in the transaction itself. Purchasing securities on a
forward commitment, when-issued or delayed delivery basis when a Fund is fully
or almost fully invested may result in greater potential fluctuation in the
value of the Fund's net assets. In addition, there is a risk that securities
purchased on a when-issued or delayed delivery basis may not be delivered and
that the purchaser of securities sold by a Fund on a forward basis will not
honor its purchase obligation. In such cases, the Fund may incur a loss.
RESTRICTED AND ILLIQUID INVESTMENTS
Although the Funds will invest primarily in publicly traded securities, each may
invest up to 15% of the value of its 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 1933 Act or, if they are unregistered, may be sold only in a privately
negotiated transaction or pursuant to an exemption from registration under the
1933 Act.
Where registration is required to sell a security, a 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 Fund may be permitted to
sell a security under an effective registration statement. If, during such a
period, adverse market conditions were to develop, a Fund might obtain a less
favorable price than the prevailing price when it decided to sell. Restricted
securities for which no market exists and other illiquid investments are valued
at fair value as determined in accordance with procedures approved and
periodically reviewed by the Directors.
A Fund may be unable to sell restricted and other illiquid securities at the
most opportune times or at prices approximating the value at which the Fund
purchased such securities.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following investment restrictions as fundamental
policies, which cannot be changed without approval by holders of a majority (as
defined in the 1940 Act) of the Fund's outstanding voting securities. Neither
Fund may:
o Issue senior securities, except that, to the
extent permitted by the 1940 Act, the Fund may
borrow money (a) to finance portfolio transactions
and engage in other transactions involving the
issuance by the Fund of "senior securities"
representing indebtedness, and (b) for temporary
or emergency purposes or in connection with
repurchases of, or tenders for, the Fund's
interests.
o Underwrite securities of other issuers, except
insofar as the Fund may be deemed an underwriter
under the 1933 Act in connection with the
disposition of its portfolio securities.
o Make loans, except through purchasing fixed-income
securities, lending portfolio securities or
entering into repurchase agreements in a manner
consistent with the Fund's investment policies or
as otherwise permitted under the 1940 Act.
o Purchase, hold or deal in real estate, except that
the Fund may invest in securities or other
instruments that are secured by real estate, or
securities of companies that invest or deal in
real estate or interests in real estate or are
engaged in the real estate business.
o Invest in commodities or commodity contracts,
except that the Fund may purchase and sell
options, including those related to indexes.
o Invest in the securities of any one industry,
except, as to the Redwood Fund, the science and
technology industries, and, as to each Fund,
securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, if
as a result 25% or more of the Fund's total assets
would be invested in the securities of such
industry.
Under the 1940 Act, the vote of a majority of the outstanding voting securities
of an investment company, such as a Fund, means the vote, at the annual or a
special meeting of the security holders of such company duly called, (A) of 67%
or more of the voting securities present at such meeting, if the holders of more
than 50% of the outstanding voting securities of such company are present or
represented by proxy; or (B) of more than 50% of the outstanding voting
securities of such company, whichever is less.
With respect to these investment restrictions, and other policies described in
this Memorandum, if a percentage restriction is adhered to at the time of an
investment or transaction, a later change in percentage resulting from a change
in the values of investments or the value of a Fund's total assets, unless
otherwise stated, will not constitute a violation of such restriction or policy.
Each Fund's investment objective is fundamental and may not be changed without
the vote of a majority (as defined by the 1940 Act) of the Fund's outstanding
voting securities.
ADDITIONAL RISK FACTORS
-----------------------
INCENTIVE ALLOCATION
The Incentive Allocation of 20% of net profits to the capital account of the
Manager may create an incentive for the Manager to make investments that are
riskier or more speculative than those that might have been made in the absence
of the Incentive Allocation. In addition, because the allocation is calculated
on a basis that includes unrealized appreciation of the relevant Fund's assets,
the Incentive Allocation may be greater than if it were based solely on realized
gains. See "CAPITAL ACCOUNTS AND ALLOCATIONS--Incentive Allocation."
TAX RISKS
Counsel to each Fund has rendered an opinion that the Fund will be treated as a
partnership and not as an association taxable as a corporation for Federal
income tax purposes. Counsel to the Funds has rendered its opinion that, under a
"facts and circumstances" test set forth in regulations adopted by the U.S.
Treasury Department each Fund will not be treated as a "publicly traded
partnership" taxable as a corporation. If it were determined that a Fund should
be treated as an association or publicly traded partnership taxable as a
corporation, as a result of a successful challenge to the opinions rendered by
counsel to the Funds or otherwise, the taxable income of the Fund would be
subject to corporate income tax and distributions of profits from the Fund would
be treated as dividends. See "TAX ASPECTS--Tax Treatment of Fund
Operations--Classification of the Funds."
Each Fund's short sales and transactions in Derivatives will be subject to
special tax rules, the effect of which may be to accelerate income to the Fund,
defer losses to the Fund, cause adjustments in the holding period of the Fund's
securities and convert short-term capital losses into long-term capital losses.
Such transactions may result in a Fund realizing more short-term capital gains
and ordinary income subject to tax at ordinary income tax rates than it would if
it did not engage in such transactions.
LACK OF OPERATING HISTORY
Each Fund and the Manager are newly formed entities and have no operating
histories upon which investors can evaluate the performance of the Funds.
However, as discussed below, the personnel of the Manager who are responsible
for managing the Sequoia Fund's investment portfolio have substantial experience
in managing private investment funds and individually managed client accounts
that have investment programs that are similar to the Sequoia Fund's investment
program. Past performance is not necessarily indicative of future results. See
"PERFORMANCE INFORMATION," "THE MANAGER, PWFA AND FRONTIER" and "CONFLICTS OF
INTEREST--Participation in Investment Opportunities."
LIQUIDITY RISKS
Interests in each Fund will not be traded on any securities exchange or other
market and are subject to substantial restrictions on transfer. Although a Fund
may offer to repurchase Investor interests from time to time, an Investor may
not be able to liquidate its interest in the Fund for up to two years. These
repurchases will be made at such times and on such terms as may be determined by
the Board, in its complete and exclusive discretion. The Manager expects that it
will recommend to the Board that each Fund offer to repurchase interests from
Investors in December 2001 and, thereafter, twice each year, near mid-year and
year-end. See "REDEMPTIONS, REPURCHASES OF INTERESTS AND TRANSFERS."
DISTRIBUTIONS TO INVESTORS AND PAYMENT OF TAX LIABILITY
Neither Fund intends to make periodic distributions of its net income or gains,
if any, to Investors. Whether or not distributions are made, Investors will be
required each year to pay applicable Federal and state income taxes on their
respective shares of the relevant Fund's taxable income, and will have to pay
such applicable taxes from sources other than Fund distributions. The amount and
times of any distributions will be determined in the sole discretion of the
Board.
PERFORMANCE INFORMATION
------------------------
Appendix B contains pro-forma composite performance information for all accounts
managed by Frontier's personnel (the "Frontier Accounts") pursuant to an
investment program that is substantially similar to the Sequoia Fund's expected
investment program. The future performance of the Frontier Accounts may vary
from the future performance of the Sequoia Fund and should be expected to vary
significantly from the future performance of the Redwood Fund. See "CONFLICTS OF
INTEREST--Participation in Investment Opportunities." PAST PERFORMANCE DOES NOT
GUARANTEE FUTURE RESULTS.
THE DIRECTORS
-------------
Each Fund's Board has overall responsibility to manage and control the business
affairs of the relevant Fund, including the complete and exclusive authority to
oversee and to establish policies regarding the management, conduct and
operation of the Fund's business. Each Fund's Board exercises the same powers,
authority and responsibilities on behalf of the relevant Fund as are customarily
exercised by the board of directors of a registered investment company organized
as a corporation.
The Directors are not required to contribute to the capital of a Fund or hold
interests in a Fund. A majority of each Fund's Directors are not "interested
persons" (as defined in the 1940 Act) of the Fund (collectively, the
"Independent Directors") and perform the same functions for the Fund as are
customarily exercised by the non-interested directors of a registered investment
company organized as a corporation.
The identity of each Fund's Directors and brief biographical information
regarding each Director is set forth below. Each Director who is deemed to be an
"interested person" of a Fund, as defined in the 1940 Act, is indicated by an
asterisk.
NAME, ADDRESS AND AGE PRINCIPAL OCCUPATION(S) DURING
PAST FIVE YEARS
*E. Garrett Bewkes, Jr. Mr. Bewkes is a director of,
c/o PaineWebber Incorporated and prior to December 1995 was a
1285 Avenue of the Americas consultant to, PW Group, and recommenced
New York, New York 10019 service as a consultant to PW Group in
Age 73 May 1999. Prior to 1988, he was Chairman
of the Board, President and Chief
Executive Officer of American Bakeries
Company. Mr. Bewkes is a director of
Interstate Bakeries Corporation. Mr.
Bewkes also is a director or trustee of
38 other investment companies for which
PaineWebber Incorporated or its
affiliates serves as investment adviser.
Meyer Feldberg Mr. Feldberg is Dean and
c/o Columbia University Professor of Management of the Graduate
101 Uris Hall School of Business, Columbia University.
New York, New York 10027 Prior to 1989, he was President of the
Age 58 Illinois Institute of Technology. Dean
Feldberg is a director of Primedia, Inc.
(publishing), Federated Department
Stores Inc. (operator of department
stores) and Revlon, Inc (cosmetics).
Dean Feldberg also is a director or
trustee of 37 other investment companies
for which PaineWebber Incorporated or
its affiliates serves as investment
adviser.
George W. Gowen Mr. Gowen is a partner in the
666 Third Avenue law firm of Dunnington, Bartholow &
New York, New York 10017 Miller. Prior to May 1994, he was a
Age 70 partner in the law firm of Fryer, Ross &
Gowen. Mr. Gowen also is a director or
trustee of 37 other investment companies
for which PaineWebber Incorporated or
its affiliates serves as investment
adviser.
As to each Fund, the Directors serve on the Fund's Board for terms of indefinite
duration. A Director's position in that capacity will terminate if such Director
is removed, resigns or is subject to various disabling events such as death or
incapacity. A Director may resign upon 90 days' prior written notice to the
other Directors, subject to waiver of notice, and may be removed either by vote
of two-thirds of the Directors not subject to the removal vote or vote of the
Investors holding not less than two-thirds of the total number of votes eligible
to be cast by all Investors. In the event of any vacancy in the position of a
Director, the remaining Directors may appoint an individual to serve as a
Director, so long as immediately after such appointment at least two-thirds of
the Directors then serving would have been elected by the Investors. The
Directors may call a meeting of Investors to fill any vacancy in the position of
a Director, and must do so within 60 days after any date on which Directors who
were elected by the Investors cease to constitute a majority of the Directors
then serving. If no Director remains to manage the business of a Fund, the
Manager may manage and control the Fund, but must convene a meeting of Investors
within 60 days for the purpose of either electing new Directors or dissolving
the Fund.
As to each Fund, the Independent Directors are each paid an annual retainer of
$5,000 and per meeting fees of $500, or $250 in the case of telephonic meetings
by the Fund. The other Directors receive no annual or other fees from the Funds.
All Directors are reimbursed by the Fund for their reasonable out-of-pocket
expenses. It is estimated that the aggregate annual compensation paid by the
Fund to each Independent Director will be $6,000 during the coming year, and
that, together with compensation paid to them by other registered investment
companies advised by affiliates of the Manager, Messrs. Feldberg and Gowen will
each receive aggregate annual compensation from all such companies of
approximately $165,000 for such year. The Directors do not receive any pension
or retirement benefits from the Funds.
THE MANAGER, PWFA AND FRONTIER
------------------------------
The Directors have engaged the Manager to provide investment advice to, and the
day-to-day management of, each Fund, in each case under the ultimate supervision
of and subject to any policies established by the Board. The Manager was formed
as a Delaware limited liability company on July 20, 2000 and will be registered
as an investment adviser under the Advisers Act before the commencement of each
Fund's operations. The offices of the Manager are located at 1285 Avenue of the
Americas, New York, New York 10019, and its telephone number is (800) 486-2608.
Before the commencement of each Fund's operations, the Manager owned 99% of the
outstanding interests in each Fund (thereby controlling the Funds) and was the
only person to own of record or beneficially 5% or more of the outstanding
interests in each Fund. The Manager or its designee maintains each Fund's
accounts, books and other documents required to be maintained under the 1940 Act
at 1285 Avenue of the Americas, New York, New York 10019, or at such other place
as designated by the Manager.
The Manager is a joint venture between PWFA and Frontier. PWFA is the managing
member of the Manager and oversees the Manager's provision of investment advice
and day-to-day management to each Fund. Frontier provides the Manager with use
of and access to such of its personnel, research and facilities as the Manager
requires to manage each Fund's investment portfolio, and these individuals have
the sole responsibility, subject only to the oversight of the Manager and the
Board, for the investment advisory services provided to each Fund.
PWFA is an indirect, wholly-owned subsidiary of PW Group and is registered as an
investment adviser under the Advisers Act. On July 12, 2000, PW Group and UBS
announced that they had entered into an agreement and plan of merger pusuant to
which PW Group will merge into a wholly-owned subsidiary of UBS. If all required
approvals of the agreement are obtained and satisfied, PW Group and UBS expect
to complete the transaction in the fourth quarter of 2000. UBS, with
headquarters in Zurich, Switzerland, is an internationally diversified
organization with operations in many areas of the financial services industry.
PWFA and its affiliates provide investment advisory services to registered
investment companies, private investment funds and individual accounts, and, as
of June 30, 2000, have approximately $484 billion of client assets and
approximately $73 billion of assets under management. PaineWebber Incorporated,
a wholly-owned subsidiary of PW Group, is registered as a broker-dealer under
the Securities Exchange Act of 1934, as amended, and is a member of the New York
Stock Exchange, Inc. and other principal securities exchanges.
FCM, organized as a Delaware limited liability company in September, 1999, is
the successor to Frontier Capital Management Company, Inc., a Massachusetts
corporation founded in 1980. FPA was organized as a Delaware limited partnership
in May, 1994. FCM and FPA provide investment advisory services to institutions
and individuals, and, as of June 30, 2000, Frontier had approximately $5.4
billion of assets under management. Both FCM and FPA are registered as
investment advisers under the Investment Advisers Act of 1940.
The authority of the Manager to serve or act as investment adviser, and be
responsible for the day-to-day management, of each Fund (collectively, "Advice
and Management"), and the incentive allocation arrangement between each Fund and
the Manager, as the foregoing are set forth in each Fund's respective LLC
Agreement, was initially approved by the Board, including each Independent
Director, and by vote of Investors holding interests in each of the Funds on
July 27, 2000. This vote took into account the proposed transaction between PW
Group and UBS. As to each Fund, the authority of the Manager to provide Advice
and Management will terminate under the following circumstances:
(1) if revoked by (A) vote of a majority (as defined
in the 1940 Act) of the outstanding voting
securities of the Fund or (B) the Board, in either
case with 60 days' prior written notice to the
Manager;
(2) at the election of the Manager, with 60 days'
prior written notice to the Board;
(3) if, after July 27, 2001, any period of 12
consecutive months shall conclude without the
approval of the continuation of such authority by
(A) the vote of a majority (as defined in the 1940
Act) of the outstanding voting securities of the
Fund or (B) the Board and, in either case,
approved by a majority of the Independent
Directors by vote cast at a meeting called for
such purpose; or
(4) to the extent required by the 1940 Act, upon the
occurrence of any event in connection with the
Manager, its provision of Advice and Management,
the relevant LLC Agreement or otherwise
constituting an "assignment" within the meaning of
the 1940 Act.
VOTING
------
Each Investor will have the right to cast a number of votes on a Fund matter
based on the value of such Investor's respective capital account in the Fund at
any meeting of Investors called by the Fund's Directors or Investors holding at
least a majority of the total number of votes eligible to be cast by all
Investors in the Fund. Investors will be entitled to vote on any matter on which
shareholders of a registered investment company organized as a corporation would
be entitled to vote, including selection of Directors, approval of the authority
of the Manager to provide Advice and Management and approval of the Fund's
auditors. Except for the exercise of their voting privileges, Investors will not
be entitled to participate in the management or control of a Fund's business,
and may not act for or bind the Fund.
CONFLICTS OF INTEREST
----------------------
PWFA
PWFA and its affiliates manage the assets of registered investment companies,
private investment funds and individual accounts (collectively, "PWFA Clients").
Neither Fund has an interest in these activities. In addition, PWFA, its
affiliates, and any of their respective officers, directors, partners, members
or employees, may invest for their own accounts in various investment
opportunities in which a Fund will have no interest. PWFA and its officers or
employees who assist PWFA in its oversight of the Manager will be engaged in
substantial activities other than on behalf of the Manager and may have
conflicts of interest in allocating their time and activity between the Manager
and PWFA Clients. PWFA and its officers and employees will devote so much of
their time to the affairs of the Manager as in their judgment is necessary and
appropriate.
PaineWebber Incorporated acts as the placement agent for each Fund, without
special compensation from either Fund, and will bear its own costs associated
with its activities as placement agent. PWFA and PaineWebber Incorporated intend
to compensate PaineWebber Incorporated's or its affiliates' financial advisors,
as well as third-party securities dealers and other industry professionals, for
their ongoing servicing of clients with whom they have placed interests in a
Fund and such compensation will be based upon a formula that takes into account
the amount of client assets being serviced as well as the investment results
attributable to the clients' assets in the Fund. Additionally these entities, at
their discretion, may charge Investors placement fees of up to 2% of the
purchase price of Fund interests being purchased. See "FEES AND EXPENSES" and
"CAPITAL ACCOUNTS AND ALLOCATIONS--Incentive Allocation."
PaineWebber Incorporated or its affiliates may provide advisory, consulting or
investment banking services to one or more of the Funds' portfolio companies or
to a client that may enter or has entered into a transaction with one or more of
the Funds' portfolio companies. While the employees of PaineWebber or its
affiliates providing these services will be different from those associated with
the Manager, these services or the transactions resulting therefrom could
conflict with or have an adverse impact on a Fund's portfolio investments.
PWFA and its affiliates may engage in certain activities through which the
Manager may acquire confidential or material non-public information with respect
to certain companies. As a result, the Manager may be restricted from engaging
in transactions on behalf of a Fund involving the securities of these companies.
PaineWebber Incorporated or its affiliates may provide brokerage and other
services from time to time to one or more accounts or entities managed by
FCM, FPA or one of their affiliates.
FRONTIER
Frontier provides investment advisory and other services to other clients or
accounts (the "Frontier Accounts"). Frontier and certain of the investment
professionals who are principals of or employed by Frontier (collectively with
Frontier, the "Frontier Managers") also carry on substantial investment
activities for their own accounts, for the accounts of family members and for
other Frontier Accounts. Neither Fund will have an interest in these activities.
As a result of the foregoing, Frontier and the investment professionals who, on
behalf of the Manager, will manage each Fund's investment portfolio will be
engaged in substantial activities other than on behalf of the Manager, may have
differing economic interests in respect of such activities and may have
conflicts of interest in allocating their time and activity between the Funds
and the Frontier Accounts. Such persons will devote only so much time to the
affairs of the Manager as in their judgment is necessary and appropriate.
Frontier and its affiliates may engage in certain activities through which the
Manager may acquire confidential or material non-public information with respect
to certain companies. As a result, the Manager may be restricted from engaging
in transactions on behalf of a Fund involving the securities of these companies.
PWFA, its affiliates or PWFA Clients may have an interest in the Frontier
Accounts on terms different than, and sometimes more favorable than, an interest
in a Fund. PWFA or its affiliates may receive compensation in connection with
the services provided by Frontier to the Frontier Accounts. In addition, the
Frontier Managers may receive research products and services in connection with
the brokerage services that PWFA and its affiliates may provide from time to
time to one or more Frontier Accounts or to a Fund.
PARTICIPATION IN INVESTMENT OPPORTUNITIES
The Manager expects to employ an investment program for each Fund that is
similar to the investment program that is being employed by the Frontier
Managers for certain Frontier Accounts. Accordingly, as a general matter, the
Manager will consider participation by a Fund in all appropriate investment
opportunities that will be under consideration for investment by the Frontier
Managers for the relevant Frontier Accounts. There may be, however,
circumstances under which the Frontier Managers will cause one or more Frontier
Accounts to commit a larger percentage of their respective assets to an
investment opportunity than to which the Manager will commit a Fund's assets.
There also may be circumstances under which the Frontier Managers will consider
participation by the Frontier Accounts in investment opportunities in which the
Manager does not intend to invest on behalf of a Fund, or vice versa.
The Manager will evaluate for each Fund, and it is anticipated that the Frontier
Managers will evaluate for each Frontier Account, a variety of factors that may
be relevant in determining whether a particular investment opportunity or
strategy is appropriate and feasible for a Fund or a Frontier Account at a
particular time, including, but not limited to, the following: (1) the
investment objective and investment policies of the relevant Fund or Frontier
Account; (2) the nature of the investment opportunity taken in the context of
the other investments at the time; (3) the liquidity of the investment relative
to the needs of the particular entity or account; (4) the availability of the
opportunity (i.e., size of obtainable position); (5) the transaction costs
involved; and (6) the investment or regulatory limitations applicable to the
particular entity or account. Because these considerations may differ for the
Funds and the Frontier Accounts in the context of any particular investment
opportunity, the investment activities of the Funds and the Frontier Accounts
may differ considerably from time to time. In addition, the fees and expenses of
the Funds may differ from those of the Frontier Accounts. Accordingly,
prospective Investors should note that the future performance of each Fund and
the Frontier Accounts will vary and may vary significantly.
When the Manager and the Frontier Managers determine that it would be
appropriate for a Fund and one or more Frontier Accounts to participate in an
investment opportunity at the same time, they will attempt to aggregate, place
and allocate orders on a basis that the Manager believes to be fair and
equitable, consistent with its responsibilities under applicable law. Decisions
in this regard are necessarily subjective and there is no requirement that a
Fund participate, or participate to the same extent as the Frontier Accounts, in
all trades. However, no participating entity or account will receive
preferential treatment over any other over time and the Frontier Managers will
take steps to ensure that no participating entity or account will be
systematically disadvantaged by the aggregation, placement and allocation of
orders.
Situations may occur, however, where a Fund could be disadvantaged because of
the investment activities conducted by the Frontier Managers for the Frontier
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 a
Fund and the Frontier Accounts, thereby limiting the size of the Fund's
position; (2) the difficulty of liquidating an investment for a Fund and the
Frontier Accounts where the market cannot absorb the sale of the combined
positions; and (3) the determination that a particular investment is warranted
only if hedged with an option or other instrument and there is a limited
availability of such options or other instruments. In particular, a Fund may be
legally restricted from entering into a "joint transaction" (as defined in the
1940 Act) with the Frontier Accounts with respect to the securities of an issuer
without first obtaining exemptive relief from the SEC. See "CONFLICTS OF
INTEREST--Other Matters."
The Manager and members of the Manager, and their members, directors, 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 a Fund. As a result of differing
trading and investment strategies or constraints, positions may be taken by the
Manager, members, directors, officers, employees and affiliates of PWFA or
Frontier, or by the Frontier Managers for the Frontier Accounts, that are the
same, different or made at a different time than positions taken for a Fund.
The Manager may serve as investment adviser for clients other than the Funds. As
a result, it may have conflicts of interests similar to those described above
with respect to PWFA and Frontier.
OTHER MATTERS
Except in accordance with applicable law, the Manager and its members are not
permitted to buy securities or other property from, or sell securities or other
property to, a Fund. However, each Fund may effect certain principal
transactions in securities with one or more Frontier Accounts, except for
accounts in which Frontier or any affiliate thereof serves as a general partner
or in which it has a financial interest, other than an interest that results
solely from Frontier's or any affiliate's appointment as an investment adviser
to the account. Such transactions would be made in circumstances where the
Manager has determined it would be appropriate for a Fund to purchase and a
Frontier Account to sell, or the Fund to sell and a Frontier Account to
purchase, the same security or instrument on the same day.
Future investment activities of PWFA or Frontier, or their affiliates, and the
principals, partners, directors, officers or employees of the foregoing, may
give rise to additional conflicts of interest. Each Fund, the Manager and
PaineWebber Incorporated each has adopted a code of ethics under Rule 17j-1 of
the 1940 Act that permits its personnel, subject to the codes, to invest in
securities, including securities that may be purchased or held by the Fund.
These codes 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. These codes are
available on the EDGAR database on the SEC's Internet site at
http://www.sec.gov, and also may be obtained, after paying a duplicating fee, by
electronic request at the following E-mail address: [email protected], or by
writing the SEC's Public Reference Section, Washington, D.C. 20549-0102.
BROKERAGE
----------
The Manager is responsible for the execution of each Fund's portfolio
transactions and the allocation of brokerage. Transactions on U.S. stock
exchanges involve the payment of negotiated brokerage commissions. No stated
commission is generally applicable to securities traded in over-the-counter
markets, but the prices of those securities include undisclosed commissions or
mark-ups.
In executing transactions on behalf of a Fund, the Manager seeks to obtain the
best execution for the Fund, taking into account factors such as price, size of
order, difficulty of execution and operational facilities of a brokerage firm,
and in the case of transactions effected by the Fund with unaffiliated brokers,
the firm's risk in positioning a block of securities. Although the Manager
generally will seek reasonably competitive commission rates, a Fund will not
necessarily pay the lowest commission available on each transaction. Neither
Fund will have an obligation to deal with any broker or group or brokers in
executing transactions in portfolio securities. Each Fund may execute portfolio
brokerage transactions through PaineWebber Incorporated or its affiliates,
subject to compliance with the 1940 Act.
Following the principle of seeking best execution, the Manager may place
brokerage business on behalf of a Fund with brokers that provide the Manager and
its affiliates, including the Frontier Managers, with supplemental research,
market and statistical information, including advice as to the value of
securities, the advisability of investing in, purchasing or selling securities,
and the availability of securities or purchasers or sellers of securities, and
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy and the performance of accounts.
The expenses of the Manager are not necessarily reduced as a result of the
receipt of this supplemental information, which may be useful to the Manager and
its affiliates in providing services to clients other than the Funds. In
addition, not all of the supplemental information is used by the Manager in
connection with the Funds. Conversely, the information provided to the Manager
by brokers and dealers through which other clients of the Manager and its
affiliates effect securities transactions may be useful to the Manager in
providing services to the Funds.
Although the Funds cannot accurately predict their portfolio turnover, each Fund
expects that its annual portfolio turnover rate generally may exceed 100%. A
turnover rate of 100% is equivalent to a Fund buying and selling all of the
securities in its portfolio once in the course of a year. Higher portfolio
turnover rates usually generate additional brokerage commissions and transaction
costs and the short-term gains realized from these transactions are taxable to
Investors at ordinary income tax rates.
FEES AND EXPENSES
------------------
PWFA provides certain management and administrative services to each Fund,
including, among other things, providing office space and other support
services. In consideration for these services, each Fund will pay PWFA a
management fee generally on a monthly basis at the annual rate of 1.25% of the
respective Fund's net assets for the month, excluding assets attributable to the
Manager's capital account (the "Fee"). Net assets means the total value of all
assets of the Fund, less an amount equal to all accrued debts, liabilities and
obligations of the Fund, calculated before giving effect to any repurchases of
interests. The Fee will be computed as of the start of business on the first
business day of the period to which the Fee relates, after adjustment for any
capital contributions effective on such date, and will be payable in arrears.
The Fee will be charged in each period to the capital accounts of all Investors
in proportion to their capital accounts at the beginning of such period. A
portion of the Fee will be paid by PWFA to Frontier.
The Administrator performs certain administration, accounting and investor
services for each Fund and other investment funds sponsored or advised by PW
Group or its affiliates. In consideration for these services, each Fund and such
other funds will pay the Administrator an annual fee based on: (i) the average
net assets of the Fund, subject to a minimum monthly fee, and (ii) the aggregate
net assets of such other funds, subject to a minimum monthly fee, and will
reimburse the Administrator for out-of-pocket expenses.
In addition, the capital accounts of Investors may be subject to an Incentive
Allocation depending upon the investment performance of each Fund. See "CAPITAL
ACCOUNTS AND ALLOCATIONS--Incentive Allocation."
Each Fund will bear all expenses incurred in its business other than those
specifically required to be borne by PWFA. Expenses to be borne by each Fund
include:
o all costs and expenses directly related to
portfolio transactions and positions for the
Fund's account, including, but not limited to,
brokerage commissions, research fees, interest and
commitment fees on loans and debit balances,
borrowing charges on securities sold short,
dividends on securities sold short but not yet
purchased, custodial fees, margin fees, transfer
taxes and premiums and taxes withheld on foreign
dividends;
o all costs and expenses associated with the
organization and registration of the Fund, certain
offering costs and the costs of compliance with
any applicable Federal or state laws;
o the costs and expenses of holding any meetings of
the Board and any meetings of Investors that are
regularly scheduled, permitted or required to be
held under the terms of its LLC Agreement, the
1940 Act or other applicable law;
o fees and disbursements of any attorneys,
accountants, auditors and other consultants and
professionals engaged on behalf of the Fund;
o the fees of custodians and other persons providing
administrative services to the Fund;
o the costs of a fidelity bond and any liability
insurance obtained on behalf of the Fund, the
Manager or the Directors;
o all costs and expenses of preparing, setting in
type, printing and distributing reports and other
communications to Investors;
o all expenses of computing the Fund's net asset
value, including any equipment or services
obtained for the purpose of valuing the Fund's
investment portfolio, including valuation services
provided by third parties;
o all charges for equipment or services used for
communications between the Fund and any custodian,
or other agent engaged by the Fund; and
o such other types of expenses as may be approved
from time to time by the Board.
The Manager will be reimbursed by each Fund for any of the above expenses that
it pays on behalf of a Fund.
Each Fund's organizational and offering expenses are estimated at $250,000.
Before a recent change to the guidelines followed by the American Institute of
Certified Public Accountants applicable to the Funds, each Fund would have been
able to amortize the organizational expenses over a 60-month period. Because of
that change, however, the organizational expenses now must be expensed as
incurred. To achieve a more equitable distribution of the impact of those
expenses among the Investors, an amount equal to the organizational expenses
incurred by each Fund will be allocated among and credited to or debited against
the capital accounts of all Investors in that Fund based on the percentage that
an Investor's contributed capital to the Fund bears to the total capital
contributed to the Fund by all Investors as of the relevant allocation date. An
initial allocation of organizational costs will be made as of the first date on
which capital contributions of Investors are made (the "Initial Closing Date").
These allocations will thereafter be adjusted as of each date on which
additional capital is contributed to each Fund by its Investors, through and
including the date which is six months after the Initial Closing Date. Each Fund
also will bear certain ongoing offering costs associated with any periodic
offers of Fund interests. Offering costs cannot be deducted by the Funds or the
Investors.
PLACEMENT FEE
In connection with initial and additional purchases of Fund interests, Investors
may be charged by PaineWebber Incorporated and its Financial Advisors, as well
as third party securities dealers and other industry professionals, a placement
fee of up to 2% of the Investor's capital contribution, in their sole
discretion. The placement fee will be added to the purchase price and will not
constitute assets of the relevant Fund. See "APPLICATION FOR
INTERESTS--Application Terms."
CAPITAL ACCOUNTS AND ALLOCATIONS
---------------------------------
CAPITAL ACCOUNTS
Each Fund will maintain a separate capital account for each Investor, which will
have an opening balance equal to such Investor's initial contribution to the
capital of the Fund. Each Investor's capital account will be increased by the
sum of the amount of cash and the value of any securities constituting
additional contributions by such Investor to the capital of a Fund, plus any
amounts credited to such Investor's capital account as described below.
Similarly, each Investor's capital account will be reduced by the sum of the
amount of any repurchase by a Fund of the interest or portion of the interest of
such Investor, plus the amount of any distributions to such Investor which are
not reinvested, plus any amounts debited against such Investor's capital account
as described below. To the extent that any debit would reduce the balance of the
capital account of any Investor below zero, that portion of any such debit will
instead be allocated to the capital account of the Manager; any subsequent
credits that would otherwise be allocable to the capital account of any such
Investor will instead be allocated to the capital account of the Manager in such
amounts as are necessary to offset all previous debits attributable to such
Investor.
As to each Fund, capital accounts of Investors 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 (1) the last day of the fiscal year of the
Fund, (2) the day preceding the date as of which a contribution to the capital
of the Fund is made, (3) the day as of which the Fund repurchases any interest
or portion of an interest of any Investor, (4) the day as of which the Fund
admits a substituted Investor to whom an interest or portion of an interest of
an Investor has been transferred (unless there is no change in beneficial
ownership) or (5) the day as of which any amount is credited to or debited from
the capital account of any Investor other than an amount to be credited to or
debited from the capital accounts of all Investors in accordance with their
respective Fund percentages. A Fund percentage will be determined for each
Investor as of the start of each fiscal period by dividing the balance of such
Investor's capital account as of the commencement of such period by the sum of
the balances of all capital accounts of all Investors as of such date.
ALLOCATION OF NET PROFITS AND NET LOSSES
As to each Fund, net profits or net losses of the Fund for each fiscal period
will be allocated among and credited to or debited against the capital accounts
of all Investors as of the last day of each fiscal period in accordance with
Investors' respective Fund percentages for such fiscal period. Net profits or
net losses will be measured as the net change in the value of the net assets of
the Fund, including any net change in unrealized appreciation or depreciation of
investments and realized income and gains or losses and expenses during a fiscal
period, before giving effect to any repurchases by the Fund of interests or
portions of interests, and adjusted to exclude the amount of any "key man" and
other insurance premiums or proceeds to be allocated among the capital accounts
of the Investors and any items to be allocated among the capital accounts of the
Investors other than in accordance with the Investors' respective Fund
percentages.
Allocations for Federal income tax purposes generally will be made among the
Investors so as to reflect equitably amounts credited or debited to each
Investor's capital account for the current and prior fiscal years.
INCENTIVE ALLOCATION
So long as the Manager provides Advice and Management to a Fund, the Manager
will be entitled to an incentive-based allocation (the "Incentive Allocation"),
charged to the capital account of each Investor as of the last day of each
"allocation period," of 20% of the amount by which any "allocated gain" during
an "allocation period" exceeds the positive balance in the Investor's "loss
recovery account." The Incentive Allocation will be credited to the capital
account of the Manager.
For purposes of calculating the Incentive Allocation, "allocated gain" means the
excess of the balance of the Investor's capital account at the end of an
"allocation period," after giving effect to allocations other than the Incentive
Allocation, but before giving effect to any distributions and repurchases of
interests by the relevant Fund or debits to such capital account to reflect any
item (other than management fees) not chargeable ratably to all Investors, over
the balance of the Investor's capital account at the start of such "allocation
period." Consequently, any Incentive Allocation to be credited to the Manager
will be increased by a portion of the amount of any net unrealized appreciation,
as well as net realized gains, allocable to an Investor.
An Incentive Allocation will be charged only with respect to any "allocated
gain" in excess of the positive balance of a "loss recovery account" maintained
for each Investor. A "loss recovery account" is a memorandum account maintained
by each Fund for each Investor, which has an initial balance of zero and is (1)
increased after the close of each "allocation period" by the amount of any
negative performance for such Investor during such "allocation period," and (2)
decreased (but not below zero) after the close of each "allocation period" by
the amount of any allocated gain for such Investor during such "allocation
period." Any positive balance in an Investor's "loss recovery account" would be
reduced as the result of a repurchase or certain transfers with respect to the
Investor's interest in a Fund in proportion to the reduction of the Investor's
capital account attributable to the repurchase or transfer.
An "allocation period" as to each Investor in a Fund is a period commencing on
the admission of such Investor to the Fund and ending at the close of business
on the first to occur of (1) the last day of the twelfth complete calendar month
since the admission of such Investor to the Fund, (2) the last day of a fiscal
year subsequent to an Investor having been admitted to the Fund for 12 complete
calendar months, and the last day of each fiscal year thereafter, (3) the day as
of which the Fund repurchases any interest or portion of an interest of such
Investor, (4) the day as of which the Fund admits as a substitute Investor a
person to whom the interest or portion of the interest of such Investor has been
transferred, (5) the day as of which the authority of the Manager to provide
Advice and Management is terminated, (6) the day preceding any day as of which
such Investor becomes a Special Investor (as defined below), or (7) the day on
which such Investor ceases to be a Special Investor. The measurement of any
Incentive Allocation for an "allocation period" must take into account any
negative performance from a prior allocation period to the extent reflected in
the "loss recovery account." Therefore, the Incentive Allocation for any
allocation period after the initial 12-month period in effect is a reflection of
the extent to which cumulative performance achieved with respect to an
Investor's account since such Investor's admission to a Fund exceeds the highest
previous level of performance achieved through the close of any prior allocation
period.
After the close of each allocation period with respect to each Investor, and
subject to certain limitations, the Manager may withdraw up to 100% of the
Incentive Allocation, computed on the basis of unaudited data, that was credited
to the Manager's capital account and debited from the Investor's capital account
with respect to such allocation period. Each Fund will pay any balance, subject
to audit adjustments, within 30 days after the completion of the audit of its
books.
The Manager, in its sole discretion, may reduce or waive the Incentive
Allocation for Investors who are key employees or directors of the Manager and
its affiliates, and members of their immediate families, and attorneys or other
professional advisors engaged on behalf of a Fund, and members of their
immediate families (collectively, "Special Investors").
ALLOCATION OF SPECIAL ITEMS--CERTAIN WITHHOLDING TAXES AND OTHER EXPENDITURES
-----------------------------------------------------------------------------
Withholding taxes or other tax obligations incurred by a Fund which are
attributable to any Investor will be debited against the capital account of such
Investor as of the close of the fiscal period during which the Fund paid such
obligation, and any amounts then or thereafter distributable to such Investor
will be reduced by the amount of such taxes. If the amount of such taxes is
greater than any such distributable amounts, the Investor and any successor to
the Investor's interest is required to pay to the Fund, upon demand of the Fund,
the amount of such excess.
RESERVES
Appropriate reserves may be created, accrued and charged against net assets of a
Fund for contingent liabilities of a Fund as of the date any such contingent
liabilities become known to the Manager or the Fund's Board. Reserves will be in
such amounts, subject to increase or reduction, which the Board or the Manager
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 Investors at the time when
such reserve is created, increased or decreased, as the case may be; provided,
however, that if any such reserve, or any increase or decrease therein, exceeds
the lesser of $500,000 or 1% of the aggregate value of the capital accounts of
all such Investors, the amount of such reserve, increase, or decrease shall
instead be charged or credited to those investors who, as determined by the
Board, were Investors at the time of the act or omission giving rise to the
contingent liability for which the reserve was established, increased or
decreased in proportion to their capital accounts at that time.
NET ASSET VALUATION
Net asset value of each Fund will be determined by or at the direction of the
Manager as of the close of business at the end of any fiscal period in
accordance with the valuation principles set forth below or as may be determined
from time to time pursuant to policies established by the Fund's Directors.
Domestic exchange traded securities and securities included in the Nasdaq
National Market System will be valued at their last composite sale prices as
reported on the exchanges where such securities are traded. If no sales of such
securities are reported on a particular day, the securities will be valued based
upon their composite bid prices for securities held long, or their composite ask
prices for securities held short, as reported by such exchanges. Listed options
will be valued using last sales prices as reported by the exchange with the
highest reported daily volume for such options or, in the absence of any sales
on a particular day, at their bid prices as reported by the exchange with the
highest volume on the last day a trade was reported. Other securities for which
market quotations are readily available will be valued at their bid prices, or
ask prices in the case of securities held short, as obtained from one or more
dealers making markets for such securities. If market quotations are not readily
available, securities and other assets will be valued at fair value as
determined in good faith by, or under the supervision of, the Directors.
Debt securities will be valued in accordance with the procedures described
above, which with respect to such securities may include the use of valuations
furnished by a pricing service which employs a matrix to determine valuations
for normal institutional size trading units. The Directors will monitor
periodically the reasonableness of valuations provided by any such pricing
service. Debt securities with remaining maturities of 60 days or less, absent
unusual circumstances, will be valued at amortized cost, so long as such
valuation is determined by the Directors to represent fair value.
Investors should be aware that situations involving uncertainties as to the
valuation of portfolio positions could have an adverse effect on a Fund's net
assets if the Directors' judgments regarding appropriate valuations should prove
incorrect.
APPLICATION FOR INTERESTS
-------------------------
APPLICATION TERMS
Both initial and additional applications for interests in each Fund may be
accepted from eligible investors (as described below) at such times as the
Manager may determine on the terms set forth below. Each Fund may, in its
discretion, suspend the offering of interests at any time or permit applications
on a more frequent basis. Each Fund reserves the right to reject any application
for interests in the Fund. After the initial closing, initial applications and
additional capital contributions generally will be accepted monthly. Generally,
the minimum required initial contribution to the capital of a Fund from each
investor is $250,000. For employees or directors of the Manager and its
affiliates, and members of their immediate families, and, in the sole discretion
of the Manager, attorneys or other professional advisors engaged on behalf of
each Fund, and members of their immediate families, the minimum required initial
contribution to the capital of each Fund is $25,000. Each Fund may vary the
investment minimums from time to time. Investors may be charged a placement fee.
See "FEES AND EXPENSES--Placement Fee." The initial closing date for
applications for interests in a Fund is September 29, 2000. Each Fund, in its
sole discretion, may accelerate or postpone the closing date. In addition,
because a Fund may generate UBTI, charitable remainder trusts may not want to
purchase interests in the Fund 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. Prospective Investors that are charitable remainder trusts
will be required to make certain representations contained in a supplemental
certificate to be provided. See "TAX ASPECTS--Unrelated Business Taxable
Income."
Except as otherwise permitted by a Fund, initial and any additional
contributions to the capital of the Fund by any Investor will be payable in
cash, and all contributions must be transmitted by such time and in such manner
as is specified in the application of the Fund. Initial and any additional
contributions to the capital of a Fund will be payable in one installment and
will be due before the proposed acceptance of the contribution, although the
Fund may accept, in its discretion, an application before its receipt of cleared
funds.
Each new Investor in a Fund will be obligated to agree to be bound by all of the
terms of the Fund's LLC Agreement. Each potential Investor also will be
obligated to represent and warrant in the application, among other things, that
such investor is purchasing an interest for its own account, and not with a view
to the distribution, assignment, transfer or other disposition of such interest.
If and when a Fund determines to accept securities as a contribution to the
capital of the Fund, the Fund will charge each Investor making such contribution
an amount determined by the Directors and not exceeding 2% of the value of such
contribution in order to reimburse the Fund for any costs it incurs in
liquidating and accepting such securities. Any such charge will be due and
payable by the contributing Investor in full at the time the contribution to the
capital of the Fund to which such charge relates is due.
ELIGIBLE INVESTORS
Each prospective Investor in a Fund will be required to certify that the
interest being purchased is being acquired directly or indirectly for the
account of an "accredited investor" as defined in Regulation D under the 1933
Act, and that such Investor, as well as each of the Investor's equity owners
under certain circumstances, (i) immediately after the time of purchase, has at
least $750,000 under the discretionary investment management of PW Group and its
affiliates or subsidiaries, (ii) at the time of purchase, has a net worth of
more than $1.5 million, or (iii) at the time of purchase, is a "qualified
purchaser" as defined in Section 2(a)(51)(A) of the 1940 Act (a "Qualified
Purchaser"). Existing Investors who purchase additional interests in the Fund
and transferees of interests in the Fund may be required to represent that they
meet the foregoing eligibility criterion at the time of the additional purchase.
The relevant Investor qualifications will be set forth in an application to be
provided to prospective Investors, which must be completed by each prospective
Investor.
REDEMPTIONS, REPURCHASES OF INTERESTS AND TRANSFERS
----------------------------------------------------
NO RIGHT OF REDEMPTION
No Investor or other person holding an interest or a portion of an interest will
have the right to require a Fund to redeem the interest or portion thereof. No
public market exists for interests in the Funds, 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 a Fund, as described
below.
REPURCHASES OF INTERESTS
Each Fund from time to time may offer to repurchase interests pursuant to
written tenders by Investors. These repurchases will be made at such times and
on such terms as may be determined by the Board, in its complete and exclusive
discretion. In determining whether a Fund should repurchase interests or
portions thereof from Investors pursuant to written tenders, the Fund's Board
will consider the recommendation of the Manager. The Manager expects that it
will recommend to the Fund's Board that the Fund offer to repurchase interests
from its Investors in December 2001 and, thereafter, twice each year, near
mid-year and year-end. As to each Fund, the Directors also will consider the
following factors, among others, in making such determination:
o whether any Investors have requested to tender
interests or portions thereof to the Fund;
o the liquidity of the Fund's assets;
o the investment plans and working capital
requirements of the Fund;
o the relative economies of scale with respect to
the size of the Fund;
o the history of the Fund in repurchasing interests
or portions thereof;
o the condition of the securities markets; and
o the anticipated tax consequences of any proposed
repurchases of interests or portions thereof.
The Board will determine that a Fund repurchase interests or portions thereof
from Investors pursuant to written tenders only on terms they determine to be
fair to the Fund and to all Investors or persons holding interests acquired from
Investors, as applicable. When the Board determines that the Fund will
repurchase interests in the Fund or portions thereof, notice will be provided to
each Investor describing the terms thereof, and containing information Investors
should consider in deciding whether and how to participate in such repurchase
opportunity. Investors who are deciding whether to tender their interests or
portions thereof during the period that a repurchase offer is open may ascertain
an estimated net asset value of their interest in the Fund from the Manager
during such period.
Each Fund's LLC Agreement provides that the Fund shall be dissolved if the
interest of any Investor that has submitted a written request to tender its
entire interest for repurchase by the Fund has not been repurchased within a
period of two years of such request.
Repurchases of interests or portions thereof from Investors by a Fund may be
made, in the discretion of the Board, in part or in whole for cash or for
securities of equivalent value and will be effective after receipt by the Fund
of all eligible written tenders of interests or portions thereof from Investors.
The amount due to any Investor whose interest or portion thereof is repurchased
will be equal to the value of the Investor's capital account or portion thereof
based on the estimated net asset value of a Fund's assets as of the effective
date of repurchase, after giving effect to all allocations to be made to the
Investor's capital account (including the Incentive Allocation) as of such date.
Payment of the purchase price pursuant to a tender of interests will consist of,
first, cash and/or securities valued at net asset value in accordance with the
Fund's LLC Agreement and distributed to tendering Investors on a PARI PASSU
basis, in an aggregate amount equal to at least 95% of the estimated unaudited
net asset value of the interests tendered, determined as of the expiration date
of the tender offer (the "expiration date"). Payment of such amount will be made
promptly after the expiration date (the "cash payment"). Generally, payment
pursuant to such a tender also will consist of a promissory note that, without
approval by the Board, will bear no interest and is not transferable (the
"note") entitling the holder thereof to a contingent payment equal to the
excess, if any, of (a) the net asset value of the interests tendered as of the
expiration date, over (b) the cash payment. The note would be delivered to the
tendering Investor promptly after the expiration date and would be payable
generally no later than 60 days after the end of each year. Neither Fund will
impose any charges on a repurchase of interests or portion of interests in the
Fund.
Each Fund intends to maintain daily a segregated account containing permissible
liquid assets in an amount equal to the aggregate amount of the notes. Payment
for repurchased interests may require a Fund to liquidate portfolio holdings
earlier than the Manager otherwise would liquidate such holdings, potentially
resulting in losses, and may increase the Fund's portfolio turnover. The Manager
intends to take measures to attempt to avoid or minimize such potential losses
and turnover, and instead of liquidating portfolio holdings, may borrow money to
finance repurchases of interests.
Each Fund may repurchase an interest in the Fund or portion of an interest of an
Investor or any person acquiring an interest or portion thereof from or through
an Investor if:
o such an interest or portion thereof has been
transferred or such an interest or portion thereof
has vested in any person by operation of law as
the result of the death, dissolution, bankruptcy
or incompetency of an Investor;
o ownership of such an interest by an Investor or
other person will cause the Fund to be in
violation of, or require registration of any
interest or portion thereof under, or subject the
Fund 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 such an interest may be
harmful or injurious to the business or reputation
of the Fund or the Manager, or may subject the
Fund or any Investors to an undue risk of adverse
tax or other fiscal consequences;
o any of the representations and warranties made by
an Investor in connection with the acquisition of
an interest in the Fund 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 Fund, as
determined by the Manager, for the Fund to
repurchase such an interest or portion thereof.
TRANSFERS OF INTERESTS
No person may become a substituted Investor without the written consent of the
Manager, which consent may be withheld for any reason in the Manager's sole and
absolute discretion. Investor interests may be transferred only (i) by operation
of law pursuant to the death, bankruptcy, insolvency or dissolution of an
Investor or (ii) with the written consent of the Manager, which may be withheld
in its sole and absolute discretion and is expected to be granted, if at all,
only in limited circumstances. Notice to a Fund of any proposed transfer must
include evidence satisfactory to the Fund that the proposed transfer is exempt
from registration under the 1933 Act, that the proposed transferee meets any
requirements imposed by the Fund with respect to investor eligibility and
suitability, including the requirement that any Investor, or Investor's equity
owners in certain circumstances, (i) immediately after the time of purchase, has
at least $750,000 under the discretionary investment management of PW Group and
its affiliates or subsidiaries, (ii) at the time of purchase, has a net worth of
more than $1.5 million, or (iii) at the time of purchase, is a Qualified
Purchaser, and must be accompanied by a properly completed application. In
addition to the foregoing, no Investor will be permitted to transfer an interest
or portion thereof unless after such transfer the balance of the capital account
of the transferee, and any Investor transferring less than its entire interest,
is at least equal to the amount of the Investor's initial capital contribution.
Any transferee meeting the eligibility requirements that acquires an interest or
portion thereof in a Fund by operation of law as the result of the death,
dissolution, bankruptcy or incompetency of an Investor or otherwise, will be
entitled to the allocations and distributions allocable to the interest so
acquired and to transfer such interest in accordance with the terms of the
Fund's LLC Agreement, but will not be entitled to the other rights of an
Investor unless and until such transferee becomes a substituted Investor as
provided in the Fund's LLC Agreement. If an Investor transfers an interest or
portion thereof with the approval of the Manager, under the policies established
by the Fund's Board, the Fund will promptly take all necessary actions to admit
such transferee or successor to the Fund as an Investor. Each Investor and
transferee is required to pay all expenses, including attorneys' and
accountants' fees, incurred by the Fund in connection with such transfer. If
such a transferee does not meet the investor eligibility requirements, the Fund
reserves the right to redeem its interest.
By purchasing an interest in a Fund, each Investor in the Fund has agreed to
indemnify and hold harmless the Fund, the Directors, the Manager, each other
Investor and any affiliate of the foregoing against all losses, claims, damages,
liabilities, costs and expenses, including legal or other expenses incurred in
investigating or defending against any such losses, claims, damages,
liabilities, costs and expenses or any judgments, fines and amounts paid in
settlement, joint or several, to which such persons may become subject by reason
of or arising from any transfer made by such Investor in violation of these
provisions or any misrepresentation made by such Investor in connection with any
such transfer.
SUMMARY OF LLC AGREEMENT
The following is a summary description of select provisions of each LLC
Agreement which are not described elsewhere in this Memorandum. The description
of such items and provisions is not definitive and reference should be made to
the complete text of each Fund's LLC Agreement contained in Appendix A-1.
LIABILITY OF INVESTORS
Investors in each Fund will be members of a limited liability company as
provided under Delaware law. Under Delaware law and the relevant LLC Agreement,
an Investor will not be liable for the debts, obligations or liabilities of the
Fund solely by reason of being an Investor, except that the Investor may be
obligated to make capital contributions to the Fund pursuant to its LLC
Agreement, to repay any funds wrongfully distributed to the Investor. However,
the Manager may require an Investor to contribute to the relevant Fund, whether
before or after the Fund's dissolution or after the Investor ceases to be an
investor, such amounts as the Manager deems necessary to meet the Fund's debts,
obligations or liabilities (not to exceed for any Investor, the aggregate amount
of any distributions, amounts in connection with a repurchase of all or a
portion of the Investor's interests and any other amounts received by the
Investor from the Fund during or after the fiscal year to which any debt,
obligation or liability of the Fund is incurred).
DUTY OF CARE OF THE BOARD AND MANAGER
Each Fund's LLC Agreement provides that neither the Fund's Directors nor its
Manager (including certain of its affiliates, among others) shall be liable to
the Fund or any of its Investors for any loss or damage occasioned by any act or
omission in the performance of their respective services as such in the absence
of willful misfeasance, bad faith, gross negligence or reckless disregard of
their duties. Each Fund's LLC Agreement also contains provisions for the
indemnification, to the extent permitted by law, of the Fund's Directors and its
Manager (including certain of its affiliates, among others) by the Fund, but not
by its Investors individually, against any liability and expense to which any of
them may be liable which arises in connection with the performance of their
activities on behalf of the Fund. None of these persons will be personally
liable to any Investor for the repayment of any balance in such Investor's
capital account or for contributions by such Investor to the capital of the Fund
or by reason of any change in the Federal or state income tax laws applicable to
the Fund or its Investors. The rights of indemnification and exculpation
provided under each Fund's LLC Agreement do not provide for indemnification of a
Fund's Director or its 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.
AMENDMENT OF THE LLC AGREEMENT
Each Fund's LLC Agreement may be amended with the approval of (i) the Fund's
Board, including a majority of its Independent Directors, if required by the
1940 Act, (ii) the Manager or (iii) a majority, as defined in the 1940 Act, of
the outstanding voting securities of the Fund. Certain amendments involving
capital accounts, allocations thereto and the modification of events causing
dissolution of a Fund may not be made without the consent of any of its
Investors adversely affected thereby or unless each Investor has received notice
of such amendment and any Investor objecting to such amendment has been allowed
a reasonable opportunity to tender its entire interest for repurchase by the
Fund.
POWER OF ATTORNEY
By purchasing an interest in a Fund, each Investor in the Fund will appoint the
Manager and each of the Fund's Directors his or her attorney-in-fact for
purposes of filing required certificates and documents relating to the formation
and continuance of the Fund as a limited liability company under Delaware law or
signing all instruments effecting authorized changes in the Fund or the Fund's
LLC Agreement and conveyances and other instruments deemed necessary to effect
the dissolution or termination of the Fund.
The power-of-attorney granted in each Fund's LLC Agreement is a special
power-of-attorney coupled with an interest in favor of the Manager and each
Fund's Directors and as such is irrevocable and continues in effect until all of
such Investor's interest in the Fund has been withdrawn pursuant to a periodic
tender or transferred to one or more transferees that have been approved by the
Fund's Board for admission to the Fund as substitute Investors.
TERM, DISSOLUTION AND LIQUIDATION
A Fund will be dissolved:
o upon the affirmative vote to dissolve the Fund by
both (1) the Fund's Board and (2) Investors
holding at least two-thirds of the total number of
votes eligible to be cast by all Investors in the
Fund;
o upon the expiration of any two-year period which
commences on the date on which any Investor has
submitted to the Fund a written request in
accordance with the Fund's LLC Agreement, to
tender its entire interest for repurchase by the
Fund if such Investor's interest has not been
repurchased during such period;
o at the election of the Manager;
o upon the failure of Investors to elect successor
Directors at a meeting called by the Manager when
no Director remains; or
o as required by operation of law.
As to each Fund, upon the occurrence of any event of dissolution, the Manager,
or a liquidator under appointment by the Fund's Board, is charged with winding
up the affairs of the Fund and liquidating its assets. Net profits or net loss
during the fiscal period including the period of liquidation will be allocated
as described in the section titled "CAPITAL ACCOUNTS AND ALLOCATIONS--Allocation
of Net Profits and Net Losses."
Upon the dissolution of a Fund, its assets are to be distributed (1) first to
satisfy the debts, liabilities and obligations of the Fund, other than debts to
Investors, including actual or anticipated liquidation expenses, (2) next to
satisfy debts owing to the Investors, and (3) finally to the Investors
proportionately in accordance with the balances in their respective capital
accounts. Assets may be distributed in-kind on a pro rata basis if the Fund's
Board or liquidator determines that such a distribution would be in the
interests of the Investors in facilitating an orderly liquidation.
TAX ASPECTS
------------
The following is a summary of certain aspects of the income taxation of each
Fund and its Investors which should be considered by a prospective Investor.
Neither Fund has 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 Fund, nor has either Fund obtained an opinion of
counsel with respect to any tax issues other than the characterization of the
Fund as a partnership which is not a "publicly traded partnership" for Federal
income tax purposes.
This summary of certain aspects of the Federal income tax treatment of each Fund
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 (possibly with retroactive effect). Except as otherwise noted
below, 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
a Fund. This summary also does not discuss all of the tax consequences that may
be relevant to a particular investor, to investors that acquire interests in a
Fund other than for cash or to certain investors subject to special treatment
under the Federal income tax laws, such as insurance companies.
EACH PROSPECTIVE INVESTOR SHOULD CONSULT WITH ITS OWN TAX ADVISER IN ORDER FULLY
TO UNDERSTAND THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME TAX CONSEQUENCES OF
AN INVESTMENT IN A FUND.
In addition to the particular matters set forth in this section, tax-exempt
organizations should review carefully those sections of this Memorandum
regarding liquidity and other financial matters to ascertain whether the
investment objective of a Fund is consistent with their overall investment
plans. Each prospective tax-exempt Investor is urged to consult its own counsel
regarding the acquisition of interests in the Funds.
TAX TREATMENT OF FUND OPERATIONS
CLASSIFICATION OF THE FUNDS. Each Fund has received an opinion of Stroock &
Stroock & Lavan LLP, counsel to each Fund, that under the provisions of the Code
and the Regulations, as in effect on the date of the opinion, each Fund 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 a Fund will not be
traded on an established securities market. Regulations concerning the
classification of partnerships as publicly traded partnerships provide certain
safe harbors under which interests in a partnership will not be considered
readily tradable on a secondary market, or the substantial equivalent thereof.
Neither Fund will be eligible for any of those safe harbors. In particular,
neither Fund will qualify under the private placement safe harbor set forth in
the Regulations if, as is anticipated, each Fund has more than 100 Investors.
The Regulations specifically provide that the fact that a partnership does not
qualify for the safe harbors is disregarded for purposes of determining whether
interests in a partnership are readily tradable on a secondary market, or the
substantial equivalent thereof. Rather, in this event the partnership's status
is examined under a general facts and circumstances test set forth in the
Regulations. Counsel to each Fund has rendered its opinion that, under this
"facts and circumstances" test, and based upon the anticipated operations of the
Fund as well as the legislative history to Section 7704 and the text of the
Regulations, interests in the Fund will not be readily tradable on a secondary
market, or the substantial equivalent thereof, and, therefore, the Fund 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 a Fund 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 Fund would be subject to corporate income tax when
recognized by the Fund; distributions of such income, other than in certain
redemptions of Fund interests, would be treated as dividend income when received
by Investors to the extent of a Fund's current or accumulated earnings and
profits; and Investors would not be entitled to report profits or losses
realized by the Fund.
As an entity that is properly classified as a partnership, each Fund is not
itself subject to Federal income tax. For income tax purposes, each Investor
will be treated as a partner of the Fund and, as such, will be taxed upon its
distributive share of each item of the Fund's income, gain, loss and deductions
for each taxable year of the Fund ending with or within the Investor's taxable
year. Each item will have the same character to an Investor, and will generally
have the same source (either United States or foreign), as though the Investor
realized the item directly. Investors must report these items regardless of the
extent to which, or whether, the Fund or its Investors receive cash
distributions for such taxable year, and thus may incur income tax liabilities
unrelated to any distributions to or from the Fund.
ALLOCATION OF PROFITS AND LOSSES. Under each Fund's LLC Agreement, the Fund's
net capital appreciation or net capital depreciation for each fiscal period is
allocated among the Investors and to their capital accounts without regard to
the amount of income or loss actually recognized by the Fund for Federal income
tax purposes. Each Fund's LLC Agreement provides that items of income,
deduction, gain, loss or credit actually recognized by the Fund for each fiscal
year generally are to be allocated for income tax purposes among the Investors
pursuant to Regulations issued under Sections 704(b) and 704(c) of the Code,
based upon amounts of the Fund's net capital appreciation or net capital
depreciation allocated to each Investor's capital account for the current and
prior fiscal years. To the extent an Incentive Allocation is charged against the
capital account of an Investor and credited to the capital account of the
Manager, corresponding items of income and gain will be allocated for income tax
purposes to the Manager and not to the Investor. See "CAPITAL ACCOUNTS AND
ALLOCATIONS -- Incentive Allocation."
Under each Fund's LLC Agreement, the Manager has the discretion to allocate
specially an amount of the Fund's net capital gains, including short-term
capital gain, for Federal income tax purposes to a withdrawing Investor to the
extent that the Investor's capital account exceeds its Federal income tax basis
in its interest in the Fund. There can be no assurance that, if the Manager
makes such a special allocation, the Service will accept such allocation. If
such allocation is successfully challenged by the Service, the Fund's gains
allocable to the remaining Investors would be increased.
An Investor admitted to a Fund other than as of January 1 of a fiscal year will
be allocated its distributive share of the Fund's tax items at the end of such
fiscal year based on its pro rata share of the Fund's capital. Such allocation
does not account for the possibility of a subsequent reallocation in the
following year to the Manager in respect of the initial Incentive Allocation.
The Manager, in its discretion, may attempt to minimize any negative tax
consequences which may result to an Investor from the foregoing, including by
utilizing special allocations of the Fund's tax items. However, there is no
assurance that any such attempt will successfully minimize any negative tax
consequence resulting to an Investor from the initial Incentive Allocation.
TAX ELECTIONS; RETURNS; TAX AUDITS. The Code provides for optional adjustments
to the basis of partnership property upon distributions of partnership property
to a partner and transfers of partnership interests, including by reason of
death, provided that a partnership election has been made pursuant to Section
754. Under each Fund's LLC Agreement, at the request of an Investor, the
Manager, in its sole discretion, may cause the Fund to make such an election.
Any such election, once made, cannot be revoked without the Service's consent.
As a result of the complexity and added expense of the tax accounting required
to implement such an election, the Manager does not presently intend to make
such election.
The Manager decides how to report a Fund's tax items on the Fund's tax returns,
and all Investors are required under the Code to treat the items consistently on
their own returns, unless they file a statement with the Service disclosing the
inconsistency. In the event the income tax returns of a Fund are audited by the
Service, the tax treatment of the Fund's income and deductions generally is
determined at the Fund level in a single proceeding rather than by individual
audits of the Investors. The Manager is designated as each Fund's "Tax Matters
Partner" in its LLC Agreement. As such, it has considerable authority to make
decisions affecting the tax treatment and procedural rights of all Investors. In
addition, the Tax Matters Partner has the authority to bind certain Investors to
settlement agreements and the right on behalf of all Investors to extend the
statute of limitations relating to the Investors' tax liabilities with respect
to a Fund's tax items.
TAX CONSEQUENCES TO A WITHDRAWING INVESTOR
An Investor receiving a cash liquidating distribution from a Fund, in connection
with a complete withdrawal from the Fund generally will recognize capital gain
or loss to the extent of the difference between the proceeds received by such
Investor and such Investor's adjusted tax basis in its interest in the Fund.
Such capital gain or loss will be short-term or long-term depending upon the
Investor's holding period for its interest in the Fund. However, a withdrawing
Investor will recognize ordinary income to the extent such Investor's allocable
share of the Fund's "unrealized receivables" exceeds the Investor'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 a Fund will be treated as an unrealized receivable with respect to the
withdrawing Investor. An Investor receiving a cash nonliquidating distribution
will recognize income in a similar manner only to the extent that the amount of
the distribution exceeds such Investor's adjusted tax basis in its interest in
the Fund.
As discussed above, each Fund's LLC Agreement provides that the Manager may
specially allocate items of Fund capital gain, including short-term capital
gain, to a withdrawing Investor to the extent its liquidating distribution would
otherwise exceed its adjusted tax basis in its Fund interest. Such a special
allocation may result in the withdrawing Investor recognizing capital gain,
which may include short-term gain, in the Investor's last taxable year in the
Fund, thereby reducing the amount of long-term capital gain recognized during
the taxable year in which it receives its liquidating distribution upon
withdrawal.
DISTRIBUTION 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). Each Fund will determine at the appropriate time whether it
qualifies as an "investment partnership." Assuming it so qualifies, if an
Investor is an "eligible partner," which term should include an Investor whose
contributions to the Fund consisted solely of cash, the recharacterization rule
described above would not apply.
TAX TREATMENT OF FUND INVESTMENTS
IN GENERAL. Each Fund expects to act as a trader or investor, and not as a
dealer, with respect to its securities transactions. A trader and an investor
are persons who buy and sell securities for their own accounts. A dealer, on the
other hand, is a person who purchases securities for resale to customers rather
than for investment or speculation.
Generally, the gains and losses realized by a trader or investor on the sale of
securities are capital gains and losses. Thus, subject to the treatment of
certain transactions described below, the Fund 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 a particular investment position is maintained
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
constructive sales, to so-called "straddle" and "wash sale" transactions and to
"Section 1256 contracts" may serve to alter the manner in which the holding
period for a security is determined or may otherwise affect the characterization
as long-term or short-term, and also the timing of the realization, of certain
gains or losses. Moreover, the straddle rules and short sale rules may require
the capitalization of certain related expenses.
The maximum ordinary income tax rate for individuals is 39.6%, and the maximum
individual income tax rate for long-term capital gains is 20%, unless the
taxpayer elects to be taxed at ordinary rates, although in any case the actual
rate may be higher due to the phase out of certain tax deductions and
exemptions. See "Limitation on Deductibility of Interest" below. The excess of
capital losses over capital gains may be offset against the ordinary income of
an individual taxpayer, subject to an annual deduction limitation of $3,000. For
corporate taxpayers, the maximum income tax rate is 35%. Capital losses of a
corporate taxpayer may be offset only against capital gains, but unused capital
losses may be carried back three years, subject to certain limitations, and
carried forward five years.
Each Fund may realize ordinary income from accruals of interest and dividends on
securities. Income or loss from transactions involving derivative instruments,
such as swap transactions, entered into by the Fund also may constitute ordinary
income or loss. Moreover, gain recognized from certain "conversion transactions"
will be treated as ordinary income.1
[FN]
-------------------
1 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 the Regulations.
</FN>
SECTION 1256 CONTRACTS. In the case of "Section 1256 Contracts," the Code
generally applies a "mark to market" system of taxing unrealized gains and
losses on such contracts and otherwise provides for special rules of taxation.
Under these rules, Section 1256 Contracts, which include certain options
contracts, held at the end of each taxable year are treated for Federal income
tax purposes as if they were sold by the holder 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 holder in computing its taxable income for such year.
If a Section 1256 Contract held 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. 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, a 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 Regulations1 mixed straddle account
rules is not entirely clear. Therefore, there is no assurance that a mixed
straddle account election by a Fund 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 taxpayer'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 of the short sale, special rules would generally
treat the gains on short sales as short-term capital gains. Moreover, a loss on
a short sale will be treated as a long-term capital loss if, on the date of the
short sale, "substantially identical property" has been held by the taxpayer for
more than one year. These rules may also terminate the running of the holding
period of "substantially identical property" held by the taxpayer.
Gain or loss on a short sale will generally not be realized until such time that
the short sale is closed. However, if a Fund 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 underlying property, the Fund 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 a Fund 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 Fund 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 the constructive sale rules
will be determined as if such position were acquired on the date of the
constructive sale.
EFFECT OF STRADDLE RULES ON INVESTORS' SECURITIES POSITIONS. The Service may
treat certain positions in securities held, directly or indirectly, by an
Investor and its indirect interest in similar securities held by a Fund as
"straddles" for Federal income tax purposes. The application of the "straddle"
rules in such a case could affect an Investor's holding period for the
securities involved and may defer the recognition of losses with respect to such
securities.
LIMITATION ON DEDUCTIBILITY OF INTEREST. For noncorporate taxpayers, Section
163(d) of the Code limits the deduction for "investment interest" (i.e.,
interest or short sale expenses for "indebtedness 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, a Fund's activities will be treated as giving
rise to investment income for an Investor, and the investment interest
limitation would apply to a noncorporate Investor's share of the interest and
short sale expenses attributable to the Fund's operation. In such case, a
noncorporate Investor would be denied a deduction for all or part of that
portion of its distributive share of a Fund's ordinary losses attributable to
interest and short sale expenses unless it had sufficient investment income from
all sources including the Fund. An Investor that could not deduct losses
currently as a result of the application of Section 163(d) would be entitled to
carry forward such losses to future years, subject to the same limitation. The
investment interest limitation would also apply to interest paid by a
noncorporate Investor on money borrowed to finance its investment in a Fund.
Potential Investors are advised to consult with their own tax advisers with
respect to the application of the investment interest limitation in their
particular tax situations.
As indicated earlier, under "Tax Treatment of Fund Investments--Obligations with
Market Discount," limitations also may apply with respect to interest deductions
on indebtedness of a Fund that is incurred or continued to purchase or carry a
Market Discount Obligation.
DEDUCTIBILITY OF FUND INVESTMENT EXPENDITURES BY NONCORPORATE INVESTORS. It
is anticipated that each Fund's expenses (including the Fee) will be investment
expenses rather than trade or business expenses. Investment expenses of an
individual, trust or estate are deductible only to the extent that such expenses
exceed 2% of adjusted gross income.2 Further, in the case of an Investor that is
a partnership having 100 or more partners and which has elected to be treated as
an "electing large partnership," 70% of such deductions will be disallowed,
although the remaining deductions generally will be allowed at the partnership
level and will not be subject to the 2% floor that would otherwise be applicable
to individual Investors. 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.
[FN]
------------------
2 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. Investors that are trusts or estates
should consult their tax advisers as to the applicability of this case
to the investment expenses that are allocated to them.
</FN>
Although each Fund intends to treat any incentive-based allocations as
allocations rather than fees, and, therefore, as not being subject to the
foregoing limitations on deductibility, there can be no assurance that the
Service will not treat such items as investment expenses which are subject to
the limitations.
The consequences of these limitations will vary depending upon the particular
tax situation of each taxpayer. Accordingly, noncorporate Investors should
consult their tax advisers with respect to the application of these limitations.
No deduction is allowed for placement fees paid by an Investor to acquire an
interest in a Fund; instead, any such fees will be included in the Investor's
adjusted tax basis for its interest in the Fund.
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 a Fund's securities trading activity generally
will not constitute income or loss from a passive activity. Therefore, passive
losses from other sources generally could not be deducted against an Investor's
share of income and gain from the Fund. Income or loss attributable to
investments in partnerships engaged in a trade or business may constitute
passive activity income or loss.
"PHANTOM INCOME" FROM CERTAIN FOREIGN EQUITY 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 a Fund in certain foreign corporations may cause an
Investor to (i) recognize taxable income prior to the Fund'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 capital gain.
FOREIGN TAXES
It is possible that certain dividends and interest received from sources within
foreign countries will be subject to withholding taxes imposed by such
countries. In addition, some foreign countries may impose capital gains taxes on
certain securities transactions involving foreign issuers. Tax treaties between
certain countries and the United States may reduce or eliminate such taxes.
Each Fund will inform its Investors of their proportionate share of the foreign
taxes paid or incurred by the Fund that Investors will be required to include in
their income. The Investors 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. An Investor that is tax exempt will not ordinarily
benefit from such credit or deduction.
UNRELATED BUSINESS TAXABLE INCOME
Generally, an exempt organization (such as an employee benefit plan, Individual
Retirement Account or 401(k) or Keogh Plan) 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 an investor.3 This general exemption from tax does
not apply to the UBTI of an exempt organization. UBTI includes "unrelated
debt-financed income," which generally consists of (i) income derived by an
exempt organization, directly or through a partnership, from income-producing
property with respect to which there is "acquisition indebtedness" at any time
during the taxable year, and (ii) gains derived by an exempt organization,
directly or through a partnership, from the disposition of property with respect
to which there is "acquisition indebtedness" at any time during the 12-month
period ending with the date of such disposition. With respect to its investments
in partnerships engaged in a trade or business, a Fund's income, or loss, from
these investments may constitute UBTI.
[FN]
--------------------------
3 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.
</FN>
A Fund 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 Fund will
treat its short sales of securities as not involving "acquisition indebtedness"
and therefore not generating UBTI.4 The percentage of income (i.e., dividends
and interest) from securities with respect to which there is "acquisition
indebtedness" during a taxable year 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.
[FN]
--------------------------
4 Moreover, income realized from option writing generally would not
constitute UBTI.
</FN>
The percentage of capital gain from securities with respect to which there is
"acquisition indebtedness" at any time during the 12-month period ending with
the date of their disposition 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 a Fund, an allocable
portion of deductions directly connected with the Fund's debt-financed property
is taken into account. Thus, for instance, a percentage of capital losses from
debt-financed securities, based on the debt/basis percentage calculation
described above, would offset gains treated as UBTI.
Since the calculation of a Fund's "unrelated debt-financed income" is complex
and will depend in large part on the amount of leverage, if any, used by the
Fund from time to time,5 it is impossible to predict what percentage of the
Fund's income and gains will be treated as UBTI for an Investor which is an
exempt organization. An exempt organization's share of the income or gains of a
Fund which is treated as UBTI may not be offset by losses of the exempt
organization either from the Fund 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).
[FN]
--------------------------
5 The calculation of a particular exempt organization's UBTI would also
be affected if it incurs indebtedness to finance its investment in a
Fund. An exempt organization is required to make estimated tax
payments with respect to its UBTI.
</FN>
To the extent that a Fund generates UBTI, the applicable Federal tax rate for
such an Investor 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 substantiate, to the satisfaction of the
Service, the method used to calculate its UBTI. Each Fund will be required to
report to an Investor which is an exempt organization information as to the
portion, if any, of its income and gains from the Fund for each year which will
be treated as UBTI. The calculation of such amount with respect to transactions
entered into by a Fund is highly complex, and there is no assurance that the
Fund'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 a Fund'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
Fund generally should not affect the tax-exempt status of such an exempt
organization.6 However, a charitable remainder trust will not be exempt from
Federal income tax under Section 664(c) of the Code for any year in which it has
UBTI. A title-holding company will not be exempt from tax if it has certain
types of UBTI. Moreover, the charitable contribution deduction for a trust under
Section 642(c) of the Code may be limited for any year in which the trust has
UBTI. A prospective Investor should consult its tax adviser with respect to the
tax consequences of receiving UBTI from a Fund. See also "ERISA CONSIDERATIONS."
[FN]
---------------------
6 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 Investor should consult its tax adviser in this
regard.
</FN>
CERTAIN ISSUES PERTAINING TO SPECIFIC EXEMPT ORGANIZATIONS
PRIVATE FOUNDATIONS. Private foundations and their managers are subject to
excise taxes if they invest "any amount in such a manner as to jeopardize the
carrying out of any of the foundation's exempt purposes." This rule requires a
foundation manager, in making an investment, to exercise "ordinary business care
and prudence" under the facts and circumstances prevailing at the time of making
the investment, in providing for the short-term and long-term needs of the
foundation to carry out its exempt purposes. The factors which a foundation
manager may take into account in assessing an investment include the expected
rate of return, both income and capital appreciation, the risks of rising and
falling price levels, and the needs for diversification within the foundation's
portfolio.
In order to avoid the imposition of an excise tax, a private foundation may be
required to distribute on an annual basis its "distributable amount," which
includes, among other things, the private foundation's "minimum investment
return," defined as 5% of the excess of the fair market value of its
nonfunctionally related assets (defined to include 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 a Fund would most probably be classified as a
nonfunctionally related asset. A determination that an interest in a Fund is a
nonfunctionally related asset could conceivably cause cash flow problems for a
prospective Investor 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 Fund. Of course,
this factor would create less of a problem to the extent that the value of the
investment in the Fund is not significant in relation to the value of other
liquid assets held by a foundation.
In some instances, an investment in a Fund 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 a Fund, 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 Fund 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 Fund is "passive" within the applicable provisions of the Code and
Regulations. Although there can be no assurance, the Manager believes that each
Fund will meet this 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 ("IRAs") and Keogh Plans should consult
their counsel as to the implications of such an investment under ERISA. See "TAX
ASPECTS--Unrelated Business Taxable Income" and "ERISA CONSIDERATIONS."
ENDOWMENT FUNDS. Investment managers of endowment funds should consider whether
the acquisition of an interest in a Fund 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 funds 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.
LEGISLATIVE PROPOSALS
There have been several proposals initiated by the Clinton Administration and
Congress that would affect the tax consequences described herein. It is not
possible to predict at this time the extent to which any of these proposals will
be enacted by Congress and, if enacted, what their final form and effective
dates will be. In addition, other proposals could be enacted that would change
the tax consequences described herein of an investment in a Fund. Prospective
Investors should consult their own tax advisers regarding the status of these
proposed changes and the effect, if any, on their investment in a Fund.
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 a Fund. State and local tax laws differ in the treatment of
limited liability companies such as the Funds. 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, except as noted below, each Fund 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. An
Investor's distributive share of the taxable income or loss of a Fund 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 a Fund acquires an interest may conduct business in a
jurisdiction which will subject to tax an Investor's share of the Fund's income
from that business. Prospective Investors should consult their tax advisers with
respect to the availability of a credit for such tax in the jurisdiction in
which that Investor is a resident.
Neither Fund should be subject to the New York City unincorporated business tax,
which is not imposed on an entity taxed as a partnership which purchases and
sells securities for its "own account." By reason of a similar "own account"
exemption, it is also expected that a nonresident individual Investor should not
be subject to New York State personal income tax with respect to his share of
income or gain realized directly by a Fund. A nonresident individual Investor
will not be subject to New York City earnings tax on nonresidents with respect
to his or her investment in a Fund.
Individual Investors who are residents of New York State and New York City
should be aware that the New York State and New York City personal income tax
laws limit the deductibility of itemized deductions for individual taxpayers at
certain income levels. This limitation would likely apply to an Investor's share
of some or all of a Fund's expenses. Prospective Investors are urged to consult
their tax advisers with respect to the impact of these provisions and the
Federal limitations on the deductibility of certain itemized deductions and
investment expenses on their New York State and New York City tax liability.
For purposes of the New York State corporate franchise tax and the New York City
general corporation tax, a corporation generally is treated as doing business in
New York State and New York City, respectively, and is subject to such corporate
taxes as a result of the ownership of a limited partnership interest in a
partnership which does business in New York State and New York City,
respectively.7 Each of the New York State and New York City corporate taxes are
imposed, in part, on the corporation's taxable income or capital allocable to
the relevant jurisdiction by application of the appropriate allocation
percentages. Moreover, a non-New York corporation which does business in New
York State may be subject to a New York State license fee. A corporation which
is subject to New York State corporate franchise tax solely as a result of being
a limited partner in a New York partnership may, under certain circumstances,
elect to compute its New York State corporate franchise tax by taking into
account only its distributive share of such partnership's income and loss. There
is currently no similar provision in effect for purposes of the New York City
general corporation tax.
[FN]
----------------------
7 New York State, but not New York City, generally exempts from
corporate franchise tax a non-New York corporation which (i) does not
actually or constructively own a 1% or greater limited partnership
interest in a partnership doing business in New York and (ii) has a
tax basis in such limited partnership interest not greater than $1
million.
</FN>
Regulations under both the New York State corporate franchise tax and the New
York City general corporation tax, however, provide an exception to this general
rule in the case of a "portfolio investment partnership," which is defined,
generally, as a partnership which meets the gross income requirements of Section
851(b)(2) of the Code. New York State (but not New York City) has adopted
regulations that also include income and gains from commodity transactions
described in Section 864(b)(2)(B)(iii) as qualifying gross income for this
purpose. Each Fund's qualification as such a portfolio investment partnership
must be determined on an annual basis and with respect to a taxable year, the
Fund may not qualify as a portfolio investment partnership.
A trust or other unincorporated organization which by reason of its purposes or
activities is exempt from Federal income tax is also exempt from New York State
and New York City personal income tax. A nonstock corporation which is exempt
from Federal income tax is generally presumed to be exempt from New York State
corporate franchise tax and New York City general corporation tax. New York
State imposes a tax with respect to such exempt entities on UBTI, including
unrelated debt-financed income, at a rate which is currently equal to the New
York State corporate franchise tax rate, plus the corporate surtax. There is no
New York City tax on the UBTI of an otherwise exempt entity.
Each prospective corporate Investor should consult its tax adviser with regard
to the New York State and New York City tax consequences of an investment in a
Fund.
ERISA CONSIDERATIONS
Persons who are fiduciaries with respect to an employee benefit plan or other
arrangement subject to the Employee Retirement Income Security Act of 1974, as
amended (an "ERISA Plan" and "ERISA," respectively), and persons who are
fiduciaries with respect to an IRA or Keogh Plan, which is not subject to ERISA
but is subject to the prohibited transaction rules of Section 4975 of the Code
(together with ERISA Plans, "Benefit Plans") should consider, among other
things, the matters described below before determining whether to invest in a
Fund.
ERISA imposes certain general and specific responsibilities on persons who are
fiduciaries with respect to an ERISA Plan, including prudence, diversification,
an obligation not to engage in a prohibited transaction and other standards. In
determining whether a particular investment is appropriate for an ERISA Plan,
Department of Labor ("DOL") regulations provide that a fiduciary of an ERISA
Plan must give appropriate consideration to, among other things, the role that
the investment plays in the ERISA Plan's portfolio, taking into consideration
whether the investment is designed reasonably to further the ERISA Plan's
purposes, an examination of the risk and return factors, the portfolio's
composition with regard to diversification, the liquidity and current return of
the total portfolio relative to the anticipated cash flow needs of the ERISA
Plan, the income tax consequences of the investment (see "TAX ASPECTS--Unrelated
Business Taxable Income" and "--Certain Issues Pertaining to Specific Exempt
Organizations") and the projected return of the total portfolio relative to the
ERISA Plan's funding objectives. Before investing the assets of an ERISA Plan in
a Fund, 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 Fund may be too
illiquid or too speculative for a particular ERISA Plan, and whether the assets
of the ERISA Plan would be sufficiently diversified. If a fiduciary with respect
to any such ERISA Plan breaches its or his responsibilities with regard to
selecting an investment or an investment course of action for such ERISA Plan,
the fiduciary itself or himself may be held liable for losses incurred by the
ERISA Plan as a result of such breach.
Because each Fund will register as an investment company under the 1940 Act, the
underlying assets of each Fund should not be considered to be "plan assets" of
the ERISA Plans investing in a Fund for purposes of ERISA's (or the Code's)
fiduciary responsibility and prohibited transaction rules. Thus, the Manager
will not be a fiduciary within the meaning of ERISA by reason of its authority
with respect to a Fund.
The Manager will require a Benefit Plan which proposes to invest in a Fund to
represent that it, and any fiduciaries responsible for such Plan's investments,
are aware of and understand the Fund's investment objective, policies and
strategies, that the decision to invest plan assets in the Fund was made with
appropriate consideration of relevant investment factors with regard to the
Benefit Plan and is consistent with the duties and responsibilities imposed upon
fiduciaries with regard to their investment decisions under ERISA and/or the
Code.
Certain prospective Benefit Plan Investors may currently maintain relationships
with the Manager or other entities which are affiliated with the Manager. Each
of such persons may be deemed to be a party in interest to and/or a fiduciary of
any Benefit Plan to which it provides investment management, investment advisory
or other services. ERISA prohibits (and the Code penalizes) the use of ERISA and
Benefit Plan assets for the benefit of a party in interest and also prohibits
(or penalizes) an ERISA or Benefit Plan fiduciary from using its position to
cause such Plan to make an investment from which it or certain third parties in
which such fiduciary has an interest would receive a fee or other consideration.
ERISA and Benefit Plan investors should consult with counsel to determine if
participation in the Fund 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 a Fund was made by them as fiduciaries
that are independent of such affiliated persons, that such fiduciaries are duly
authorized to make such investment decision and that they have not relied on any
individualized advice or recommendation of such affiliated persons, as a primary
basis for the decision to invest in the Fund.
The provisions of ERISA and the Code are subject to extensive and continuing
administrative and judicial interpretation and review. The discussion of ERISA
and the Code contained in this Memorandum is general and may be affected by
future publication of regulations and rulings. Potential Benefit Plan Investors
should consult their legal advisers regarding the consequences under ERISA and
the Code of the acquisition and ownership of interests.
ADDITIONAL INFORMATION
----------------------
REPORTS TO INVESTORS
Each Fund will furnish to its Investors as soon as practicable after the end of
each taxable year such information as is necessary for such Investors to
complete Federal and state income tax or information returns, along with any
other tax information required by law. Each Fund will send to its Investors a
semi-annual and an audited annual report within 60 days after the close of the
period for which it is being made, or as otherwise required by the 1940 Act.
Quarterly reports from the Manager regarding each Fund's operations during such
period also will be sent to Investors.
FISCAL YEAR
Each Fund's fiscal year ends on December 31st.
AUDITORS AND LEGAL COUNSEL
Ernst & Young LLP serves as the independent auditors of each Fund. Its principal
business address is 787 Seventh Avenue, New York, New York 10019.
Stroock & Stroock & Lavan LLP, New York, New York, acts as legal counsel to the
Funds.
Schulte Roth & Zabel LLP, New York, New York, acts as legal counsel to the
Manager and certain of its affiliates.
CUSTODIAN
PFPC Trust Company (the "Custodian") serves as the primary custodian of each
Fund's assets, 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 Fund's Directors. Assets of each Fund are not
held by the Manager or commingled with the assets of other accounts other than
to the extent that securities are held in the name of a custodian in a
securities depository, clearing agency or omnibus customer account of such
custodian. The Custodian's principal business address is Airport Business
Center, International Court 2, 200 Stevens Drive, Lester, Pennsylvania 19113.
INQUIRIES
Inquiries concerning a Fund and interests in a Fund, including information
concerning purchase and redemption procedures, should be directed to:
PW Redwood/Sequoia Management, L.L.C.
c/o PaineWebber Incorporated
Alternative Investment Group
1285 Avenue of the Americas
New York, New York 10019
Telephone: (800) 486-2608
Telecopier: (212) 713-1498
* * * * *
All potential Investors are encouraged to consult appropriate legal and tax
counsel.
<PAGE>
APPENDIX A
PW * FUND, L.L.C.
-----------------------
LIMITED LIABILITY COMPANY AGREEMENT
THIS LIMITED LIABILITY COMPANY AGREEMENT of PW * Fund, L.L.C. (the
"Fund") is dated and effective as of July 27, 2000 by and among the
Organizational Member, the Manager and each person hereinafter admitted to the
Fund and reflected on the books of the Fund as a Member.
_____________
[FN]
* Each Fund will be governed by a separate Limited Liability Company
Agreement. This blank will be completed with the word "Redwood" for
investors in the Redwood Fund and "Sequoia" for investors in the Sequoia
Fund.
</FN>
W I T N E S S E T H :
WHEREAS, the Fund heretofore has been formed as a limited liability
company under the Delaware Limited Liability Company Act, pursuant to the
Certificate dated as of July 26, 2000 and filed with the Secretary of State of
the State of Delaware on July 26, 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:
ADVICE AND MANAGEMENT means those services provided to the Fund by the
Manager pursuant to Section 3.4(b) hereof.
ADVISERS ACT means the Investment Advisers Act of 1940 and the rules,
regulations and orders thereunder, as amended from time to time, or any
successor law.
AFFILIATE means affiliated person as such term is defined in the 1940
Act.
AGREEMENT means this Limited Liability Company Agreement, as amended
and/or restated from time to time.
ALLOCATION CHANGE means, with respect to each Member for each
Allocation Period, the difference between:
(1) the sum of (a) the balance of such Member's Capital Account as of
the close of the Allocation Period (after giving effect to all
allocations to be made to such Member's Capital Account as of
such date other than any Incentive Allocation to be debited
against such Member's Capital Account), plus (b) any debits to
such Member's Capital Account during the Allocation Period to
reflect any actual or deemed distributions or repurchases with
respect to such Member's Interest, plus (c) any debits to such
Member's Capital Account during the Allocation Period to reflect
any Insurance premiums allocable to such Member, plus (d) any
debits to such Member's Capital Account during the Allocation
Period to reflect any items allocable to such Member's Capital
Account pursuant to Section 5.6 hereof other than Management
Fees; and
(2) the sum of (a) the balance of such Member's Capital Account as of
the commencement of the Allocation Period, plus (b) any credits
to such Member's Capital Account during the Allocation Period to
reflect any contributions by such Member to the capital of the
Fund, plus (c) any credits to such Member's Capital Account
during the Allocation Period to reflect any Insurance proceeds
allocable to such Member.
If the amount specified in clause (1) exceeds the amount
specified in clause (2), such difference shall be a POSITIVE
ALLOCATION CHANGE, and if the amount specified in clause (2)
exceeds the amount specified in clause (1), such difference shall
be a NEGATIVE ALLOCATION CHANGE.
ALLOCATION PERIOD means, with respect to each Member, the period
commencing as of the date of admission of such Member to the Fund and ending at
the close of business on the first to occur of the following:
(1) the last day of the twelfth complete calendar month since the
admission of such Member to the Fund;
(2) the last day of a Fiscal Year subsequent to a Member having been
admitted to the Fund for 12 complete calendar months, and the
last day of each Fiscal Year thereafter;
(3) the day as of which the Fund repurchases any Interest or portion
of an Interest of such Member;
(4) the day as of which the Fund admits as a substituted Member a
person to whom the Interest (or a portion thereof) of such Member
has been Transferred (unless there is no change in beneficial
ownership);
(5) the day as of which the authority of the Manager to provide
Advice and Management is terminated pursuant to Section 3.4(a)
hereof;
(6) the day preceding any day as of which such Member becomes a
Special Member; or
(7) the day on which such Member ceases to be a Special Member.
BOARD means the Board of Directors established pursuant to Section 2.6
hereof.
CAPITAL ACCOUNT means, with respect to each Member, the capital
account established and maintained on behalf of each Member pursuant to Section
5.3 hereof.
CAPITAL PERCENTAGE means a percentage established for each Member as
of each Expense Allocation Date. The Capital Percentage of a Member on an
Expense Allocation Date shall be determined by dividing the amount of capital
contributed to the Fund by the Member pursuant to Section 5.1 hereof by the sum
of the capital contributed to the Fund by each Member pursuant to Section 5.1
hereof on or prior to such Expense Allocation Date. The sum of the Capital
Percentages of all Members on each Expense Allocation Date shall equal 100%.
CAPITAL CONTRIBUTION means the contribution, if any, made, or to be
made, as the context requires, to the capital of the Fund by a Member.
CERTIFICATE means the Certificate of Formation of the Fund and any
amendments thereto as filed with the office of the Secretary of State of the
State of Delaware.
CLOSING DATE means the first date on or as of which a Member other
than the Organizational Member or the Manager is admitted to the Fund.
CODE means the United States Internal Revenue Code of 1986, as amended
and as hereafter amended from time to time, or any successor law.
DELAWARE ACT means the Delaware Limited Liability Company Act (6
DEL.C.ss.18-101, ET SEQ.) as in effect on the date hereof and as amended from
time to time, or any successor law.
DIRECTOR means each natural person listed on Schedule I hereto who
serves on the Board and any other natural person who, from time to time,
pursuant hereto shall serve on the Board. Each Director shall constitute a
"manager" of the Fund within the meaning of the Delaware Act.
EXPENSE ALLOCATION DATE means the Closing Date, and thereafter each
day, through and including the date which is six months after the Closing Date,
as of which a contribution to the capital of the Fund is made pursuant to
Section 5.1 hereof.
FISCAL PERIOD means 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 day preceding any day as of which a contribution to the
capital of the Fund is made pursuant to Section 5.1;
(3) the day as of which the Fund repurchases any Interest or portion
of an Interest of any Member;
(4) the day as of which the Fund admits a substituted Member to whom
an Interest (or portion thereof) of a Member has been Transferred
(unless there is no change of beneficial ownership); or
(5) any other day 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 Fund Percentages.
FISCAL YEAR means the period commencing on the Closing Date and ending
on the first December 31st following the Closing Date, and thereafter each
period commencing on January 1 of each year and ending on December 31 of each
year (or on the date of a final distribution pursuant to Section 6.2 hereof),
unless the Directors shall designate another fiscal year for the Fund that is a
permissible taxable year under the Code.
FORM N-2 means the Fund's Registration Statement on Form N-2 filed
with the Securities and Exchange Commission, as amended from time to time.
FUND means the limited liability company governed hereby, as such
limited liability company may from time to time be constituted.
FUND PERCENTAGE means a percentage established for each Member on the
Fund's books as of the first day of each Fiscal Period. The Fund 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 Fund Percentages of all Members for each Fiscal
Period shall equal 100%.
INCENTIVE ALLOCATION means, with respect to any Member, other than a
Special Member, 20% (and, as respects a Special Member, such percentage as the
Manager shall have agreed with such Special Member) of the amount, determined as
of the close of each Allocation Period with respect to such Member, by which
such Member's Positive Allocation Change for such Allocation Period, if any,
exceeds any positive balance in such Member's Loss Recovery Account as of the
most recent prior date as of which any adjustment has been made thereto.
INDEPENDENT DIRECTORS means those Directors who are not "interested
persons" of the Fund as such term is defined in the 1940 Act.
INSURANCE means one or more "key man" insurance policies on the life
of any principal of a member of the Manager or any other insurance policy, the
benefits of which are payable to the Fund.
INTEREST means the entire ownership interest in the Fund at any
particular time of a Member or other person to whom an Interest or portion
thereof has been transferred pursuant to Section 4.3 hereof, including the
rights and obligations of such Member or other person under this Agreement and
the Delaware Act.
INVESTED CAPITAL means, with respect to any Member, the amount of such
Member's aggregate Capital Contributions to the Fund, decreased by any
withdrawals (through repurchases pursuant to Section 4.4 hereof) made by such
Member pursuant to Section 4.4 hereof other than withdrawals of aggregate Net
Capital Appreciation (for this purpose, any amounts withdrawn shall first be
applied against Net Capital Appreciation, if any).
LOSS RECOVERY ACCOUNT means a memorandum account to be recorded in the
books and records of the Fund with respect to each Member, which shall have an
initial balance of zero and which shall be adjusted as follows:
(1) As of the first day after the close of each Allocation Period for
such Member, the balance of the Loss Recovery Account shall be
increased by the amount, if any, of such Member's Negative
Allocation Change for such Allocation Period and shall be reduced
(but not below zero) by the amount, if any, of such Member's
Positive Allocation Change for such Allocation Period.
(2) The balance of the Loss Recovery Account shall be reduced (but
not below zero) as of the first date as of which the Capital
Account balance of any Member is reduced as a result of
repurchase or transfer with respect to such Member's Interest by
an amount determined by multiplying (a) such positive balance by
(b) a fraction, (i) the numerator of which is equal to the amount
of the repurchase or transfer, and (ii) the denominator of which
is equal to the balance of such Member's Capital Account
immediately before giving effect to such repurchase or transfer.
No transferee of any Interest shall succeed to any Loss Recovery
Account balance or portion thereof attributable to the transferor unless the
Transfer by which such transferee received such Interest did not involve a
change of beneficial ownership.
MANAGEMENT FEE means the fee paid to PWFA out of the Fund's assets,
and debited against Members' Capital Accounts, for PWFA Services.
MANAGER means PW Redwood/Sequoia Management, L.L.C. or any successor
thereto. The Manager shall constitute a "manager" of the Fund within the meaning
of the Delaware Act. The Manager also shall constitute a "member" of the Fund
within the meaning of the Delaware Act and shall have an Interest.
MEMBER means the Manager and any person who shall have been admitted
to the Fund as a member (including any person who is a Special Member) until the
Fund repurchases the entire Interest of such person pursuant to Section 4.4
hereof or a substitute Member who is admitted to the Fund pursuant to Section
4.3 hereof, in such person's capacity as a member of the Fund. For purposes of
the Delaware Act, the Members shall constitute a single class or group of
members.
NEGATIVE ALLOCATION CHANGE has the meaning given such term in the
definition of Allocation Change.
NET ASSETS means the total value of all assets of the Fund, less an
amount equal to all accrued debts, liabilities and obligations of the Fund,
calculated before giving effect to any repurchases of Interests.
NET CAPITAL APPRECIATION means, with respect to any Member, the
excess, if any, of the aggregate amount credited to such Member's Capital
Account under clause (ii) of paragraph (c) of Section 5.3 hereof over the
aggregate amount debited to such Member's Capital Account under clause (ii) of
paragraph (d) of Section 5.3 hereof.
NET PROFIT OR NET LOSS means 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 Fund, at the close of business on the Closing Date), such amount
to be adjusted to exclude:
(1) the amount of any Insurance premiums or proceeds to be allocated
among the Capital Accounts of the Members pursuant to Section 5.5
hereof;
(2) any items to be allocated among the Capital Accounts of the
Members on a basis which is not in accordance with the respective
Fund Percentages of all Members as of the commencement of such
Fiscal Period pursuant to Sections 5.6 and 5.7 hereof; and
(3) Organizational Expenses allocated among the Capital Accounts of
the Members pursuant to Section 5.11 hereof.
1940 ACT means the Investment Company Act of 1940 and the rules,
regulations and orders thereunder, as amended from time to time, or any
successor law.
1934 ACT means the Securities Exchange Act of 1934 and the rules,
regulations and orders thereunder, as amended from time to time, or any
successor law.
ORGANIZATIONAL EXPENSES means the expenses incurred by the Fund in
connection with its formation, its initial registration as an investment company
under the 1940 Act, and the initial offering of Interests.
ORGANIZATIONAL MEMBER means Norman E. Sienko, Jr.
PERSON means any individual, entity, corporation, partnership,
association, limited liability company, joint-stock company, trust, estate,
joint venture, organization or unincorporated organization.
POSITIVE ALLOCATION CHANGE has the meaning given such term in the
definition of Allocation Change.
PWFA means PW Fund Advisor, L.L.C., or any successor thereto.
PWFA SERVICES means such management and administrative services as
PWFA or its affiliates shall provide to the Fund pursuant to a separate written
agreement with the Fund as contemplated by Section 3.10(a) hereof.
RELATED PERSON means, with respect to any person, (i) a relative,
spouse or relative of a spouse who has the same principal residence as such
person, (ii) any trust or estate in which such person and any persons who are
related to such person collectively have more than 50% of the beneficial
interests (excluding contingent interests) and (iii) any corporation or other
organization of which such person and any persons who are related to such person
collectively are beneficial owners of more than 50% of the equity securities
(excluding directors' qualifying shares) or equity interests.
SECURITIES means 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, currency or commodity, all manner of
derivative instruments and any contracts based on any index or group of
securities, debt obligations, currencies or commodities, and any options
thereon.
SPECIAL MEMBER means such Members as the Manager shall determine from
time to time, in its sole discretion, to be key employees, or directors of the
Manager and its affiliates, and members of their immediate families, and
attorneys or other professional advisors engaged on behalf of the Fund, and
members of their immediate families.
TAX MATTERS PARTNER means the Manager designated as "tax matters
partner" of the Fund pursuant to Section 8.17 hereof.
TRANSFER means the assignment, transfer, sale or other disposition of
all or any portion of an Interest, including any right to receive any
allocations and distributions attributable to an Interest.
VOTING INTEREST means with respect to a Member the number of votes
equivalent to such Member's Fund Percentage as of the record date for a meeting
of Members.
--------------------------------------------------------------------------------
ARTICLE II
ORGANIZATION; ADMISSION OF MEMBERS; BOARD
--------------------------------------------------------------------------------
2.1 FORMATION OF LIMITED LIABILITY COMPANY.
The Organizational Member and any person designated by the Board
hereby are designated as authorized persons, within the meaning of the Delaware
Act, to execute, deliver and file all certificates (and any amendments and/or
restatements thereof) required or permitted by the Delaware Act to be filed in
the office of the Secretary of State of the State of Delaware. The Board shall
cause to be executed and filed with applicable governmental authorities any
other instruments, documents and certificates which, in the opinion of the
Fund'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 Fund 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 Fund.
2.2 NAME.
The name of the Fund shall be "PW ___*____ Fund, L.L.C." or such other
name as the Board hereafter may 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. The Fund's business may be conducted
under the name of the Fund or, to the fullest extent permitted by law, any other
name or names deemed advisable by the Board.
2.3 PRINCIPAL AND REGISTERED OFFICE.
The Fund shall have its principal office at the principal office of
the Manager, or at such other place designated from time to time by the Board.
The Fund shall have its registered office in the State of Delaware at
1013 Center Road, Wilmington, New Castle County, Delaware 19805-1297, and shall
have Corporation Service Company as its registered agent at such registered
office for service of process in the State of Delaware, unless a different
registered office or agent is designated from time to time by the Board in
accordance with the Delaware Act.
2.4 DURATION.
The term of the Fund commenced on the filing of the Certificate with
the Secretary of State of the State of Delaware and shall continue until the
Fund is dissolved pursuant to Section 6.1 hereof.
2.5 BUSINESS OF THE FUND.
(a) The business of the Fund is to purchase, sell (including short
sales), invest and trade in Securities, and to engage in any financial or
derivative transactions relating thereto or otherwise. The Manager, on behalf of
the Fund, may execute, deliver and perform all contracts, agreements and other
undertakings and engage in all activities and transactions as may in the opinion
of the Manager be necessary or advisable to carry out the Fund's business and
any amendments to any such contracts, agreements and other undertakings, all
without any further act, vote or approval of any other person, notwithstanding
any other provision of this Agreement.
(b) The Fund shall operate as a closed-end, 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 THE BOARD.
(a) The Organizational Member hereby designates those persons listed
on Schedule I who shall agree to be bound by all of the terms of this Agreement
to serve as Directors on the initial Board. The Board 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 Director and the provisions of
Section 3.3 hereof with respect to the election of Directors by Members,
designate any person who shall agree to be bound by all of the terms of this
Agreement as a Director. The names and mailing addresses of the Directors shall
be set forth in the books and records of the Fund. The number of Directors shall
be fixed from time to time by the Directors but, at the Closing Date, shall not
be fewer than three.
(b) Each Director shall serve as a Director for the duration of the
term of the Fund, unless his or her status as a Director shall be sooner
terminated pursuant to Section 4.1 hereof. If any vacancy in the position of a
Director occurs, the remaining Directors may appoint a person to serve in such
capacity, so long as immediately after such appointment at least two-thirds of
the Directors then serving would have been elected by the Members. The Directors
may call a meeting of Members to fill any vacancy in the position of Director,
and shall do so within 60 days after any date on which Directors who were
elected by the Members cease to constitute a majority of the Directors then
serving as Directors.
(c) If no Director remains, the Manager shall promptly call a meeting
of the Members, to be held within 60 days after the date on which the last
Director ceased to act in that capacity, for the purpose of determining whether
to continue the business of the Fund and, if the business shall be continued, of
electing the required number of Directors. If the Members shall determine at
such meeting not to continue the business of the Fund or if the required number
of Directors is not elected within 60 days after the date on which the last
Director ceased to act in that capacity, then the Fund shall be dissolved
pursuant to Section 6.1 hereof and the assets of the Fund shall be liquidated
and distributed pursuant to Section 6.2 hereof.
2.7 MEMBERS.
The Board may admit one or more Members as of the beginning of each
calendar month or at such other times as the Board may determine. Members may be
admitted to the Fund subject to the condition that each such Member shall
execute an appropriate signature page of this Agreement or of the Fund's
application pursuant to which such Member agrees to be bound by all the terms
and provisions hereof. The Board, in its absolute discretion, may reject
applications for Interests in the Fund. The admission of any person as a Member
shall be effective upon the revision of the books and records of the Fund to
reflect the name and the contribution to the capital of the Fund of such
additional Member. Each of the Manager and the Organizational Member hereby is
admitted as a Member on the date hereof.
2.8 ORGANIZATIONAL MEMBER.
Upon the admission to the Fund of any additional Member pursuant to
Section 2.7, the Organizational Member shall withdraw from the Fund as the
Organizational Member and shall be entitled to the return of his Capital
Contribution, if any, without interest or deduction, and shall cease to be a
member of the Fund.
2.9 BOTH DIRECTORS AND MEMBERS.
A Member may at the same time be a Director 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 and as provided in
the Delaware Act.
2.10 LIMITED LIABILITY.
Except as otherwise provided under applicable law, no Member or
Director shall be liable personally for the Fund's debts, obligations or
liabilities, whether arising in contract, tort or otherwise, solely by reason of
being a member or manager of the Fund, except that a Member may be obligated to
make capital contributions to the Fund pursuant to this Agreement and to repay
any funds wrongfully distributed to such Member. Notwithstanding any other
provision of this Agreement, the Manager, in its sole discretion, may require a
Member to contribute to the Fund, at any time or from time to time, whether
before or after the dissolution of the Fund or after such Member ceases to be a
member of the Fund, such amounts as are requested by the Manager to meet the
Fund's debts, obligations or liabilities (not to exceed for any Member the
aggregate amount of any distributions, amounts paid in connection with a
repurchase of all or a portion of such Member's Interest and any other amounts
received by such Member from the Fund during or after the Fiscal Year in which
any debt, obligation or liability of the Fund arose or was incurred); PROVIDED
HOWEVER, that each Member shall contribute only his pro rata share of the
aggregate amount requested based on such Member's Invested Capital in the Fiscal
Year in which the debt, obligation or liability arose or was incurred as a
percentage of the aggregate Invested Capital of the Fund in such Fiscal Year;
and PROVIDED FURTHER that the provisions of this Section 2.10 shall not affect
the obligations of Members under Section 18-607 of the Delaware Act.
--------------------------------------------------------------------------------
ARTICLE III
MANAGEMENT
--------------------------------------------------------------------------------
3.1 MANAGEMENT AND CONTROL.
(a) Management and control of the business of the Fund shall be vested
in the Board, which shall have the right, power and authority, on behalf of the
Fund 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 business of the Fund and its duties hereunder, including, without
limitation, the power to engage the Manager to provide Advice and Management to
the Fund. No Director shall have the authority individually to act on behalf of
or to bind the Fund except within the scope of such Director's authority as
delegated by the Board. The parties hereto intend that, except to the extent
otherwise expressly provided herein, (i) each Director shall be vested with the
same powers, authority and responsibilities on behalf of the Fund as are
customarily vested in each director of a Delaware corporation and (ii) each
Independent Director shall be vested with the same powers, authority and
responsibilities on behalf of the Fund 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 Fund shall have no Directors, the Manager shall continue to
provide Advice and Management to the Fund.
(b) Each Member agrees not to treat, on his personal return or in any
claim for a refund, any item of income, gain, loss, deduction or credit in a
manner inconsistent with the treatment of such item by the Fund. The Board shall
have the exclusive authority and discretion to make any elections required or
permitted to be made by the Fund under any provisions of the Code or any other
revenue laws.
(c) Members (other than the Manager) shall have no right to
participate in and shall take no part in the management or control of the Fund's
business and shall have no right, power or authority to act for or bind the
Fund. 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 may delegate to any person, including the Manager, even
if such delegation is greater than the power given to the Manager pursuant to
Section 3.4 hereof, any rights, power and authority vested by this Agreement in
the Board to the extent permissible under applicable law.
3.2 ACTIONS BY THE BOARD.
(a) Unless provided otherwise in this Agreement, the Board shall act
only: (i) by the affirmative vote of a majority of the Directors (which majority
shall include any requisite number of Independent Directors required by the 1940
Act) present at a meeting duly called at which a quorum of the Directors shall
be present (in person or, if in person attendance is not required by the 1940
Act, in person or by telephone) or (ii) by unanimous written consent of all of
the Directors without a meeting, if permissible under the 1940 Act.
(b) The Board may designate from time to time a Chairman who shall
preside at all meetings. Meetings of the Board may be called by the Chairman or
any two Directors, and may be held on such date and at such time and place as
the Board shall determine. Each Director 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 Director 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. Directors 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 Directors then in office
shall constitute a quorum at any meeting.
(c) The Board may designate from time to time agents and employees of
the Fund who shall have the same powers and duties on behalf of the Fund
(including the power to bind the Fund) as are customarily vested in officers of
a Delaware corporation, and designate them as officers of the Fund.
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 or by Members holding a majority 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 shall determine. The Board 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.
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 Directors 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 Voting Interest. The Board 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 which 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.
(c) A Member may vote at any meeting of Members by a proxy properly
executed in writing by the Member and filed with the Fund 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 Fund 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 ADVICE AND MANAGEMENT.
(a) Among its powers, the Board shall have the power to engage the
Manager to provide Advice and Management to the Fund under its general
supervision, subject to the initial approval thereof prior to the Closing Date
by the Organizational Member. The Board also delegates to the Manager the rights
and powers expressly given to the Manager under this Agreement. The authority of
the Manager granted under this Section 3.4 shall become effective upon such
initial approval and shall terminate: (i) if any period of 12 consecutive months
following the first 12 consecutive months of the effectiveness of such authority
shall conclude without the approval of the continuation of such authority by (A)
the vote of a majority (as defined in the 1940 Act) of the outstanding Voting
Interests of the Fund or (B) the Board, and in either case, approval by a
majority of the Independent Directors by vote cast in person at a meeting called
for such purpose; (ii) if revoked by the Board or by vote of a majority (as
defined in the 1940 Act) of the outstanding Voting Interests of the Fund, in
either case with 60 days' prior written notice to the Manager; or (iii) at the
election of the Manager with 60 days' prior written notice to the Board. The
authority of the Manager to provide Advice and Management pursuant to this
Section 3.4 shall automatically terminate upon the occurrence of any event in
connection with the Manager, its provision of Advice and Management, this
Agreement or otherwise constituting an "assignment" within the meaning of the
1940 Act. If the authority of the Manager under this Section 3.4 is terminated
as provided herein, the Board may appoint, subject to the approval thereof by a
majority of the Independent Board and by vote of a majority (as defined in the
1940 Act) of the outstanding Voting Interests of the Fund, a person or persons
to provide Advice and Management to the Fund, and shall cause the terms and
conditions of such appointment to be stated in an agreement executed on behalf
of the Fund and such person or persons. Notwithstanding anything in this
Agreement to the contrary, upon receiving the requisite approval set forth in
the preceding sentence, the Fund, and a person designated by the Board, shall
have the power and authority to enter into such agreement without any further
act, vote or approval of any Member.
(b) So long as the Manager has been and continues to be authorized to
provide Advice and Management, it shall have, subject to any policies and
restrictions set forth in any current offering memorandum issued by the Fund,
this Agreement, the Form N-2 or the 1940 Act, or adopted from time to time by
the Board and communicated in writing to the Manager, full discretion and
authority (i) to manage the assets and liabilities of the Fund and (ii) to
manage the day-to-day business and affairs of the Fund. In furtherance of and
subject to the foregoing, the Manager, except as otherwise provided in this
Agreement, shall have full power and authority on behalf of the Fund:
(1) to purchase, sell, exchange, trade and otherwise deal in and with
Securities and other property of the Fund and to loan Securities
of the Fund;
(2) to open, maintain and close accounts with brokers and dealers, to
make all decisions relating to the manner, method and timing of
Securities and other investment transactions, to select and place
orders with brokers, dealers or other financial intermediaries
for the execution, clearance or settlement of any transactions on
behalf of the Fund on such terms as the Manager considers
appropriate, and to grant limited discretionary authorization to
such persons with respect to price, time and other terms of
investment and trading transactions;
(3) to borrow from banks or other financial institutions and to
pledge Fund assets as collateral therefor, to trade on margin, to
exercise or refrain from exercising all rights regarding the
Fund's investments, and to instruct custodians regarding the
settlement of transactions, the disbursement of payments to
Members with respect to repurchases of Interests and the payment
of Fund expenses, including those relating to the organization
and registration of the Fund;
(4) to issue to any Member an instrument certifying that such Member
is the owner of an Interest;
(5) to call and conduct meetings of Members at the Fund's principal
office or elsewhere as it may determine and to assist the Board
in calling and conducting meetings of the Board;
(6) to engage and terminate such attorneys, accountants and other
professional advisors and consultants as the Manager may deem
necessary or advisable in connection with the affairs of the Fund
or as may be directed by the Board;
(7) to engage and terminate the services of others to assist the
Manager in providing, or to provide under the Manager's control
and supervision, Advice and Management to the Fund at the expense
of the Manager;
(8) to assist in the preparation and filing of any required tax or
information returns to be made by the Fund;
(9) as directed by the Board, to commence, defend and conclude any
action, suit, investigation or other proceeding that pertains to
the Fund or any assets of the Fund;
(10) if directed by the Board, to arrange for the purchase of (A)
Insurance, or (B) any insurance covering the potential
liabilities of the Fund or relating to the performance of the
Board or the Manager, or any of their principals, directors,
officers, members, employees and agents; and
(11) to execute, deliver and perform such contracts, agreements and
other undertakings, and to engage in such activities and
transactions as are, in the opinion of the Manager, necessary and
appropriate for the conduct of the business of the Fund, without
the act, vote or approval of any other Member or person.
3.5 CUSTODY OF ASSETS OF THE FUND.
The physical possession of all funds, Securities or other property of
the Fund shall at all times, be held, controlled and administered by one or more
custodians retained by the Fund in accordance with the requirements of the 1940
Act.
3.6 BROKERAGE.
In the course of selecting brokers, dealers and other financial
intermediaries for the execution, clearance and settlement of transactions for
the Fund, the Manager may agree to such commissions, fees and other charges on
behalf of the Fund as it shall deem reasonable under the circumstances, taking
into account all such factors as it deems relevant (including the quality of
research and other services made available to it even if such services are not
for the exclusive benefit of the Fund and the cost of such services does not
represent the lowest cost available) and shall be under no obligation to combine
or arrange orders so as to obtain reduced charges unless otherwise required
under the Federal securities laws. The Manager, subject to such procedures as
may be adopted by the Board, may use Affiliates of the Manager as brokers to
effect the Fund's Securities transactions and the Fund may pay such commissions
to such brokers in such amounts as are permissible under applicable law.
3.7 OTHER ACTIVITIES OF MEMBERS (INCLUDING THE MANAGER) AND DIRECTORS.
(a) Neither the Directors nor the Manager shall be required to devote
full time to the affairs of the Fund, but shall devote such time as may
reasonably be required to perform their obligations under this Agreement.
(b) Any Member (including the Manager) or Director or Affiliate
thereof 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 shall have any
rights in or to such activities of any other Member or Director, or any profits
derived therefrom.
3.8 DUTY OF CARE.
(a) The Directors and the Manager, including any officer, director,
member, principal, employee or agent of the Manager, shall not be liable to the
Fund or to any of its Members for any loss or damage occasioned by any act or
omission in the performance of such person's 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 person constituting willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of such
person's duties hereunder.
(b) A Member 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 Fund, any other Member or third parties only as required by the
Delaware Act or otherwise provided in this Agreement.
3.9 INDEMNIFICATION.
(a) To the fullest extent permitted by law, the Fund shall, subject to
Section 3.9(b) hereof, indemnify each Director (including for this purpose their
executors, heirs, assigns, successors or other legal representatives), the
Manager (including for this purpose each affiliate, officer, director, member,
partner, principal, employee or agent of the Manager or a member thereof, and
the executors, heirs, assigns, successors or other legal representatives of each
of the foregoing, and of any person who controls or is under common control, or
otherwise is affiliated, with the Manager or any member thereof, and their
executors, heirs, assigns, successors or other legal representatives), and the
Tax Matters Partner (including for this purpose its successor) 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
Director, Manager or the Tax Matters Partner, as the case may be, of the Fund or
the past or present performance of services to the Fund by such indemnitee,
except to the extent such loss, claim, damage, liability, cost or expense shall
have been finally determined in a non-appealable 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
3.9 shall not be construed so as to provide for indemnification of an indemnitee
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 3.9 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 Fund
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 Fund amounts so paid if it shall ultimately be determined that
indemnification of such expenses is not authorized under Section 3.9(a) hereof;
PROVIDED, HOWEVER, that (i) such indemnitee shall provide security for such
undertaking, (ii) the Fund shall be insured by or on behalf of such indemnitee
against losses arising by reason of such indemnitee's failure to fulfill his or
its undertaking, or (iii) a majority of the Directors (excluding any Director
who is seeking 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 Fund 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 Section 3.9(a) hereof if (i) approved as in the best
interests of the Fund by a majority of the Directors (excluding any Director who
is seeking 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 Fund and that such indemnitee is not liable to
the Fund 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 Directors secure 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 indemnitee acted
in good faith and in the reasonable belief that such actions were in the best
interests of the Fund and that such indemnitee is not liable to the Fund 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.
(d) Any indemnification or advancement of expenses made pursuant to
this Section 3.9 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 Fund 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 any suit brought by an indemnitee to
enforce a right to indemnification under this Section 3.9 it shall be a defense
that, and in any suit in the name of the Fund to recover any indemnification or
advancement of expenses made pursuant to this Section 3.9 the Fund shall be
entitled to recover such expenses upon a final adjudication that, the indemnitee
has not met the applicable standard of conduct set forth in this Section 3.9. 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 3.9,
the burden of proving that the indemnitee is not entitled to be indemnified, or
to any indemnification or advancement of expenses, under this Section 3.9 shall
be on the Fund (or any Member acting derivatively or otherwise on behalf of the
Fund or its Members).
(e) An indemnitee may not satisfy any right of indemnification or
advancement of expenses granted in this Section 3.9 or to which he, she or it
may otherwise be entitled except out of the assets of the Fund, 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 3.9 shall
affect the power of the Fund to purchase and maintain liability insurance on
behalf of any Director or other person.
3.10 FEES, EXPENSES AND REIMBURSEMENT.
(a) So long as PWFA (or its affiliates) provides PWFA Services to the
Fund, it shall be entitled to receive such fees as may be agreed to by PWFA and
the Fund pursuant to a separate written agreement, which, notwithstanding
anything in this Agreement to the contrary, may be entered into by the Fund, and
the Manager on behalf of the Fund, without any further act, vote or approval of
any Member.
(b) The Board may cause the Fund to compensate each Director for his
or her services hereunder. In addition, the Fund shall reimburse the Directors
for reasonable out-of-pocket expenses incurred by them in performing their
duties under this Agreement.
(c) The Fund shall bear all expenses incurred in the business of the
Fund other than those specifically required to be borne by the Manager or its
members hereunder or under any other agreement. Expenses to be borne by the Fund
include, but are not limited to, the following:
(1) all costs and expenses related to portfolio transactions and
positions for the Fund's account, including, but not limited to,
brokerage commissions, research fees, interest and commitment
fees on loans and debit balances, borrowing charges on Securities
sold short, dividends on Securities sold short but not yet
purchased, custodial fees, margin fees, transfer taxes and
premiums and taxes withheld on foreign dividends;
(2) all costs and expenses associated with the organization and
registration of the Fund, offering costs and the costs of
compliance with any applicable Federal or state laws;
(3) the costs and expenses of holding any meetings of Members that
are regularly scheduled, permitted or are required to be held by
this Agreement, the 1940 Act or other applicable law;
(4) fees and disbursements of any attorneys, accountants, auditors
and other consultants and professionals engaged on behalf of the
Fund;
(5) the costs of a fidelity bond and any liability insurance obtained
on behalf of the Fund, the Manager or the Directors;
(6) any fees payable to PWFA or its affiliates for PWFA Services;
(7) all costs and expenses of preparing, setting in type, printing
and distributing reports and other communications to Members;
(8) all expenses of computing the Fund's net asset value, including
any equipment or services obtained for the purpose of valuing the
Fund's investment portfolio, including valuation services
provided by third parties;
(9) all charges for equipment or services used for communications
between the Fund and any custodian, or other agent engaged by the
Fund;
(10) fees payable to custodians and persons providing administrative
services to the Fund; and
(11) such other types of expenses as may be approved from time to time
by the Board.
The Manager shall be entitled to reimbursement from the Fund for any
of the above expenses that it pays on behalf of the Fund.
(d) The Fund from time to time, alone or in conjunction with other
accounts for which the Manager, or any Affiliate of the Manager, acts as general
partner, managing member or investment adviser, may purchase Insurance in such
amounts, from such insurers and on such terms as the Board shall determine.
--------------------------------------------------------------------------------
ARTICLE IV
TERMINATION OF STATUS OF DIRECTORS;
TRANSFERS AND REPURCHASES
--------------------------------------------------------------------------------
4.1 TERMINATION OF STATUS OF A DIRECTOR.
The status of a Director shall terminate if the Director (i) shall
die; (ii) shall be adjudicated incompetent; (iii) shall voluntarily withdraw as
a Director (upon not less than 90 days' prior written notice to the other
Directors, unless the other Directors waive such notice); (iv) shall be removed
under Section 4.2; (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; or (vii) shall have a receiver appointed to administer the property
or affairs of such Director.
4.2 REMOVAL OF THE DIRECTORS.
Any Director may be removed either by (a) the vote or written consent
of at least two-thirds of the Directors not subject to the removal vote or (b)
the vote or written consent of Members holding not less than two-thirds of the
total number of votes eligible to be cast by all Members.
4.3 TRANSFER OF INTERESTS OF MEMBERS.
(a) An Interest or portion thereof of a Member may be Transferred only
(i) by operation of law pursuant to the death, bankruptcy, insolvency or
dissolution of such Member or (ii) with the written consent of the Board (which
may be withheld in its sole and absolute discretion). In addition, the Board may
not consent to a Transfer of an Interest or a portion thereof of a Member unless
the person to whom such Interest is transferred (or each of such person's equity
owners if such a person is a "private investment company" as defined in Rule
205-3(d)(3) under the Advisers Act, an investment company registered under the
1940 Act, or a business development company as defined under the Advisers Act)
is a person whom the Board believes meets the requirements of paragraph (d)(1)
of Rule 205-3 under the Advisers Act or successor rule thereto, or is otherwise
exempt from such requirements. If any transferee does not meet such investor
eligibility requirements, the Fund reserves the right to redeem its Interest. If
the Board does not consent to a Transfer by operation of law, the Fund shall
redeem the Interest from the Member's successor. In addition to the foregoing,
no Member shall be permitted to Transfer its Interest or portion thereof unless
after such Transfer the balance of the Capital Account of each of the transferor
and the transferee is at least equal to the amount of the transferor's initial
Capital Contribution. Any permitted transferee 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 or portion
thereof with the approval of the Board, the Fund shall promptly take all
necessary actions so that each transferee or successor to whom such Interest or
portion thereof is Transferred is admitted to the Fund as a substituted Member.
The admission of any transferee as a substituted Member shall be effective upon
the execution and delivery by, or on behalf of, such substituted Member of
either a counterpart of this Agreement or an instrument that constitutes the
execution and delivery of this Agreement. Each transferring Member and
transferee agrees to pay all expenses, including attorneys' and accountants'
fees, incurred by the Fund in connection with such Transfer. Upon the Transfer
to another person or persons of a Member's entire Interest, such Member shall
cease to be a member of the Fund.
(b) Each transferring Member shall indemnify and hold harmless the
Fund, the Directors, the Manager, 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 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 4.3 and (ii) any
misrepresentation by such Member in connection with any such Transfer.
4.4 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 Fund for repurchase of that Interest or portion thereof. The
Board may from time to time, in its complete and exclusive discretion and on
such terms and conditions as it may determine, cause the Fund to repurchase
Interests or portions thereof pursuant to written tenders. In determining
whether to cause the Fund to repurchase Interests or portions thereof pursuant
to written tenders, the Board shall consider the following factors, among
others:
(1) whether any Members have requested to tender Interests or
portions thereof to the Fund;
(2) the liquidity of the Fund's assets;
(3) the investment plans and working capital requirements of the
Fund;
(4) the relative economies of scale with respect to the size of the
Fund;
(5) the history of the Fund in repurchasing Interests or portions
thereof;
(6) the condition of the securities markets; and
(7) the anticipated tax consequences of any proposed repurchases of
Interests or portions thereof.
The Board shall cause the Fund to repurchase Interests or portions
thereof pursuant to written tenders only on terms fair to the Fund and to all
Members (including persons holding Interests acquired from Members), as
applicable.
(b) The Board may cause the Fund to repurchase an Interest or portion
thereof of a Member or any person acquiring an Interest or portion thereof from
or through a Member if the Board determines or has reason to believe that:
(1) such an Interest or portion thereof has been transferred in
violation of Section 4.3 hereof, or such an Interest or portion
thereof has vested in any person by operation of law as the
result of the death, dissolution, bankruptcy or incompetency of a
Member;
(2) ownership of such an Interest by a Member or other person will
cause the Fund to be in violation of, or require registration of
any Interest or portion thereof under, or subject the Fund to
additional registration or regulation under, the securities,
commodities or other 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 Fund, the Manager
or the Directors, or may subject the Fund 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 Fund, as determined by
the Board, for the Fund to repurchase such an Interest or portion
thereof.
(c) Repurchases of Interests or portions thereof by the Fund shall be
payable in cash or in part by promissory note, in each case without interest,
unless the Board, in its discretion, determines otherwise, or, in the discretion
of the Board, in Securities (or any combination of Securities and cash) of
equivalent value. All such repurchases shall be subject to any and all
conditions as the Board may impose and shall be effective as of a date set by
the Board after receipt by the Fund of all eligible written tenders of Interests
or portion thereof. The amount due to any Member whose Interest or portion
thereof is repurchased shall be equal to the estimated 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 (other than the
Manager) to the capital of the Fund shall be $250,000 ($25,000 for employees or
directors of the Manager and its affiliates, and members of their immediate
families, and, in the sole discretion of the Board, attorneys or other
professional advisors engaged on behalf of the Fund, and members of their
immediate families) or such other amount as the Board may determine from time to
time. The amount of the initial contribution of each Member shall be recorded on
the books and records of the Fund upon acceptance as a contribution to the
capital of the Fund. The Directors shall not be entitled to make voluntary
contributions of capital to the Fund as Directors of the Fund, but may make
voluntary contributions to the capital of the Fund as Members.
(b) The Members may make additional contributions to the capital of
the Fund, effective as of such times as the Board in its discretion may permit,
but no Member shall be obligated to make any additional contribution to the
capital of the Fund except to the extent provided in Section 5.7 hereof.
(c) Except as otherwise permitted by the Board, (i) initial and any
additional contributions to the capital of the Fund by any Member shall be
payable in cash or in such Securities that the Board, in its absolute
discretion, may agree to accept on behalf of the Fund, 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 Fund shall charge
each Member making a contribution in Securities to the capital of the Fund such
amount as may be determined by the Board not exceeding 2% of the value of such
contribution in order to reimburse the Fund for any costs incurred by the Fund
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 Fund 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.
5.2 RIGHTS OF MEMBERS TO CAPITAL.
No Member shall be entitled to interest on his or its contribution to
the capital of the Fund, nor shall any Member be entitled to the return of any
capital of the Fund except (i) upon the repurchase by the Fund of a part or all
of such Member's Interest pursuant to Section 4.4 hereof, (ii) pursuant to the
provisions of Section 5.7(c) hereof or (iii) upon the liquidation of the Fund'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
Fund's property or to compel any sale or appraisal of the Fund's assets.
5.3 CAPITAL ACCOUNTS.
(a) The Fund 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) constituting such Member's initial contribution to the
capital of the Fund.
(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) constituting additional contributions by such Member to
the capital of the Fund permitted pursuant to Section 5.1 hereof, plus (ii) any
amount credited to such Member's Capital Account pursuant to Sections 5.4
through 5.7 or 5.11 hereof.
(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 4.4, 5.10 or 6.2 hereof
which are not reinvested, plus (ii) any amounts debited against such Member's
Capital Account pursuant to Sections 5.4 through 5.7 and 5.11 hereof.
(e) If all or a portion of an Interest is transferred in accordance
with the terms of this Agreement, the transferee shall succeed to the Capital
Account of the transferor to the extent it relates to the transferred Interest.
5.4 ALLOCATION OF NET PROFIT AND 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
Fund Percentages for such Fiscal Period.
5.5 ALLOCATION OF INSURANCE PREMIUMS AND PROCEEDS.
(a) Any premiums payable by the Fund for Insurance purchased pursuant
to Section 3.10(d) hereof shall be apportioned evenly over each Fiscal Period or
portion thereof falling within the period to which such premiums relate under
the terms of such Insurance, and the portion of the premiums so apportioned to
any Fiscal Period shall be allocated among and debited against the Capital
Accounts of each Member who is a member of the Fund during such Fiscal Period in
accordance with such Member's Fund Percentage for such Fiscal Period.
(b) Proceeds, if any, to which the Fund may become entitled pursuant
to such Insurance shall be allocated among and credited to the Capital Accounts
of each Member who is a member of the Fund during the Fiscal Period in which the
event which gives rise to recovery of proceeds occurs in accordance with such
Member's Fund Percentage for such Fiscal Period.
5.6 ALLOCATION OF CERTAIN WITHHOLDING TAXES AND OTHER EXPENDITURES.
(a) If the Fund incurs a withholding tax or other tax obligation with
respect to the share of Fund income allocable to any Member, then the Board,
without limitation of any other rights of the Fund or the Board, shall cause the
amount of such obligation to be debited against the Capital Account of such
Member when the Fund pays such obligation, and any amounts then or thereafter
distributable to such Member shall be reduced by the amount of such taxes. 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 Fund as
a contribution to the capital of the Fund, upon demand of the Fund, the amount
of such excess. The Fund 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; provided, that in the event that
the Fund determines that a Member is eligible for a refund of any withholding
tax, the Fund may, at the request and expense of such Member, assist such Member
in applying for such refund.
(b) Except as otherwise provided for in this Agreement and unless
prohibited by the 1940 Act, any expenditures payable by the Fund, to the extent
determined by the Board 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 Fund.
5.7 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 Manager or the Board, such reserves to be in the amounts
which the Board in its sole discretion deem necessary or appropriate. The Board
may increase or reduce any such reserves from time to time by such amounts as it
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 instead shall be charged or credited to those
parties who were Members at the time, as determined by the Board 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.
(b) If at any time an amount is paid or received by the Fund (other
than contributions to the capital of the Fund, 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 Fund'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
5.7 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 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 Fund 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 from the date on which such party
ceased to be a Member. To the extent that a former Member fails to pay to the
Fund, 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.
5.8 INCENTIVE ALLOCATION.
(a) So long as the authority to provide Advice and Management under
Section 3.4 hereof shall remain effective, the Incentive Allocation shall be
debited against the Capital Account of each Member (other than the Manager) as
of the last day of each Allocation Period with respect to such Member and the
amount so debited shall be credited simultaneously to the Capital Account of the
Manager, or, subject to compliance with the 1940 Act and the Advisers Act, to
the Capital Accounts of such Members as have been designated in any written
notice delivered by the Manager, to the Fund within 90 days after the close of
such Allocation Period.
(b) Within 30 days after the close of each Allocation Period with
respect to each Member, the Manager may withdraw up to 100% of the Incentive
Allocation (computed on the basis of unaudited data) that was credited to the
Capital Account of the Manager, and debited from such Member's Capital Account
with respect to such Allocation Period. The Fund shall pay the Manager the
undrawn balance, if any, of such Incentive Allocation (subject to audit
adjustments) within 30 days after the completion of the audit of the Fund's
books. Any amount of such Incentive Allocation not withdrawn by the Manager
pursuant to the first sentence of this Section 5.8(b) shall be deemed reinvested
in the Fund by the Manager.
5.9 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 a 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 5.9 shall be made pursuant to the principles of
Sections 704(b) and 704(c) of the Code, and in conformity with Treasury
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
Regulations Section 1.704-1(b)(2)(ii)(d).
If the Fund realizes capital gains (including short-term capital
gains) for Federal income tax purposes for any Fiscal Year during or as of the
end of which one or more Positive Basis Members (as hereinafter defined)
withdraw from the Fund pursuant to Articles IV or VI hereof, the Board may elect
to 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 reflect equitably the amounts credited to such Members'
Capital Accounts.
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 the total
of such Member's Capital Account 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 Fund
under Section 752 of the Code), and (ii) the term "Positive Basis Member" shall
mean any Member who withdraws from the Fund and who has a 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 preceding sentence equal to its Positive Basis as
of the effective date of its withdrawal.
5.10 DISTRIBUTIONS.
(a) The Board, in its sole discretion, may authorize the Fund to make
distributions in cash or in kind at any time to all of the Members on a PRO RATA
basis in accordance with the Members' Fund Percentages. Notwithstanding anything
to the contrary in this Agreement, a Member may be compelled to accept a
distribution of any asset in kind from the Fund despite the fact that the
percentage of the asset distributed to the Member exceeds the percentage of that
asset which is equal to the percentage in which the Member shares in
distributions from the Fund.
(b) The Board may withhold taxes from any distribution to any Member
to the extent required by the Code or any other applicable law. For purposes of
this Agreement, any taxes so withheld by the Fund with respect to any amount
distributed by the Fund 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, if appropriate, reducing the Capital
Account of such Member.
(c) Notwithstanding anything to the contrary contained herein, none of
the Directors or the Members (including the Manager), nor any other person on
behalf of the Fund, shall make a distribution to the Members on account of their
interest in the Fund if such distribution would violate the Delaware Act or
other applicable law.
5.11 ALLOCATION OF ORGANIZATIONAL EXPENSES.
(a) As of the first Expense Allocation Date, Organizational Expenses
shall be allocated among and debited against the Capital Accounts of the Members
in accordance with their respective Capital Percentages on such Expense
Allocation Date.
(b) As of each Expense Allocation Date following the first Expense
Allocation Date, all amounts previously debited against the Capital Account of a
Member pursuant to this Section 5.11 on the preceding Expense Allocation Date
will be credited to the Capital Account of such Member, and Organizational
Expenses then shall be re-allocated among and debited against the Capital
Accounts of all Members in accordance with their respective Capital Percentages
on such Expense Allocation Date.
--------------------------------------------------------------------------------
ARTICLE VI
DISSOLUTION AND LIQUIDATION
--------------------------------------------------------------------------------
6.1 DISSOLUTION.
(a) The Fund shall be dissolved at any time there are no Members,
unless the Fund is continued in accordance with the Delaware Act, or upon the
occurrence of any of the following events:
(1) upon the affirmative vote to dissolve the Fund by both (i) the
Board and (ii) Members holding at least two-thirds of the total
number of Voting Interests eligible to be cast by all Members;
(2) upon the failure of Members to approve of successor Directors at
a meeting called by the Manager in accordance with Section 2.6(c)
hereof when no Director remains to continue the business of the
Fund;
(3) upon the expiration of any two-year period which commences on the
date on which any Member has submitted a written notice to the
Fund requesting to tender such Member's entire Interest for
repurchase by the Fund if such Member has not been permitted to
do so at any time during such period;
(4) upon the determination by the Manager to dissolve the Fund; or
(5) as required by operation of law.
Dissolution of the Fund shall be effective on the day on which the
event giving rise to the dissolution shall occur, but the Fund shall not
terminate until the assets of the Fund 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 Fund as provided in Section 6.1
hereof, the Board, acting directly or through a liquidator it selects, shall
promptly liquidate the business and administrative affairs of the Fund, except
that if the Board 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 Fund. Net Profit and Net Loss during the period of liquidation shall be
allocated pursuant to Article V hereof. The proceeds from liquidation shall,
subject to the Delaware Act, be distributed in the following manner:
(1) in satisfaction (whether by payment or the making of reasonable
provision for payment thereof) of the debts and liabilities of
the Fund, including the expenses of liquidation (including legal
and accounting expenses incurred in connection therewith), but
not including debt and liabilities to Members, up to and
including the date that distribution of the Fund'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 be paid next in their order of seniority and on a
PRO RATA basis; and
(3) the Members shall be paid next on a PRO RATA basis the positive
balances of their respective Capital Accounts after giving effect
to all allocations to be made to such Members' Capital Accounts
for the 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, but
subject to the priorities set forth in Section 6.2(a) above, upon dissolution of
the Fund, the Board or other liquidator may distribute ratably in kind any
assets of the Fund; 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 Fund shall adopt for tax accounting purposes any accounting
method which the Board shall decide in its sole discretion is in the best
interests of the Fund. The Fund's accounts shall be maintained in U.S. currency.
(b) After the end of each taxable year, the Fund shall furnish to each
Member such information regarding the operation of the Fund and such Member's
Interest as is necessary for Members to complete Federal and state income tax or
information returns and any other tax information required by federal or state
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
Fund shall furnish to each Member a semi-annual report and an annual report
containing the information required by the 1940 Act. The Fund 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
Fund may furnish to each Member such other periodic reports as it deems
necessary or appropriate in its discretion.
7.2 DETERMINATIONS BY THE BOARD.
(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 (either directly or by the Manager
pursuant to delegated authority) unless specifically and expressly otherwise
provided for by the provisions of this Agreement or as required by law, and such
determinations and allocations shall be final and binding on all the Members.
(b) The Board may make such adjustments to the computation of Net
Profit or Net Loss or any components (withholding any items of income, gain,
loss or deduction) comprising any of the foregoing as it considers appropriate
to reflect fairly and accurately the financial results of the Fund 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 shall value
or have valued any Securities or other assets and liabilities of the Fund as of
the close of business on the last day of each Fiscal Period or more frequently,
in the discretion of the Board, in accordance with such valuation procedures as
shall be established from time to time by the Board and which conform to the
requirements of the 1940 Act. In determining the value of the assets of the
Fund, no value shall be placed on the goodwill or name of the Fund, or the
office records, files, statistical data or any similar intangible assets of the
Fund not normally reflected in the Fund'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, the unamortized
portion of any organizational expenses 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 value of Securities and other assets of the Fund and the net
worth of the Fund 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 the approval of (i) the Board
(including the vote of a majority of the Independent Directors, if required by
the 1940 Act), (ii) the Manager or (iii) a majority (as defined in the 1940 Act)
of the outstanding Voting Interests of the Fund.
(b) Any amendment that would:
(1) increase the obligation of a Member to make any contribution to
the capital of the Fund;
(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 Fund;
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) to tender his or her entire Interest for repurchase by the Fund.
(c) By way of example only, the Board at any time without the consent
of the Members may:
(1) restate this Agreement together with any amendments hereto which
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 or to cure any ambiguity or to
correct or supplement any provision hereof which may be
inconsistent with any other provision hereof, provided that such
action does not adversely affect the rights of any Member in any
material respect; and
(3) amend this Agreement to make such changes as may be necessary or
desirable, based on advice of legal counsel to the Fund, to
assure the Fund's continuing eligibility to be classified for
U.S. Federal income tax purposes as a partnership which is not
treated as a corporation under Section 7704(a) of the Code.
(d) The Board shall give written notice of any proposed amendment to
this Agreement (other than any amendment of the type contemplated by clause (1)
of Section 8.1(a) hereof) to each Member, which notice shall set forth (i) the
text of the proposed 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 the
Manager and each of the Directors, acting severally, and any liquidator of the
Fund's assets appointed pursuant to Section 6.2 hereof with full power of
substitution, the true and lawful representatives and 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 which 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 or as otherwise required by the Delaware Act; and
(3) all other such instruments, documents and certificates which, in
the opinion of legal counsel to the Fund, from time to time may
be required by the laws of the United States of America, the
State of Delaware or any other jurisdiction in which the Fund
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 Fund 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 Fund without such Member's
consent. If an amendment to the Certificate or this Agreement or any action by
or with respect to the Fund is taken in the manner contemplated by this
Agreement, each Member agrees that, notwithstanding any objection which 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 which 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 Fund.
(c) This power-of-attorney is a special power-of-attorney and is
coupled with an interest in favor of the Manager and each of the Directors,
acting severally, and any liquidator of the Fund's assets, appointed pursuant to
Section 6.2 hereof, 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 Fund,
the Board or any liquidator 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 for admission
to the Fund 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 or any liquidator to
execute, acknowledge and file any instrument necessary to effect
such substitution.
8.3 NOTICES.
Notices which may or are required to be provided under this Agreement
shall be made, if to a Member, by regular mail, hand delivery, registered or
certified mail return receipt requested, commercial courier service, telex,
telecopier or other electronic means, or, if to the Fund, by registered or
certified mail, return receipt requested, and shall be addressed to the
respective parties hereto at their addresses as set forth on the books and
records of the Fund (or to such other addresses as may be designated by any
party hereto by notice addressed to the Fund in the case of notice given to any
Member, and to each of the Members in the case of notice given to the Fund).
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 which 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 which affect numerous aspects of the conduct of the Fund'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) EACH MEMBER AGREES TO SUBMIT ALL CONTROVERSIES ARISING BETWEEN OR
AMONG MEMBERS OR ONE OR MORE MEMBERS AND THE FUND IN CONNECTION WITH THE FUND OR
ITS BUSINESSES OR CONCERNING ANY TRANSACTION, DISPUTE OR THE CONSTRUCTION,
PERFORMANCE OR BREACH OF THIS OR ANY OTHER AGREEMENT, WHETHER ENTERED INTO PRIOR
TO, ON OR SUBSEQUENT TO THE DATE HEREOF, TO ARBITRATION IN ACCORDANCE WITH THE
PROVISIONS SET FORTH BELOW. EACH MEMBER UNDERSTANDS THAT:
(1) ARBITRATION IS FINAL AND BINDING ON THE PARTIES;
(2) THE PARTIES ARE WAIVING THEIR RIGHTS TO SEEK REMEDIES IN COURT,
INCLUDING THE RIGHT TO JURY TRIAL;
(3) PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN 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) A PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF
ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES
INDUSTRY.
(C) CONTROVERSIES SHALL BE DETERMINED BY ARBITRATION BEFORE, AND ONLY
BEFORE, AN ARBITRATION PANEL CONVENED BY THE NEW YORK STOCK EXCHANGE, INC.
("NYSE") OR THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. (THE "NASD"),
TO THE FULLEST EXTENT PERMITTED BY LAW. THE PARTIES MAY ALSO SELECT ANY OTHER
NATIONAL SECURITIES EXCHANGE'S ARBITRATION FORUM UPON WHICH A PARTY IS LEGALLY
REQUIRED TO ARBITRATE THE CONTROVERSY, TO THE FULLEST EXTENT PERMITTED BY LAW.
SUCH ARBITRATION SHALL BE GOVERNED BY THE RULES OF THE ORGANIZATION CONVENING
THE PANEL, TO THE FULLEST EXTENT PERMITTED BY LAW. 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 OVER THE PARTY OR PARTIES AGAINST WHOM
SUCH AWARD IS RENDERED. 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 UNLESS AND 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. THE 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 and the Fund. This Agreement
is not intended for the benefit of non-Member creditors and no rights are
granted to non-Member creditors under this Agreement.
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 Fund.
8.9 MERGER AND CONSOLIDATION.
(a) The Fund may merge or consolidate with or into one or more limited
liability companies formed under the Delaware Act or other business entities (as
defined in Section 18-209(a) of the Delaware Act) pursuant to an agreement of
merger or consolidation which 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(b) of the Delaware Act, (i) effect any amendment to this
Agreement, (ii) effect the adoption of a new limited liability company agreement
for the Fund 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 Fund, for any purpose reasonably
related to the Member's Interest, such information regarding the affairs of the
Fund 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.
(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 or address (whether business, residence or mailing) of any
Member (collectively, "Confidential Information") without the prior written
consent of the Board, 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 Fund.
Accordingly, in addition to any and all other remedies at law or in equity to
which the non-breaching Members and the Fund may be entitled, such Members also
shall 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.
(d) The Fund shall have the right to keep confidential from the
Members for such period of time as it deems reasonable any information which the
Board reasonably believes to be in the nature of trade secrets or other
information the disclosure of which the Board in good faith believes is not in
the best interest of the Fund or could damage the Fund or its business or which
the Fund is required by law or by agreement with a third party to keep
confidential.
8.12 CERTIFICATION OF NON-FOREIGN STATUS.
Each Member or transferee of an Interest from a Member that is
admitted to the Fund in accordance with this Agreement shall certify, upon
admission to the Fund and at such other time thereafter as the Board may
request, whether he or she is a "United States Person" within the meaning of
Section 7701(a)(30) of the Code on forms to be provided by the Fund, and shall
notify the Fund 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 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 ENTIRE AGREEMENT.
This Agreement (including the Schedule attached hereto which is
incorporated herein) constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings pertaining thereto. It is hereby acknowledged and agreed that the
Board, without the approval of any Member may enter into written agreements
("Other Agreements") with Members, executed contemporaneously with the admission
of such Members to the Fund, effecting the terms hereof or of any application in
order to meet certain requirements of such Members. The parties hereto agree
that any terms contained in an Other Agreement with a Member shall govern with
respect to such Member notwithstanding the provisions of this Agreement or of
any application.
8.15 DISCRETION.
To the fullest extent permitted by law, whenever in this Agreement, a
person is permitted or required to make a decision (i) in its "sole discretion"
or "discretion" or under a grant of similar authority or latitude, such person
shall be entitled to consider only such interests and factors as it desires,
including its own interests, and shall have no duty or obligation to give any
consideration to any interest of or factors affecting the Fund or the Members,
or (ii) in its "good faith" or under another express standard, then such person
shall act under such express standard and shall not be subject to any other or
different standards imposed by this Agreement or any other agreement
contemplated herein or by relevant provisions of law or in equity or otherwise.
8.16 COUNTERPARTS.
This Agreement may be executed in several counterparts, all of which
together shall constitute one agreement binding on all parties hereto,
notwithstanding that all the parties have not signed the same counterpart.
8.17 TAX MATTERS PARTNER. The Manager hereby is designated as the "tax
matters partner" under the Code for the Fund.
THE UNDERSIGNED ACKNOWLEDGES HAVING READ THIS AGREEMENT IN ITS
ENTIRETY BEFORE SIGNING, INCLUDING THE PRE-DISPUTE ARBITRATION CLAUSES SET FORTH
IN SECTION 8.6 ON PAGES 35-36 AND THE CONFIDENTIALITY CLAUSES SET FORTH IN
SECTION 8.11 ON PAGE 37.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
ORGANIZATIONAL MEMBER:
/S/ NORMAN E. SIENKO, JR.
-------------------------
Norman E. Sienko, Jr.
MANAGER:
PW REDWOOD/SEQUOIA MANAGEMENT, L.L.C.
By: PW FUND ADVISOR, L.L.C.
By:/S/ DANIEL ARCHETTI
Name: Daniel Archetti
Title: Authorized Person
ADDITIONAL MEMBERS:
Each person who has signed
or has had signed on its
behalf a Member Signature
Page, which shall
constitute a counterpart
hereof.
<PAGE>
The undersigned understand and agree to the provisions of this Agreement
pertaining to the obligations of Directors.
/s/ E. GARRETT BEWKES, JR.
--------------------------------
E. Garrett Bewkes, Jr., Director
/s/ MEYER FELDBERG
--------------------------------
Meyer Feldberg, Director
/s/ GEORGE W. GOWEN
--------------------------------
George W. Gowen, Director
<PAGE>
SCHEDULE I
DIRECTORS
NAME AND ADDRESS
E. Garrett Bewkes, Jr.
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Meyer Feldberg
c/o Columbia University
101 Uris Hall
New York, New York 10027
George W. Gowen
666 Third Avenue
New York, New York 10017
<PAGE>
APPENDIX B
PERFORMANCE INFORMATION
This Appendix contains pro-forma composite performance information for accounts
("Frontier Accounts") managed by the personnel of Frontier pursuant to an
investment program that is substantially similar to the Sequoia Fund's expected
investment program. This information reflects the deduction of a pro-forma
management fee and incentive allocation as if the Frontier Accounts had incurred
a management fee and an incentive allocation similar to those charged by the
Sequoia Fund. This information does not reflect the payment of a placement fee
and, if reflected, the placement fee would reduce the performance quoted. This
information has not been audited and does not comply with the standards
established by the Association of Investment Management and Research (AIMR).
Because of the similarity of investment programs, as a general matter, the
Manager will consider participation by each Fund in all appropriate investment
opportunities that are under consideration by Frontier for investment for the
Frontier Accounts. The Manager will evaluate for each Fund a variety of factors
that may be relevant in determining whether a particular investment opportunity
or strategy to be used by the Frontier Accounts is appropriate and feasible for
the Fund at that time. Because these considerations may differ for each Fund and
the Frontier Accounts in the context of any particular investment opportunity,
the investment activities of the Fund and the Frontier Accounts may differ from
time to time. See "CONFLICTS OF INTEREST--Participation in Investment
Opportunities."
THE FOLLOWING TABLE SETS FORTH THE PRO-FORMA COMPOSITE PERFORMANCE OF THE
FRONTIER ACCOUNTS FOR THE PERIODS INDICATED. THE TABLE SHOULD BE READ IN
CONJUNCTION WITH THE NOTES THERETO. PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS. PROSPECTIVE INVESTORS SHOULD RECOGNIZE THAT THERE
ARE CERTAIN DIFFERENCES BETWEEN THE INVESTMENT POLICIES OF THE SEQUOIA FUND AND
THOSE OF FRONTIER ACCOUNTS AND THAT THE SEQUOIA FUND'S FEES AND EXPENSES WILL BE
HIGHER. FUTURE PERFORMANCE OF EACH FUND WILL DIFFER FROM THAT OF THE FRONTIER
ACCOUNTS AND THE PERFORMANCE OF THE REDWOOD FUND SHOULD BE EXPECTED TO VARY
SIGNIFICANTLY FROM THAT OF THE FRONTIER ACCOUNTS.
Performance information about the Frontier Accounts has been obtained or derived
from information provided by Frontier and not by the Manager, who do not warrant
the accuracy or completeness of the information provided by Frontier.
Information about the S&P 500 Index and the Russell 2000 Index has been obtained
or derived from sources believed to be reliable but is not warranted as to
accuracy or completeness. The Manager has not independently verified and is not
responsible for this informationv and neither Frontier nor the Manager is
responsible for information about the S&P 500 Index or the Russell 2000 Index.
<PAGE>
------------------------------------------------------------------------------
PRO-FORMA COMPOSITE PERFORMANCE RECORD OF THE FRONTIER ACCOUNTS (a)
------------------------------------------------------------------------------
FRONTIER RUSSELL 2000
ACCOUNTS (D) S&P 500 INDEX (E) INDEX (F)
------------ ----------------- ---------
1994(b) 4.1% 0.0% (1.9)%
1995 38.0% 37.6% 28.4%
1996 53.8% 23.0% 16.5%
1997 25.9% 33.4% 22.4%
1998 39.3% 28.6% (2.2)%
1999 57.6% 21.0% 21.4%
2000(c) 7.8% (0.4)% 3.1%
ANNUALIZED PRO-FORMA COMPOSITE PERFORMANCE RECORD OF THE FRONTIER ACCOUNTS
(a)(g)
FRONTIER RUSSELL 2000
ACCOUNTS (D) S&P 500 INDEX (E) INDEX (F)
------------ ----------------- ---------
1 Year 41.7% 7.3% 14.5%
3 Years 37.9% 19.7% 10.7%
5 Years 38.6% 23.8% 14.4%
Since Inception 38.8% 24.3% 14.7%
------------------------------- ---------------------------- -----------------
Notes:
a. The performance information shown has been generated by applying an
investment philosophy and methodology that is substantially similar to
that which the Manager expects to use to manage the Sequoia Fund.
Future investments, however, will be made under different economic
conditions and may include different portfolio securities. The
performance information is limited and may not reflect performance in
different economic cycles. Investors should not assume that they will
experience returns in the future, if any, comparable to those
discussed herein.
b. Returns for 1994 are for the period October 1, 1994 through December
31, 1994.
c. Returns for 2000 are for the period January 1, 2000 through June 30,
2000.
d. Performance information is for Frontier Accounts managed by Frontier
pursuant to an investment program that is substantially similar to the
Sequoia Fund's expected investment program. The performance for each
period is the performance a full period investor in the Frontier
Accounts would have received, weighted by the monthly assets of each
Frontier Account. The performance has been computed on a pro-forma
basis to reflect the deduction of the Sequoia Fund's management fee at
the annual rate of 1.25% of the Sequoia Fund's net assets and the
Sequoia Fund's annual incentive allocation. The quarterly results of
the Frontier Accounts through 1999 (before giving effect to the
pro-forma adjustments) are audited. The performance information does
not reflect the payment of a placement fee and, if reflected, the
placement fee would reduce the performance quoted. The performance
also does not reflect the estimated amount by which the expenses of
the Sequoia Fund are expected to exceed those of the Frontier
Accounts. From October 1994 through December 1997, assets of the
Frontier Accounts ranged between $2 million and $32 million. From
January 1998 through June 2000, assets of the Frontier Accounts ranged
between $31 million and $259 million. As of June 30, 2000, Frontier
had approximately $5.4 billion of assets under management. The
composite performance record is comprised of one Frontier Account from
1994 through February 1997, two Frontier Accounts from March 1997
through September 1999, and four Frontier Accounts from October 1999
through present.
e. The S&P 500 Index is an unmanaged index and is considered to be
representative of the U.S. large cap stock market as a whole. The
performance data for the S&P 500 Index assumes the reinvestment of all
dividends, but does not deduct any fees or expenses. The Redwood Fund,
Sequoia Fund and the Frontier Accounts do not restrict their
investments to securities included in the S&P 500 Index.
f. The Russell 2000 Index is an unmanaged index reflecting the
performance of 2,000 of the smallest companies by market
capitalization in the U.S. equity market. The performance data for the
Russell 2000 Index assumes the reinvestment of all dividends, but does
not deduct any fees or expenses. The Redwood Fund, the Sequoia Fund
and the Frontier Accounts do not restrict their investments to
securities included in the Russell 2000 Index.
g. All returns are through June 30, 2000.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
<PAGE>
FORM N-2
PW REDWOOD FUND, L.L.C.
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements:
Because the Registrant has no assets, financial statements are
omitted.
(2) Exhibits:
(a) (1) Certificate of Formation.
(2) Limited Liability Company Agreement.
(b) Not Applicable.
(c) Not Applicable.
(d) See Item 24(2)(a)(2).
(e) Not Applicable.
(f) Not Applicable.
(g) See Item 24(2)(a)(2).
(h) Not Applicable.
(i) Not Applicable.
(j) Custodian Services Agreement.
(k) (1) Management and Administration Agreement.
(2) Sub-Management and Sub-Administration
Agreement
(3) Administration, Accounting and Investor
Services Agreement.
(4) Escrow 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.
<PAGE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Blue Sky fees and expenses (including fees of
counsel) $ 5,000
Legal and accounting fees and expenses 125,000
Printing, engraving and offering expenses 115,000
Miscellaneous 5,000
-----------
$250,000
===========
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
After completion of the private offering of interests, the Registrant
expects that no person will be directly or indirectly under common control with
the Registrant, except that the Registrant may be deemed to be controlled by PW
Redwood/Sequoia Management, L.L.C. (the "Manager"), the manager of the
Registrant, which, in turn, is controlled by PW Fund Advisor, L.L.C. Information
regarding the ownership of PW Fund Advisor, L.L.C. is set forth in its Form ADV,
as filed with the Commission (File No. 801-55537).
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Title of Class Number of Record Holders
-------------- ------------------------
Interests 1 (The Registrant anticipates
that as a result of the private
offering of interests there will
be more than 100 record holders
of such interests in the future.)
ITEM 29. INDEMNIFICATION
Reference is made to Section 3.9 of the Registrant's Limited Liability
Company Agreement (the "LLC Agreement") filed as Exhibit (a)(2) hereto. The
Registrant hereby undertakes that it will apply the indemnification provision of
the LLC Agreement in a manner consistent with Release 40-11330 of the Securities
and Exchange Commission under the Investment Company Act of 1940, as amended
(the "1940 Act"), so long as the interpretation therein of Sections 17(h) and
17(i) of the 1940 Act remains in effect.
The Registrant, in conjunction with the Manager, the Registrant's
directors and other registered management investment companies managed by the
Manager or its affiliates, maintains insurance on behalf of any person who is or
was an independent director, officer, employee, or agent of the Registrant, or
who is or was serving at the request of the Registrant as an individual general
partner, director, officer, employee or agent of another managed investment
company, against certain liability asserted against and incurred by, or arising
out of, his or her position. However, in no event will the Registrant pay that
portion of the premium, if any, for insurance to indemnify any such person or
any act for which the Registrant itself is not permitted to indemnify.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
A description of any other business, profession, vocation, or
employment of a substantial nature in which the investment adviser of the
Registrant, and each member, director, executive officer, or partner of any such
investment adviser, is or has been, at any time during the past two fiscal
years, engaged in for his or her own account or in the capacity of member,
director, officer, employee, partner or trustee, is set forth in the
Registrant's Confidential Memorandum in the section entitled "THE MANAGER, PWFA
AND FRONTIER." Information as to the members and officers of PW Fund Advisor,
L.L.C. is included in its Form ADV as filed with the Commission (File No.
801-55537), and is incorporated herein by reference. Information as to the
members and officers of Frontier Capital Management Company L.L.C. is included
in its Form ADV as filed with the Commission (File No. 801-15724), and is
incorporated herein by reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The Administrator maintains certain required accounting related and
financial books and records of the Registrant at 400 Bellevue Parkway,
Wilmington, Delaware 19809. The other required books and records are maintained
by the Manager, c/o PW Fund Advisor, L.L.C., 1285 Avenue of the Americas, New
York, New York 10019.
ITEM 32. MANAGEMENT SERVICES
Not Applicable.
ITEM 33. UNDERTAKINGS
Not Applicable.
<PAGE>
FORM N-2
PW REDWOOD FUND, L.L.C.
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940,
the Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and State of New York, on the 22nd day of August, 2000.
PW REDWOOD FUND, L.L.C.
By: PW Redwood/Sequoia Management, L.L.C.
Manager
By: PW Fund Advisor, L.L.C.
Managing Member
By: /S/ Daniel Archetti
--------------------------
Name: Daniel Archetti
Title: Authorized Representative
<PAGE>
FORM N-2
PW REDWOOD FUND, L.L.C.
EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT DESCRIPTION
(a)(1) Certificate of Formation.
