SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
PRE-EFFECTIVE AMENDMENT NO. |_|
POST-EFFECTIVE AMENDMENT NO. |_|
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
AMENDMENT NO. |_|
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PW BIRCH FUND, L.L.C.
(Exact Name of Registrant as Specified in its 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) 713-9036
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
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any securities being registered on this form will be offered on a delayed or
continuous basis in reliance on Rule 415 under the Securities Act of 1933, other
than securities offered in connection with a dividend reinvestment plan, check
the following box |_|
It is proposed that this filing will become effective when declared effective
pursuant to Section 8(c).
If appropriate, check the following box:
|_| This [post-effective] amendment designates a new effective date
for a previously filed [post-effective amendment] [registration statement].
|_| This form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act and the Securities Act
registration statement number of the earlier effective registration statement
for the same offering is - ______.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
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TITLE OF SECURITIES PROPOSED MAXIMUM AMOUNT OF
BEING REGISTERED AGGREGATE OFFERING AMOUNT REGISTRATION FEE
--------------------------------------------------------------------------------
Limited Liability Company $1,000,000 $264
Interests
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The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
CROSS REFERENCE SHEET
PARTS A AND B OF PROSPECTUS
Item No. Caption Location in Prospectus
-------- ----------------------------------- -----------------------------------
1. Outside Front Cover Page........... Outside Front Cover Page
2. Inside Front and Outside
Back Cover Page.................. Inside Front and Outside Back Cover
Page
3. Fee Table and Synopsis............. Summary of Fund Expenses
4. Financial Highlights............... Not Applicable
5. Plan of Distribution............... Outside Front Cover Page; Plan of
Distribution
6. Selling Shareholders............... Not Applicable
7. Use of Proceeds.................... Use of Proceeds
8. General Description of the
Registrant....................... Outside Front Cover Page;
Prospectus Summary--The Fund;
General Information
9. Management......................... Management of the Fund; Use of
Proceeds
10. Capital Stock, Long-Term Debt,
and Other Securities............. Capital Accounts; Plan of
Distribution
11. Defaults and Arrears on Senior
Securities....................... Not Applicable
12. Legal Proceedings.................. Not Applicable
13. Table of Contents of the Statement
of Additional Information.......... Table of Contents of Statement of
Additional Information (SAI)
14. Cover Page of SAI.................. Cover Page (SAI)
15. Table of Contents of SAI........... Table of Contents (SAI)
16. General Information and History.... General Information (SAI)
17. Investment Objective and Policies.. Investment Objective and Principal
Strategies; Additional Investment
Policies (SAI)
18. Management......................... Management of the Fund; Directors
(SAI); Investment Advisory and
Other Services (SAI)
19. Control Persons and Principal
Holders of Securities............ Not Applicable
20. Investment Advisory and Other
Services......................... Investment Advisory and Other
Services (SAI)
21. Brokerage Allocation and Other
Practices........................ Brokerage (SAI)
22. Tax Status......................... Taxes; Tax Aspects (SAI)
23. Financial Statements............... Financial Statements (SAI)
<PAGE>
Subject to Completion, Dated September 1, 2000
PROSPECTUS
PW BIRCH FUND, L.L.C.
Limited Liability Company Interests
____________________
INVESTMENT OBJECTIVE. The Fund is a newly formed limited liability
company registered under the Investment Company Act of 1940 as a
non-diversified, closed-end management investment company. The Fund's investment
objective is to seek long-term capital appreciation.
(continued on following page)
____________________
Investing in the Fund's limited liability company interests (the
"Interests") involves a high degree of risk. See "RISK FACTORS" beginning on
page _.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities or determined
if this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
____________________
Total
-----------
Offering Amount.................................. $
Sales Load (1)................................... $
Proceeds to the Fund............................. $
____________________
(1) The minimum investment in the Fund is $25,000. Investments of less than
$500,000 will be subject to a sales load of 3%; investments of $500,000 or more,
but less than $1.0 million, will be subject to a sales load of 2%; and
investments of $1.0 million or more will be subject to a sales load of 1%. No
sales load will be charged to the types of investors listed under "Plan of
Distribution."
PaineWebber Incorporated ("PaineWebber") acts as the distributor of the Fund's
Interests on a best efforts basis, subject to various conditions. The Fund also
may distribute Interests through other brokers or dealers. The Fund will sell
Interests only to Qualified Investors (as defined herein). PaineWebber expects
to deliver the Interests to investors on or about _________, 2000. The Fund will
pay organizational and offering expenses estimated at $______ from the proceeds
of the offering. The Fund will pay a shareholder servicing fee to PaineWebber
and to other brokers or dealers that have entered into shareholder servicing
agreements with the Fund at the annual rate of 0.40% of the outstanding
Interests owned by their customers. PaineWebber or its affiliates may pay from
their own resources additional compensation to brokers or dealers in connection
with the sale and distribution of the Interests or servicing of investors. See
"Plan of Distribution."
____________________
PaineWebber Incorporated
______ __, 2000
<PAGE>
(continued from previous page)
INVESTMENT PORTFOLIO. The Fund will invest primarily in equity and
equity-related securities of public and private health sciences companies
worldwide, with an emphasis on companies in the biotechnology and
pharmaceuticals sectors. The Fund may invest in securities of both established
and emerging companies, the securities of which may be denominated in foreign
currencies. The Fund will invest in publicly marketable securities ("public
securities") and up to 30% of its assets (measured at the time of purchase) in
non-marketable securities ("private securities"), although the percentage of
private securities may increase (and the percentage of public securities may
decrease) as public securities are sold or if private securities increase in
value. Private securities typically will be purchased in negotiated transactions
and will include, among others, common stock, so-called P.I.P.E.s (private
investments in public equities), convertible preferred stock, convertible
preferred debt, bridge loans with certain equity components and warrants. The
companies issuing private securities will include developmental stage companies,
some of which previously may not have sold securities to the public. The
companies whose private securities may be purchased are referred to in this
prospectus as "Portfolio Companies." To fully realize the anticipated value of
the private securities, the Fund will be dependent upon an exit strategy which
may include a public offering by, or merger or sale of, one or more Portfolio
Companies, the successful completion of which cannot be assured.
INVESTMENT ADVISER. The Fund's investment adviser is PW Birch
Management, L.L.C. (the "Adviser"), which is a newly created joint venture
between PW Fund Advisor, L.L.C. ("PWFA") and OrbiMed Advisers Inc. ("OrbiMed").
RESTRICTIONS ON TRANSFER. With very limited exceptions, Interests are
not transferable and liquidity will be provided only through limited semi-annual
repurchase offers, which will be made in the Board's sole discretion. See
"Redemptions, Repurchases of Interests and Transfers."
REPURCHASE OF INTERESTS. To provide a limited degree of liquidity to
investors, the Fund from time to time may offer to repurchase up to 10% of its
outstanding 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. The Adviser expects that it
will recommend to the Board that the Fund offer to repurchase from investors in
____________ 2001 and, thereafter, twice each year, in March and September. The
Fund's Limited Liability Company Agreement (the "LLC Agreement") provides that
the Fund will be dissolved if it has not completed a tender offer for at least
10% of its outstanding Interests within a period of two years after an investor
requests that the Fund do so. See "Redemptions, Repurchases of Interests and
Transfers--Repurchases of Interests."
MANAGEMENT FEE AND INCENTIVE ALLOCATION. The Fund will pay PWFA a
monthly management fee at an annual rate of 1.35% of the Fund's net assets for
the month, excluding assets attributable to the Adviser's capital account. The
Adviser also is entitled to receive an annual incentive allocation generally 20%
of the Fund's net profits (determined by taking into account net realized
capital gains or losses on public and private securities, net unrealized gains
or losses from public securities, unrealized gains from private securities only
to the extent of unrealized losses from private securities (except in limited
circumstances), unrealized losses from private securities, and other net income
or loss for the year) (the "Incentive Allocation"). No Incentive Allocation will
be made for any year unless losses and depreciation from prior periods have been
recovered by the Fund. This is sometimes known as a "high water mark"
calculation. The Incentive Allocation structure presents risks that are not
present in funds without an incentive allocation. The overall amounts payable by
the Fund and its investors will be higher than those paid by most other
registered investment companies, but generally similar to those paid by many
private funds with similar investment policies. See "Management of the
Fund--Incentive Allocation."
SHAREHOLDER SERVICING FEE. The Fund will pay a shareholder servicing
fee to PaineWebber and to other brokers or dealers that have entered into
shareholder servicing agreements with the Fund at the annual rate of 0.40% of
the outstanding Interests owned by their customers.
INVESTOR QUALIFICATIONS. Interests are offered only to investors who
have a net worth (with their spouses) of more than $1,500,000 or who otherwise
meet the standard for a Qualified Investor. The minimum investment is $25,000.
Investors generally must hold their Interests through PaineWebber or other
brokers or dealers that have entered into shareholder servicing agreements with
the Fund. See "Investor Qualifications."
____________________
This prospectus concisely provides the information that a prospective
investor should know about the Fund before investing. You are advised to read
this prospectus carefully and to retain it for future reference. Additional
information about the Fund, including a statement of additional information
("SAI") dated _____ __, 2000, has been filed with the Securities and Exchange
Commission. The SAI is available upon request and without charge by writing the
Fund at the address above or by calling (800) 486-2608. The SAI is
incorporated by reference into this prospectus in its entirety. The table of
contents of the SAI appears on page __ of this prospectus. The SAI, and other
information about the Fund, is also available on the SEC's website
(http://www.sec.gov). The address of the SEC's Internet site is provided solely
for the information of prospective investors and is not intended to be an active
link.
Interests are not deposits or obligations of, or guaranteed or
endorsed by, any bank or other insured depository institution, and are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board or any other government agency.
You should rely only on the information contained in this prospectus.
The Fund has not authorized anyone to provide you with different information.
The Fund is not making an offer of these securities in any state where the offer
is not permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
<PAGE>
TABLE OF CONTENTS
PAGE
PROSPECTUS SUMMARY.............................................................6
SUMMARY OF FUND EXPENSES......................................................18
RISK FACTORS..................................................................19
USE OF PROCEEDS...............................................................28
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES.................................28
MANAGEMENT OF THE FUND........................................................32
INVESTOR QUALIFICATIONS.......................................................36
REDEMPTIONS, REPURCHASES OF INTERESTS AND TRANSFERS...........................36
CALCULATION OF NET ASSET VALUE................................................39
CAPITAL ACCOUNTS..............................................................40
TAXES.........................................................................43
PLAN OF DISTRIBUTION..........................................................44
GENERAL INFORMATION...........................................................46
APPENDIX A--PERFORMANCE INFORMATION...........................................47
APPENDIX B--INVESTOR CERTIFICATION............................................48
<PAGE>
PROSPECTUS SUMMARY
This is only a summary. This summary may not contain all of the
information that you should consider before investing in the Fund. You should
review the more detailed information contained in this prospectus and in the
SAI.
The Fund............................... PW Birch Fund, L.L.C. (the "Fund") is a
newly formed limited liability company
organized as a non-diversified,
closed-end management investment company
registered under the Investment Company
Act of 1940 (the "Investment Company
Act"). The Fund's investment adviser is
PW Birch Management, L.L.C. (the
"Adviser"). See "General Information."
Investment Objective
and Principal Strategies............. The Fund's investment objective is to
seek long-term capital appreciation. The
Fund will invest primarily in equity and
equity-related securities of public and
private health sciences companies
worldwide, with an emphasis on companies
in the biotechnology and pharmaceuticals
sectors. The Fund may invest in
securities of both established and
emerging companies, the securities of
which may be denominated in foreign
currencies. The Fund will invest in
publicly marketable securities ("public
securities") and up to 30% of its assets
(measured at the time of purchase) in
non-marketable securities ("private
securities").
The Fund may invest in public securities
of issuers of any capitalization. Of its
public securities, the Fund expects to
invest principally in the public
securities of large capitalization
public companies and, to a lesser
extent, small and medium-sized public
companies. The common stock of these
companies may trade over-the-counter, on
the Nasdaq SmallCap Market, the Nasdaq
National Market, the New York Stock
Exchange, the American Stock Exchange or
on other markets. Many of these
companies only recently may have become
public companies, and may have a
relatively small proportion of their
outstanding common stock publicly
traded. The Fund may invest up to 60% of
its assets in the securities of foreign
issuers.
Private securities typically will be
purchased in negotiated transactions and
will include, among others, common
stock, so-called P.I.P.E.s (private
investments in public equities),
convertible preferred stock, convertible
preferred debt, bridge loans with
certain equity components and warrants.
The companies issuing private securities
will include developmental stage
companies, some of which previously may
not have sold securities to the public.
The companies whose private securities
may be purchased are referred to in this
prospectus as "Portfolio Companies."
The Fund's investments in Portfolio
Companies typically will be between $1
and $10 million in size, depending on a
variety of factors including anticipated
risk and return and likelihood of
follow-on investments. When analyzing
companies, the Adviser will focus on
opportunities similar to these:
o private companies that the Adviser
believes have achievable near-term
goals and may complete an initial
public offering ("IPO") or elicit
interest as an acquisition target
within a few years after investment
o public companies that the Adviser
believes need to be restructured and
refinanced, including companies that
have failed late stage clinical trial
and need capital to redesign the trial
or to advance another product
o merger and acquisition funding where
the Adviser believes that there are
several unrelated publicly traded
companies with valuable technologies
that are not adequate to support an
entire company, but which the Adviser
believes can be combined effectively
o spinouts of large biotechnology or
pharmaceutical companies
o pipeline strategies where
biotechnology companies "in-license"
multiple products and intellectual
property within a particular disease
area and then focus on development of
the acquired "pipeline"
o research and development limited
partnerships, where the Adviser
believes the technology is
sufficiently promising
Private securities are expected to
constitute a significant portion of the
Fund's total assets over time. Private
securities may exceed 30% of the value
of the Fund's net assets as the result
of the Fund's sale of public securities,
the depreciation of public securities,
the possible appreciation of private
securities, or the Fund's repurchase of
Interests. To fully realize the
anticipated value of the private
securities, the Fund will be dependent
upon an exit strategy which may include
a public offering by, or merger or sale
of, one or more Portfolio Companies, the
successful completion of which cannot be
assured. See "Investment Objective and
Principal Strategies."
The Adviser............................ The Adviser is a newly created joint
venture between PW Fund Advisor, L.L.C.
("PWFA") and OrbiMed Advisers Inc.
("OrbiMed"). Investment professionals
employed by OrbiMed will manage the
Fund's investment portfolio on behalf of
the Adviser under the oversight of
PWFA's personnel.
OrbiMed, a registered investment adviser
under the Investment Advisers Act of
1940, as amended (the "Advisers Act"),
is controlled by Samuel D. Isaly, its
President. As of August 31, 2000,
OrbiMed and its affiliates managed
assets of approximately $2 billion.
The Fund's portfolio manager will be Mr.
Isaly. Investment professionals employed
by OrbiMed have substantial experience
in investing in the biotechnology and
pharmaceutical sectors. See "Appendix A
--Performance Information". PAST
PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE PERFORMANCE.
PWFA is an indirect, wholly-owned
subsidiary of Paine Webber Group Inc.
("PW Group"), and is registered as an
investment adviser under 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 ______ __, 2000
have approximately $___ billion of
assets under control and $__ billion of
assets under management.
Management Fee:........................ PWFA provides certain management and
administrative services to the Fund,
including, among other things, providing
office space and other support services
to the Fund. In consideration for such
services, the Fund will pay PWFA a
monthly management fee at the annual
rate of 1.35% of the Fund's net assets
for the month, excluding assets
attributable to the Adviser's capital
account. The management fee will be paid
to PWFA out of the Fund's assets, and
debited against the investors' capital
accounts. A portion of the Fee will be
paid by PWFA to OrbiMed.
Incentive Allocation:.................. The Adviser is entitled to receive an
annual incentive allocation generally
equal to 20% of the Fund's net profits
(determined by taking into account net
realized capital gains or losses on
public and private securities, net
unrealized gains or losses from public
securities, unrealized gains from
private securities only to the extent of
unrealized losses from private
securities (except in limited
circumstances), unrealized losses from
private securities, and other net
income or loss for the year) (the
"Incentive Allocation"). No
Incentive Allocation will be made for
any year unless losses and depreciation
from prior periods have been recovered
by the Fund. This is sometimes known as
a "high water mark" calculation. All
unrealized gains on private securities
will be taken into account for purposes
of calculating the Fund's net asset
value for additional sales and
repurchases of Interests and determining
the amount of management fee and
shareholder servicing fee payable and
the Incentive Allocation to which the
Adviser is entitled when an investor's
Interests are repurchased. The Incentive
Allocation structure presents certain
risks that are not present in funds
without an incentive allocation. The
Incentive Allocation will be calculated
based on the Fund's performance and not
on the performance of an investor's
account, which can create distortions.
The overall amounts payable by the Fund
and its investors will be higher than
those paid by most other registered
investment companies, but generally
similar to those paid by many private
funds with similar investment policies.
The annual Incentive Allocation is
scheduled to be made on September 30 of
each year. See "Capital Accounts and
Allocations--Incentive Allocation."
Shareholder Servicing Fee.............. The Fund will pay a shareholder
servicing fee to PaineWebber and to
other brokers or dealers that have
entered into shareholder servicing
agreements with the Fund at the annual
rate of 0.40% of the outstanding
Interests owned by their customers.
Borrowing.............................. The Fund is authorized to borrow money
to meet repurchase requests and for cash
management purposes. While borrowings
are outstanding for these purposes, the
Fund will be permitted to reinvest the
proceeds of the sale of securities or
new sales of Interests. If the Fund
borrows to finance repurchases of
Interests, the interest expense on that
borrowing will negatively affect
investors who do not tender their
Interests into a repurchase offer by
increasing the Fund's expenses and
reducing any net investment income.
The Fund will not borrow money until the
proceeds of the offering are
substantially invested in furtherance of
the Fund's investment objective. The
Fund is not permitted to borrow if,
immediately after such borrowing, it
would have an asset coverage (as defined
in the Investment Company Act) of less
than 300%. See "Risk Factors - Leverage;
Borrowing" and "Investment Objective and
Principal Strategies - Borrowing; Use of
Leverage."
Special Investment Techniques.......... The Fund may use derivative instruments
to hedge portfolio risks, for cash
management purposes and for non-hedging
purposes in pursuit of its investment
objective. The derivatives employed may
relate to a specific security or to the
Fund's portfolio as a whole.
The Fund may sell securities short, lend
portfolio securities and enter into
foreign currency transactions, each in
pursuit of its investment objective.
Investor Qualifications................ Interests will be sold only to investors
who have a net worth of more than
$1,500,000 (with their spouses) or who
otherwise meet the requirements for a
"qualified client" as defined in Rule
205-3 under the Advisers Act ("Qualified
Investors"). Generally, you may hold
your Interests only through PaineWebber
or a broker or dealer that has entered
into a shareholder servicing agreement
with the Fund. Before you may invest in
the Fund, your financial advisor or
sales representative will require a
certification from you that you are a
Qualified Investor and that you will not
transfer your Interests except in the
limited circumstances permitted in the
LLC Agreement. (The form of investor
certification that you will be asked to
sign is attached to this prospectus as
Appendix B.) If you attempt to transfer
your Interests in violation of the LLC
Agreement, the transfer will not be
permitted and will be void. See
"Investor Qualifications."
Investor Suitability................... AN INVESTMENT IN THE FUND INVOLVES A
CONSIDERABLE AMOUNT OF RISK. Because it
is possible that you may lose some or
all of your investment, you should not
invest in the Fund unless you can afford
a total loss of your investment. Before
making your investment decision, you
should (i) consider the suitability of
this investment with respect to your
investment objectives and personal
situation and (ii) consider factors such
as your personal net worth, income, age,
risk tolerance and liquidity needs.
The Offering........................... The Fund is offering $___________ in
Interests through PaineWebber, the
Fund's distributor and other brokers or
dealers. See "Plan of Distribution."
PaineWebber or its affiliates may pay
from their own resources additional
compensation to brokers or dealers in
connection with the sale and
distribution of the Interests or
servicing of investors.
Distribution Policy.................... The Fund has no present intention of
making periodic distributions of its net
income or gains, if any, to investors.
The amount and times of distributions,
if any, will be determined in the sole
discretion of the Board. Whether or not
distributions are made, investors will
be required each year to pay applicable
federal and state income taxes from
sources other than Fund distributions.
Unlisted Closed-End Structure;
Limited Liquidity and
Transfer Restrictions................ The Fund has been organized as a
closed-end management investment
company. Closed-end funds differ from
open-end management investment companies
(commonly known as mutual funds) in that
investors in a closed-end fund do not
have the right to redeem their Interests
on a daily basis. To meet daily
redemption requests, mutual funds are
subject to more stringent regulatory
limitations than closed-end funds. In
particular, a mutual fund generally may
not invest more than 15% of its assets
in illiquid securities. The Fund
believes that unique investment
opportunities exist in the market for
private investments in the health
sciences sector. However, these
investments are often illiquid, and an
open-end fund's ability to make illiquid
investments is limited. For this reason,
the Fund is organized as a closed-end
fund.
Interests generally may be held only
through PaineWebber or a broker or
dealer that has entered into a
shareholder servicing agreement with the
Fund. You will not be able to redeem
your Interests on a daily basis because
the Fund is a closed-end fund. In
addition, with very limited exceptions,
the Fund's Interests are not
transferable and liquidity will be
provided only through limited repurchase
offers described below. An investment in
the Fund is suitable only for investors
who can bear the risks associated with
the limited liquidity of the Interests
and should be viewed as a long-term
investment.
Repurchase of Interests................ No investor will have the right to
require the Fund to redeem the
investor's Interest in the Fund. The
Fund from time to time may offer to
repurchase up to 10% of its outstanding
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. The
Adviser expects that it will recommend
to the Board that the Fund offer to
repurchase Interests from investors in
__________2001 and, thereafter, twice
each year, in March and September. If a
repurchase offer is oversubscribed by
investors, the Fund will repurchase only
a pro rata portion of the Interests
tendered by each investor. In addition,
the Fund may repurchase all or part of
an Interest if, among other reasons, the
Adviser determines that it would be in
the best interests of the Fund to do so.
See "Redemptions, Repurchases of
Interests and Transfers--No Right of
Redemption" and "--Repurchases of
Interests."
The LLC Agreement provides that the Fund
will be dissolved if it has not
completed a tender offer for at least
10% of its outstanding Interests within
a period of two years after an investor
requests that the Fund do so.
Taxation............................... Most closed-end investment companies
elect to be taxed as registered
investment companies under the Internal
Revenue Code of 1986, as amended (the
"Code"). The Fund will not make this
election and instead will seek to be
treated as a partnership for Federal
income tax purposes. Accordingly, the
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
Fund's taxable income or loss.
If it were determined that the Fund
should be treated as an association or a
publicly traded partnership taxable as a
corporation, 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 "Risk Factors" below.
ERISA Plans And Other
Tax-Exempt Entities.................. Investors subject to the Employee
Retirement Income Security Act of 1974,
as amended ("ERISA"), and other
tax-exempt entities, including employee
benefit plans, Individual Retirement
Accounts and 401(k) and Keogh Plans, may
purchase Interests in the Fund. The
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 Code. Because the Fund
may use leverage, a tax-exempt investor
may incur income tax liability to the
extent the Fund's transactions are
treated as giving rise to unrelated
business taxable income. An investor
that is a charitable remainder trust
should contact the Fund at (800)
505-4695 before investing.
Risk Factors........................... An investment in the Fund involves a
high degree of risk. These include the
risks of:
o loss of capital
o investing in a fund that has no
operating history and that must
compete for a potentially limited
number of desirable investments
o investing in developing companies
o investing in securities that are
illiquid and volatile
o investing in illiquid shares of an
unlisted closed-end fund
o investing in the health sciences and
related industries, whose companies
may be subject to a high degree of
government regulation, making these
companies susceptible to changes in
government policy and failures to
secure, or unanticipated delays in
securing, regulatory approvals
o concentrating in a small number of
industry sectors and maintaining a
"non-diversified" portfolio
o investing in small companies
o investing in securities of non-U.S.
issuers
o investing in a fund that may sell
securities short
o investing in a fund that uses
derivatives for hedging and
non-hedging purposes
o investing in a fund that does not make
periodic distributions; investors will
be required to pay applicable taxes on
their respective share of the Fund's
taxable income
o investing in a fund that seeks to be
treated for tax purposes as a
partnership, but could be taxable as a
corporation, thus subjecting its
distributions to two levels of
taxation
o investing in a fund that has an
Adviser who may have conflicts of
interests in managing other accounts
not related to the Fund
o investing in a fund that will bear an
incentive allocation
o investing in a fund many of whose
assets will be priced in the absence
of a readily available market and may
be priced based on estimates of fair
value, which may prove to be
inaccurate; these valuations will be
used to calculate the incentive
allocation, fees payable to the
Adviser, the shareholder servicing fee
and the price at which repurchases are
made
o investing in a fund where the proceeds
necessary to fund repurchases may need
to be borrowed, thus increasing the
volatility of the Fund's net asset
value for non-tendering investors
ACCORDINGLY, THE FUND SHOULD BE
CONSIDERED A SPECULATIVE INVESTMENT, AND
YOU SHOULD INVEST IN THE FUND ONLY IF
YOU CAN SUSTAIN A COMPLETE LOSS OF YOUR
INVESTMENT.
See "Risk Factors."
<PAGE>
SUMMARY OF FUND EXPENSES
The following table illustrates the expenses and fees that the Fund
expects to incur and that investors can expect to bear.
Investor Transaction Expenses
Sales load(1) (percentage of purchase amount)........... 3.00%
Maximum redemption fee.................................. none
Annual Expenses (except for any interest expense,
as a percentage of net assets attributable to Interests)
Management Fee.......................................... 1.35%
Incentive Allocation.................................... 20% of net profits(2)
Shareholder servicing fees.............................. 0.40%
Other expenses.......................................... %
-----
Total annual expenses (other than incentive allocation
and interest expense)................................... %
=====
(1) Investments of less than $500,000 will be subject to a sales load of 3%;
investments of $500,000 or more, but less than $1 million will be subject
to a sales load of 2%; investments of $1 million or more will be subject to
a sales load of 1%. No sales load will be charged to the types of
investors listed under "Plan of Distribution."
(2) Net profits means the sum of the Fund's net realized capital gains or
losses from public and private securities, net unrealized gains or losses
from public securities, unrealized gains from private securities only
to the extent of unrealized losses from private securities (except in
limited circumstances), unrealized losses from private securities, and
other net income or loss for the year. See "Management of the Fund -
Incentive Allocation."
The purpose of the table above is to assist you in understanding the
various costs and expenses you would bear directly or indirectly as an investor
in the Fund. The annual "Other expenses" shown above are estimated, based on net
assets of the Fund of $___ million, and include expenses of approximately
$_______ incurred in connection with the initial organization of the Fund. The
Fund will pay additional organizational and offering expenses estimated to be
$_________, which will be charged to the Fund's capital at commencement of
operations and are not included in "Total annual expenses" above. For a more
complete description of the various costs and expenses of the Fund, see
"Management of the Fund."
Example
-------
1 YEAR 3 YEARS 5 YEARS
------ ------- -------
You would pay the following expenses
on a $1,000 investment, assuming a
5% annual return: $___ $___ $___
The example does not present actual expenses and should not be
considered a representation of future expenses. Actual expenses may be greater
or less than those shown. Moreover, the Fund's actual rate of return may be
greater or less than the hypothetical 5% return shown in the example. The Fund's
organizational and offering expenses are not reflected in the example.
The example includes an accrual for the annual Incentive Allocation.
The Incentive Allocation is 20% of the Fund's net profits (determined by taking
into account net realized capital gains or losses on public and private
securities, net unrealized gains or losses from public securities, unrealized
gains from private securities only to the extent of unrealized losses from
private securities (except in limited circumstances), unrealized losses from
private securities, and other net income or loss for the year). No Incentive
Allocation will be made for any year unless losses and depreciation from prior
periods have been recovered by the Fund. This is sometimes known as a "high
water mark" calculation. The Incentive Allocation will be credited to the
capital account of the Adviser. All unrealized gains on private securities will
be taken into account for purposes of calculating the Fund's net asset value for
additional sales and repurchases of Interests, and determining the amount of
management fee and shareholder servicing fee payable and the Incentive
Allocation to which the Adviser is entitled when an investor's Interests are
repurchased. The dollar amounts in the example could be significantly higher if
the Fund's actual rate of return exceeds 5%.
RISK FACTORS
STOCK PRICES FLUCTUATE
Apart from the specific risks identified below, the Fund's investments
may be negatively affected by the broad investment environment in the U.S. and
international securities markets. That investment environment is influenced by,
among other things, interest rates, inflation, politics, fiscal policy, current
events, competition, productivity and technological and regulatory change.
Therefore, as with any fund that invests in stocks, the Fund's net asset value
will fluctuate. You may experience a significant decline in the value of your
investment and could lose your entire investment. The Fund should be considered
a speculative investment, and you should invest in the Fund only if you can
sustain a complete loss of your investment.
NEWLY ORGANIZED FUND AND ADVISER
The Fund is a newly organized investment company and the Adviser is a
newly organized investment adviser, each with no previous operating history.
Although OrbiMed and the Fund's portfolio manager have substantial experience
investing in the biotechnology and pharmaceutical sectors, the Fund may not
succeed in meeting its objective, and the Fund's net asset value may decrease.
INVESTMENT IN COMPANIES DEPENDENT UPON NEW SCIENTIFIC DEVELOPMENTS AND
TECHNOLOGIES
The Fund plans to invest primarily in the stock of health sciences
companies, with an emphasis on companies in the biotechnology and
pharmaceuticals sectors. The value of its Interests may be susceptible to
factors affecting health sciences and related industries and to greater risk and
market fluctuation than an investment in a fund that invests in a broader range
of portfolio securities. The specific risks faced by health sciences companies
include:
o rapidly changing science and technologies
o products that may quickly become obsolete
o exposure to a high degree of government regulation, making these
companies susceptible to changes in government policy and
failures to secure, or unanticipated delays in securing,
regulatory approvals
o scarcity of management, technical, scientific, research and
marketing personnel with appropriate training
o the possibility of lawsuits related to patents and intellectual
property
o changing investor sentiments and preferences with regard to
health sciences sector investments (which are generally perceived
as risky)
INVESTMENTS IN SMALL COMPANIES
Although the Fund may invest in companies of any capitalization, the
Fund plans to invest a substantial amount of its assets in equity securities of
small and medium-sized capitalization companies. These investments may present
greater opportunity for growth, but there are specific risks associated with
investments in small companies, which include:
o poor corporate performance because of less experienced
management, limited product lines, undeveloped markets and/or
limited financial resources
o less predictable returns because of shorter operating histories,
less publicly available information and little or no research by
the investment community
o reduced or zero liquidity because of small market capitalizations
and absence of exchange listings or dealers willing to make a
market
o increased share price volatility because, in periods of investor
uncertainty, investor sentiment may favor large, well-known
companies over small, lesser-known companies
o reliance, in many cases, on one or two key individuals for
management
INVESTMENTS IN PORTFOLIO COMPANIES
In addition to the risks associated generally with investments in the
health sciences sector and in small companies, the Fund will be subject to the
additional risks in respect of its investments in private securities of
Portfolio Companies which include:
o very limited liquidity of the private securities, because of
legal or contractual limitations on resales
o lack of a public market into which the Fund could sell the
securities of Portfolio Companies
o dependence on an exit strategy, such as an IPO or sale of a
business, which may not occur to realize the anticipated value of
an investment
o dependence on managerial assistance provided by other investors
and the willingness of other investors or third parties to
provide additional financial support to the Portfolio Company
VALUATION OF PRIVATE SECURITIES
Depending on the specific facts and circumstances of an investment in
a Portfolio Company, there may not be a reasonable basis to revalue it for a
substantial period of time after the Fund's investment. If a Portfolio Company
does not complete an IPO or a sale to or merger with a public company, there may
never be a public market benchmark for valuing the investment and it may be very
difficult for the Fund to dispose of its investment, or it may be possible to
dispose of the investment only at a substantial loss. It is possible that the
fair value attributed to the investment may not accurately reflect its actual
value and, consequently, the net asset value at which Interests may have been
sold or repurchased, or upon which the Incentive Allocation may have been based,
may not reflect the actual values of the Fund's portfolio. In addition, the
Fund's net asset value may change substantially in a short time as a result of
developments at the companies in which the Fund invests. Changes in the Fund's
net asset value may be more pronounced and more rapid than with other funds
because of the Fund's emphasis on private securities. The Fund's net asset value
may change materially from day to day, including during the time between the
date a repurchase offer is mailed and the due date for tendering Interests, and
during the period immediately after a repurchase is completed.
AVAILABILITY OF INVESTMENT OPPORTUNITIES IN PRIVATE SECURITIES
The business of identifying investments of the types contemplated by
the Fund is competitive, and involves a high degree of uncertainty. Furthermore,
the availability of investment opportunities in private securities generally
will be subject to market conditions as well as, in some cases, the prevailing
regulatory or political climate. Accordingly, there can be no assurance that the
Fund will be able to identify attractive Portfolio Companies in the future.
LIMITED LIQUIDITY
The Fund is a closed-end investment company designed primarily for
long-term investors. Interests in the Fund will not be traded on any securities
exchange or other market. With very limited exceptions, Interests are not
transferable and liquidity will be provided only through limited semi-annual
repurchase offers. 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 Adviser expects that it will recommend to the Board that the
Fund offer to repurchase Interests from investors in ______________ 2001 and,
thereafter, twice each year, in March and September. The LLC Agreement provides
that the Fund will be dissolved if it has not completed a tender offer for at
least 10% of its outstanding Interests within a period of two years after an
investor requests that the Fund do so. See "Redemptions, Repurchases of
Interests and Transfers."
The Fund will offer to purchase only a small portion of its Interests,
and there is no guarantee that you will be able to sell all of the Interests
that you desire to sell in any particular repurchase offer. If a repurchase
offer is oversubscribed by investors, the Fund will repurchase only a pro rata
portion of the Interests tendered by each investor. The potential for pro-ration
may cause some investors to tender more Interests for repurchase than they wish
to have repurchased.
The Fund's repurchase policy will have the effect of decreasing the
size of the Fund over time from what it otherwise would have been. Therefore, it
may force the Fund to sell assets it otherwise would not sell. It also may
reduce the investment opportunities available to the Fund and cause its expense
ratio to increase. In addition, because of the limited market for the Fund's
investments in private securities, the Fund may be forced to sell its publicly
traded securities to meet cash requirements for repurchases. This may have the
effect of substantially increasing the Fund's ratio of illiquid investments to
liquid investments for the remaining investors.
LEVERAGE; BORROWING
The Fund is authorized to borrow money to meet repurchase requests and
for cash management purposes. While borrowings are outstanding for these
purposes, the Fund will be permitted to reinvest the proceeds of the sale of
securities or new sales of Interests and, thus, may employ leverage. To the
extent that the Fund uses leverage, the value of its net assets will tend to
increase or decrease at a greater rate than if no leverage were employed. If the
Fund's investments decline in value, the loss will be magnified if the Fund has
borrowed money to make its investments.
If the Fund does not generate sufficient cash flow from operations, it
may not be able to repay borrowings, or it may be forced to sell investments at
disadvantageous times to repay borrowings. The Fund's performance may be
adversely affected if it is not able to repay borrowings (because of the
continuing interest expense) or if it is forced to sell investments at
disadvantageous times in order to repay borrowings. The Fund likely will sell
its more liquid assets first to repay borrowings, thus increasing its
concentration in private securities. As the percentage of the Fund's portfolio
invested in private securities increases, the associated risk described under
"Investments in small companies" and "Investments in Portfolio Companies" will
increase.
The Investment Company Act provides that the Fund may not borrow for
any purpose if, immediately after doing so, it will have an "asset coverage" of
less than 300%. This could prevent the Fund from completing its repurchase
offers. For this purpose, an "asset coverage" of 300% means that the Fund's
total assets equal 300% of the total outstanding principal balance of
indebtedness. Lenders may require the Fund to agree to more restrictive asset
coverage requirements as a condition to providing credit to the Fund, and also
may limit the extent to which the Fund may hold illiquid securities, reducing
the Fund's investment flexibility. The Fund also may be forced to sell
investments on unfavorable terms if market fluctuations or other factors reduce
its asset level below what is required by the Investment Company Act or the
Fund's loan agreements.
The rights of any lenders to the Fund to receive payments of interest
or repayments of principal will be senior to those of the holders of the Fund's
Interests, and the terms of any borrowings may contain provisions that limit
certain activities of the Fund. Payments of interest and fees incurred in
connection with borrowings will increase the Fund's expense ratio and will
reduce any income the Fund otherwise would have available. The Fund's obligation
to make interest or principal payments on borrowings may prevent the Fund from
taking advantage of attractive investment opportunities.
RELIANCE ON KEY PERSONNEL OF THE ADVISER
The Fund's ability to identify and invest in attractive opportunities
is dependent upon Samuel D. Isaly, the President of OrbiMed. If he leaves
OrbiMed, the Adviser may not be able to hire a qualified replacement at all, or
may require an extended time to do so. This could prevent the Fund from
achieving its investment objective.
INCENTIVE ALLOCATION
The right to the Incentive Allocation may give the Adviser reason to
select investments for the Fund that are riskier or more speculative than it
would select if it were paid only the management fee. In addition, since the
Incentive Allocation accrual is calculated based on unrealized as well as
realized gain on private securities, the amount of the accrual ordinarily will
be greater in any period than if it were based solely on realized gains.
The amount of the Incentive Allocation accrual will be based in part
on the valuation of the Fund's private investments. Until a Portfolio Company
completes an IPO or is acquired by a public company, the value of an investment
in that company must be estimated by the Adviser using fair value techniques
under the direction of, and following procedures approved by, the Fund's Board.
See "Calculation of Net Asset Value." The Incentive Allocation structure could
give the Adviser an incentive to select a higher fair value for the Fund's
private securities than it otherwise would.
The Incentive Allocation will be accrued and so reduce the Fund's net
asset value. The repurchase price received by an investor whose Interests are
repurchased in a repurchase offer will reflect an Incentive Allocation if the
Fund has experienced an increase in net assets as a result of investment
operations through the date of repurchase. The Adviser will be entitled to
receive any Incentive Allocation attributable to the capital account of a
tendering investor at the time the investor's Interests are repurchased and, in
this instance, will receive an Incentive Allocation based on unrealized gains on
private securities. No adjustment to a repurchase price will be made after it
has been allocated to the Adviser to reflect any subsequent realized losses. An
Incentive Allocation will not accrue for any year unless the Fund has fully
recovered any cumulative losses from prior periods. However, the total amount of
cumulative loss will be shared equally by all outstanding Interests and not only
by those investors who held Interests at the time the loss occurred.
The Incentive Allocation is based upon the performance of the Fund as
a whole and not upon the performance of a particular investor's capital account
and certain distortions may exist as a result. Thus, for example, the value of
Interests held by an investor at the time of purchase may be reduced as a result
of payment of the Incentive Allocation, even though the value of the Interests
held by the investor has declined. In addition, if Interests are purchased when
there is a loss carryforward for Incentive Allocation purposes (that is, when
the high water mark has not been exceeded), an existing investor's share of the
loss carryforward will effectively be diluted by such new investment.
For an explanation of the Incentive Allocation calculation, see the
section in this prospectus entitled "Investment Advisory and Other Services -
Incentive Allocation" and the Fund's SAI.
CONCENTRATION; NON-DIVERSIFIED STATUS
The assets of the Fund will consist almost entirely of health sciences
companies within or related to the biotechnology and pharmaceuticals sectors.
Since the Fund's portfolio will be concentrated in securities of a small number
of companies or in securities of companies in a single industry, the risk of any
investment decision is increased. The Adviser will seek to reduce the
company-specific risk, as opposed to sector-specific risk, of the Fund's
portfolio by investing in more than one company in a particular sector.
The Fund is classified as a "non-diversified" management investment
company under the Investment Company Act. This means that the Fund may invest a
greater portion of its assets in a limited number of issuers than would be the
case if the Fund were classified as a "diversified" management investment
company. Accordingly, the Fund may be subject to greater risk with respect to
its portfolio securities than a "diversified" fund because changes in the
financial condition or market assessment of a single issuer may cause greater
fluctuation in the value of its Interests.
RESTRICTED AND ILLIQUID SECURITIES
The Fund intends to invest up to 30% of its assets (measured at the
time of purchase) in private securities, which will be restricted securities and
illiquid. Over time it is likely that the percentage of the Fund's assets
invested in restricted and illiquid securities will exceed considerably 30% as a
result of sales of public securities and the possible appreciation of private
securities. Restricted securities are securities that may not be resold to the
public without an effective registration statement under the Securities Act of
1933 (the "Securities Act") or, if they are unregistered, may be sold only in a
privately negotiated transaction or pursuant to an exemption from registration.
Restricted and other illiquid investments involve the risk that the
securities cannot be sold at the time desired by the Fund or at prices
approximating the value the Fund has determined. Difficulty in selling illiquid
investments could impair the Fund's ability to meet repurchase requests or to
pay its fees and expenses (including the management fee).
INVESTMENTS IN FOREIGN SECURITIES
The Fund plans to invest in the securities of foreign companies in the
health sciences sector. Investments in foreign securities face specific risks,
which include:
o unfavorable changes in currency rates and exchange control
regulations
o restrictions on, and costs associated with, the exchange of
currencies and the repatriation of capital invested abroad
o reduced availability of information regarding foreign companies
o foreign companies may be subject to different accounting,
auditing and financial standards and to less stringent reporting
standards and requirements
o reduced liquidity as a result of inadequate trading volume and
government-imposed trading restrictions
o the difficulty in obtaining or enforcing a judgment abroad
o increased market risk due to regional economic and political
instability
o increased brokerage commissions and custody fees
o securities markets which are subject to a lesser degree of
supervision and regulation by competent authorities
o foreign withholding taxes
o delays in settling securities transactions
o the threat of nationalization and expropriation
o an increased potential for corrupt business practices in certain
foreign countries
USE OF DERIVATIVES
The Fund may use derivative instruments to hedge portfolio risk, for
cash management purposes and for non-hedging purposes in pursuit of its
investment objective. Investing in derivative investments involves numerous
risks. For example:
o the underlying investment or security might not perform in the
manner that the Adviser expects it to perform, which could make
an effort to hedge unsuccessful
o the company issuing the instrument may be unable to pay the
amount due on the maturity of the instrument
o certain derivative investments held by the Fund may trade only in
the over-the-counter markets or not at all, and can be illiquid
o derivatives may change rapidly in value because of their inherent
leverage
All of this can mean that the Fund's net asset value may change more
often and to a greater degree than it otherwise would. The Fund has no
obligation to enter into any hedging transactions.
SHORT SELLING
Short selling is a speculative investment technique that involves
expenses to the Fund and the following additional risks:
o while the potential gain on a short sale is limited, the loss is
theoretically unlimited
o it can increase the effect of adverse price movements on the
Fund's portfolio
o the Fund may not be able to close out a short portion at any
particular time or at the desired price
o the Fund may be subject to a "short squeeze" when other short
sellers desire to replace a borrowed security at the same time as
the Fund, thus increasing the price the Fund may have to pay for
the security and causing the Fund to incur losses on the position
o if the market for small capitalization companies becomes
illiquid, the Fund may be unable to obtain securities to cover
short positions
CONFLICTS OF INTEREST
PWFA and OrbiMed, or their affiliates, provide investment advisory and
other services to various entities. PWFA and OrbiMed are parties to a joint
venture that advises funds with similar objectives and management policies. PWFA
and OrbiMed and certain of the investment professionals who are principals of or
employed by PWFA or OrbiMed or their affiliates also carry on substantial
investment activities for their own accounts, for the accounts of family members
and for other accounts (collectively, "Other Accounts"). The Fund has no
interest in these activities. As a result of the foregoing, PWFA and OrbiMed and
the investment professionals who, on behalf of the Adviser, will manage the
Fund's investment portfolio will be engaged in substantial activities other than
on behalf of the Adviser, may have differing economic interests in respect of
such activities, and may have conflicts of interest in allocating their time and
activity between the Fund and Other Accounts. Such persons will devote only so
much as in their judgment is necessary and appropriate.
There also may be circumstances under which PWFA or OrbiMed will cause
one or more of their Other Accounts to commit a larger percentage of their
respective assets to an investment opportunity than to which the Adviser will
commit the Fund's assets. There also may be circumstances under which PWFA or
OrbiMed will consider participation by their Other Accounts in investment
opportunities in which the Adviser does not intend to invest on behalf of the
Fund, or vice versa.
PWFA or its affiliates may have an interest in other accounts managed
by OrbiMed ("OrbiMed Accounts") on terms different than an interest in the Fund.
In addition, OrbiMed 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 OrbiMed Accounts or to the Fund.
TAX RISK
The Fund expects to be treated as a partnership for Federal income tax
purposes. If it were determined that the Fund should be treated as an
association or a publicly traded partnership taxable as a corporation, 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.
Because the Fund may borrow money, a tax-exempt investor may incur
income tax liability to the extent the Fund's transactions are treated as giving
rise to UBTI.
DISTRIBUTIONS TO INVESTORS AND PAYMENT OF TAX LIABILITY
The Fund has no present intention of making 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 Fund's taxable income, and will
have to pay such applicable taxes from sources other than Fund distributions.
The amount and times of distributions, if any, will be determined in the sole
discretion of the Board.
USE OF PROCEEDS
The Fund will invest the net proceeds of the offering in accordance
with the Fund's investment objective and policies and principal strategies as
soon as practicable after the closing of the offering. Based on current market
conditions, the Adviser expects the Fund will be fully invested within [one
year]. The Adviser believes that, under current market conditions, it would be
able to invest up to approximately $___ million in accordance with the Fund's
objective, policies and strategies in this time frame. Although the Fund expects
to invest at least [80%] of its total assets in securities of health sciences
companies within [one year], it may take substantially longer to reach the
Fund's target of investing 30% of its assets in private securities. This lengthy
investment period reflects the fact that: (i) the Adviser plans to spend
considerable time researching prospective investments; and (ii) the companies in
which the Fund plans to invest will be primarily health sciences companies which
may have limited amounts of securities available for purchase. Pending the full
investment of the proceeds of the offering in equity securities of health
sciences companies, the proceeds of the offering will be invested in short-term,
high quality debt securities. The Fund will pay organizational and offering
expenses estimated to be $__________ from the proceeds of the offering.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
LONG-TERM CAPITAL APPRECIATION
The Fund's investment objective is to seek long-term capital
appreciation. Current income is not an objective. No assurance can be given that
the Fund will achieve its investment objective.
THE FUND MAY CHANGE ITS INVESTMENT STRATEGIES
The Fund's investment objective is a fundamental policy and may not be
changed without the approval of investors. Please see the SAI for additional
fundamental policies of the Fund. The Fund's principal investment policies and
strategies are listed below. The Fund may change any of these non-fundamental
investment policies and strategies, and may change the definition of small and
medium-sized companies, if the Fund's Board believes doing so would be
consistent with the Fund's investment objective of long-term capital
appreciation.
INVESTING IN THE HEALTH SCIENCES SECTOR
The Fund will invest primarily in equity and equity-related securities
of public and private health sciences companies worldwide, with an emphasis on
companies in the biotechnology and pharmaceuticals sectors. These investments
involve many risks, which include those described under "Risk Factors." Equity
and equity-related securities include common stocks, securities convertible into
or exchangeable for common stocks, rights and warrants to purchase common stocks
and depository receipts representing an ownership interest in equity securities.
The Fund also may invest in fixed-income securities, such as non-convertible
debt securities, or preferred stocks, including those rated below investment
grade, where the Adviser believes they provide opportunities for capital gain.
The Fund may invest in securities of both established and emerging
companies, the securities of which may be denominated in foreign currencies. The
Fund will invest in public securities and up to 30% of its assets (measured at
the time of purchase) in private securities, although the percentage of private
securities may increase (and the percentage of public securities may decrease)
as public securities are sold or if private securities increase in value.
Private securities typically will be purchased in negotiated transactions and
will include, among others, common stock, so-called P.I.P.E.s (private
investments in public equities), convertible preferred stock, convertible
preferred debt, bridge loans with certain equity components and warrants.
The Fund may invest in public securities of issuers of any
capitalization. Of its public securities, the Fund expects to invest principally
in the public securities of large capitalization public companies and, to a
lesser extent, small and medium-sized public companies. The common stock of
these companies may trade over-the-counter, on the Nasdaq SmallCap Market, the
Nasdaq National Market, the New York Stock Exchange, the American Stock Exchange
or on other markets. Many of these companies only recently may have become
public companies, and may have a relatively small proportion of their
outstanding common stock publicly traded.
The Fund's investments in private securities of Portfolio Companies
typically will be between $1 and $10 million in size, depending on a variety of
factors including anticipated risk and return and likelihood of follow-on
investments. When analyzing companies, the Adviser will focus on opportunities
similar to these:
o private companies that the Adviser believes have achievable
near-term goals and may complete an initial public offering
("IPO") or elicit interest as an acquisition target within a few
years after investment
o public companies that the Adviser believes need to be
restructured and refinanced, including companies that have failed
late stage clinical trial and need capital to redesign the trial
or to advance another product
o merger and acquisition funding where the Adviser believes that
there are several unrelated publicly traded companies with
valuable technologies that are not adequate to support an entire
company, but which the Adviser believes can be combined
effectively. In these cases, the Fund will seek to provide
consolidation financing where the Adviser believes such action is
scientifically, strategically and financially feasible.
o spinouts of large biotechnology or pharmaceutical companies; that
is, companies that have "spun-out" non-core assets into new
companies to attract independent financing opportunities
o pipeline strategies where biotechnology companies "in-license"
multiple products and intellectual property within a particular
disease area and then focus on development of the acquired
"pipeline". The Fund will seek to invest in these companies where
the Adviser believes the in-licensed assets are meaningful, the
strategy is sound, and the management has a track record of
executing the in-licensing and drug development strategy.
o research and development limited partnerships, where the Adviser
believes the technology is sufficiently promising
The Fund may invest in securities of non-U.S. issuers. The Fund may
invest directly in foreign securities or it may invest through depositary
receipts, which are certificates issued by a bank or other financial institution
that evidence the right to receive the underlying foreign security. Investments
in non-U.S. securities involve certain risks in addition to those of health
sciences companies generally. These risks are discussed under "Risk
Factors--Investments in Foreign Securities." The Fund may not invest more than
60% of its total assets in the securities of non-U.S. issuers.
The limitations on the percentage of the Fund's total assets that may
be invested in private securities and securities of non-U.S. issuers apply at
the time of investment by the Fund. The Fund will not be required to reduce its
investments in these securities if a percentage limit is exceeded as a result of
changes in the value of the Fund's portfolio securities or repurchases of its
Interests.
BORROWING; USE OF LEVERAGE
The Fund is authorized to borrow money to meet repurchase requests and
for cash management purposes. While borrowings are outstanding for these
purposes, the Fund will be permitted to reinvest the proceeds of the sale of
securities or new sales of Interests. The use of borrowings involves a high
degree of risk. See "Risk Factors - Leverage; Borrowing." The Fund generally
intends to borrow money only in these limited circumstances.
The Investment Company Act prohibits the Fund from borrowing for any
purpose if, immediately after such borrowing, it will have an "asset coverage"
of less than 300%. For this purpose, an "asset coverage" of 300% means that the
Fund's total assets equal 300% of the total outstanding principal balance of
indebtedness. Lenders may require the Fund to agree to more restrictive asset
coverage requirements as a condition to providing credit to the Fund, and also
may limit the extent to which the Fund may hold illiquid securities, reducing
the Fund's investment flexibility. The Fund also may be forced to sell
investments on unfavorable terms if market fluctuations or other factors reduce
the asset level below what is required by the Investment Company Act or the
Fund's loan agreements.
DERIVATIVES
The Fund may use financial instruments, known as derivatives, for the
purposes of hedging portfolio risk, cash management and for non-hedging
purposes. A derivative is generally defined as an instrument whose value is
derived from, or based upon, some underlying index, reference rate (such as
interest rates or currency exchange rates), security, commodity or other asset.
Examples include futures and options on futures. The Fund will use a specific
type of derivative only after consideration of, among other things, how the
derivative instrument serves the Fund's investment objective and the risk
associated with the instrument.
The Fund may buy or sell put or call options on transferable
securities or indices of securities. The Fund's options strategies may include
the purchase of puts and the simultaneous writing of calls having different
strike prices to place a "collar" on a portion of the Fund's asset value. The
Fund may buy or sell these options if they are traded on options exchanges or in
over-the-counter markets. However, the Fund will only enter into transactions
with broker-dealers that are reputable financial institutions which (i)
specialize in these types of transactions, (ii) make markets in these options,
or (iii) are participants in over-the-counter markets. A put option gives the
purchaser of the option the right to sell, and obligates the writer of the put
option to buy, the underlying security at a stated exercise price at any time
prior to the expiration of the option. Similarly, a call option gives the
purchaser of the option the right to buy, and obligates the writer of the call
option to sell, the underlying security at a stated exercise price at any time
prior to the expiration of the option.
The Adviser will consider changes in foreign currency exchange rates
in making investment decisions about non-U.S. securities. As one way of managing
exchange rate risk, the Fund may enter into forward currency exchange contracts
(agreements to purchase or to sell U.S. dollars or non-U.S. currencies at a
future date). A forward contract may help reduce the Fund's losses on securities
denominated in a currency other than U.S. dollars, but it also may reduce the
potential gain on the securities depending on changes in the currency's value
relative to the U.S. dollar. See "Certain Portfolio Securities and Other
Operating Policies - Foreign Securities" in the SAI.
SHORT SELLING
The Fund may sell securities short. To effect a short sale, the 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.
POTENTIAL FOR LARGE POSITIONS AND CONTROLLING INTERESTS
As a non-diversified investment company, the Fund faces few regulatory
restrictions on the proportion of its total assets it may invest in the
securities of any one company, or on the proportion of its total assets it
allocates to control interests in companies. However, the Fund does not intend
to invest more than 10% of its total assets in the securities of any one
company. The Fund may own a controlling interest in one or more companies, and
it (or it and other funds or accounts managed by the Adviser) may own up to 100%
of certain companies. However, the Fund does not intend to invest more than 15%
of its total assets in controlling interests of companies. Market fluctuations
could cause these limits to be exceeded.
DEFENSIVE MEASURES
The Fund, from time to time, may take temporary defensive positions in
cash or short-term debt securities that are inconsistent with its principal
strategies in an attempt to moderate extreme volatility caused by adverse
market, economic, or other conditions. This could prevent the Fund from
achieving its investment objective.
OTHER
The Fund may enter into repurchase agreements with commercial banks
and broker-dealers as a short-term cash management tool. The Fund also may lend
portfolio securities. Repurchase agreements and stock lending involve certain
risks that are described in the SAI.
MANAGEMENT OF THE FUND
GENERAL
The Fund's Board provides broad oversight over the affairs of the
Fund.
The Adviser is a joint venture between PWFA and OrbiMed. Investment
professionals employed by OrbiMed will manage the Fund's investment portfolio on
behalf of the Adviser under the supervision of PWFA's personnel. OrbiMed, a
registered investment adviser under Investment Advisers Act of 1940, as amended
(the "Advisers Act"), is controlled by Samuel D. Isaly, its President. As of
August 31, 2000, OrbiMed and its affiliates managed assets of approximately $5
billion.
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 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 have approximately $____ billion of assets under control and $__
billion of assets under management.
PORTFOLIO MANAGEMENT
The Fund's primary portfolio manager will be Samuel D. Isaly, who is
OrbiMed's president. Mr. Isaly has been active in international and health care
investing throughout his career, beginning at Chase Manhattan Bank in 1968. In
1982, his company, Gramercy Associates, was the first to develop an integrated,
worldwide system of analysis on the 100 leading pharmaceutical companies, with
investment recommendations conveyed to 50 leading financial institutions in the
U.S. and Europe. Gramercy Associates was absorbed into S.G. Warburg & Co., Inc.,
in 1986, where Mr. Isaly was Senior Vice President and international equity
analyst. For a time, Mr. Isaly also was associated with Credit Suisse as an
analyst of the European pharmaceutical industry. In all, he has worked as a
pharmaceutical and international investment specialist for 30 years.
In March 1989, Mr. Isaly co-founded Mehta and Isaly, which provided
investment ideas to institutional investors on worldwide health care, undertook
cross-border merger, acquisition and alliances projects in the industry, and
provided investment management services to selected investors. In early 1998,
Mehta and Isaly was renamed OrbiMed Advisers Inc.
Mr. Isaly earned a B.A. degree from Princeton University and a M.Sc.
in economics from the London School of Economics.
Other investment professionals employed by OrbiMed have substantial
experience in investing in the biotechnology and pharmaceutical sectors. See
"Appendix A --Performance Information." PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE PERFORMANCE.
MANAGEMENT FEE
The Fund will pay a fee to PWFA for its management services at an
annual rate of 1.35% of the Fund's average daily net assets, excluding assets
attributable to the Adviser's capital account. The fee is payable monthly. The
overall amounts payable by the Fund and its investors will be higher than those
paid by most other registered investment companies, but generally similar to
those paid by many private funds with similar investment policies. PWFA
will pay a portion of the management fee to OrbiMed.
INCENTIVE ALLOCATION
The following discussion of the Incentive Allocation is only a
summary, and is qualified in its entirety by reference to the more complete
description contained in the SAI under "Investment Advisory and Other Services -
Incentive Allocation." The calculation of the Incentive Allocation involves
complex accounting concepts. The Fund encourages you to consult with you
financial adviser regarding this calculation.
In addition to the management fee, the Adviser is entitled to receive
the Incentive Allocation on September 30 of each year, commencing in 2001. The
Incentive Allocation generally will equal 20% of the Fund's net profits
(determined by taking into account net realized capital gains or losses on
public and private securities, net unrealized gains or losses from public
securities, unrealized gains from private securities only to the extent of
unrealized losses from private securities (except in limited circumstances),
unrealized losses from private securities, and other net income or loss for the
year). No Incentive Allocation will be made for any year unless losses and
depreciation from prior periods have been recovered by the Fund. This is
sometimes known as a "high water mark" calculation. The Adviser will be under no
obligation to return any Incentive Allocation previously allocated by the Fund.
The Incentive Allocation is made annually, on September 30, except as
respects investors whose Interests are repurchased other than at September 30.
The Fund believes it is appropriate for those investors to bear their share of
the Incentive Allocation for those Interests for the period between the last
Incentive Allocation allocated to the Adviser and the date of repurchase.
Otherwise, the remaining Interests, and thus their investors, could incur a
disproportionate share of the Incentive Allocation. For this reason, the Fund
will calculate the Incentive Allocation based on its performance which will take
into account all unrealized gains for the private securities. The Fund's net
asset value will be reduced or increased to reflect this calculation. The
portion of the Incentive Allocation attributable to tendering investors will be
made to the Adviser on the date the tendering investors' Interests are
purchased.
If the Fund is in a net loss situation, there will be no accrual, and
no Incentive Allocation will be made. If this situation arises, the Fund will
keep track of its "cumulative loss." If, at any time, the Fund completes a
semi-annual tender for its Interests, the Fund will adjust the amount of any
cumulative loss in proportion to the net amount of Interests repurchased
(adjusted for any concurrent sales of Interests not exceeding the amount
repurchased), so that the repurchase of Interests has the effect of reducing the
amount of cumulative loss and thus the "high water mark."
The Incentive Allocation is based upon the performance of the Fund as
a whole and not upon the performance of a particular investor's capital account
and certain distortions may exist as a result. Thus, for example, the value of
Interests held by an investor at the time of purchase may be reduced as a result
of payment of the Incentive Allocation, even though the value of the investor's
Interests has declined. In addition, if the Fund sells additional Interests when
there is a loss carryforward for Incentive Allocation purposes (that is, when
the high water mark has not been exceeded), an existing investor's share of the
loss carryforward will effectively be diluted by such new investment.
Very few investment advisers to registered investment companies
receive an Incentive Allocation similar to that to which the Adviser is
entitled.
OTHER EXPENSES OF THE FUND
The Fund will bear all expenses incurred in the business of the Fund
other than those specifically required to be borne by PWFA. Expenses to be borne
by the 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, shareholder servicing 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 any investors
that are regularly scheduled, permitted or required to be held
under the terms of the LLC Agreement, the Investment Company 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, including all travel-related expenses and other costs
associated with due diligence performed, in connection with the
analysis, purchase and sale of Portfolio Companies;
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 Adviser or the Board;
o all costs and expenses of preparing, setting in type, printing
and distributing reports, repurchase notices, 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 appraisals and 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 Fund will reimburse the Adviser for any of the above expenses that
it pays on behalf of the Fund.
ADMINISTRATOR AND CUSTODIAN
PFPC Inc., the Fund's administrator (the "Administrator"), performs
certain administration, accounting and investor services for the Fund and other
investment funds sponsored or advised by PW Group or its affiliates. In
consideration for these services, the 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.
PFPC Trust Company, the Fund's custodian and an affiliate of the
Administrator, acts as custodian for the Fund's assets.
INVESTOR QUALIFICATIONS
Interests in the Fund are offered only to investors who are "qualified
clients" as such term is defined in Rule 205-3 under the Advisers Act, as that
rule may be amended from time to time. Currently, qualified clients include
natural persons and companies (other than investment companies) that have a net
worth (together, in the case of a natural person, with assets held jointly with
a spouse) of more than $1,500,000, or who meet the standard for a "qualified
purchaser" in the Investment Company Act and the rules thereunder. Qualified
clients also include persons who have at least $750,000 under PWFA's or its
affiliates' management, including any amount invested in the Fund, and certain
knowledgeable employees who participate in PWFA's investment activities. All of
these persons are referred to in this prospectus as "Qualified Investors." You
must complete and sign an investor certification before you may invest. The form
of this investor certification is included as Appendix B to this prospectus. The
Fund will not be obligated to sell to brokers or dealers any Interests that have
not been placed with Qualified Investors.
REDEMPTIONS, REPURCHASES OF INTERESTS AND TRANSFERS
NO RIGHT OF REDEMPTION OR TRANSFER
No investor or other person holding an Interest or a portion of an
Interest will have the right to require the Fund to redeem the Interest or
portion thereof. No public market exists for Interests, and none is expected to
develop. With very limited exceptions, Interests are not transferable and
liquidity will be provided only through limited semi-annual repurchase offers,
which will be made in the Board's sole discretion. Consequently, investors may
not be able to liquidate their investment other than as a result of repurchases
of Interests by the Fund, as described below.
REPURCHASES OF INTERESTS
The Fund from time to time may offer to repurchase up to 10% of its
outstanding 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 the
Fund should repurchase Interests or portions thereof from investors pursuant to
written tenders, the Fund's Board will consider the recommendation of the
Adviser. The Adviser expects that it will recommend to the Fund's Board that the
Fund offer to repurchase Interests from its investors in ____________2001 and,
thereafter, twice each year, in March and September. 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 the 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 Adviser during such period. If a repurchase offer is oversubscribed by
investors, the Fund will repurchase only a pro rata portion of the Interests
tendered by each investor.
The LLC Agreement provides that the Fund will be dissolved if it has
not completed a tender offer for at least 10% of its outstanding Interests
within a period of two years after an investor requests that the Fund do so.
See "Other Information--Term, Dissolution and Liquidation" in the SAI.
DETERMINATION OF REPURCHASE PRICE
The repurchase price payable in respect of repurchased Interests will
be equal to the value of the investor's capital account or portion thereof based
on the estimated net asset value of the 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.
The Fund's net asset value may change materially between the date a tender offer
is mailed and the due date, and it also may change materially shortly after a
tender is completed. The method by which the Fund calculates its net asset value
is discussed under the caption "Calculation of Net Asset Value" and additional
risks are discussed under "Risk Factors--Limited liquidity."
PAYMENT
Under normal conditions, the Fund intends to repurchase its Interests
for cash. However, the Fund reserves the right to pay for all or a portion of
its repurchased Interests with an in-kind distribution of a portion of its
portfolio securities. The Fund might distribute stock of a company in-kind if
the Fund's position is large relative to the company's market capitalization or
trading volume and the Fund believes that selling its position would adversely
affect the price received on the sale or the value of the Fund's remaining
position in that company. The Fund will not make in-kind payments with private
securities. Payment of the purchase price pursuant to a tender of Interests will
be made promptly after the expiration date of the tender offer. The Fund will
not impose any charges on a repurchase of Interests.
PRO RATA PURCHASES OF INTERESTS IN THE EVENT OF AN OVERSUBSCRIBED TENDER OFFER
If a tender offer by the Fund is oversubscribed, the Fund may, but is
not required to, tender for additional Interests, but only up to a maximum
amount of two percent of the outstanding Interests of the Fund. If the Fund
determines not to repurchase additional Interests beyond the repurchase offer
amount, or if an investor tenders an amount of Interests greater than that which
the Fund is entitled to purchase, the Fund will repurchase the Interests
tendered on a pro rata basis.
If pro-ration is necessary, the Fund will send a notice of pro-ration
to selected brokers and dealers on the business day following the due date. The
amount of Interests each investor asked to have repurchased will be reduced by
the same percentage. If any Interests that you wish to have repurchased by the
Fund are not repurchased because of pro-ration, you will have to wait until the
next tender offer, and your repurchase request will not be given any priority
over other investors' requests at this later date. Thus, there is a risk that
the Fund may not purchase all of the Interests you wish to have repurchased in a
given period or in any subsequent period. In anticipation of the possibility of
pro-ration, some investors may tender more Interests than they wish to have
repurchased in a particular repurchase period, thereby increasing the likelihood
of pro-ration. There is no assurance that the Fund will repurchase as much of
your Interests as you wish to have repurchased.
CONSEQUENCES OF REPURCHASE OFFERS
The Fund believes that repurchase offers generally will be beneficial
to the Fund's investors, and typically will be funded from available cash or
sales of portfolio securities. However, payment for repurchased Interests may
require the Fund to liquidate portfolio holdings earlier than the Adviser
otherwise would liquidate such holdings, potentially resulting in losses, and
may increase the Fund's portfolio turnover. The Adviser 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. If the Fund borrows to finance repurchases, interest on that
borrowing will negatively affect investors who do not tender their Interests
into a repurchase offer by increasing the Fund's expenses and reducing any net
investment income. To the extent the Fund finances repurchase proceeds by
selling Fund investments, the Fund will hold a larger proportion of its total
assets in highly illiquid securities. Also, the sale of securities to fund
repurchases could reduce the market price of those securities, which in turn
would reduce the Fund's net asset value.
Repurchase of the Fund's Interests will tend to reduce the amount of
outstanding Interests and, depending upon the Fund's investment performance, its
net assets. A reduction in the Fund's net assets will tend to increase the
Fund's expense ratio. In addition, the repurchase of Interests by the Fund will
be a taxable event to investors.
CALCULATION OF NET ASSET VALUE
The Fund will compute its net asset value as of the close of business
of each "fiscal period" (as defined under "Capital Accounts"). Securities owned
by the Fund will be valued at current market prices. If reliable market prices
are unavailable (e.g., in the case of certain private securities), securities
will be valued at fair value as determined under the direction of, and in
accordance with, procedures approved by the Fund's Board. Private securities
will be valued at fair value, which will be cost until the Adviser determines,
pursuant to the Fund's valuation procedures, that such a valuation is no longer
fair or appropriate. In such situations, the Fund's investment will be revalued
in a manner that the Adviser, following procedures approved by the Board,
determines best reflects its fair value. When the Fund holds restricted
securities of a class that has been sold to the public, fair valuation would
often be market value less a discount to reflect contractual or legal
restrictions limiting resale. Fair value represents a good faith approximation
of the value of an asset and will be used where there is no public market or
possibly no market at all for a company's securities. The fair values of one or
more assets, in retrospect, may not be the prices at which those assets could
have been sold during the period in which the particular fair values were used
in determining the Fund's net asset value. As a result, the Fund's issuance or
repurchase of its Interests at a time when it owns securities that are valued at
fair value may have the effect of diluting or increasing the economic interest
of existing investors. Fair values assigned to the Fund's investments also will
affect the amount of the management fee, shareholder servicing fee and Incentive
Allocation. See "Risk Factors - Incentive Allocation." All fair value
determinations by the Adviser are subject to ratification by the Board.
The Adviser and the Board will consider numerous factors in
establishing a fair value for private securities. Factors that relate to the
securities of a Portfolio Company will include the cost of the security; the
last available quoted price or traded price, if any, for the security;
fundamental analytical data relating to transactions in comparable securities;
relationships among various securities and industry-specific indices and
evaluation of the forces which influence the market in which the security is
purchased and sold; the size of the Fund's position and the liquidity of the
market for the security; recent purchases and sales (including new issuances) of
the company's securities; pricing by dealers in similar securities; reported
prices and the extent of public trading in similar financial instruments of the
issuer or comparable securities; pending public offerings by the company; and
contractual and regulatory restrictions on the Fund's disposition of the
security. Factors that relate to a Portfolio Company itself will include its
financial position and results of operations, including their variance from
projections; the company's business and financial plan; its ability to obtain
needed financing; changes in economic conditions affecting the company; pending
reorganization activity; changes in management; changes in contracts with major
customers and distributors; and changes in the market affecting the company's
products and services. Certain developments, such as changes in senior
management of a company or its capital structure, or removal of legal or
contractual restrictions on sale, will cause the Adviser to review the valuation
of a company's securities. In addition, a combination of developments that are
individually less significant also may cause a review of valuation. In making
determinations, the Adviser and Board will rely in many cases on information
provided by OrbiMed.
Expenses of the Fund, including the management fee, the shareholder
servicing fee, the Incentive Allocation accrual and the costs of any borrowings,
are taken into account for the purpose of determining net asset value. See "Risk
Factors - Incentive Allocation."
CAPITAL ACCOUNTS
GENERAL
The 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 the 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 the Fund of the Interest or portion of the Interest
of such investor, plus the amount of distributions, if any, to such investor
which are not reinvested, plus any amounts debited against such investor's
capital account. 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 Adviser; 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 Adviser in such
amounts as are necessary to offset all previous debits attributable to such
investor.
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
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 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.
ALLOCATION OF SPECIAL ITEMS--ORGANIZATIONAL EXPENSES, CERTAIN WITHHOLDING TAXES
AND OTHER EXPENDITURES
The Fund's organizational and offering expenses are estimated at
$__________. Before a recent change to the guidelines followed by the American
Institute of Certified Public Accountants, the 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 the
Fund will be allocated among and credited to or debited against the capital
accounts of all investors 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 the Fund by its investors through and including, the
date which is six months after the Initial Closing Date.
Withholding taxes or other tax obligations incurred by the 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 for contingent liabilities as of the date any such contingent liabilities
become known to the Adviser or the Board. Reserves will be in such amounts,
subject to increase or reduction, which the Board or the Adviser 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.
VOTING
Each investor will have the right to cast a number of votes based on
the value of such investor's capital account relative to all capital accounts of
investors at any meeting of investors called by the Board or investors holding
at least a majority of the total number of votes eligible to be cast by all
investors. 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 Adviser to provide advisory services to the Fund 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 the Fund's
business, and may not act for or bind the Fund.
TAXES
The Fund has not sought a ruling from the Internal Revenue Service
(the "Service") or any other Federal, state or local agency with respect to any
of the tax issues affecting the Fund, nor has it obtained an opinion of counsel
with respect to any tax issues other than the characterization of the Fund as a
partnership for Federal income tax purposes.
The discussion below 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.
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 THE FUND.
The Fund has received an opinion of Stroock & Stroock & Lavan LLP,
counsel to the Fund, that under the provisions of the Code and the Regulations,
as in effect on the date of the opinion, the 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 the 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.
The Fund will not be eligible for any of those safe harbors. In particular, it
will not qualify under the private placement safe harbor set forth in the
Regulations if, as is anticipated, the 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 the 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 the 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 the investors to the extent of the 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 taxable as a partnership, the 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 allocated to the Fund
(including from investments in other partnerships) 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 generally will 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 investors receive cash distributions for such taxable year, and thus
may incur income tax liabilities unrelated to any distributions to or from the
Fund. For a more detailed discussion of certain aspects of the income taxation
of the Fund and its investments, see "Tax Aspects" in the SAI.
PLAN OF DISTRIBUTION
GENERAL
PaineWebber acts as the distributor of the Fund's Interests on a best
efforts basis, subject to various conditions. The Fund also may distribute
Interests through brokers or dealers with which it has entered into distribution
agreements. The Fund is not obligated to sell to a broker or dealer any
Interests that have not been placed with Qualified Investors. PaineWebber
expects to deliver the Interests to the investors on or about _____ __, 2000.
The Fund will pay a servicing fee to PaineWebber and to each broker or dealer
that is not affiliated with the Fund or PaineWebber and that has entered into a
shareholder servicing agreement with the Fund at the annual rate of 0.40% of the
net asset value of the outstanding Interests owned by their customers.
PaineWebber or its affiliates may pay from their own resources additional
compensation to brokers or dealers in connection with the sale and distribution
of the Interests or servicing of investors.
Neither PaineWebber nor any other broker or dealer is obligated to buy
from the Fund any of the Interests.
There is no minimum amount of Interests required to be purchased.
Investor funds will not be accepted until the registration statement to which
this prospectus relates is declared effective.
All investor funds for the initial closing on the sale of Interests
will be deposited into an escrow account set up at __________ (the "Escrow
Agent") for the benefit of the investors. The Escrow Agent will invest all funds
it receives in accordance with Rule 15c2-4 under the Securities Exchange Act of
1934, as amended. Any interest collected on the funds will be returned to the
Fund and investors on the Initial Closing Date.
The Fund has agreed to indemnify PaineWebber and its affiliates and
certain other persons against certain liabilities under the Securities Act.
The Fund has agreed to reimburse ____________________for up to
$________ for expenses that it incurs in connection with the offering.
PURCHASE TERMS
Sales of Interests will be made only to Qualified Investors. Investors
will pay to PaineWebber a sales load of 3% for investments of less than
$500,000; 2% for investments of $500,000 or more, but less than $1 million; 1%
for investments of $1 million or more. No sales load will be charged in respect
of purchases of Interests by employees or directors of the Adviser and its
affiliates, Board members and attorneys or other professional advisors engaged
on behalf of the Fund, and members of their immediate families. The minimum
required initial contribution to the capital of the Fund from each investor is
$25,000. The Fund may vary the investment minimum from time to time.
The LLC Agreement is annexed as Appendix A to the Fund's SAI and each
new investor will be bound by all of its terms by executing the investor
certification form included as Appendix B to this prospectus.
ADDITIONAL SALES
From time to time, the Fund may sell additional Interests to Qualified
Investors. PaineWebber intends to make payments out of its own resources to the
brokers or dealers who participate in the offerings. In deciding whether to
commence sales, the Fund will take into account all factors it considers
relevant, including market conditions and the cash available to it for
investment.
SHAREHOLDER SERVICING FEE
The Fund intends to pay compensation to selected brokers and dealers
that are not affiliated with the Fund or PaineWebber that hold Interests for
their customers in accordance with several shareholder servicing agreements
between the Fund and the brokers and dealers. The shareholder servicing fee is
payable monthly at an annual rate of 0.40% of the net asset value of outstanding
Interests held by the brokers and dealers for their customers (prorated for
shorter periods). The brokers and dealers will provide customary investor
services, including responding to investor questions about the Fund and
assisting the Fund in administering repurchases. Shareholder servicing fees will
accrue daily as an expense of the Fund.
GENERAL INFORMATION
The Fund is registered under the Investment Company Act as a
closed-end, non-diversified management investment company. The Fund was formed
as a limited liability company under the laws of the State of Delaware on August
29, 2000 and has no operating history. The Fund's office is located at 1285
Avenue of the Americas, New York, New York 10019 and its telephone number is
(212) 713-2000.
<PAGE>
APPENDIX A
PERFORMANCE INFORMATION
<PAGE>
APPENDIX B
INVESTOR CERTIFICATION
[To come]
<PAGE>
================================================================================
PW TREE FUND, INC.
Limited Liability Company Interests
____________________
PROSPECTUS
________ , 2000
____________________
PAINEWEBBER INCORPORATED
____________________
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 2000
PW Birch Fund, L.L.C.
__________, 2000
STATEMENT OF ADDITIONAL INFORMATION
1285 Avenue of the Americas
New York, New York 10019
(212) 713-9036
toll-free (800) 486-2608
This Statement of Additional Information ("SAI") is not a prospectus.
This SAI relates to and should be read in conjunction with the prospectus of PW
Birch Fund, L.L.C. (the "Fund"), dated _________ __ , 2000. A copy of the
prospectus may be obtained by contacting the Fund at the telephone numbers or
address set forth above.
The information in this SAI is not complete and may be changed. The
Fund may not sell these securities until the registration statement filed with
the Securities and Exchange Commission (the "SEC") is effective. This SAI is not
an offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
TABLE OF CONTENTS
PAGE
ADDITIONAL INVESTMENT POLICIES.................................................3
REPURCHASES AND TRANSFERS OF INTERESTS.........................................9
DIRECTORS.....................................................................11
CODE OF ETHICS................................................................13
INVESTMENT ADVISORY AND OTHER SERVICES........................................13
CONFLICTS OF INTEREST.........................................................16
TAX ASPECTS...................................................................18
ERISA CONSIDERATIONS..........................................................34
BROKERAGE.....................................................................35
ACCOUNTANTS AND LEGAL COUNSEL.................................................36
CUSTODIAN.....................................................................36
OTHER INFORMATION.............................................................37
FINANCIAL STATEMENTS..........................................................40
INDEPENDENT AUDITORS' REPORT..................................................40
STATEMENT OF ASSETS AND LIABILITIES...........................................41
STATEMENT OF OPERATIONS.......................................................41
APPENDIX A--LIMITED LIABILITY COMPANY AGREEMENT...............................43
<PAGE>
ADDITIONAL INVESTMENT POLICIES
The investment objective and principal investment strategies of the
Fund, as well as the principal risks associated with the Fund's investment
strategies, are set forth in the prospectus. Certain additional investment
information is set forth below.
FUNDAMENTAL POLICIES
The Fund's stated fundamental policies, which may only be changed by
the affirmative vote of a majority of the outstanding voting securities of the
Fund ("Interests"), are listed below. Within the limits of these fundamental
policies, the Fund's management has reserved freedom of action. For the purposes
of this SAI, "majority of the outstanding voting securities of the Fund" means
the vote, at an annual or special meeting of securityholders 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 the Fund are present or
represented by proxy; or (b) of more than 50% of the outstanding voting
securities of the Fund, whichever is the less. The Fund may not:
o Issue senior securities, except to the extent permitted by
Section 18 of the Investment Company Act of 1940, as amended (the
"Investment Company Act"), or as otherwise permitted by the SEC.
o Underwrite securities of other issuers, except insofar as the
Fund may be deemed an underwriter under the Securities Act of
1933 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 Investment Company
Act.
o Purchase, hold or deal in real estate, except that the Fund may
invest in securities that are secured by real estate, or issued
by companies that invest or deal in real estate or real estate
investment trusts.
o Invest in commodities or commodity contracts, except that the
Fund may purchase and sell foreign currency, options, futures and
forward contracts, including those related to indexes, and
options on indexes.
o Invest in the securities of any one industry, except the health
sciences, biotechnology and pharmaceuticals industries (and
except 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.
With respect to these investment restrictions, and other policies
described in this SAI, if a percentage restriction is adhered to at the time of
an investment or transaction, a later change in percentage resulting from a
change in the values of investments or the value of the Fund's total assets,
unless otherwise stated, will not constitute a violation of such restriction or
policy.
The Fund's investment objective is fundamental and may not be changed
without the vote of a majority (as defined by the Investment Company Act) of the
Fund's outstanding voting securities.
CERTAIN PORTFOLIO SECURITIES AND OTHER OPERATING POLICIES
FOREIGN SECURITIES
The Fund may invest in equity and fixed-income securities of foreign
issuers and in depositary receipts, such as American Depositary Receipts
("ADRs"), that represent indirect interests in securities of foreign issuers.
Foreign securities in which the Fund may invest may be listed on foreign
securities exchanges or traded in foreign over-the-counter markets or may be
purchased in private placements and not be publicly traded. Investments in
foreign securities are affected by risk factors generally not thought to be
present in the U.S. These factors are listed in the prospectus under "Risk
Factors--Investments in Foreign Securities."
As a general matter, the Fund will not hedge against foreign currency
risks, including the risk of changing currency exchange rates, which could
reduce the value of certain of the Fund's foreign currency denominated portfolio
securities irrespective of the underlying investment. However, from time to
time, the Fund may enter into forward currency exchange contracts ("forward
contracts") for hedging purposes and non-hedging purposes to pursue its
investment objective. Forward contracts are transactions involving the Fund's
obligation to purchase or sell a specific currency at a future date at a
specified price. Forward contracts may be used by the Fund for hedging purposes
to protect against uncertainty in the level of future foreign currency exchange
rates, such as when the Fund anticipates purchasing or selling a foreign
security. This technique would allow the Fund to "lock in" the U.S. dollar price
of the security. Forward contracts also may be used to attempt to protect the
value of the Fund's existing holdings of foreign securities. There may be,
however, imperfect correlation between the Fund's foreign securities holdings
and the forward contracts entered into with respect to such holdings. Forward
contracts also may be used for non-hedging purposes to pursue the Fund's
investment objective, such as when the Adviser anticipates that particular
foreign currencies will appreciate or depreciate in value, even though
securities denominated in such currencies are not then held in the Fund's
investment portfolio. See "Certain Portfolio Securities and Other Operating
Policies--Special Investment Techniques."
FIXED-INCOME SECURITIES
The Fund may invest in fixed-income securities. The Adviser will
invest in these securities when their yield and potential for capital
appreciation are considered sufficiently attractive and also may invest in these
securities for defensive purposes and to maintain liquidity. Fixed-income
securities include bonds, notes and debentures issued by corporations and U.S.
Government Securities. These securities may pay fixed, variable or floating
rates of interest, and may include zero coupon obligations. Fixed-income
securities are subject to the risk of the issuer's inability to meet principal
and interest payments on its obligations (i.e., credit risk) and are subject to
the risk of price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness or financial condition of the issuer
and general market liquidity (i.e., market risk). Certain portfolio securities,
such as those with interest rates that fluctuate directly or indirectly based on
multiples of a stated index, are designed to be highly sensitive to changes in
interest rates and can subject the holders thereof to extreme reductions of
yield and possibly loss of principal.
The 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 PW Birch
Management, L.L.C. (the "Adviser") to be of comparable quality.
The 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.
MONEY MARKET INSTRUMENTS
The 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 Adviser deems appropriate under the circumstances. The 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.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements involve the sale of a security to a bank
or securities dealer and the simultaneous agreement to repurchase the security
for a fixed price, reflecting a market rate of interest, on a specific date.
These transactions involve a risk that the other party to a reverse repurchase
agreement will be unable or unwilling to complete the transaction as scheduled,
which may result in losses to the Fund. Reverse repurchase agreements are a form
of leverage which also may increase the volatility of the Fund's investment
portfolio.
SPECIAL INVESTMENT TECHNIQUES
The 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, for cash management and for
non-hedging purposes to pursue the Fund's investment objective. These techniques
may involve the use of derivative transactions. The techniques the 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 the 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 the Fund may suffer
losses as a result of its hedging activities.
DERIVATIVES. Derivatives can be volatile and involve various types and
degrees of risk, depending upon the characteristics of the particular derivative
and the portfolio as a whole. Derivatives permit the 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 the Fund's performance.
If the 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. The 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.
OPTIONS. The Fund may engage in options transactions. The 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, the 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, the Fund may have difficulty closing out its
position. Over-the-counter options purchased and sold by the Fund also may
include options on baskets of specific securities.
The Fund may purchase and sell call and put options in respect of
specific securities, and may write and sell covered or uncovered call and put
options.
A covered call option, which is a call option with respect to which
the 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 the 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.
The 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. The 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, the 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.
CURRENCY SWAPS. The Fund may enter into currency swaps for both
hedging and non-hedging purposes. Currency swaps involve the exchange of rights
to make or receive payments in specified currencies. Since currency swaps are
individually negotiated, the Fund expects to achieve an acceptable degree of
correlation between its portfolio investments and its currency swap positions.
Currency swaps usually involve the delivery of the entire principal value of one
designated currency in exchange for another designated currency. Therefore, the
entire principal value of a currency swap is subject to the risk that the other
party to the swap will default on its contractual delivery obligations. The use
of currency swaps is a highly specialized activity which involves special
investment techniques and risks. If the Adviser is incorrect in its forecasts of
market values and currency exchange rates, the Fund's performance will be
adversely affected. The Fund will not enter into any currency swap unless the
credit quality of the unsecured senior debt or the claims-paying ability of the
other party thereto is considered to be investment grade by the Adviser. If
there is a default by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction. See
"Certain Portfolio Securities and Other Operating Policies--Foreign Securities."
CALL AND PUT OPTIONS ON SECURITIES INDEXES. The Fund may purchase and
sell call and put options on stock indexes listed on national securities
exchanges or traded in the over-the-counter market for hedging purposes and to
pursue its investment objective. A stock index fluctuates with changes in the
market values of the stocks that comprise the index. Accordingly, successful use
by the Fund of options on stock indexes will be subject to the Adviser's ability
to predict correctly movements in the direction of the stock market generally or
segments thereof. This requires different skills and techniques than forecasting
changes in the price of individual stocks.
LENDING PORTFOLIO SECURITIES
The 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 the 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. The 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,
the 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 the Fund
enters into the commitment, but the Fund does not make payment until it receives
delivery from the counterparty. The 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 the 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 the 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 the Fund on a forward basis will not
honor its purchase obligation. In such cases, the Fund may incur a loss.
REPURCHASES AND TRANSFERS OF INTERESTS
REPURCHASES
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
accordance with the provisions of applicable law. In determining whether the
Fund should repurchase Interests or portions thereof from investors pursuant to
written tenders, the Fund's Board will consider the recommendation of the
Adviser. 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 the 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 Adviser during such period. If a repurchase offer is oversubscribed by
investors, the Fund will repurchase only a pro rata portion of the Interests
tendered by each investor.
INVOLUNTARY REPURCHASES
The Fund may repurchase an Interest 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
Adviser, 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 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 Adviser, 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 Adviser, which consent may be withheld for any reason in the
Adviser's sole and absolute discretion. 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 Adviser, 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 the Fund of any proposed
transfer must include evidence satisfactory to the Fund that the proposed
transferee meets any requirements imposed by the Fund with respect to investor
eligibility and suitability. 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 the 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 Limited Liability Company Agreement (the "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 LLC Agreement. If an investor
transfers an Interest or portion thereof with the approval of the Adviser, 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.
The LLC Agreement provides that each investor in the Fund has agreed
to indemnify and hold harmless the Fund, the Directors, the Adviser, 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.
DIRECTORS
The Board has overall responsibility to manage and control the
business affairs of the Fund, including the complete and exclusive authority to
oversee and to establish policies regarding the management, conduct and
operation of the Fund's business. The Board exercises the same powers, authority
and responsibilities on behalf of the 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 the
Fund or hold Interests in the Fund. A majority of the Directors are not
"interested persons" (as defined in the Investment Company 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 the Directors and brief biographical information
regarding each Director is set forth below. Each Director who is deemed to be an
"interested person" of the Fund, as defined in the Investment Company Act, is
indicated by an asterisk.
Name, (Age) and
Address
During the Past 5 Years Position(s) Held
with Fund Principal Occupation(s)
--------------------------------------------------------------------------------
____________________
* "Interested Person", as defined in the Investment Company Act.
The Directors serve on the 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,
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 the Fund, the Adviser 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.
COMPENSATION
Total Compensation from
Aggregate Compensation Fund andFund Complex
Name and Position with Fund from the Fund** Paid to Board Members
--------------------------- ------------- ---------------------
[$_____] (__)*
[$_____] (__)*
____________________
* Represents the number of separate portfolios comprising the investment
companies in the Fund complex, including the Fund, for which the Board member
serves.
** Estimated for the fiscal year ending _______ __, 200_. Amount does not
include reimbursed expenses for attending Board meetings, which amounted to
$_____ for all Board members as a group.
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 Fund. All
Directors are reimbursed by the Fund for their reasonable out-of-pocket
expenses. The Directors do not receive any pension or retirement benefits from
the Fund.
CODE OF ETHICS
The Alternative Investments Group of PaineWebber has adopted a code of
ethics under Rule 17j-1 of the Investment Company Act that applies to the Fund,
the Adviser and PaineWebber and permits covered personnel, subject to the code,
to invest in securities, including securities that may be purchased or held by
the Fund. The code of ethics can be reviewed and copied at the SEC's Public
Reference Room in Washington, D.C. Information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-202-942-8090. The code is
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.
INVESTMENT ADVISORY AND OTHER SERVICES
THE ADVISER
The Directors have engaged the Adviser to provide investment advice
to, and the day-to-day management of, the Fund, in each case under the ultimate
supervision of and subject to any policies established by the Board. The Adviser
was formed as a Delaware limited liability company on August 29, 2000 and will
be registered as an investment adviser under the Investment Advisers Act of
1940, as amended (the "Advisers Act"), before the commencement of the Fund's
operations. The offices of the Adviser 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 the Fund's operations, the Adviser owned 99% of the
outstanding Interests in the Fund (thereby controlling the Fund) and was the
only person to own of record or beneficially 5% or more of the outstanding
Interests in the Fund. The Adviser or its designee maintains the Fund's
accounts, books and other documents required to be maintained under the
Investment Company Act at 1285 Avenue of the Americas, New York, New York 10019.
The Adviser is a joint venture between PW Fund Advisor, L.L.C.
("PWFA") and OrbiMed Advisers Inc. ("OrbiMed"). PWFA is the managing member of
the Adviser and oversees the Adviser's provision of investment advice and
day-to-day management to the Fund. OrbiMed provides the Adviser with use of and
access to such of its personnel, research and facilities as the Adviser requires
to manage the Fund's investment portfolio, and these individuals have the sole
responsibility, subject only to the oversight of the Adviser and the Board, for
the investment advisory services provided to the Fund.
The authority of the Adviser to serve or act as investment adviser,
and be responsible for the day-to-day management, of the Fund (collectively,
"Advice and Management"), and the incentive allocation arrangement between the
Fund and the Adviser, as the foregoing are set forth in the Fund's LLC
Agreement, was initially approved by the Board, including each Independent
Director, and by vote of investors holding Interests in the Fund on _________
__, 2000. The authority of the Adviser to provide Advice and Management will
terminate under the following circumstances:
(1) if revoked by (A) vote of a majority (as defined in the
Investment Company Act) of the outstanding voting securities
of the Fund or (B) the Board, in either case with 60 days'
prior written notice to the Adviser;
(2) at the election of the Adviser, with 60 days' prior written
notice to the Board;
(3) if, after __________ __, 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 Investment Company 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 Investment Company Act, upon
the occurrence of any event in connection with the Adviser,
its provision of Advice and Management, the LLC Agreement or
otherwise constituting an "assignment" within the meaning of
the Investment Company Act.
INCENTIVE ALLOCATION
The Adviser will be entitled to an incentive allocation, as of the
last day of an allocation period, calculated as described below. The Fund will
accrue an incentive allocation that may be greater than the amount receivable by
the Adviser from the Fund as a result of using a different calculation for
determining the accrual. The amount of incentive allocation received by the
Adviser will not exceed the incentive allocation accrued by the Fund. The
Adviser will be a member of the Fund.
The Fund will accrue incentive allocations receivable by the Adviser.
The incentive allocation accrual will be calculated on a "high water mark"
basis. This means no incentive allocation will be accrued unless, for the
allocation period, net realized capital gains, net unrealized appreciation (but,
as respects private securities, only to the extent of unrealized depreciation of
private securities) and net investment income exceeds cumulative net realized
losses, net investment losses and net unrealized depreciation (the sum of which
is referred to as "cumulative loss"). If the Fund is in a net loss situation and
it completes a semi-annual tender of Interests, the amount of the cumulative
loss will be reduced in proportion to the net amount of Interests repurchased
(adjusted for any concurrent sales of Interests not exceeding the amount
repurchased).
The incentive allocation accrual will include all unrealized capital
appreciation on private securities to ensure that investors whose Interests are
repurchased in a semi-annual repurchase offer bear an appropriate share of the
annual incentive allocation attributable to any subsequent realization of such
unrealized appreciation. For example, if Interests are repurchased at a time
when one or more of the Fund's Portfolio Company investments has appreciated
significantly in value, but has not yet been sold, the repurchase price will
reflect an incentive allocation accrual that includes the entire unrealized
appreciation of those investments. The full amount of the incentive allocation
accrual attributable to a tendering investor's capital account will be made to
the Adviser at the time of the repurchase. No adjustment to a repurchase price
will be made after it has been paid.
The incentive allocation is based upon the performance of the Fund as
a whole and not upon the performance of a particular investor's capital account
and certain distortions may exist as a result. Thus, for example, the value of
Interests held by an investor may be reduced as a result of payment of the
incentive allocation, even though the value of the investor's Interests has
declined. In addition, if Interests are purchased when there is a cumulative
loss carryforward for incentive allocation purposes (that is, when the high
water mark has not been exceeded and prior losses have not been fully
recovered), an existing investor's share of the loss carryforward will
effectively be diluted by such new investment.
CONFLICTS OF INTEREST
PWFA
PWFA and its affiliates manage the assets of registered investment
companies, private investment funds and individual accounts (collectively, "PWFA
Clients"). The Fund has no interest in these activities. PWFA and its officers
or employees who assist PWFA in its oversight of the Adviser will be engaged in
substantial activities other than on behalf of the Adviser and may have
conflicts of interest in allocating their time and activity between the Adviser
and PWFA Clients. PWFA and its officers and employees will devote so much of
their time to the affairs of the Adviser as in their judgment is necessary and
appropriate.
PaineWebber or its affiliates may provide brokerage and other services
from time to time to one or more accounts or entities managed by OrbiMed or one
of its affiliates.
ORBIMED AND SAMUEL D. ISALY
Mr. Isaly provides investment advisory and other services, directly
and through affiliated investment advisers that he controls, to other accounts
("OrbiMed Accounts"). OrbiMed, of which Mr. Isaly is President, or its
affiliates, provides investment advisory and other services to various entities.
OrbiMed and certain of the investment professionals who are principals of or
employed by OrbiMed or its affiliates (collectively with OrbiMed, the "OrbiMed
Managers") also carry on substantial investment activities for their own
accounts, for the accounts of family members and for other OrbiMed Accounts. The
Fund has no interest in these activities. As a result of the foregoing, OrbiMed
and the investment professionals who, on behalf of the Adviser, will manage the
Fund's investment portfolio will be engaged in substantial activities other than
on behalf of the Adviser, may have differing economic interests in respect of
such activities, and may have conflicts of interest in allocating their time and
activity between the Fund and the OrbiMed Accounts. Such persons will devote
only so much time to the affairs of the Adviser as in their judgment is
necessary and appropriate.
OrbiMed and its affiliates may engage in certain research activities
through which the Adviser may acquire confidential or material non-public
information with respect to certain companies. As a result, the Adviser may be
restricted from engaging in transactions involving those company's securities on
behalf of the Fund.
PARTICIPATION IN INVESTMENT OPPORTUNITIES
The Adviser expects to employ an investment program for the Fund that
is substantially similar to the investment program employed by the OrbiMed
Managers for some of the OrbiMed Accounts. Accordingly, as a general matter, the
Adviser will consider participation by the Fund in all appropriate investment
opportunities that are under consideration for investment by the OrbiMed
Managers for the OrbiMed Accounts. There may be, however, circumstances under
which the OrbiMed Managers will cause one or more OrbiMed Accounts to commit a
larger percentage of their respective assets to an investment opportunity than
to which the Adviser will commit the Fund's assets. There also may be
circumstances under which the OrbiMed Managers will consider participation by
the OrbiMed Accounts in investment opportunities in which the Adviser does not
intend to invest on behalf of the Fund, or vice versa.
The Adviser will evaluate for the Fund, and it is anticipated that the
OrbiMed Managers will evaluate for each OrbiMed Account, a variety of factors
that may be relevant in determining whether a particular investment opportunity
or strategy is appropriate and feasible for the Fund or an OrbiMed Account at a
particular time, including, but not limited to, the following: (1) the nature of
the investment opportunity taken in the context of the other investments at the
time; (2) the liquidity of the investment relative to the needs of the
particular entity or account; (3) the availability of the opportunity (i.e.,
size of obtainable position); (4) the transaction costs involved; and (5) the
investment or regulatory limitations applicable to the particular entity or
account. Because these considerations may differ for the Fund and the OrbiMed
Accounts in the context of any particular investment opportunity, the investment
activities of the Fund and the OrbiMed Accounts may differ considerably from
time to time. In addition, the fees and expenses of the Fund will differ from
those of the OrbiMed Accounts. Accordingly, prospective investors should note
that the future performance of the Fund and the OrbiMed Accounts will vary.
When the Adviser and the OrbiMed Managers determine that it would be
appropriate for the Fund and one or more OrbiMed 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 Adviser believes to be fair and
equitable, consistent with its responsibilities under applicable law. Decisions
in this regard are necessarily subjective and there is no requirement that the
Fund participate, or participate to the same extent as the OrbiMed Accounts, in
all trades. However, no participating entity or account will receive
preferential treatment over any other and the OrbiMed Managers will take steps
to ensure that no participating entity or account will be systematically
disadvantaged by the aggregation, placement and allocation of orders.
Situations may occur, however, where the Fund could be disadvantaged
because of the investment activities conducted by the OrbiMed Managers for the
OrbiMed Accounts. Such situations may be based on, among other things, the
following: (1) legal restrictions on the combined size of positions that may be
taken for the Fund and the OrbiMed Accounts, thereby limiting the size of the
Fund's position; (2) the difficulty of liquidating an investment for the Fund
and the OrbiMed Accounts where the market cannot absorb the sale of the combined
positions; and (3) the determination that a particular investment is warranted
only if hedged with an option or other instrument and there is a limited
availability of such options or other instruments. In particular, the Fund may
be legally restricted from entering into a "joint transaction" (as defined in
the Investment Company Act) with the OrbiMed Accounts with respect to the
securities of an issuer without first obtaining exemptive relief from the SEC.
See "Other Matters" below.
The members of the Adviser, 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 the Fund. As a result of differing
trading and investment strategies or constraints, positions may be taken by
members, directors, officers, employees and affiliates of PWFA or OrbiMed, or by
the OrbiMed Managers for the OrbiMed Accounts, that are the same, different or
made at a different time than positions taken for the Fund.
OTHER MATTERS
Except in accordance with applicable law, the Adviser and its members
are not permitted to buy securities or other property from, or sell securities
or other property to, the Fund. However, the Fund may effect certain principal
transactions in securities with one or more OrbiMed Accounts, except for
accounts in which OrbiMed 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 OrbiMed's or any affiliate's appointment as an investment adviser to
the account. Such transactions would be made in circumstances where the Adviser
has determined it would be appropriate for the Fund to purchase and a OrbiMed
Account to sell, or the Fund to sell and a OrbiMed Account to purchase, the same
security or instrument on the same day.
Future investment activities of PWFA or OrbiMed, or their affiliates,
and the principals, partners, directors, officers or employees of the foregoing,
may give rise to additional conflicts of interest.
TAX ASPECTS
The following is a summary of certain aspects of the income taxation
of the Fund and its investors which should be considered by a prospective
investor. The Fund has not sought a ruling from the Internal Revenue Service
(the "Service") or any other Federal, state or local agency with respect to any
of the tax issues affecting the Fund, nor has it obtained an opinion of counsel
with respect to any tax issues other than the characterization of the Fund as a
partnership for Federal income tax purposes.
This summary of certain aspects of the Federal income tax treatment of
the 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. 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 the Fund. This summary also
does not discuss all of the tax consequences that may be relevant to a
particular investor, to all investors that acquire Interests 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 THE FUND.
In addition to the particular matters set forth in this section,
tax-exempt organizations should review carefully those sections of the
prospectus and this SAI regarding liquidity and other financial matters to
ascertain whether the investment objective of the 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.
TAX TREATMENT OF FUND OPERATIONS
CLASSIFICATION OF THE FUND. The Fund has received an opinion of
Stroock & Stroock & Lavan LLP, counsel to the Fund, that under the provisions of
the Code and the Regulations, as in effect on the date of the opinion, the 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 the 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.
The Fund will not be eligible for any of those safe harbors. In particular, it
will not qualify under the private placement safe harbor set forth in the
Regulations if, as is anticipated, the 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 the 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 the 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 the investors to the extent of the 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 taxable as a partnership, the 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 allocated to the Fund
(including from investments in other partnerships) 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 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 the LLC Agreement, the Fund's
net capital appreciation or net capital depreciation for each accounting 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. The 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.
Under the LLC Agreement, the Adviser 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 Adviser
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 the Fund other than as of January 1 of a
fiscal year will be allocated its distributive share of Fund tax items at the
end of its year of admission 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 Adviser in respect of the initial
incentive allocation. The Adviser, 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 Fund 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 the LLC Agreement, at the request of an investor,
the Adviser, 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 Adviser does not presently intend to
make such election.
The Adviser decides how to report the Fund 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 the 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 Adviser is designated as
the Fund's "Tax Matters Partner" in the 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 Fund items.
TAX CONSEQUENCES TO A WITHDRAWING INVESTOR
An investor receiving a cash liquidating distribution from the 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 the 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, the LLC Agreement provides that the Adviser 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 tax 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). The 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. The 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 currency exchange gains as ordinary income and certain
other transactions described below, the Fund expects that its gains and losses
from its securities transactions typically will be capital gains and capital
losses. See "Currency Fluctuations--'Section 988' Gains or Losses" below and
certain other transactions described below.
These capital gains and losses may be long-term 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 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.
The Fund may realize ordinary income from accruals of interest and
dividends on securities. The Fund may hold debt obligations with "original issue
discount." In such case, the Fund would be required to include amounts in
taxable income on a current basis even though receipt of such amounts may occur
in a subsequent year. The Fund also may acquire debt obligations with "market
discount." Upon disposition of such an obligation, the Fund generally would be
required to treat gain realized as interest income to the extent of the market
discount which accrued during the period the debt obligation was held by the
Fund. The Fund may realize ordinary income or loss with respect to its
investments in partnerships engaged in a trade or business. Income or loss from
transactions involving derivative instruments, such as swap transactions,
entered into by the Fund also may constitute ordinary income or loss. Moreover,
gain recognized from certain "conversion transactions" will be treated as
ordinary income.1
____________________
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.
CURRENCY FLUCTUATIONS--"SECTION 988" GAINS OR LOSSES. The amount of
gain or loss on securities denominated in a foreign currency frequently will be
affected by the fluctuation in the value of such foreign currencies relative to
the value of the dollar. Generally, gains or losses with respect to investments
in common stock of foreign issuers will be taxed as capital gains or losses at
the time of the disposition of such stock. However, under Section 988 of the
Code, gains and losses on the acquisition and disposition of foreign currency
(e.g., the purchase of foreign currency and subsequent use of the currency to
acquire stock) will be treated as ordinary income or loss. Moreover, under
Section 988, gains or losses on disposition of debt securities denominated in a
foreign currency to the extent attributable to fluctuation in the value of the
foreign currency between the date of acquisition of the debt security and the
date of disposition will be treated as ordinary income or loss. Similarly, gains
or losses attributable to fluctuations in exchange rates that occur between the
time the taxpayer accrues interest or other receivables or accrues expenses or
other liabilities denominated in a foreign currency and the time the taxpayer
actually collects such receivables or pays such liabilities may be treated as
ordinary income or ordinary loss.
The Fund may acquire foreign currency forward contracts. See " Certain
Portfolio Securities and Other Operating Policies--Special Investment
Techniques" and "--Foreign Securities." Generally, option contracts that qualify
as "Section 1256 Contracts" (see "Section 1256 Contracts" below), will not be
subject to ordinary income or loss treatment under Section 988. However, if the
Fund acquires option contracts that are not Section 1256 Contracts, or any
currency forward contracts, any gain or loss realized by the Fund with respect
to such instruments will be ordinary, unless (i) the contract is a capital asset
in the hands of the Fund and is not a part of a straddle transaction and (ii)
the Fund makes an election (by the close of the day the transaction is entered
into) to treat the gain or loss attributable to such contract as capital gain or
loss.
SECTION 1256 CONTRACTS. In the case of "Section 1256 Contracts," the
Code generally applies a "mark to market" system of taxing unrealized gains and
losses on such contracts and otherwise provides for special rules of taxation.
Under these rules, Section 1256 Contracts, which include certain foreign
currency forward contracts and certain options contracts, held 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.
Gains and losses from certain foreign currency transactions will be treated as
ordinary income and losses. See "Currency Fluctuations--'Section 988' Gains or
Losses." If an individual taxpayer incurs a net capital loss for a year, the
portion thereof, if any, which consists of a net loss on "Section 1256
Contracts" may, at the election of the taxpayer, be carried back three years.
Losses so carried back may be deducted only against net capital gain to the
extent that such gain includes gains on "Section 1256 Contracts."
MIXED STRADDLE ELECTION. The Code allows a taxpayer to elect to offset
gains and losses from positions which are part of a "mixed straddle." A "mixed
straddle" is any straddle in which one or more but not all positions are Section
1256 Contracts.
Pursuant to Temporary Regulations, the Fund may be eligible to elect
to establish one or more mixed straddle accounts for certain of its mixed
straddle trading positions. The mixed straddle account rules require a daily
"marking to market" of all open positions in the account and a daily netting of
gains and losses from positions in the account. At the end of a taxable year,
the annual net gains or losses from the mixed straddle account are recognized
for tax purposes. The application of the Temporary Regulations' mixed straddle
account rules is not entirely clear. Therefore, there is no assurance that a
mixed straddle account election by the 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 the 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 the 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 the 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, the 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 the 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 the 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.
DEDUCTIBILITY OF FUND INVESTMENT EXPENDITURES BY NONCORPORATE
INVESTORS. It is anticipated that the Fund's expenses (including management
fees) 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.
____________________
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.
Although the Fund intends to treat the incentive allocation as an
allocation and not a fee, and, therefore, as not being subject to the foregoing
limitations on deductibility, there can be no assurance that the Service may not
treat the incentive allocation as an investment expense which is subject to the
limitations.
The consequences of these limitations will vary depending upon the
particular tax situation of each taxpayer. Accordingly, noncorporate investors
should consult their tax advisers with respect to the application of these
limitations.
No deduction is allowed for sales loads paid by an investor to acquire
an Interest in the 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 the 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 FUND INVESTMENTS. As discussed in more detail
below, pursuant to various "anti-deferral" provisions of the Code (the "Subpart
F," "passive foreign investment company" and "foreign personal holding company"
provisions), investments, if any, by the 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.
CONTROLLED FOREIGN CORPORATIONS. Certain United States Persons who
hold stock in a foreign corporation that is a "controlled foreign corporation"
(a "CFC") for an uninterrupted period of 30 days or more during a taxable year
must include in their income their pro rata share of certain of the CFC's
"Subpart F income" for the year, regardless of whether any portion of such
income is distributed by the CFC to such shareholders. Subpart F income
generally includes income or gain derived from portfolio-type investments, as
well as rents and royalties (other than those derived from the active conduct of
a trade or business, as defined in Treasury regulations). Subpart F income also
includes certain income attributable to the sale of personal property or the
provision of services between the CFC and a related corporation.
A CFC is any non-United States corporation in which "United States
shareholders" own, directly or indirectly, more than 50% of either (a) the total
combined voting power of all classes of voting stock or (b) the total value of
the stock. For this purpose, a "United States shareholder" is a United States
citizen, resident, partnership or domestic corporation that owns, directly or
indirectly, 10% or more of the total combined voting power of all classes of the
corporation's voting stock. As a result, the Fund will be a "United States
shareholder" of any foreign corporation of which it acquires stock (or warrants,
options or convertible debt to acquire stock) with 10% or more of the voting
power, and such corporation will be a CFC if United States shareholders
(including the Fund) own directly or by virtue of certain constructive ownership
rules, more than 50% of the voting power or the value of the stock of such
corporation. In such event, all Fund investors who are United States persons
(including those with a less than 10% indirect interest in a CFC) will be taxed
on their pro rata shares of such CFC's subpart F income.
In addition, gain from the sale of the stock of such CFC to the extent
attributable to the Fund's pro rata shares of such CFC's earnings and profits
while a CFC and while the Fund owned its stock would be recharacterized as a
dividend to the Fund, subject to tax at ordinary income rates with respect to
Fund investors who are United States Persons.
In any event, Subpart F income cannot exceed a corporation's earnings
and profits, so a corporation with an aggregate deficit in earnings will not
have Subpart F income. In addition, Subpart F income does not include income
subject to income tax at a rate more than 90% of the United States federal
corporate income tax rate. Furthermore, Subpart F income and gain from sale of
stock to the extent of earnings and profits during the United States person's
holding period and while a CFC, are treated as deemed dividends and, therefore,
may enable corporate investors holding an indirect interest of 10% or more of a
CFC's voting power, subject to certain limitations, to receive foreign tax
credit for foreign taxes paid by a CFC in respect of such Subpart F income or
earnings. The Fund is not precluded from investing in a foreign Portfolio
Company that may constitute a CFC and generate Subpart F income.
Foreign Tax Credit: Income received by the Fund from sources outside
the United States may be subject to withholding and other income taxes imposed
by foreign countries. Each non-tax exempt United States Fund investor will be
required to include in its income an amount equal to its allocable share of such
taxes paid and such Fund investor will be entitled, subject to certain
limitations, to credit its portion of these amounts against its United States
federal income tax due, if any, or to deduct its portion from its United States
taxable income, if any. The amount of foreign income taxes that may be credited
against a United States investor's United States federal income tax is generally
limited to the product of such investor's United States federal income tax
liability multiplied by the ratio of such investor's foreign source taxable
income to such investor's world-wide taxable income. For this purpose, the Fund
expects that capital gains allocable to the United States investors will not be
treated as foreign source taxable income. In addition, this limitation must be
applied separately to certain categories of foreign source income, one of which
is foreign source "passive income". For this purpose, foreign "passive income"
includes dividends, interest, capital gains and certain foreign currency gains.
As a consequence, certain United States investors may not be able to claim a
foreign tax credit for the full amount of their proportionate share of foreign
taxes paid by the Fund.
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, the
Fund's income, or loss, from these investments may constitute UBTI.
____________________
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.
The 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.
____________________
4 Moreover, income realized from option writing generally would not
constitute UBTI.
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 the 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 the 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
the 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).
____________________
5 The calculation of a particular exempt organization's UBTI would also be
affected if it incurs indebtedness to finance its investment in the Fund.
An exempt organization is required to make estimated tax payments with
respect to its UBTI.
To the extent that the 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 support, to the satisfaction of the Service, the
method used to calculate its UBTI. The 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 the 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 the 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 the Fund. See "ERISA
Considerations."
____________________
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.
CERTAIN ISSUES PERTAINING TO SPECIFIC EXEMPT ORGANIZATIONS
PRIVATE FOUNDATIONS. Private foundations and their managers are
subject to excise taxes if they invest "any amount in such a manner as to
jeopardize the carrying out of any of the foundation's exempt purposes." This
rule requires a foundation manager, in making an investment, to exercise
"ordinary business care and prudence" under the facts and circumstances
prevailing at the time of making the investment, in providing for the short-term
and long-term needs of the foundation to carry out its exempt purposes. The
factors which a foundation manager may take into account in assessing an
investment include the expected rate of return, both income and capital
appreciation, the risks of rising and falling price levels, and the needs for
diversification within the foundation's portfolio.
In order to avoid the imposition of an excise tax, a private
foundation may be required to distribute on an annual basis its "distributable
amount," which includes, among other things, the private foundation's "minimum
investment return," defined as 5% of the excess of the fair market value of its
nonfunctionally related assets, assets not used or held for use in carrying out
the foundation's exempt purposes, over certain indebtedness incurred by the
foundation in connection with such assets. It appears that a foundation's
investment in the Fund would most probably be classified as a nonfunctionally
related asset. A determination that an interest in the 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 assets held by a
foundation.
In some instances, an investment in the 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 the 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 Adviser believes that the
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 the 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, as part of the budgetary process,
other proposals could be enacted that would change the tax consequences
described herein of an investment in the 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 the 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 the Fund. State and local tax laws differ in the treatment
of limited liability companies such as the Fund. 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, the 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 the
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 the 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.
The Fund should not 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." (This exemption may not be
applicable if an entity taxed as a partnership in which the Fund invests
conducts a business in New York City.) 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 the 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 the 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 the 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.
____________________
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.
Regulations under both the New York State corporate franchise tax and
the New York City general corporation tax, however, provide an exception to this
general rule in the case of a "portfolio investment partnership," which is
defined, generally, as a partnership which meets the gross income requirements
of Section 851(b)(2) of the Code. New York State (but not New York City) has
adopted regulations that also include income and gains from commodity
transactions described in Section 864(b)(2)(B)(iii) as qualifying gross income
for this purpose. The 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 the 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 the
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 the 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 the Fund will register as an investment company under the
Investment Company Act, the underlying assets of the Fund should not be
considered to be "plan assets" of the ERISA Plans investing in the Fund for
purposes of ERISA's (or the Code's) fiduciary responsibility and prohibited
transaction rules. Thus, the Adviser will not be a fiduciary within the meaning
of ERISA by reason of its authority with respect to the Fund.
The Adviser will require a Benefit Plan which proposes to invest in
the 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 Adviser or other entities which are affiliated with the
Adviser. 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 the 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.
BROKERAGE
The Adviser is responsible for the execution of the Fund's portfolio
transactions and the allocation of brokerage. Transactions on U.S. stock
exchanges and on some foreign stock exchanges involve the payment of negotiated
brokerage commissions. On the great majority of foreign stock exchanges,
commissions are fixed. No stated commission is generally applicable to
securities traded in over-the-counter markets, but the prices of those
securities include undisclosed commissions or mark-ups.
In executing transactions on behalf of the Fund, the Adviser 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 Adviser generally will seek reasonably competitive commission
rates, the Fund will not necessarily pay the lowest commission available on each
transaction. The Fund will have no obligation to deal with any broker or group
or brokers in executing transactions in portfolio securities. The Fund may
execute portfolio brokerage transactions through PaineWebber or its affiliates,
subject to compliance with the Investment Company Act.
Following the principle of seeking best execution, the Adviser may
place brokerage business on behalf of the Fund with brokers that provide the
Adviser and its affiliates, including the OrbiMed 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 Adviser are not necessarily reduced as a result
of the receipt of this supplemental information, which may be useful to the
Adviser and its affiliates in providing services to clients other than the Fund.
In addition, not all of the supplemental information is used by the Adviser in
connection with the Fund. Conversely, the information provided to the Adviser by
brokers and dealers through which other clients of the Adviser and its
affiliates effect securities transactions may be useful to the Adviser in
providing services to the Fund.
Although the Fund cannot accurately predict its portfolio turnover,
the Fund expects that its annual portfolio turnover rate for public securities
generally will not exceed 50%. A turnover rate of 100% is equivalent to the 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.
ACCOUNTANTS AND LEGAL COUNSEL
____________________ serves as the independent public accountants of
the Fund. Its principal business address is ____________________________.
Stroock & Stroock & Lavan LLP, New York, New York, acts as legal
counsel to the Fund.
Schulte Roth & Zabel LLP, New York, New York, acts as legal counsel to
the Adviser and its affiliates.
CUSTODIAN
PFPC Trust Company (the "Custodian") serves as the primary custodian
of the Fund's assets, and may maintain custody of the Fund's assets with
domestic and foreign subcustodians (which may be banks, trust companies,
securities depositories and clearing agencies) approved by the Directors. Assets
of the Fund are not held by the Adviser 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.
OTHER INFORMATION
The following is a summary description of additional items and of
select provisions of the LLC Agreement which are not described elsewhere in the
Fund's prospectus and this SAI. The description of such items and provisions is
not definitive and reference should be made to the complete text of the LLC
Agreement contained in Appendix A.
LIABILITY OF INVESTORS
Investors in the Fund will be members of a limited liability company
as provided under Delaware law. Under Delaware law and the 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 the LLC
Agreement, to repay any funds wrongfully distributed to the investor. An
investor may be required to contribute to the Fund, whether before or after the
Fund's dissolution or after the investor ceases to be an investor, such amounts
as the Fund 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 the 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 ADVISER
The LLC Agreement provides that neither the Directors nor the Adviser
(including certain of its affiliates, among others) shall be liable to the Fund
or any of the 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. The LLC Agreement also contains provisions for the indemnification, to
the extent permitted by law, of the Directors and the Adviser (including certain
of its affiliates, among others) by the Fund, but not by the 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 the LLC
Agreement do not provide for indemnification of a Director or the Adviser 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
The LLC Agreement may be amended with the approval of (i) the Board,
including a majority of the Independent Directors, if required by the Investment
Company Act, (ii) the Adviser or (iii) a majority, as defined in the Investment
Company Act, of the outstanding voting securities of the Fund. Certain
amendments involving capital accounts, allocations thereto and the modification
of events causing dissolution of the Fund may not be made without the consent of
any 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 the Fund and by signing the LLC Agreement
(which each investor will do by virtue of signing the investor certification
form attached to the prospectus as Appendix B), each investor will appoint the
Adviser and each of the 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 LLC
Agreement and conveyances and other instruments deemed necessary to effect the
dissolution or termination of the Fund.
The power-of-attorney granted in the LLC Agreement is a special
power-of-attorney coupled with an interest in favor of the Adviser and each of
the 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
Board for admission to the Fund as substitute investors.
TERM, DISSOLUTION AND LIQUIDATION
The Fund will be dissolved:
o upon the affirmative vote to dissolve the Fund by both (1)
the Board and (2) investors holding at least two-thirds of
the total number of votes eligible to be cast by all
investors;
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 Interest for repurchase by the Fund
if the Fund has not completed a tender offer for at least
10% of the Fund's outstanding Interests;
o at the election of the Adviser;
o upon the failure of investors to elect successor Directors
at a meeting called by the Adviser when no Director remains;
or
o as required by operation of law.
Upon the occurrence of any event of dissolution, the Adviser, or a
liquidator under appointment by the 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 --Allocation of Net Profits
and Net Losses" in the prospectus.
Upon the dissolution of the 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 Board or
liquidator determines that such a distribution would be in the interests of the
investors in facilitating an orderly liquidation.
REPORTS TO INVESTORS
The Fund will furnish to 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. The Fund will send to 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 Investment
Company Act. Quarterly reports from the Adviser regarding the Fund's operations
during such period also will be sent to investors.
FISCAL YEAR
The Fund's fiscal year ends on December 31st.
<PAGE>
FINANCIAL STATEMENTS
The following comprise the financial statements of the Fund:
o Independent Auditors' Report.
o Statement of Assets and Liabilities.
o Statement of Operations.
o Notes to the Financial Statements.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Investors of PW Birch Fund, L.L.C.:
We have audited the accompanying statement of assets and liabilities
of PW Birch Fund, L.L.C. (the "Fund") as of______ __, 2000 [and the related
statement of operations for the period from the date of organization, ________
__, 2000, to _________ __, 2000]. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such financial statements referred to above present
fairly, in all material respects, the financial position of PW Birch Fund,
L.L.C. as of ________ __, 2000, and the results of its operations for the stated
period, in conformity with accounting principles generally accepted in the
United States of America.
____________________
New York, New York ______ __, 2000
<PAGE>
PW BIRCH FUND, L.L.C.
STATEMENT OF ASSETS AND LIABILITIES
______ __, 2000
ASSETS
Cash...........................................................................
Prepaid expenses...............................................................
Total assets...............................................................
LIABILITIES
Accrued expenses payable........................................................
Commitments and contingencies (Notes 1 and 2)
Net assets equivalent to $
................................................................................
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM THE DATE OF ORGANIZATION,
__________ __, 2000, TO ________ __, 2000
Income.........................................................................
Expenses:
Organization expenses..........................................................
Net expenses...................................................................
Net income.....................................................................
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
PW Birch Fund, L.L.C. (the "Fund") was organized in the State of
Delaware on August 29, 2000 as a non-diversified, closed-end management
investment company. The Fund has had no operations other than those related to
organizational matters and the sale and issuance to PaineWebber Incorporated
(the "Distributor") of $__________ of Interests in the Fund.
The Fund's organizational and offering expenses are estimated at
$_______________. According to recent guidelines followed by the American
Institute of Certified Public Accountants, the organizational expenses of the
Fund must be expensed as incurred. To achieve an equitable distribution of the
impact of those expenses among investors, an amount equal to the organizational
expenses incurred by the Fund will be allocated among and credited to or debited
against the capital accounts of all investors based on the percentage that an
investor's contributed capital 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 the Fund by investors, through and including, the date
which is six months after the Initial Closing Date.
NOTE 2. MANAGEMENT AGREEMENT
The Management Agreement provides that the Fund will pay PWFA monthly
a management fee at the annual rate of 1.35% of the Fund's net assets for the
month and the LLC Agreement provides for an annual incentive allocation
generally equal to 20% of the Fund's net profits (determined by taking into
account net realized capital gains or losses, net unrealized gains or losses
from public securities, unrealized gains from private securities only to the
extent of unrealized losses from private securities (except in limited
circumstances), unrealized losses from private securities, and net income or
loss for the year).
No incentive allocation will be made for any year unless losses and
depreciation from prior periods have been recovered by the Fund.
NOTE 3. INCOME TAXES
[To Come]
<PAGE>
APPENDIX A
<PAGE>
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
1. Financial
Statements:
Part A: Financial Highlights (not applicable).
Part B: Independent Auditors' Report Statement of Assets and
Liabilities Statement of Operations Notes to Financial
Statements
2. Exhibits:
a. (1) Certificate of Formation.
(2) Limited Liability Company Agreement (to be included as
Appendix A to the Fund's Statement of Additional
Information).
b. Not Applicable.
c. Not Applicable.
d. See Item 24 (2) (a) (2).
e. Not Applicable.
g. See Item 24 (2) (a) (2).
h. (1) Distribution Agreement.
(2) Form of Shareholder Servicing Agreement.
j. Custody 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. Opinion and Consent of Stroock & Stroock & Lavan LLP.
n. (1) Opinion and Consent of Stroock & Stroock & Lavan LLP.
(2) Consent of Independent Auditors.
p. Not Applicable.
r. Code of Ethics.
s. Powers of Attorney (included as part of the signature page).
Item 25. Marketing Arrangements: Not Applicable.
Item 26. Other Expenses of Issuance and Distribution:
Registration fees $[]
Legal fees []
Accounting fees -
Miscellaneous (printing, mailing, etc.) []
Total $[]
Item 27. Persons Controlled by or Under Common Control with Registrant: None.
Item 28. Number of Holders of Securities as of ________ __, 2000:
TITLE OF CLASS NUMBER OF RECORDHOLDERS
Limited Liability Company Interests 1
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 "Investment Company Act"), so long as the interpretation therein of
Sections 17(h) and 17(i) of the Investment Company Act remains in effect.
The Registrant, in conjunction with the Adviser, the Registrant's
directors and other registered management investment companies managed by the
Adviser 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 Prospectus in the section entitled "Management of the Fund."
Information as to the members and officers of PW Birch Management, L.L.C. is
included in its Form ADV as filed with the Commission (File No. 801-_________),
and is incorporated herein by reference. 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 OrbiMed Advisers, Inc. is included
in its Form ADV as filed with the Commission (File No. 801-34429), 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 Adviser, 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:
I. The Registrant undertakes to suspend the offering of Interests
until the prospectus is amended if (1) subsequent to the effective date of its
registration statement, the net asset value of the Fund declines more than ten
percent from its net asset value as of the effective date of the registration
statement or (2) the net asset value of the Fund increases to an amount greater
than its net proceeds as stated in the prospectus.
II. The Registrant undertakes that:
(a) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the
time it was declared effective.
(b) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering
thereof.
III. The Registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery within two business days of
receipt of a written or oral request, the Registrant's Statement of Additional
Information.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and 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, State of New York, on the 1st day of
September, 2000.
PW BIRCH FUND, L.L.C.
By: /S/ DANIEL ARCHETTI
------------------------------------
Daniel Archetti, Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, this Registration Statement has been signed
below by the following persons in the capacities indicated on September 1, 2000.
Name Title
/S/ DANIEL ARCHETTI Principal Executive Officer, Principal
------------------------- Accounting Officer and Director
(Daniel Archetti)
<PAGE>
EXHIBIT INDEX
EXHIBIT SEQUENTIAL PAGE NUMBER
NUMBER DESCRIPTION
a. (1) Certificate of Formation.
(2) Limited Liability Company Agreement.* (to be included
as Exhibit A to the Statement of Additional Information).
b. Not Applicable.
c. Not Applicable.
d. See Item 24 (2) (a) (2).
e. Not Applicable.
g. See Item 24 (2) (a) (2).
h. (1) Distribution Agreement.*
(2) Form of Shareholder Servicing Agreement.*
j. Custody 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. Opinion and Consent of Stroock & Stroock & Lavan LLP.*
n. (1) Opinion and Consent of Stroock & Stroock & Lavan LLP.*
(2) Consent of Independent Auditors.*
p. Not Applicable.
r. Code of Ethics.*
s. Powers of Attorney (included on signature page)
____________________
* To be filed by amendment.
