As filed with the Securities and Exchange Commission on [_________, 2000]
Investment Company Act File No. 811-[ ]
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[ ] Amendment No. _____
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DEAUVILLE EUROPE FUND, L.L.C.
(Exact name of Registrant as specified in Charter)
One World Financial Center
31st Floor
200 Liberty Street
New York, New York 10281
(Address of principal executive offices)
Registrant's Telephone Number, including Area Code: (212) 667-4225
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c/o HOWARD M. SINGER
Managing Director
CIBC World Markets Corp.
One World Financial Center
31st Floor
200 Liberty Street
New York, New York 10281
(Name and address of agent for service)
Copy to:
KENNETH S. GERSTEIN, ESQ.
Schulte Roth & Zabel LLP
900 Third Avenue
New York, New York 10022
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This Registration Statement has been filed by Registrant pursuant to Section
8(b) of the Investment Company Act of 1940, as amended. Interests in the
Registrant are not being registered under the Securities Act of 1933, as amended
(the "1933 Act"), and will be issued solely in private placement transactions
that do not involve any "public offering" within the meaning of Section 4(2) of
the 1933 Act. Investments in Registrant may only be made by individuals or
entities that are "accredited investors" within the meaning of Regulation D
under the 1933 Act. This Registration Statement does not constitute an offer to
sell, or the solicitation of an offer to buy, interests in Registrant.
<PAGE>
PART A - INFORMATION REQUIRED IN A PROSPECTUS
PART B - INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
The information required to be included in this Registration Statement by
Part A and Part B of Form N-2 is contained in the Confidential Memorandum which
follows.
<PAGE>
Copy Number: ________________
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DEAUVILLE EUROPE FUND, L.L.C.
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CONFIDENTIAL MEMORANDUM
JANUARY 2001
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CIBC OPPENHEIMER ADVISERS, L.L.C.
INVESTMENT ADVISER
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One World Financial Center, 31st Floor
200 Liberty Street
New York, New York 10281
(212) 667-4225
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY UPON THEIR OWN EXAMINATION
OF DEAUVILLE EUROPE FUND, L.L.C. AND THE TERMS OF THE OFFERING, INCLUDING THE
MERITS AND RISKS INVOLVED. THE INTERESTS IN DEAUVILLE EUROPE FUND, L.L.C.
("INTERESTS") HAVE NOT BEEN REGISTERED WITH OR APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER FEDERAL OR STATE GOVERNMENTAL
AGENCY OR REGULATORY AUTHORITY OR ANY NATIONAL SECURITIES EXCHANGE. NO AGENCY,
AUTHORITY OR EXCHANGE HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
CONFIDENTIAL MEMORANDUM OR THE MERITS OF AN INVESTMENT IN THE INTERESTS OFFERED
HEREBY. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
TO ALL INVESTORS
INTERESTS ARE NOT INSURED BY THE UNITED STATES FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY. INTERESTS ARE NOT DEPOSITS OR
OTHER OBLIGATIONS OF, AND ARE NOT GUARANTEED BY, CANADIAN IMPERIAL BANK OF
COMMERCE OR ANY OTHER BANK. INTERESTS ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
THE POSSIBLE LOSS OF THE FULL AMOUNT INVESTED.
INTERESTS HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "1933 ACT"), OR THE SECURITIES LAWS OF ANY OF THE
STATES OF THE UNITED STATES. THE OFFERING CONTEMPLATED BY THIS CONFIDENTIAL
MEMORANDUM WILL BE MADE IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE 1933 ACT FOR OFFERS AND SALES OF SECURITIES THAT DO NOT
INVOLVE ANY PUBLIC OFFERING, AND ANALOGOUS EXEMPTIONS UNDER STATE SECURITIES
LAWS.
THIS CONFIDENTIAL MEMORANDUM SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF INTERESTS IN ANY
JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE IS NOT AUTHORIZED OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OR SALE. NO
PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESENTATIONS CONCERNING DEAUVILLE
EUROPE FUND, L.L.C. THAT ARE INCONSISTENT WITH THOSE CONTAINED IN THIS
CONFIDENTIAL MEMORANDUM. PROSPECTIVE INVESTORS SHOULD NOT RELY ON ANY
INFORMATION NOT CONTAINED IN THIS CONFIDENTIAL MEMORANDUM OR THE EXHIBITS
HERETO.
THIS CONFIDENTIAL MEMORANDUM IS INTENDED SOLELY FOR THE USE OF THE PERSON
TO WHOM IT HAS BEEN DELIVERED FOR THE PURPOSE OF EVALUATING A POSSIBLE
INVESTMENT BY THE RECIPIENT IN THE INTERESTS DESCRIBED HEREIN, AND IS NOT TO BE
REPRODUCED OR DISTRIBUTED TO ANY OTHER PERSONS (OTHER THAN PROFESSIONAL ADVISORS
OF THE PROSPECTIVE INVESTOR RECEIVING THIS DOCUMENT).
PROSPECTIVE INVESTORS SHOULD NOT CONSTRUE THE CONTENTS OF THIS CONFIDENTIAL
MEMORANDUM AS LEGAL, TAX OR FINANCIAL ADVICE. EACH PROSPECTIVE INVESTOR SHOULD
CONSULT HIS OR HER OWN PROFESSIONAL ADVISORS AS TO THE LEGAL, TAX, FINANCIAL OR
OTHER MATTERS RELEVANT TO THE SUITABILITY OF AN INVESTMENT IN DEAUVILLE EUROPE
FUND, L.L.C. FOR SUCH INVESTOR.
THESE SECURITIES ARE SUBJECT TO SUBSTANTIAL RESTRICTIONS ON TRANSFERABILITY
AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
LIMITED LIABILITY COMPANY AGREEMENT OF DEAUVILLE EUROPE FUND, L.L.C., THE 1933
ACT, AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR UP TO TWO (2) YEARS FROM THE DATE THAT A
REPURCHASE REQUEST HAS BEEN MADE BY AN INVESTOR.
FOR GEORGIA RESIDENTS ONLY
THESE SECURITIES HAVE BEEN ISSUED OR SOLD IN RELIANCE ON PARAGRAPH (13) OF
CODE SECTION 10-5-9 OF THE GEORGIA SECURITIES ACT OF 1973, AND MAY NOT BE SOLD
OR TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER SUCH ACT OR
PURSUANT TO AN EFFECTIVE REGISTRATION UNDER SUCH ACT.
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY OF TERMS..............................................................1
SUMMARY OF FUND EXPENSES.....................................................19
THE COMPANY..................................................................20
USE OF PROCEEDS..............................................................20
STRUCTURE....................................................................21
INVESTMENT PROGRAM...........................................................21
TYPES OF INVESTMENTS AND RELATED RISK FACTORS................................27
ADDITIONAL RISK FACTORS......................................................42
BOARD OF MANAGERS............................................................44
COMPENSATION TABLE...........................................................46
THE ADVISER, CIBC WM AND THE NON-MANAGING MEMBERS............................47
PERFORMANCE INFORMATION......................................................52
VOTING.......................................................................52
CONFLICTS OF INTEREST........................................................53
BROKERAGE....................................................................57
FEES AND EXPENSES............................................................58
CAPITAL ACCOUNTS AND ALLOCATIONS.............................................60
SUBSCRIPTION FOR INTERESTS...................................................65
REDEMPTIONS, REPURCHASES OF INTERESTS AND TRANSFERS..........................67
TAX ASPECTS..................................................................71
ERISA CONSIDERATIONS.........................................................85
ADDITIONAL INFORMATION AND SUMMARY OF LIMITED LIABILITY COMPANY AGREEMENT...87
APPENDIX A LIMITED LIABILITY COMPANY AGREEMENT...............................1
i
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APPENDIX B-1 Buttonwood Focus Fund II, L.P. Investment Performance.........1
APPENDIX B-2 The Pegasus Fund Limited Investment Performance...............1
APPENDIX B-3 Scudder Greater Europe Growth Fund Investment Performance.....1
ii
<PAGE>
SUMMARY OF TERMS
The following summary is qualified entirely by the detailed information
appearing elsewhere in this Confidential Memorandum and by the terms and
conditions of the limited liability company agreement of Deauville Europe Fund,
L.L.C. (the "Company Agreement"), each of which should be read carefully and
retained by any prospective investor.
THE COMPANY: Deauville Europe Fund, L.L.C. (the
"Company") is a recently formed Delaware
limited liability company, registered under
the Investment Company Act of 1940 (the
"1940 Act") as a closed-end,
non-diversified, management investment
company.
The Company is a specialized investment
vehicle that may be referred to as a
registered private investment company. The
Company is similar to an unregistered
private investment partnership in that (i)
the Company's portfolio may be more actively
managed than most other investment
companies, (ii) interests in the Company
("Interests") are sold in comparatively
large minimum denominations in private
placements solely to high net worth
individuals and institutional investors, and
thus are restricted as to transfer, and
(iii) the capital accounts of persons who
purchase Interests offered hereby
("Members") are subject to both asset-based
charges and performance-based allocations in
connection with the Company's activities.
Unlike a private investment partnership but
like other registered investment companies,
however, the Company has registered under
the 1940 Act to be able to offer Interests
without limiting the number of investors
that can participate in its investment
program.
INVESTMENT PROGRAM: The Company's investment objective is to
seek long-term capital appreciation while
managing risk through use of a
multi-strategy investment program. It
pursues this objective by investing
substantially all of its assets in
wholly-owned private investment funds (the
"Master Funds") which, in turn, invest
primarily in equity securities of European
issuers. For this purpose, a company will be
considered a European issuer if: (i) the
principal trading market for its securities
is in a European country; (ii) during the
company's most recent fiscal year, at least
50% of the company's revenues or profits
were derived from goods produced or sold,
investments made or services performed in
European countries; or (iii) during the
company's most recent fiscal year, it had at
least 50% of its assets in European
countries. As used herein, the terms
<PAGE>
"Europe" or "European" include the United
Kingdom, the industrial nations of Western
Europe and the less wealthy or developed
countries of Eastern Europe, including
Russia and Ukraine. It is anticipated that a
majority of the Company's assets will be
invested, through the Master Funds, in the
securities of issuers of the United Kingdom
and other Western European issuers.
CIBC Oppenheimer Advisers, L.L.C. serves as
the investment adviser of the Company (the
"Adviser") and is responsible for the
allocation of the Company's assets for
investment across various investment styles.
For each such investment style, the Adviser
will establish a separate Master Fund in
order to facilitate the investment of the
Company's assets in accordance with such
investment style. The Adviser will also
serve as the investment adviser of each
Master Fund. CIBC World Markets Corp. ("CIBC
WM") is the managing member of the Adviser.
Personnel of the various investment advisory
firms that are non-managing members of the
Adviser, acting on behalf of the Adviser and
under the supervision of CIBC WM, will serve
as portfolio managers for the Master Funds
(the "Portfolio Managers") and will manage
the assets of the Master Funds in accordance
with their respective investment styles. The
Portfolio Managers have been selected based
on their experience and expertise in
particular investment strategies.
Initially, the personnel of the Non-Managing
Members who will serve as Portfolio Managers
will be:
o Jeffrey M. Weingarten, Francois
Langlade-Demoyen and Paul Feldman,
each of whom are also directors of
Buttonwood Capital Partners Limited
("Buttonwood").;
o David Yarrow, who also serves as a
Managing Director of Clareville
Capital Limited ("Clareville") and
o Carol Franklin, who also serves as
a Managing Director of Zurich
Scudder Investments, Inc. (formerly
Scudder Kemper Investments, Inc.)
("Scudder").
Buttonwood, Clareville and Scudder are
non-managing members of the Adviser and are,
or will be prior to the Company's initial
closing, registered investment advisers
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<PAGE>
under the Investment Advisers Act of 1940.
The Portfolio Managers, in managing the
assets of Company, will employ investment
strategies that are substantially similar to
those they use in managing the assets of
client accounts of the non-managing member
with which the Portfolio Manager is
associated.
o In managing client accounts on
behalf of BUTTONWOOD CAPITAL
PARTNERS LIMITED, Messrs.
Weingarten, Langlade-Demoyen and
Feldman have employed detailed
proprietary research and analysis
in seeking to generate absolute
returns in the long-term by
investing both long and short in
equities of European issuers, and
focusing on those companies that
they believe can sustain above
average returns. Buttonwood was
incorporated in England on March 4,
1999 and is controlled by a trust
established by Jeffrey M.
Weingarten. Buttonwood serves as
the general partner of Buttonwood
Capital Partners Limited
Partnership, which, by delegation
from Buttonwood Capital Management
Company Limited, manages the
investment portfolio of Buttonwood
Focus Fund II, L.P., a private
investment partnership. Buttonwood
was admitted to Investment
Management Regulatory Organisation
("IMRO") membership in 1999, and as
of November 30, 2000, Buttonwood
had approximately $50 million in
assets under its management.
o In managing client accounts on
behalf of CLAREVILLE CAPITAL
LIMITED, Mr. Yarrow has sought to
achieve long-term capital
appreciation through investment in
businesses in the United Kingdom
and continental Europe that offer
the potential for above average
growth and positive earnings
surprises. His focus has been on
his areas of core competence, such
as finance, retail, media and
telecommunications. Mr. Yarrow
generally has taken positions with
at least a one year view.
Clareville, which was founded in
1995, was admitted to IMRO
membership in 1996 and, as of
[December 1, 2000], had
approximately $48 million in client
assets under management. Clareville
is controlled by David Yarrow.
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<PAGE>
o In managing client accounts on
behalf of ZURICH SCUDDER
INVESTMENTS, INC., Ms. Franklin has
sought long-term growth of capital
through investments primarily in
equity securities of European
issuers, and, as a secondary
objective, has sought to provide
current income principally through
investments in dividend-paying
securities. Scudder provides
investment advice to individuals
and institutions, including over
[____] open-end and closed-end
registered investment companies.
Scudder was founded as Scudder,
Stevens & Clark, Inc. in 1919 and
in 1953 introduced the first mutual
fund available in the U.S.
investing in securities of issuers
in several foreign countries.
Scudder is controlled by Zurich
Financial Services, Inc., and, as
of [September 30, 2000], managed
approximately $297 billion in
assets.
CIBC WM, as managing member of the Adviser,
will oversee the activities and performance
of the Portfolio Managers. The Adviser may,
subject to the approval of the Board of
Managers of the Company, establish
additional, replace or reduce the number of,
Master Funds. Additional or replacement
Master Funds will be managed by Portfolio
Managers associated with investment advisory
firms other than those with which the
current Portfolio Managers are associated.
The Adviser, in its sole discretion, may
also reallocate the assets of the Company
among the Master Funds. In providing
services to the Company, the Adviser will
rely on Kenneth Stemme, an Executive
Director of CIBC WM, to oversee the
activities and performance of the Portfolio
Managers. Mr. Stemme will regularly assess
the allocation of the Company's assets among
various investment strategies and styles,
and determine the recommended investment
strategies to be used in managing the
Company's assets. Mr. Stemme will be the
person primarily responsible for allocation
of the Company's assets among the Master
Funds and Portfolio Manager selection
recommendations, subject to such policies as
may be adopted by and such approvals as may
be required by the Board of Managers. (See
"The Adviser, CIBC WM and the Non-Managing
Managers").
The securities in which the Company invests
typically are traded on internationally
recognized European securities exchanges or
liquid over-the-counter markets. The Company
may effect short sales of securities and may
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<PAGE>
invest in debt securities. It may also
utilize various derivatives, including
options on securities and stock index
options. In pursuing its investment
objective, the Company may from time to time
borrow money for the purchase of investments
(a practice known as "leverage"). The use of
these investment techniques and instruments
is subject to certain limitations described
elsewhere in this Confidential Memorandum,
and involves certain risks. CIBC Oppenheimer
Deauville Europe Fund, Ltd. (the "Offshore
Fund"), for which an affiliate of the
Adviser will serve as investment adviser,
will invest substantially all of its assets
in the Company. (See "Types of Investments
and Related Risk Factors.")
The Portfolio Managers will rely on
investment research and fundamental analysis
of company financial data in seeking to
identify attractive investment opportunities
for the Company. The research process may
involve company visits, use of valuation
models, review and analysis of published
research, and discussions with industry
sources.
RISK FACTORS: The Company's investment program is
speculative and entails substantial risks.
There can be no assurance that the Company's
investment objective will be achieved.
Because Company will invest primarily in the
equity securities of European issuers, its
investments and investment performance will
be affected by risk factors that generally
are not associated with investments in the
U.S. These include, among other things:
varying custody, brokerage and settlement
practices in different countries; difficulty
in pricing securities; less public
information about issuers of foreign
securities; less governmental regulation and
supervision over the issuance and trading of
securities; the unavailability of financial
information regarding issuers or the
difficulty of interpreting financial
information prepared under foreign
accounting standards; less liquidity and
more volatility in securities markets; the
possibility of expropriation or
nationalization; the imposition of
withholding and other taxes; adverse
political, social or diplomatic
developments; limitations on the movement of
funds or other assets of the between
different countries; difficulties in
invoking legal process and enforcing
contractual obligations; greater difficulty
of assessing economic trends in foreign
countries; and exposure to the impact of
currency fluctuations. Moreover, foreign
governmental issuers may be unwilling to
repay
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<PAGE>
principal and interest due, and may require
that the conditions for payment be
renegotiated.
The Company's, investment performance will
depend at least partially on the ability of
the Portfolio Managers to identify and
purchase securities that appreciate in value
for investment and to identify and sell
securities that depreciate in value.
However, the performance of equity
securities in which the Company invest will
be affected by general market and economic
conditions affecting securities markets
generally.
The Company's use of leverage, short sales
and derivative transactions, and potentially
limited diversification can, in certain
circumstances, result in significant losses
to the Company. Certain other types of
investments, such as derivatives and
illiquid investments, also involve
particular risks as described herein.
As a non-diversified investment company,
there are no percentage limitations on the
portion of the Company's assets that may be
invested in the securities of any one
issuer. The Company intends to invest no
more than 15% of the value of its total
assets (unleveraged and measured at the time
of purchase) in the securities of any one
issuer. However, while seeking desirable
investments, the Company may temporarily
exceed this limitation. The Company's
investment portfolio may be subject to
greater risk and volatility than if
investments were made in the securities of a
broader range of issuers.
CIBC WM generally will charge the Company
and each Master Fund an asset-based fee and
the Adviser will receive performance-based
allocations with respect to the performance
of the Company and each Master Fund
(together, the "Incentive Allocations"). The
Incentive Allocations may create an
incentive for the Adviser to cause the
Company to make investments that are riskier
or more speculative than would be the case
in the absence of such allocations. In
addition, because an Incentive Allocation is
calculated on a basis that includes
unrealized appreciation of assets, the
allocation may be greater than if it were
based solely on realized gains.
The Company is a recently formed entity and
has no operating history upon which
investors can evaluate its performance. The
personnel of CIBC WM responsible for
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<PAGE>
overseeing the Company's investments and the
personnel of the non-managing members of the
Adviser serving as Portfolio Managers, who
are responsible for managing the Company's
investment portfolio, however, have
substantial experience in managing
investments and private investment funds.
Interests will not be traded on any
securities exchange or other market and are
subject to substantial restrictions on
transfer. Although the Company may offer to
repurchase Interests from time to time, a
Member may not be able to liquidate its
Interest for up to two years. (See "Types of
Investments and Related Risk Factors," "Tax
Aspects," and "Redemptions, Repurchases of
Interests and Transfers.")
INVESTING IN A MULTI-PORTFOLIO MANAGER FUND,
SUCH AS THE COMPANY, INVOLVES ADDITIONAL
SPECIAL RISKS, INCLUDING THE FOLLOWING:
The Adviser will receive any
performance-based allocations to which it is
entitled with respect to the performance of
a Master Fund irrespective of the
performance of the other Master Funds and
the Company generally. Accordingly, the
Adviser may receive compensation from the
Company as a result of a Master Fund's
positive investment performance even if the
Company's overall returns are negative.
Investment decisions of the Company are made
by the Portfolio Managers independently of
each other. As a result, at any particular
time, one Portfolio Manager may be
purchasing shares of an issuer whose shares
are being sold by another Portfolio Manager.
Consequently, the Company could indirectly
incur certain transaction costs without
accomplishing any net investment result.
MANAGEMENT: The board of managers of the Company (the
"Board of Managers") has overall
responsibility for the management and
supervision of the operations of the
Company. The initial Managers serving on the
Board of Managers have been elected by the
organizational Member of the Company (who is
affiliated with CIBC WM). By signing the
Company Agreement, each Member will be
deemed to have voted for the election of
each of the initial Managers.
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<PAGE>
Any vacancy in the position of Manager may
be filled by the remaining Managers, or, if
required by the 1940 Act, by a vote of a
plurality of the votes cast at a meeting of
the Members (excluding any votes eligible to
be cast by the Members affiliated with CIBC
WM). (See "Board of Managers" and "Voting.")
The Adviser may be deemed to control the
Company for purposes of the 1940 Act.
ADVISER: CIBC Oppenheimer Advisers, L.L.C., a
Delaware limited liability company, serves
as the investment adviser of the Company and
will be responsible for managing the
Company's investment portfolio pursuant to
the terms of an investment advisory
agreement between it and the Company (the
"Investment Advisory Agreement"). The
Adviser also serves as the investment
adviser of each Master Fund and will be
responsible for managing the investment
portfolio of each Master Fund. CIBC WM is
the managing member and controlling person
of the Adviser, and Buttonwood, Clareville
and Scudder are the initial non-managing
members of the Adviser. Investment
professionals who are personnel of
Buttonwood, Clareville, Scudder or such
other individuals or entities as may in the
future be admitted as non-managing members
of the Adviser (each, a "Non-Managing
Member," and collectively, the "Non-Managing
Members"), will serve as Portfolio Managers,
managing the Company's investment portfolio
on behalf of the Adviser under the
supervision of CIBC WM. The Adviser
currently anticipates that, initially,
approximately one-third of the Company's
assets will be invested in each of three
Master Funds, the assets of which will be
managed by the personnel of Buttonwood,
Clareville and Scudder, respectively. This
allocation may change or be rebalanced in
the future, in the discretion of the
Adviser. The Adviser holds a non-voting
special advisory member interest (the
"Special Advisory Account") in the Company
solely for the purpose of receiving the
Incentive Allocations. In addition, the
Adviser or an affiliate of the Adviser will
make a capital contribution to the Company
as a member. The capital account of the
Adviser and any affiliate as a member of the
Company will not exceed approximately 5% of
the aggregate capital accounts of the
Members.
CIBC WM (directly or through affiliates,
including the Adviser) provides investment
advisory services to
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<PAGE>
registered investment companies, private
investment partnerships and individual
client accounts, including the Offshore
Fund. Each of Buttonwood, Scudder and
Clareville is, or will be prior to the
Company's initial closing, an investment
adviser registered under the Investment
Advisers Act of 1940.
The Investment Advisory Agreement is
effective for an initial term expiring March
1, 2003, and may be continued in effect from
year to year thereafter if the continuance
is approved annually by the Board of
Managers. The Board of Managers may
terminate the Investment Advisory Agreement
on 60 days' prior written notice to the
Adviser.
CIBC WM and the Adviser may be deemed to
"control" the Company for purposes of the
Bank Holding Company Act of 1956, as amended
(the "BHC Act"), to which the Adviser, CIBC
WM and affiliates of CIBC WM are subject. As
a result, certain activities of the Company
may be restricted by the BHC Act and rules
and regulations thereunder, as described in
"Types of Investments and Related Risk
Factors - Investment Policies and
Restrictions" below.
PLACEMENT AGENT: CIBC WM acts as the placement agent for the
Company, without special compensation from
the Company, and will bear its own costs
associated with its activities as placement
agent. The Board of Managers may terminate
CIBC WM as placement agent on 30 days' prior
written notice. CIBC WM intends to
compensate its account executives for their
ongoing servicing of clients with whom they
have placed Interests. This compensation
will be based on a formula that takes into
account the amount of client assets being
serviced as well as the investment results
attributable to clients' assets invested in
the Company. (See "Conflicts Of Interest -
CIBC WM.")
CIBC WM (subject to the approval of the
Board of Managers) may delegate any of its
duties, functions or powers as placement
agent to unaffiliated third-parties to act
as sub-placement agents for the Company and
may compensate them therefor. The Company
will not bear any costs associated with any
such arrangements.
CONFLICTS OF INTEREST: Certain conflicts of interest may arise from
the following: (i) CIBC WM, the Non-Managing
Members and their respective affiliates,
including the Adviser, and the
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<PAGE>
Portfolio Managers may each engage in
investment management activities for their
own accounts and the accounts of others in
which the Company has no interest and may
have actual or potential conflicts of
interest with respect to investments made by
the Adviser on behalf of the Company; (ii)
the Adviser, the Non-Managing Members and
their respective affiliates may manage
accounts (in which the Company has no
interest), including the Offshore Fund, of
certain other persons in accordance with
investment programs that are substantially
similar to the Company's investment program,
but (a) these accounts may commit a
different percentage of their respective
assets to an investment opportunity than the
Adviser may commit of the Company's assets
and (b) there may be circumstances under
which the Adviser, the Non-Managing Members
or their respective affiliates will consider
participation by such accounts in investment
opportunities in which the Adviser does not
intend to invest on behalf of the Company;
(iii) situations may occur where the Company
could be disadvantaged because of the
investment activities conducted by CIBC WM,
the Adviser, the Non-Managing Members or
their respective affiliates for their own
accounts or for accounts they manage; (iv)
the Company may enter into certain
transactions with one or more accounts that
are managed by the Adviser, the Non-Managing
Members or their respective affiliates, but
only in accordance with the 1940 Act; (v)
the Adviser, the Non-Managing Members or
their respective affiliates may currently or
in the future provide investment advisory
services from time to time to private
investment partnerships or other entities or
accounts, including the Offshore Fund, that
are advised by CIBC WM, the Adviser, the
Non-Managing Members or their respective
affiliates; (vi) the Non-Managing Members
and their personnel or affiliates may
receive research products and services in
connection with the brokerage services that
CIBC WM and its affiliates may provide from
time to time (a) to one or more entities
managed by the Non-Managing Members or their
respective affiliates or (b) to the Company;
(vii) from time to time, in the ordinary
course of their brokerage, investment or
dealer activities, CIBC WM and its
affiliates may trade, position or invest in,
for their own accounts, the same securities
as those in which the Company invests;
(viii) the Company may be subject to the
same restrictions relating to the purchase
and sale of securities contained on CIBC
WM's recommended and restricted list as are
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<PAGE>
imposed on CIBC WM's proprietary accounts;
(ix) the investment banking and corporate
finance activities of CIBC WM, Canadian
Imperial Bank of Commerce (the parent
company of CIBC WM) or their respective
affiliates may restrict the ability of the
Company to purchase or sell certain
securities; and (x) the Adviser, CIBC WM and
affiliates of CIBC WM are subject to
regulation under the BHC Act and to
restrictions imposed by the Board of
Governors of the Federal Reserve System on
their transactions and relationships with
the Company and these restrictions may
affect the investments made by the Company.
Future activities of CIBC WM, the Adviser,
the Non-Managing Members or their respective
affiliates, including the respective
directors, principals, officers and
employees of the foregoing, may give rise to
additional conflicts of interest. (See
"Conflicts Of Interest.")
FEES AND EXPENSES: CIBC WM will provide certain administration
and investor services to the Company,
including, among other things, providing
office space and other support services to
the Company, maintaining and preserving
certain records of the Company, preparing
and filing various materials with state and
Federal regulators, providing legal and
regulatory advice in connection with
administrative functions and reviewing and
arranging for payment of the Company's
expenses. In consideration for these
services, the Company will pay CIBC WM a
monthly administration fee of approximately
0.10417% (1.25% on an annualized basis) of
the Company's net assets (the "CIBC WM
Fee").
In addition to the services described above,
CIBC WM will provide certain other services
to the Company, including, among other
things: identifying, making arrangements for
and retaining Portfolio Managers on behalf
of the Company; monitoring adherence to the
various investment strategies employed by
the Company; due diligence with respect to
the selection of Portfolio Managers and
monitoring their performance; regularly
assessing the allocation of the Company's
assets among various Master Funds; the
establishment and continuance of Master
Funds; and determining the investment
strategies desired by the Adviser for
investment of the Company's assets. In
consideration for these services, each
Master Fund will pay CIBC WM a monthly
administration fee of approximately 0.02083%
(.25% on an annualized basis) of the Master
Fund's net assets (the "Administrative
Fee").
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<PAGE>
The CIBC WM Fee and Administrative Fee will
each be paid to CIBC WM out of the Company's
assets and each Master Fund's assets,
respectively. The CIBC WM Fee will be
reflected in each Member's capital account
(including the Adviser's capital account in
the Company but excluding the Special
Advisory Account) as a reduction to net
profits or an increase to net losses
credited to or debited against each Member's
capital account. The Administrative Fee will
be reflected in the Company's capital
account in the applicable Master Fund. (See
"Capital Accounts and Allocations."). A
portion of each of the CIBC WM Fee and
Administrative Fee will be paid by CIBC WM
to the Non-Managing Members.
The Company will pay all expenses incurred
in connection with its business and
operations, including, but not limited to,
the following: all costs and expenses
related to portfolio transactions and
positions for the Company's and the Master
Funds' accounts, including: fees payable to
consultants and professionals; legal fees;
accounting fees; custody expenses; costs of
insurance; organizational and registration
expenses; certain offering expenses;
expenses of meetings of the Board of
Managers and Members; the CIBC WM Fee; and
fees payable to PFPC Inc. for providing
certain administration, accounting and
investor services to the Company. (See "Fees
and Expenses.") These expenses will not be
charged to the Special Advisory Account.
SALES CHARGE: Investors purchasing Interests may be
charged sales commissions of up to 3% of the
amount transmitted in connection with their
subscriptions for Interests. (See
"Subscription for Interests.")
ALLOCATION OF PROFIT AND LOSS: The net profits or net losses of the Company
(including, without limitation, the
Company's allocation of net realized gain or
loss and the net change in unrealized
appreciation or depreciation of securities
positions) will be credited to or debited
against the capital accounts of the Members
at the end of each fiscal period in
accordance with their respective investment
percentages for the period. Each Member's
investment percentage will be determined by
dividing as of the start of a fiscal period
the balance of the Member's capital account
by the sum of the balances of the capital
accounts of all Members. (See "Capital
Accounts and Allocations - Allocation of Net
Profits and Net Losses.")
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<PAGE>
INCENTIVE ALLOCATIONS: Generally, at the end of each fiscal year,
incentive allocations will be made with
respect to the Company as follows: (i) with
respect to each Master Fund, 15% of the net
profits of the Company that are attributable
to the Master Fund, if any, that have been
credited to the capital account of a Member
during the period (a "Master Fund Incentive
Allocation") will be debited from the
Member's capital account (including the
Adviser's capital account) and credited to
the Special Advisory Account; and then, (ii)
5% of the net profits of the Company, if
any, that have been credited to the capital
account of a Member during the period (a
"Company Incentive Allocation") will be
debited from the Member's capital account
(including the Adviser's capital account)
and credited to the Special Advisory
Account. A Master Fund Incentive allocation
will be charged to investors in the Company
with respect to a Master Fund only to the
extent that cumulative net profits of the
Master Fund through the close of any period
exceeds the highest level of cumulative net
profits of the Master Fund through the close
of any prior period. An Incentive Allocation
will be charged to investors in the Company
only to the extent that cumulative net
profits of the Company through the close of
any period exceeds the highest level of
cumulative net profits of the Company
through the close of any prior period. For
this purpose, cumulative net profits will be
adjusted to reflect any repurchases of a
Member's Interest and to reflect any
withdrawal of amounts from a Master Fund by
the Company. The Adviser may withdraw any
Incentive Allocation credited to the Special
Advisory Account by the last business day of
the month following the date on which such
allocation was made. (See "Capital Accounts
and Allocations - Incentive Allocations.")
SUBSCRIPTION FOR INTERESTS: The minimum initial investment in the
Company is $150,000 and the minimum
additional investment in the Company is
$25,000. The minimum initial and additional
contributions may be reduced by the Board of
Managers. In connection with initial and
additional investments, a sales charge of up
to 3% of the amount transmitted for such
investments may be imposed in the sole
discretion of the investor's account
executive. Amounts paid as sales charges, if
any, are included for purposes of
determining whether applicable minimum
investment requirements have been satisfied.
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<PAGE>
For the first twelve months from the date
the Company commences operations, the Board
of Managers may accept initial and
additional subscriptions for Interests as of
the first day of each month. Thereafter, the
Board of Managers may accept initial and
additional subscriptions for Interests by
eligible investors at such times as may be
determined by the Board of Managers, but not
more frequently than as of the first day of
each calendar quarter, unless the Board of
Managers has received a letter from counsel
to the Adviser stating that, under
applicable banking laws, the Board of
Managers may accept initial and additional
subscriptions from eligible investors on a
more frequent basis. All subscriptions are
subject to the receipt of cleared funds on
or before the acceptance date and require
the investor to submit a completed
subscription document before the acceptance
date. The Board of Managers reserves the
right to reject any subscription for
Interests and may, in its sole discretion,
suspend subscriptions for Interests at any
time. The Board of Managers has authorized
the Company to accept initial subscriptions
for Interests in the amount of $50,000 or
more from certain eligible investors who are
affiliated with the Company or its service
providers. (See "Subscription for
Interests.") Generally, Interests may not be
purchased by nonresident aliens, foreign
corporations, foreign partnerships, foreign
trusts or foreign estates, all as defined in
the Internal Revenue Code of 1986, as
amended (the "Code"). However,
notwithstanding the foregoing, the Offshore
Fund may, and intends to, purchase Interests
in the Company. In addition, because the
Company may generate "unrelated business
taxable income" ("UBTI"), charitable
remainder trusts may not want to purchase
Interests because a charitable remainder
trust will not be exempt from Federal income
tax under Section 664(c) of the Code for any
year in which it has UBTI.
ELIGIBILITY: Each prospective investor will be required
to certify that the Interest subscribed for
is being acquired directly or indirectly for
the account of an "accredited investor" as
defined in Regulation D under the 1933 Act
and that the investor has a net worth at the
time of subscription of more than $1.5
million or such greater amount as may be
required by applicable law or by the Board
of Managers, in its sole discretion.
Existing Members who subscribe for
additional Interests will be required to
meet the foregoing eligibility criteria at
the time of the additional subscription. The
relevant investor qualifications will be set
forth in a
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<PAGE>
subscription agreement that must be
completed by each prospective investor.
INITIAL CLOSING DATE: The anticipated initial closing date for
subscriptions for Interests is March 1,
2001.
TRANSFER RESTRICTIONS: Interests held by Members may be transferred
only with the written consent of the Board
of Managers, which may be withheld in its
sole discretion and is expected to be
granted, if at all, only under extenuating
circumstances. Without limiting the
foregoing, the Board of Managers generally
will not consent to a transfer unless the
transfer is: (i) by operation of law
pursuant to the death, divorce, bankruptcy,
insolvency or dissolution of a Member; (ii)
one in which the tax basis of the Interest
in the hands of the transferee is
determined, in whole or in part, by
reference to its tax basis in the hands of
the transferring Member (e.g., certain
transfers to affiliates, gifts and
contributions to family entities); (iii) to
members of the transferring Member's
immediate family (siblings, spouse, parents
and children); (iv) a distribution from a
qualified retirement plan or an individual
retirement account; (v) a "block transfer"
within the meaning of Treasury Regulations
ss. 1.7704-1(e)(2); or (vi) one which does
not cause interests in the Company to be
readily tradable on a secondary market or
the substantial equivalent thereof, as
determined under Treasury Regulations.
1.7704-1(j), unless it consults with counsel
to the Company and such counsel confirms
that such transfer will not cause the
Company to be treated as a publicly traded
partnership taxable as a corporation. In
addition, the Board of Managers will not
consent to a transfer unless the
transferring Member has been a Member for at
least six months and the proposed transfer
is to be made on the effective date of an
offer by the Company to repurchase
Interests. The foregoing permitted
transferees will not be allowed to become
substituted Members without the consent of
the Board of Managers, which may be withheld
in its sole discretion. A Member who
transfers an Interest may be charged
reasonable expenses, including attorneys'
and accountants' fees, incurred by the
Company in connection with the transfer.
(See "Redemptions, Repurchases of Interests
and Transfers - Transfers of Interests.")
WITHDRAWALS AND REPURCHASES
OF INTERESTS BY THE COMPANY No Member will have the right to require the
Company to redeem its Interest. The Company
may from time to time
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<PAGE>
offer to repurchase Interests pursuant to
written tenders by Members. Repurchases will
be made at such times and on such terms as
may be determined by the Board of Managers,
in its sole discretion. In determining
whether the Company should repurchase
Interests or portions thereof from Members
pursuant to written tenders, the Board of
Managers will consider the recommendation of
the Adviser. The Adviser expects that it
will recommend to the Board of Managers that
the Company offer to repurchase Interests
from Members at the end of 2001. Thereafter,
the Adviser expects that it generally will
recommend to the Board of Managers that the
Company offer to repurchase Interests from
Members twice each year, effective June 30
and December 31. The Board of Managers will
also consider the following factors, among
others, in making this determination: (i)
whether any Members have requested to tender
Interests or portions thereof to the
Company; (ii) the liquidity of the Company's
assets; (iii) the investment plans and
working capital requirements of the Company;
(iv) the relative economies of scale with
respect to the size of the Company; (v) the
history of the Company in repurchasing
Interests or portions thereof; (vi) the
economic condition of the securities
markets; and (vii) the anticipated tax
consequences of any proposed repurchases of
Interests or portions thereof. (See
"Redemptions, Repurchases of Interests and
Transfers - No Right of Redemption" and "-
Repurchases of Interests.")
The Company Agreement provides that the
Company shall be dissolved if the Interest
of any Member that has submitted a written
request, in accordance with the terms of the
Company Agreement, to tender its entire
Interest for repurchase by the Company has
not been repurchased within a period of two
years of the request.
SUMMARY OF TAXATION: Counsel to the Company will render an
opinion that the Company will be treated as
a partnership and not as an association
taxable as a corporation for Federal income
tax purposes. Counsel to the Company also
will render its opinion that, under a "facts
and circumstances" test set forth in
regulations adopted by the U.S. Treasury
Department, the Company will not be treated
as a "publicly traded partnership" taxable
as a corporation. Accordingly, the Company
should not be subject to Federal income tax,
and each Member will be required to report
on its own
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<PAGE>
annual tax return such Member's distributive
share of the Company's taxable income or
loss.
If it were determined that the Company
should be treated as an association or a
publicly traded partnership taxable as a
corporation (as a result of a successful
challenge to the opinions rendered by
counsel to the Company or otherwise), the
taxable income of the Company would be
subject to corporate income tax and any
distributions of profits from the Company
would be treated as dividends. (See "Tax
Aspects.")
ERISA PLANS AND OTHER
TAX-EXEMPT ENTITIES:
Investors subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), and other tax-exempt entities
(each, a "tax-exempt" entity) may purchase
Interests with the approval of the Board of
Managers. The Company may utilize leverage
in connection with its trading activities.
Therefore, a tax-exempt Member may incur
income tax liability with respect to its
share of the net profits from these
leveraged transactions to the extent they
are treated as giving rise to "unrelated
business taxable income" ("UBTI"). The
Company provides to tax-exempt Members such
accounting information as they require to
report their UBTI for income tax purposes.
Investment in the Company by tax-exempt
entities requires special consideration.
Trustees or administrators of these entities
are urged to carefully review the matters
discussed in this Confidential Memorandum.
TERM: The Company's term is perpetual unless the
Company is otherwise terminated under the
terms of the Company Agreement.
REPORTS TO MEMBERS: The Company will furnish to Members as soon
as practicable after the end of each taxable
year such information as is necessary for
them to complete Federal and state income
tax or information returns, along with any
other tax information required by law. The
Company will also send Members an unaudited
semi-annual and an audited annual report
within 60 days after the close of the period
for which the report is being made. Members
also will be sent quarterly reports
regarding the Company's operations during
each quarter.
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<PAGE>
FISCAL YEAR: The 12-month period ending December 31. The
first fiscal year of the Company will
commence on the date of the initial closing
and will end on December 31, 2001.
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<PAGE>
SUMMARY OF FUND EXPENSES
The following table illustrates the expenses and fees that the Company
expects to incur and that Members can expect to bear directly or indirectly.
MEMBER TRANSACTION EXPENSES
Maximum sales load (percentage of purchase amount)........... 3.00% (1)
Maximum redemption fee....................................... None
ANNUAL EXPENSES (as a percentage of net assets
attributable to Interests)
CIBC WM Fee (to CIBC World Markets Corp.).................... 1.25%
Administrative Fee (to CIBC World Markets Corp.)............. 0.25%
Company Incentive Allocation (to the Adviser)................ 5.00% of net
profits (2)
Master Fund Incentive Allocations (to the Adviser) .......... 15.00% of net
profits (2)
Other expenses............................................... 1.25%
Total annual expenses (other than Company Incentive
Allocation, Master Fund Incentive Allocations and -----
interest expense)........................................ 2.75%
(1) In connection with initial and additional purchases of Interests, an
investor's account executive may charge the investor a sales
commission of up to 3% of the amount transmitted for such purchase (up
to 3.1% of the amount invested), in the sole discretion of the account
executive. See "Subscription for Interests - Sales Charge."
(2) Net profits means, with respect to assets of the Company or of a
Master Fund (each, an "Entity"), the amount of realized and unrealized
profits that is attributable to assets of the Entity that has been
credited to the capital account of an investor in such Entity during
the applicable allocation period, but only to the extent that
cumulative net profits attributable to the Entity with respect to the
investor through the close of the allocation period exceeds the
highest level of cumulative net profits attributable to the Entity
with respect to such investor through the close of any prior
allocation period. For this purpose, cumulative net profits of the
Company or a Master Fund will be adjusted to reflect any repurchases
of an Member's Interest or withdrawals of amounts from a Master Fund,
respectively. For a more complete description of the Incentive
Allocations, see "Capital Accounts and Allocations - Incentive
Allocations."
The purpose of the table above is to assist prospective investors in
understanding the various costs and expenses Members will bear directly or
indirectly. "Other expenses," as shown above, is an estimate based on
anticipated contributions to the Company and anticipated expenses for the first
year of the Company's operations, and includes professional fees and other
expenses that the Company will bear directly, including fees paid to the
Company's administrator and custody fees and expenses. For a more complete
description of the various fees and expenses of the Company, see "Fees and
Expenses," "Additional Information and Summary of Limited Liability Company
Agreement - Custodian" and "Subscription For Interests."
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<PAGE>
Example
1 year 3 years 5 years
------ ------- -------
You would pay the following expenses
on a $150,000** investment, assuming
a 5% annual return: $5,625 $17,559 $30,467
The Example is based on the expenses set forth above and should not be
considered a representation of future expenses. Actual expenses may be greater
or less than those shown. Moreover, the Company's actual rate of return may be
greater or less than the hypothetical 5% return shown in the Example.
THE COMPANY
Deauville Europe Fund, L.L.C. (the "Company") is registered under the
Investment Company Act of 1940 (the "1940 Act") as a non-diversified, closed-end
management investment company. The Company was organized as a limited liability
company under the laws of Delaware on November 22, 2000, and has no operating
history. The Company's principal office is located at One World Financial
Center, 31st Floor, 200 Liberty Street, New York, New York 10281, and its
telephone number is (212) 667-4225. CIBC Oppenheimer Advisers, L.L.C. (the
"Adviser"), a Delaware limited liability company, serves as the investment
adviser to the Company and is responsible for the Company's investment
activities pursuant to an investment advisory agreement. Responsibility for the
overall management and supervision of the operations of the Company is vested in
the individuals who serve as the Board of Managers of the Company (the "Board of
Managers"). (See "Board of Managers.")
USE OF PROCEEDS
The Company expects that the proceeds from the sale of interests in the
Company ("Interests"), excluding the amount of any placement fees paid by
investors and net of the Company's ongoing fees and expenses, will be used to
implement the Company's investment program and objectives as soon as
practicable, consistent with market conditions, after receipt of such proceeds
by the Company.
--------
** On an investment of $1,000, the Example would be as follows:
Example
1 year 3 years 5 years
------ ------- -------
You would pay the following expenses
on a $1,000 investment, assuming
a 5% annual return: $38 $117 $203
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<PAGE>
STRUCTURE
The Company is a specialized investment vehicle that combines many of the
features of a private investment partnership with those of a closed-end
investment company. Private investment partnerships are unregistered, commingled
asset pools that are often aggressively managed and offered in large minimum
denominations (often over $1 million) through private placements to a limited
number of high net worth individual and institutional investors. The general
partners of these partnerships are typically compensated through asset-based
fees and performance-based allocations. Closed-end investment companies are 1940
Act registered pools typically organized as corporations or business trusts that
usually are managed more conservatively than most private investment
partnerships, subject to relatively modest minimum investment requirements
(often less than $2,000) and publicly offered to a broad range of investors. The
advisers to these companies are typically compensated through asset-based (but
not performance-based) fees.
The Company is similar to a private investment partnership in that its
investment portfolio may be more actively managed than most other investment
companies and Interests will be sold in comparatively large minimum
denominations ($150,000) in private placements solely to high net worth
individual and institutional investors, whose capital accounts will be subject
to both asset-based fees and performance-based allocations. However, the
Company, like other closed-end investment companies, has registered under the
1940 Act to be able to offer its Interests without limiting the number of
investors that can participate in its investment program. This permits a larger
number of investors that have a higher tolerance for investment risk to
participate in an aggressive investment program without making the more
substantial minimum capital commitment that is required by many private
investment partnerships.
INVESTMENT PROGRAM
INVESTMENT OBJECTIVE
The Company's investment objective is to seek long-term capital
appreciation while managing risk through use of a multi-strategy investment
program. It pursues this objective by investing substantially all of its assets
in wholly-owned private investment funds (the "Master Funds") which, in turn,
invest primarily in equity securities of European issuers. For this purpose, a
company will be considered a European issuer if: (i) the principal trading
market for its securities is in a European country; (ii) during the company's
most recent fiscal year, at least 50% of the company's revenues or profits were
derived from goods produced or sold, investments made or services performed in
European countries; or (iii) during the company's most recent fiscal year, it
had at least 50% of its assets in European countries. As used herein, the terms
"Europe" or "European" include the United Kingdom, the industrial nations of
Western Europe and the less wealthy or developed countries of Eastern Europe,
including Russia and Ukraine. It is anticipated that a majority of the Company's
assets will be invested, through the Master Funds, in the securities of issuers
of the United Kingdom and other Western European issuers.
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<PAGE>
INVESTMENT STRATEGY
CIBC Oppenheimer Advisers, L.L.C. serves as the investment adviser of the
Company (the "Adviser") and is responsible for the allocation of the Company's
assets for investment across various investment styles. For each such investment
style, the Adviser will establish a separate Master Fund in order to facilitate
the investment of the Company's assets in accordance with such investment style.
The Adviser will also serve as the investment adviser of each Master Fund. CIBC
World Markets Corp. ("CIBC WM") is the managing member of the Adviser.
Buttonwood Capital Partners Limited ("Buttonwood"), Clareville Capital Limited
("Clareville") and Zurich Scudder Investments, Inc. (formerly Scudder Kemper
Investments, Inc.) ("Scudder") are non-managing members of the Adviser.
(Buttonwood, Clareville, Scudder and such other investment advisory firms as may
be admitted as non-managing members of the Adviser in the future are
collectively referred to as "Non-Managing Members.") Personnel of the
Non-Managing Members, acting on behalf of the Adviser and under the supervision
of CIBC WM, will serve as portfolio managers for the Master Funds (the
"Portfolio Managers") and will manage the assets of the Master Funds in
accordance with their respective investment styles. The Portfolio Managers have
been selected based on their experience and expertise in particular investment
strategies.
Initially, the personnel of the Non-Managing Members who will serve as
Portfolio Managers will be: Jeffrey M. Weingarten, Francois Langlade-Demoyen and
Paul Feldman, each of whom are also directors of Buttonwood; David Yarrow, who
also serves as a Managing Director of Clareville; and Carol Franklin, who also
serves as a Managing Director of Scudder. Buttonwood, Clareville and Scudder are
non-managing members of the Adviser and are, or will be prior to the Company's
initial closing, registered investment advisers under the Investment Advisers
Act of 1940. The Portfolio Managers, in managing assets of the Company, through
their respective Master Funds, will employ investment strategies that are
substantially similar to those they use in managing the assets of client
accounts of the non-managing member with which the Portfolio Manager is
associated.
o In managing assets of the Company on behalf of the Adviser, Messrs.
Weingarten, Langlade-Demoyen and Feldman of BUTTONWOOD will seek to
generate absolute returns in the long-term by investing both long and
short in equities of European issuers. They will seek to identify
investment opportunities through the use of Buttonwood's detailed
proprietary research and analysis, focusing on those companies that
they believe can sustain above average returns and which can be
purchased or sold at a price that will generate substantial capital
gains for the Company in the long term. In seeking to achieve this
objective on behalf of the Company, these Portfolio Managers will
invest its assets in a wide range of instruments, including equity
securities, other collective investment vehicles, options, warrants
and other derivative instruments (which may be either exchange traded
or over-the-counter). In addition, these Portfolio Managers may employ
other hedging techniques.
o David Yarrow, who, in addition to serving as a Portfolio Manager of
the Company, is the Managing Director and majority shareholder of
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<PAGE>
CLAREVILLE, will seek to achieve long-term capital appreciation by
investing in growth stocks principally in the United Kingdom, but also
in continental Europe. In managing assets of the Company, his focus
will be on businesses on certain sectors, including, among others,
finance, retail, media and telecommunications, that offer the
potential for above average growth and significantly increased
earnings. Mr. Yarrow intends to generally take positions on behalf of
the Company with at least a two year view.
In pursuing the Company's investment objective, Mr. Yarrow may trade stocks
on a long and short basis when he believes that the flow of information or
capital in the markets will lead to short term price movements. During periods
of market uncertainty, he may seek to protect the Company's assets through the
use of derivatives, including FTSE 100 futures. However, Mr. Yarrow expects that
the positions he manages on behalf of the Company will rarely be net short.
Mr. Yarrow places great emphasis on the discipline of focus and prudence.
He will invest the assets of the Company only in areas in which he believes he
has an edge and he will attempt to reduce or realize positions when the
fundamentals of such positions deteriorate.
o Carol Franklin, a Managing Director at SCUDDER who will also serve as
a Portfolio Manager of the Company, will seek long-term growth of
capital through investments primarily in equity securities of European
issuers, including both the industrialized nations of Western Europe
and the less wealthy or developed countries in Southern and Eastern
Europe. Within this diverse area, Ms. Franklin will seek to benefit
from accelerating economic growth transformation and deregulation,
including increased privatizations and corporate restructurings,
further broadening of the European Union, and the implementation of
economic policies to promote non-inflationary growth. She expects to
invest the majority of Company's assets under her management in the
more established and liquid markets of Western and Southern Europe.
In managing assets of the Company on behalf of the Adviser, Ms. Franklin
will look for companies that have above-average potential for sustainable
earnings growth and whose market value appears reasonable in light of their
business prospects, and will seek to maintain variety in terms of the companies
and industries in which it invests.
For more detailed descriptions of the Portfolio Managers and the
Non-Managing Members, see "The Adviser, CIBC WM and the Non-Managing Members."
CIBC WM, as managing member of the Adviser, will oversee the activities and
performance of the Portfolio Managers. The Adviser may, subject to the approval
of the Board of Managers of the Company, establish additional, replace or reduce
the number of, Master Funds. Additional or replacement Master Funds will be
managed by Portfolio Managers associated with investment advisory firms other
than those with which the current Portfolio Managers are associated. The
Adviser, in its sole discretion, may also reallocate the assets of the
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<PAGE>
Company among the Master Funds. In providing services to the Company, the
Adviser will rely on Kenneth Stemme, an Executive Director of CIBC WM, to
oversee the activities and performance of the Portfolio Managers. Mr. Stemme
will regularly assess the allocation of the Company's assets among various
investment strategies and styles, and determine the recommended investment
strategies to be used in managing the Company's assets. Mr. Stemme will be the
person primarily responsible for allocation of the Company's assets among the
Master Funds and Portfolio Manager selection recommendations, subject to such
policies as may be adopted by and such approvals as may be required by the Board
of Managers. He will evaluate the Portfolio Managers based on their experience
and expertise in a particular investment strategy or strategies with respect to
European equity investments. The Adviser currently anticipates that, initially,
approximately one-third of the Company's assets will be invested in each of
three Master Funds, the assets of which will be managed by the personnel of
Buttonwood, Clareville and Scudder, respectively. This allocation may change or
be rebalanced in the future, in the discretion of the Adviser.
The securities in which the Company invests typically are traded on
internationally recognized European securities exchanges or liquid
over-the-counter markets. The Company may effect short sales of securities and
may invest in debt securities. It may also utilize various derivatives,
including options on securities and stock index options. In pursuing its
investment objective, the Company may from time to time borrow money for the
purchase of investments (a practice known as "leverage"). The use of these
investment techniques and instruments is subject to certain limitations
described elsewhere in this Confidential Memorandum, and involves certain risks.
CIBC Oppenheimer Deauville Europe Fund, Ltd. (the "Offshore Fund"), for which an
affiliate of the Adviser will serve as investment adviser, will invest
substantially all of its assets in the Company. (See "Types of Investments and
Related Risk Factors.")
The personnel of the Non-Managing Members selected as Portfolio Managers
have each, in the judgment of CIBC WM, shown the ability to achieve
above-average results within their particular investment strategies and
investment styles. However, history shows that no one particular investment
strategy or investment style produces consistent or above-average total return
results, either on an absolute or relative basis, over all phases of a cycle in
the equity market. While a particular investment strategy or investment style
within an investment strategy may not achieve above-average performance over any
given period within a cycle, the blending of investment strategies and
investment styles within those strategies can be used to seek more consistent
returns with a reduction of risk and volatility.
Consistent with these concepts, the assets of the Company will be managed
according to a variety of investment strategies and styles. This investment
allocation strategy is intended to permit the Company to achieve more consistent
investment returns, while managing risk, than could be achieved by investing in
any one investment strategy. The Adviser is responsible for the allocation of
assets among investment strategies and styles, subject to such policies as may
be adopted by the Board of Managers.
The Adviser and the personnel of the Non-Managing Members acting as
Portfolio Managers have complete discretion to purchase and sell securities and
other investments with respect to the assets of the Company consistent with the
investment objective and strategies and
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limitations of the Company. The Company will monitor compliance with all
limitations applicable with respect to the Company, including those imposed by
the 1940 Act. The Company may invest in a wide range of securities and other
financial instruments and use a broad array of investment techniques for hedging
and non-hedging purposes.
Equity securities include common and preferred stock and other securities
having equity characteristics, including convertible debt securities, stock
options, warrants and rights. The Company's portfolio of securities is expected
to include long and short positions in equity securities. As part of its
investment program, the Company may effect short sales of securities and may
invest in debt securities. The Company may also utilize swaps, swaptions and
other derivative instruments such as forward contracts and options on stock
indices and structured equity related products. Although the Company will invest
primarily in the securities of European issuers, it may invest up to 15% of the
value of its total assets in the securities of U.S. issuers.
In circumstances deemed appropriate by the Adviser, it may: (i) make
substantial investments in bonds or other fixed income securities of the United
States Government and of domestic and foreign issuers or make investments in
stocks or other equity securities of domestic and foreign issuers or make
investments in stocks or other equity securities of domestic and foreign
issuers; (ii) make substantial hedged investments in bonds or other fixed-income
securities of the United States Government and of domestic and foreign issuers
or make hedged investments in stocks or other equity securities of domestic and
foreign issuers; (iii) effect transactions in commodities and futures contracts
(and, when available, options thereon); (iv) engage in hedging in related
equity, convertible and interest rate securities; (v) engage in risk arbitrage
involving the purchase of securities of companies already in bankruptcy; (vi)
invest in instruments of failing companies or companies already in bankruptcy;
(vii) engage in strategic block investing, leveraged buy outs and acquisitions;
(viii) utilize short sales and leverage, repurchase agreements and options; and
(ix) invest with asset allocators who utilize a variety of the strategies
delineated above.
Each of the above described activities entails risk. (See "Types of
Investments and Related Risk Factors--Leverage," "--Short Sales" and "--Special
Investment Instruments and Techniques.")
Depending upon market conditions and the availability of suitable
investment opportunities, the Company may utilize leverage in pursuing its
investment objective. Leverage is the practice of borrowing money to purchase
investments, which the Company may do by purchasing securities on margin,
borrowing from a bank or entering into reverse repurchase agreements.
The Company will endeavor to attain its investment goals primarily by
making investments that are stock specific, i.e., related directly to the
prospects of certain companies. Although the Adviser's selection of a security
will focus on its long-term merits, the size of a position may vary considerably
depending upon current levels of valuation, rate of earnings growth, and stage
of the product cycle.
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In managing the investments of the Company on behalf of the Adviser, the
Portfolio Managers will rely on investment research and fundamental analysis of
company financial data in seeking to identify attractive investment
opportunities. The research process may involve company visits, continuous
updating of valuation models, review and analysis of published research and
discussions with industry sources.
The research process may involve direct contact with the management of the
companies in which the Company invests, augmented where necessary by contacts
with competitors, suppliers or end users of relevant products. The Adviser
intends to use information provided by specialized research firms or regional
brokerage companies in order to become more knowledgeable about particular
industries and geographic areas. In addition, brokerage firm analysts may be
used as either research backup or company specialists, trade publications and
industry sources will be studied on an ongoing basis, and consultants will be
utilized in specialized cases. Finally, the network of investment managers and
analysts with which the Adviser, the Non-Managing Members and their respective
personnel have become acquainted during the years in which they have worked as
asset managers may be utilized as informal sources of information.
The Company may also invest in non-convertible bonds and other
non-convertible debt securities when the Adviser believes that these securities
offer opportunities for capital appreciation or a more favorable risk/reward
ratio.
During periods of adverse market conditions, the Company may deviate from
its investment objective and invest all or any portion of its assets in high
quality debt securities, including money market instruments, or hold cash or
cash equivalents. The Company may also invest in money market instruments or
hold cash for liquidity purposes. (See "Types of Investments and Related Risk
Factors - Temporary Investments.")
In pursuing its investment objective, or for hedging purposes, the Company
may use various investment techniques and strategies. These may include the use
of leverage, short sales of securities and the purchase and sale of options on
securities and stock indices, subject, however, to certain limitations described
elsewhere in this Confidential Memorandum, including any policies that may be
established by the Board of Managers. The use of these investment techniques and
instruments involves certain risks. (See "Types of Investments and Related Risk
Factors.") The Company will comply with applicable regulatory requirements,
including the asset coverage requirements under the 1940 Act, in connection with
its use of these strategies.
Additional information about the types of investments that will be made by
the Company, its investment practices and related risk factors is provided
below. Except as otherwise indicated, the Company's investment policies and
restrictions are not fundamental and may be changed without a vote of members of
the Company (each a "Member"). (See "Types of Investments and Related Risk
Factors - Investment Policies And Restrictions.")
THE COMPANY'S INVESTMENT PROGRAM IS SPECULATIVE AND ENTAILS SUBSTANTIAL
RISKS. THERE CAN BE NO ASSURANCE THAT THE COMPANY'S INVESTMENT OBJECTIVE WILL BE
ACHIEVED. IN PARTICULAR, THE COMPANY'S USE OF LEVERAGE, SHORT SELLING AND
DERIVATIVES
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TRANSACTIONS AND ITS LIMITED DIVERSIFICATION CAN, IN CERTAIN CIRCUMSTANCES,
RESULT IN SIGNIFICANT LOSSES TO THE COMPANY.
TYPES OF INVESTMENTS AND RELATED RISK FACTORS
GENERAL
All securities investments risk the loss of capital. The value of the
Company's total net assets should be expected to fluctuate. To the extent that
the Company's portfolio is concentrated in securities of a single issuer or
issuers in a single industry, the risk of any investment decision is increased.
The Adviser's use of leverage is likely to cause the Company's net assets to
appreciate or depreciate at a greater rate than if leverage were not used.
For purposes of the Company's compliance with certain investment
restrictions and certain investment limitations under the 1940 Act, the Company
will monitor compliance at both the Company and Master Fund level.
INVESTING IN EUROPEAN COMPANIES
European securities in which the Company may invest may be listed on
foreign securities exchanges or traded in foreign over-the-counter markets.
Investments in European securities are affected by risk factors generally not
thought to be present in the U.S. These risk factors include, but are not
limited to, the following: varying custody, brokerage and settlement practices;
difficulty in pricing; less public information about issuers of foreign
securities; less governmental regulation and supervision over the issuance and
trading of securities than in the U.S.; the unavailability of financial
information regarding the foreign issuer or the difficulty of interpreting
financial information prepared under foreign accounting standards; less
liquidity and more volatility in foreign securities markets; the possibility of
expropriation or nationalization; the imposition of withholding and other taxes;
adverse political, social or diplomatic developments; limitations on the
movement of funds or other assets of the Company between different countries;
difficulties in invoking legal process abroad and enforcing contractual
obligations; and the difficulty of assessing economic trends in foreign
countries. Moreover, governmental issuers of foreign securities may be unwilling
to repay principal and interest due, and may require that the conditions for
payment be renegotiated. Investment in European countries also generally
involves higher brokerage and custodian expenses than does investment in
domestic securities.
Other risks of investing in foreign securities include changes in currency
exchange rates (in the case of securities that are not denominated in U.S.
dollars) and currency exchange control regulations or other foreign or U.S. laws
or restrictions, or devaluations of foreign currencies. A decline in the
exchange rate would reduce the value of certain of the Company's foreign
currency denominated portfolio securities irrespective of the performance of the
underlying investment. In addition, the Company may incur costs in connection
with conversion between various currencies. The foregoing risks may be greater
in emerging industrialized and less developed countries.
The Company may enter into forward currency exchange contracts ("forward
contracts") for hedging purposes and non-hedging purposes to pursue its
investment objective.
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Forward contracts are transactions involving the Company's obligation to
purchase or sell a specific currency at a future date at a specified price.
Forward contracts may be used by the Company for hedging purposes to protect
against uncertainty in the level of future foreign currency exchange rates, such
as when the Company anticipates purchasing or selling a foreign security. This
technique would allow the Company to "lock in" the U.S. dollar price of the
security. Forward contracts may also be used to attempt to protect the value of
the Company's existing holdings of foreign securities. There may be, however,
imperfect correlation between the Company's foreign securities holdings and the
forward contracts entered into with respect to those holdings. Forward contracts
may also be used for non-hedging purposes to pursue the Company's investment
objective (subject to any policies established by the Board of Managers), such
as when the Adviser anticipates that particular foreign currencies will
appreciate or depreciate in value, even though securities denominated in those
currencies are not then held in the Company's investment portfolio.
The securities markets of many European countries are relatively small,
with the majority of market capitalization and trading volume concentrated in a
limited number of companies representing a small number of industries.
Consequently, the Company's investment portfolio may experience greater
volatility and significantly lower liquidity than a portfolio invested in equity
securities of U.S. companies. These markets may be subject to greater influence
by adverse events generally affecting the market, and by large investors trading
significant blocks of securities, than is usual in the U.S. Securities
settlements may in some instances be subject to delays and related
administrative uncertainties.
The Company may invest in developing or emerging market countries or
countries whose economies are less well developed than that of the United States
or European countries that are members of the G7.(1) The economies of such
countries generally are heavily dependent upon international trade and,
accordingly, have been and may continue to be adversely affected by trade
barriers, exchange controls, managed adjustments in relative currency values and
other protectionist measures imposed or negotiated by the countries with which
they trade. Business entities in some of these countries, including many Eastern
European countries, may have only a limited history of operating in a
market-oriented economy, and the ultimate impact of such countries' attempts to
move toward more market-oriented economies is currently unclear. The social and
economic difficulties resulting from local corruption and crime could adversely
affect the value of the Company's investments. Certain of these countries have
been developing a body of real property, securities and tax laws and laws
governing corporations and other business entities. Such legal structures
governing private and foreign investment and private property, where they have
been implemented, are new. Laws may not exist to cover all business and
commercial relationships or to protect the holders of interests in equity or
debt securities adequately. Laws, regulations, and legal interpretations in less
developed European countries can change quickly and unpredictably in a manner
far more volatile than in the United States and certain of the more developed
European countries. These changes could materially and adversely affect the
Company's investments.
---------------
(1) The G7 includes the following European countries: France, Germany, Great
Britain and Italy.
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EQUITY SECURITIES
A significant portion of the Company's investment portfolio normally will
consist of long and short positions in common stocks and other equity
securities. The values of equity securities change in response to many factors,
including, but not limited to, the activities and financial condition of
individual companies, the business market in which individual companies compete
and general market and economic conditions.
The Company's investments in equity securities of European companies will
include securities that are listed on foreign and U.S. securities exchanges as
well as unlisted securities that are traded over-the-counter. Equity securities
of companies traded over-the-counter and on foreign exchanges may not be traded
in the volumes typically found on a national securities exchange. Consequently,
the Company may be required to dispose of these securities over a longer (and
potentially less favorable) period of time than is required to dispose of the
securities of exchange listed companies. There is no minimum required market
capitalization of the companies in which the Company may invest, and the Company
may invest a significant portion of its assets in securities of companies having
smaller market capitalization. Investments in companies with smaller market
capitalizations are generally riskier than investments in larger,
well-established companies. Smaller companies often are more recently formed
than larger companies and may have limited product lines, distribution channels
and financial and managerial resources. There is often less publicly available
information about these companies than there is for larger, more established
issuers, making it more difficult for the Adviser to analyze the value of the
company. The equity securities of smaller companies are often traded
over-the-counter or on regional exchanges and those securities may not be traded
in the volume typical for securities that are traded on a national securities
exchange. Consequently, the Company may be required to sell these securities
over a longer period of time (and potentially at less favorable prices) than
would be the case for securities of larger companies. In addition, the prices of
the securities of smaller companies may be more volatile than those of larger
companies. These companies may not be well known to the investing public, may
not have significant institutional ownership and may have cyclical, static or
only moderate growth prospects. Additionally, the securities of these companies
may be more volatile in price and have less liquidity than the securities of
companies having larger market capitalization.
COMMON STOCKS. Common stocks are shares of a corporation or other entity
that entitle the holder to a pro rata share of the profits, if any, of the
entity without preference over any other shareholder or claim of shareholders,
after making required payments to holders of the entity's preferred stock and
other senior equity. Common stock usually carries with it the right to vote and
frequently an exclusive right to do so.
PREFERRED STOCKS. Preferred stock generally has a preference over an
issuer's common stock as to dividends and upon liquidation, but it ranks junior
to debt securities in an issuer's capital structure. Preferred stock generally
pays dividends in cash (or additional shares of preferred stock) at a defined
rate, but unlike interest payments on debt securities, preferred stock dividends
are payable only if declared by the issuer's board of directors. Dividends on
preferred stock may be cumulative, meaning that, in the event the issuer fails
to make one or more dividend payments on the preferred stock, no dividends may
be paid on the issuer's
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common stock until all unpaid preferred stock dividends have been paid.
Preferred stock may also be subject to optional or mandatory redemption
provisions.
CONVERTIBLE SECURITIES. Convertible securities are bonds, debentures,
notes, preferred stocks or other securities that may be converted into or
exchanged for a specified amount of common stock of the same or different issuer
within a particular period of time at a specified price or formula. A
convertible security entitles the holder to receive interest that is generally
paid or accrued on debt or a dividend that is paid or accrued on preferred stock
until the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have unique investment characteristics, in that they
generally (1) have higher yields than common stocks, but lower yields than
comparable non-convertible securities, (2) are less subject to fluctuation in
value than the underlying common stock due to their debt characteristics and (3)
provide the potential for capital appreciation if the market price of the
underlying common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors may also have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally,
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a debt security.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by the Company is called for
redemption, the Company will be required to permit the issuer to redeem the
security, convert it into the underlying common stock or sell it to a third
party. Any of these actions could have an adverse effect on the Company's
ability to achieve its investment objective.
BONDS AND OTHER DEBT SECURITIES
GENERALLY. The Company may invest a portion of its assets in bonds and
other debt securities when, in the judgment of the Adviser (subject to any
policies established by the Board of Managers), such investments are warranted.
In addition, the Company may invest in high quality debt securities for
temporary defensive purposes and to maintain liquidity. Debt securities include,
among other securities: bonds, notes and debentures issued by corporations; debt
securities issued or guaranteed by the U.S. Government or one of its agencies or
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instrumentalities ("U.S. Government Securities") or by a foreign government;
municipal securities; and mortgage-backed and asset-backed securities. These
securities may pay fixed, variable or floating rates of interest, and may
include zero coupon obligations. Debt securities are subject to the risk of the
issuer's inability to meet principal and interest payments on its obligations
(i.e., credit risk) and are subject to price volatility due to such factors as
interest rate sensitivity, market perception of the creditworthiness of the
issuer and general market liquidity (i.e., market risk).
The Company may invest in both investment grade and non-investment grade
debt securities. Investment grade debt securities are securities that have
received a rating from at least one nationally recognized statistical rating
organization ("NRSRO") in one of the four highest rating categories or, if not
rated by any NRSRO, have been determined by the Adviser to be of comparable
quality. Non-investment grade debt securities (typically called "junk bonds")
are securities that have received a rating from a NRSRO of below investment
grade or have been given no rating, and are considered to be predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal. Non-investment grade debt securities in the lowest rating categories
may involve a substantial risk of default or may be in default. Adverse changes
in economic conditions or developments regarding the individual issuer are more
likely to cause price volatility and weaken the capacity of the issuers of
non-investment grade debt securities to make principal and interest payments
than is the case for higher grade debt securities. An economic downturn
affecting an issuer of non-investment grade debt securities may result in an
increased incidence of default. In addition, the market for lower grade debt
securities may be thinner and less active than for higher grade debt securities.
The Company will not invest more than 20% of its total assets in non-convertible
debt securities which have not received an investment grade rating from at least
one NRSRO.
LIMITED DIVERSIFICATION
The Company is a "non-diversified" investment company. Thus, there are no
percentage limitations on the percentage of the Company's assets that may be
invested in the securities of any one issuer. To the extent that a relatively
high percentage of the Company's assets were invested in the securities of a
limited number of issuers, some of which may be within the same industry, the
Company's investment portfolio will be more susceptible to any single economic,
political or regulatory occurrence than the portfolio of a diversified
investment company.
The Company intends to invest no more than 15% of the value of its total
assets (unleveraged and measured at the time of investment) in the securities of
any one issuer. However, while seeking desirable investments, the Company may
temporarily exceed this limitation subject to other applicable policies and
procedures.
LEVERAGE
The Company may borrow money to purchase securities, a practice known as
"leverage," which involves certain risks. In this regard, the Company may make
margin purchases of securities, borrow money from banks and enter into reverse
repurchase agreements.
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The Company may also borrow money for temporary or emergency purposes or in
connection with the repurchase of Interests.
Trading equity securities on margin involves an initial cash requirement
representing at least 50% of the underlying security's value with respect to
transactions in U.S. markets and varying (typically lower) percentages with
respect to transactions in foreign markets. Borrowings to purchase equity
securities typically will be secured by the pledge of those securities. The
financing of securities purchases may also be effected through reverse
repurchase agreements with banks, brokers and other financial institutions. This
involves the transfer by the Company of the underlying security to a
counterparty in exchange for cash proceeds based on a percentage (which can be
as high as 95% to 100%) of the value of the debt instrument.
Although leverage will increase investment return if the Company earns a
greater return on the investments purchased with borrowed funds than it pays for
the use of those funds, the use of leverage will decrease investment return if
the Company fails to earn as much on investments purchased with borrowed funds
as it pays for the use of those funds. The use of leverage will therefore
magnify the volatility of the value of the Company's investment portfolio. In
the event that the Company's equity or debt instruments decline in value, the
Company could be subject to a "margin call" or "collateral call," pursuant to
which the Company must either deposit additional collateral with the lender or
suffer mandatory liquidation of the pledged securities to compensate for the
decline in value. In the event of a sudden, precipitous drop in value of the
Company's assets, the Company might not be able to liquidate assets quickly
enough to pay off its borrowing. Money borrowed for leveraging will be subject
to interest costs that may or may not be recovered by return on the securities
purchased. The Company also may be required to maintain minimum average balances
in connection with its borrowings or to pay a commitment or other fee to
maintain a line of credit; either of these requirements would increase the cost
of borrowing over the stated interest rate.
The 1940 Act requires the Company to satisfy an asset coverage requirement
of 300% of its indebtedness, including amounts borrowed, measured at the time
the Company incurs the indebtedness (the "Asset Coverage Requirement"). This
means that the value of the Company's total indebtedness may not exceed
one-third the value of its total assets (including such indebtedness), measured
at the time the Company incurs the indebtedness. The staff of the Securities and
Exchange Commission's Division of Investment Management (the "SEC Staff") takes
the position that short sales of securities, reverse repurchase agreements, use
of margin, sales of put and call options on specific securities or indices,
investments in certain other types of instruments (including certain derivatives
such as swap agreements), and the purchase and sale of securities on a
when-issued or forward commitment basis, may be deemed to constitute
indebtedness subject to the Asset Coverage Requirement. Compliance with the
Asset Coverage Requirement will be monitored by the Adviser.
The SEC Staff has stated, however, that it will not deem a portfolio
position involving such instruments to be subject to the Asset Coverage
Requirement if an investment company "covers" its position by segregating liquid
securities on its books or in an account with its custodian in amounts
sufficient to offset the liability associated with the position. Generally, in
conjunction with portfolio positions that are deemed to constitute senior
securities, the
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Company must: (1) observe the Asset Coverage Requirement; (2) maintain daily a
segregated account in cash or liquid securities at such a level that the amount
segregated plus any amounts pledged to a broker as collateral will equal the
current value of the position; or (3) otherwise cover the portfolio position
with offsetting portfolio securities. Segregation of assets or covering
portfolio positions with offsetting portfolio securities may limit the Company's
ability to otherwise invest those assets or dispose of those securities.
In order to obtain "leveraged" market exposure in certain investments and
to increase the overall return to the Company of various investments, the
Company may purchase options and other synthetic instruments that do not
constitute "indebtedness" for purposes of the Asset Coverage Requirement. These
instruments may nevertheless involve significant economic leverage and therefore
may, in some cases, involve significant risks of loss.
SHORT SALES
The Company may attempt to limit exposure to a possible market decline in
the value of its portfolio securities through short sales of securities of
companies that the Adviser (subject to any policies established by the Board of
Managers) believes possess volatility characteristics similar to those being
hedged. In addition, the Company may use short sales for non-hedging purposes to
pursue its investment objective. To effect a short sale, the Company will borrow
a security from a brokerage firm to make delivery to the buyer. The Company is
then obligated to replace the borrowed security by purchasing it at the market
price at the time of replacement. Until the security is replaced, the Company is
required to pay to the brokerage firm any accrued interest or dividend and may
be required to pay a premium.
The Company will realize a gain if the borrowed security declines in price
between the date of the short sale and the date on which the Company replaces
the security. The Company will incur a loss if the price of the borrowed
security increases between those dates. This loss can increase rapidly and
without effective limit. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium or interest the
Company may be required to pay in connection with a short sale. There is a risk
that the borrowed securities would need to be returned to the brokerage firm on
short notice. If a request for return of securities occurs at a time when other
short sellers of the subject security are receiving similar requests, a "short
squeeze" can occur, wherein the Company might be compelled, at the most
disadvantageous time, to replace borrowed securities previously sold short with
purchases on the open market, possibly at prices significantly in excess of the
price at which the securities were sold short. The successful use of short
selling may be adversely affected by imperfect correlation between movements in
the price of the security sold short and the securities being hedged. Short
selling may exaggerate the volatility of the Company's investment portfolio.
Short selling may also produce higher than normal portfolio turnover and may
result in increased transaction costs to the Company.
REVERSE REPURCHASE AGREEMENTS
Reverse repurchase agreements involve the Company's sale of a security to a
bank or securities dealer and the Company's simultaneous agreement to repurchase
that security for a fixed price (reflecting a market rate of interest) on a
specific date. These transactions involve a
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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 Company. Reverse repurchase transactions are a form of leverage which may
also increase the volatility of the Company's investment portfolio. The Company
has adopted specific policies designed to minimize certain of the risks of loss
associated with reverse repurchase transactions.
SPECIAL INVESTMENT INSTRUMENTS AND TECHNIQUES
The Company may utilize a variety of special investment instruments and
techniques (described below) to hedge their investment portfolios against
various risks (such as changes in interest rates or other factors that affect
security values) or for non-hedging purposes to pursue the Company's investment
objective. These strategies may be executed through derivative transactions. The
instruments the Company may use and the particular manner in which they may be
used may change over time as new instruments and techniques are developed or
regulatory changes occur. Certain of the special investment instruments and
techniques that the Company may use are speculative and involve a high degree of
risk, particularly in the context of non-hedging transactions to pursue the
Company's investment objective.
CALL AND PUT OPTIONS ON INDIVIDUAL SECURITIES. The Company may purchase
call and put options in respect of specific securities, and may write and sell
covered or uncovered call and put options for hedging purposes and non-hedging
purposes to pursue its investment objective. A put option gives the purchaser of
the option the right to sell, and obligates the writer to buy, the underlying
security at a stated exercise price at any time prior to the expiration of the
option. Similarly, a call option gives the purchaser of the option the right to
buy, and obligates the writer to sell, the underlying security at a stated
exercise price at any time prior to the expiration of the option.
A covered call option written by the Company is a call option with respect
to which the Company owns the underlying security. The sale of such an option
exposes the Company 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 written by the Company is a put option with
respect to which cash or liquid securities have been placed in a segregated
account on the Company's books or with the Company's custodian to fulfill the
obligation undertaken. The sale of such an option exposes the Company during the
term of the option to a decline in price of the underlying security while
depriving the Company of the opportunity to invest the segregated assets.
The Company may close out a position when writing options by purchasing an
option on the same security with the same exercise price and expiration date as
the option that it has previously written on the security. The Company 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 Company would ordinarily
make a similar "closing sale transaction," which involves liquidating the
Company's position by selling the option previously purchased, although the
Company would be entitled to exercise the option should it deem it advantageous
to do so. The Company may also invest in so-called "synthetic" options or other
derivative instruments written by broker-dealers.
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Options transactions may be effected on securities exchanges or in the
over-the-counter market. When options are purchased over-the-counter by the
Company, the Company 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 may also be illiquid and, in such cases, the Company may
have difficulty closing out its position. Over-the-counter options purchased and
sold by the Company may also include options on baskets of specific securities.
WARRANTS AND RIGHTS. Warrants are derivative instruments that permit, but
do not obligate, the holder to subscribe for other securities or commodities.
Rights are similar to warrants, but normally have a shorter duration and are
offered or distributed to shareholders of a company. Warrants and rights do not
carry with them the right to dividends or voting rights with respect to the
securities that they entitle the holder to purchase, and they do not represent
any rights in the assets of the issuer. As a result, warrants and rights may be
considered more speculative than certain other types of equity-like securities.
In addition, the values of warrants and rights do not necessarily change with
the value of the underlying securities or commodities and these instruments
cease to have value if they are not exercised prior to their expiration dates.
CALL AND PUT OPTIONS ON SECURITIES INDICES. The Company may purchase and
sell call and put options on stock indices listed on national securities
exchanges or traded in the over-the-counter market for hedging purposes and
non-hedging purposes to pursue its investment strategy and the Company's
investment objective. A stock index fluctuates with changes in the market values
of the stocks included in the index. The effectiveness of purchasing or writing
stock index options for hedging purposes will depend upon the extent to which
price movements in the Company's portfolio correlate with price movements of the
stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular stock,
whether the Company will realize a gain or loss from the purchase or writing of
options on an index depends upon movements in the level of stock prices in the
stock market generally or, in the case of certain indexes, in an industry or
market segment, rather than movements in the price of a particular stock.
Accordingly, successful use by the Company 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 of a particular industry or market segment.
This requires different skills and techniques than predicting changes in the
price of individual stocks.
ADDITIONAL DERIVATIVE TRANSACTIONS. The Company may take advantage of
opportunities in the area of swaps, options on various underlying instruments,
swaptions and certain other customized derivative instruments. In addition, the
Company may take advantage of opportunities with respect to certain other
derivative instruments that are not presently contemplated for use by the
Company or which are currently not available, but which may be developed, to the
extent such opportunities are both consistent with the Company's investment
strategy and the Company's investment objective and legally permissible for the
Company. Special risks may apply to instruments that are invested in by the
Company in the future, which risks cannot be determined at this time or until
such instruments are developed or invested in by the Company.
A swap is a contract under which two parties agree to make periodic
payments to each other based on specified interest rates, an index or the value
of some other instrument, applied to a stated, or "notional", amount. Swaps
generally can be classified as interest rate
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swaps, currency swaps, commodity swaps or equity swaps, depending on the type of
index or instrument used to calculate the payments. Such swaps would increase or
decrease the Company's investment exposure to the particular interest rate,
currency, commodity or equity involved. A swaption is an option entitling one
party to enter into a swap agreement with the counterparty. In addition to swaps
and swaptions, the Company may become a party to various other customized
derivative instruments entitling the counterparty to certain payments on the
gain or loss on the value of an underlying or referenced instrument. Certain
swaps, options and other derivative instruments may be subject to various types
of risks, including market risk, liquidity risk, counterparty credit risk, legal
risk and operations risk. In addition, swaps and other derivatives can involve
significant economic leverage and may, in some cases, involve significant risks
of loss.
Foreign Futures and Options. You should also be aware that the Company may
trade foreign futures or options contracts. Transactions on markets located
outside the United States, including on markets formally linked to a United
States market, may be subject to regulations which offer different or diminished
protection to the Company. Further, United States regulatory authorities may be
unable to compel the enforcement of the rules of regulatory authorities or
markets in non-United States jurisdictions where transactions for the Company
may be effected.
LENDING PORTFOLIO SECURITIES
The Company may lend its portfolio securities to domestic and foreign
brokers, dealers and financial institutions. These loans will be secured by
collateral (consisting of cash, U.S. Government Securities or irrevocable
letters of credit) maintained in an amount equal to at least 100% of the market
value, determined daily, of the loaned securities. The Company may at any time
call the loan and obtain the return of the securities loaned. The Company will
be entitled to payments equal to the interest and dividends on the loaned
security and may receive a premium for lending the securities. Lending portfolio
securities may result in income to the Company, but there may be delays in the
recovery of the loaned securities or a loss of rights in the collateral supplied
should the borrower fail financially. Securities lending involves a form of
leverage, and the Company may incur a loss if securities purchased with the
collateral from securities loans decline in value.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES
The Company may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis in order to hedge
against anticipated changes in interest rates and prices. These transactions
involve a commitment by the Company to purchase or sell securities at a future
date (ordinarily one or two months later). The price of the underlying
securities, which is generally expressed in terms of yield, is fixed at the time
the commitment is made, but delivery and payment for the securities takes place
at a later date. No income accrues on securities that have been purchased
pursuant to a forward commitment or on a when-issued basis prior to delivery to
the Company. When-issued securities and forward commitments may be sold prior to
the settlement date. If the Company disposes of the right to acquire a
when-issued security prior to its acquisition or disposes of its right to
deliver or receive against a forward commitment, it may incur a gain or loss.
These transactions will be subject to
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the Company's limitation on indebtedness unless, at the time the Company enters
into such a transaction, a segregated account consisting of cash, U.S.
Government Securities or liquid securities equal to the value of the when-issued
or forward commitment securities is established and maintained. There is a risk
that securities purchased on a when-issued basis may not be delivered and that
the purchaser of securities sold by the Company on a forward basis will not
honor its purchase obligation. In such cases, the Company may incur a loss.
RESTRICTED AND ILLIQUID INVESTMENTS
Although the Company will invest primarily in publicly traded securities,
it may invest up to 15% of the value of its total assets (measured at the time
of investment) in restricted securities and other investments which are
illiquid. Restricted securities are securities that may not be sold to the
public without an effective registration statement under the Securities Act of
1933, as amended (the "1933 Act"), or, if they are unregistered, may be sold
only in a privately negotiated transaction or pursuant to an exemption from
registration. In recognition of the increased size and liquidity of the
institutional markets for unregistered securities and the importance of
institutional investors in the formation of capital, the Securities and Exchange
Commission (the "SEC") has adopted Rule 144A under the 1933 Act, which is
designed to further facilitate efficient trading among qualified institutional
investors by permitting the sale of certain unregistered securities to qualified
institutional buyers. The Company is eligible to purchase securities in Rule
144A transactions if and when it and all other investment companies for which
the Adviser serves as the investment adviser own, in the aggregate, at least
$100 million of securities of unaffiliated issuers. To the extent privately
placed securities held by the Company qualify under Rule 144A, and an
institutional market develops for those securities, the Company likely will be
able to dispose of the securities without registering them under the 1933 Act.
To the extent that qualified institutional buyers become, for a time,
uninterested in purchasing these securities, investing in Rule 144A securities
could have the effect of increasing the level of the Company's illiquidity. The
Company may adopt procedures under which certain Rule 144A securities will not
be deemed to be subject to the 15% of total assets limitation on investments in
restricted and illiquid securities, if certain criteria are satisfied with
respect to those securities and the market therefor. Foreign securities that can
be freely sold in the markets in which they are principally traded are not
considered by the Company to be restricted or illiquid. Regulation S under the
1933 Act permits the sale abroad of securities that are not registered for sale
in the United States. Repurchase agreements with maturities of more than seven
days will be treated as illiquid.
Where registration is required to sell a security, the Company may be
obligated to pay all or part of the registration expenses, and a considerable
period may elapse between the decision to sell and the time the Company may be
permitted to sell a security under an effective registration statement. If,
during such period, adverse market conditions were to develop, the Company might
obtain a less favorable price than prevailed when it decided to sell. Restricted
securities for which no market exists and other illiquid investments are valued
at fair value as determined in accordance with procedures approved and
periodically reviewed by the Board of Managers.
Restricted securities and other illiquid investments involve the risk that
the securities will not be able to be sold at the time desired by the Adviser or
at prices approximating
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the value at which the Company is carrying the securities. As a result, in
determining the proportion of the value of its total assets that will be
invested in restricted and other illiquid investments, the Company will consider
the need to maintain an adequate level of liquidity in its portfolio in order
for the Company to fund the repurchase of interests from Members without
unnecessarily adversely impacting the value of the Company's portfolio. (See
"Redemptions, Repurchases of Interests and Transfers - Repurchases of
Interests.") It is not expected that the Company will invest all or a
substantial portion of the value of its total assets in such restricted or other
illiquid investments.
TEMPORARY INVESTMENTS
For defensive purposes, the Company may temporarily invest all or a
substantial portion of its assets in high quality debt securities, including
money market instruments, or may temporarily hold cash or cash equivalents in
such amounts as the Adviser deems appropriate under the circumstances.
Securities will be deemed to be of high quality if they are rated in the top
three categories by an NRSRO or, if unrated, are determined to be of comparable
quality by the Adviser. Money market instruments are high quality, short-term
debt obligations (which generally have remaining maturities of one year or
less), and may include: U.S. Government Securities; commercial paper;
certificates of deposit and banker's acceptances issued by domestic branches of
United States banks that are members of the Federal Deposit Insurance
Corporation; and repurchase agreements for U.S. Government Securities. In lieu
of purchasing money market instruments, the Company may purchase shares of money
market mutual funds that invest primarily in U.S. Government Securities and
repurchase agreements involving those securities, subject to certain limitations
imposed by the 1940 Act.
The Company may also invest in money market instruments or purchase shares
of money market mutual funds pending investment of its assets in equity
securities or non-money market fixed-income securities, or to maintain such
liquidity as may be necessary to effect repurchases of Interests from Members or
for other purposes.
Repurchase agreements are agreements under which the Company purchases
securities from a bank that is a member of the Federal Reserve System, a foreign
bank or a securities dealer that agrees to repurchase the securities from the
Company at a higher price on a designated future date. If the seller under a
repurchase agreement becomes insolvent, the Company's right to dispose of the
securities may be restricted, or the value of the securities may decline before
the Company is able to dispose of them. In the event of the commencement of
bankruptcy or insolvency proceedings with respect to the seller of the
securities before the repurchase of the securities under a repurchase agreement
is accomplished, the Company may encounter a delay and incur costs, including a
decline in the value of the securities, before being able to sell the
securities. If the seller defaults, the value of the securities may decline
before the Company is able to dispose of them. If the Company enters into a
repurchase agreement that is subject to foreign law and the other party
defaults, the Company may not enjoy protections comparable to those provided to
certain repurchase agreements under U.S. bankruptcy law, and may suffer delays
and losses in disposing of the collateral as a result. The Company has adopted
specific policies designed to minimize certain of the risks of loss from the
Company's repurchase agreement transactions.
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INVESTMENT POLICIES AND RESTRICTIONS
The Company has adopted the following six fundamental investment
restrictions, which cannot be changed without the vote of a majority of the
Company's outstanding voting securities (as defined by the 1940 Act):
(1) The Company will not invest 25% or more of the value of its total
assets in the securities (other than U.S. Government Securities) of
issuers engaged in any single industry.
(2) The Company will not issue senior securities representing stock, but
may borrow money from banks, brokers and other lenders, and may engage
in transactions involving the issuance by the Company of "senior
securities" representing indebtedness, to the extent permitted by the
1940 Act.
(3) The Company will not underwrite securities of other issuers, except
insofar as the Company may be deemed an underwriter under the 1933 Act
in connection with the disposition of its portfolio securities.
(4) The Company will not make loans of money or securities to other
persons, except through purchasing debt securities, lending portfolio
securities or entering into repurchase agreements in a manner
consistent with the Company's investment policies.
(5) The Company will not purchase or sell commodities or commodity
contracts, but the Company may purchase and sell foreign currency and
enter into foreign currency forward contracts, and may engage in other
transactions in financial instruments, in each case to the extent
permitted under the Company's investment policies as in effect from
time to time.
(6) The Company will not purchase, hold or deal in real estate, but may
invest in securities that are secured by real estate or that are
issued by companies that invest or deal in real estate.
The investment objective of the Company is also fundamental and may not be
changed without a vote of a majority of the Company's outstanding voting
securities (as defined by the 1940 Act).
Under the 1940 Act, the vote of a majority of the outstanding voting
securities of an investment company, such as the Company, means the vote, at an
annual or a special meeting of the security holders of the company duly called,
(A) of 67 percent or more of the voting securities present at the meeting, if
the holders of more than 50 percent of the outstanding voting securities of the
company are present or represented by proxy; or (B) of more than 50 percent of
the outstanding voting securities of the company, whichever is less.
With respect to these investment restrictions, and other policies described
in this Confidential Memorandum, if a percentage restriction is adhered to at
the time of entering into the investment or transaction, a later change in
percentage resulting from a change in the values
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of investments or the value of the Company's total assets, unless otherwise
stated, will not constitute a violation of the restriction or policy. In
addition to the restrictions contained in the fundamental investment policies
stated above, the Company is subject to certain restrictions imposed by the 1940
Act on registered investment companies, including restrictions with respect to
its investment in the securities of other investment companies, insurance
companies and companies engaged in certain securities related businesses.
The Bank Holding Company Act of 1956, as amended (the "BHC Act"), together
with the rules and regulations of the Board of Governors of the Federal Reserve
System (the "Federal Reserve"), currently impose certain restrictions on the
ability of bank holding companies and their subsidiaries to own equity
securities of certain issuers. The parent company of the Adviser is Canadian
Imperial Bank of Commerce ("CIBC"), which is subject to the BHC Act.
In particular, CIBC generally may not own or control, directly or
indirectly, 5% or more of the outstanding shares of any class of voting
securities or 25% or more of the outstanding equity (including subordinated
debt) of certain issuers (the "Equity Limit"). Because CIBC may be deemed to
control the Company within the meaning of the BHC Act, the Company's holdings of
all such securities will be aggregated with those of CIBC and its subsidiaries
(including CIBC WM) for purposes of calculating the Equity Limit. Consequently,
the Company generally will be unable to purchase equity securities that, when
taken together with the equity securities of an issuer owned or controlled by
CIBC and its subsidiaries, would cause the Equity Limit to be exceeded. In
addition, CIBC and its subsidiaries generally will be precluded under the BHC
Act from exerting a "controlling influence over the management or policies" of a
company with business activities in the United States. Consequently, activities
in relation to companies in which the Company may invest will need to be
conducted so as not to result in a determination of "control" within the meaning
of the BHC Act.
Under the BHC Act, a foreign bank or a bank holding company may, if it
meets certain criteria, become a financial holding company ("FHC") and engage
(and may acquire companies engaged) in a wide range of activities that are
"financial in nature" (or, in some circumstances, "incidental" or
"complementary" to financial activities), including certain banking, securities,
merchant banking and insurance activities. The BHC Act does not authorize bank
holding companies or FHCs to engage in activities that are not financial in
nature. As of March 13, 2000, CIBC became an FHC.
As an FHC, CIBC may in the future elect to treat the Company as part of its
merchant banking activities. If CIBC were to elect to treat the Company as part
of its merchant banking activities, the Equity Limit would no longer apply to
the Company and the Company would become subject to the provisions of the BHC
Act governing merchant banking activities by affiliates of FHCs. As a result,
certain features of the Company's structure and business plan may be modified
and the organizational documents of the Company may be amended to effect such
modifications.
The Federal Reserve and the U.S. Department of Treasury have issued an
interim regulation (the "Interim Regulation") governing the merchant banking
activities of an FHC that would become applicable to the Company if CIBC elected
to conduct merchant banking activities
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by investment in or through the Company. The Interim Regulation would impose:
limitations on the involvement of the Company, the Adviser and CIBC (and its
subsidiaries and affiliates) in the routine management and operations of a
portfolio company; possible limitations on certain transactions between U.S.
banking offices and any depository institution subsidiaries of CIBC (the "U.S.
Banking Offices") and certain portfolio companies; possible limitations on
cross-marketing by the U.S. Banking Offices with the Company and certain
portfolio companies; and limitations on the duration of the Company's investment
in a portfolio company. (The duration of investments by the Company in a
portfolio company would be limited to a maximum of 10 years under the Interim
Regulation.) Certain recordkeeping and reporting requirements mandated by the
Interim Regulation also would become applicable to the Company. The regulators
have solicited comments on the Interim Regulation and may issue an amended
regulation which would, when issued, also be applicable to the Company.
If CIBC were to elect to treat the Company as part of its merchant banking
activities, in order to ensure compliance with the Interim Regulation, the
participation of the Adviser and the Company in the management and operation of
the Company's portfolio companies would be limited and restricted in certain
ways. If the Company acquired control of a portfolio company and appointed its
representatives to the board of directors, the Interim Regulation would permit
the Company (through its representatives on the board of directors) to exercise
customary oversight over the operations and management of the portfolio company.
However, the Interim Regulation would restrict the Company's representatives
from becoming officers, employees or agents of the portfolio company, from
exercising control (by contract or otherwise) of the routine business decisions
of the portfolio company, and from otherwise becoming involved in the day-to-day
operations of the portfolio company. Nonetheless, the Interim Regulation would
permit the Company's representatives to become involved in the routine
management and operation of the portfolio company, for up to six months (or such
longer period as the Federal Reserve may approve), when such intervention is
necessary to address a material risk to the value or operation of the portfolio
company.
If in the future CIBC ceased to qualify as an FHC under the regulations of
the Federal Reserve, additional restrictions might be imposed on the Company's
activities (such as restrictions on the Company's acquisition of portfolio
companies, which may include the Equity Limit), or CIBC may be required to
divest or restructure its interests in the Company. Investments in banks,
thrifts, bank holding companies and thrift holding companies are subject to
certain limits and approval requirements established by Federal and state
banking laws, including the BHC Act. Accordingly, the Company may limit its
investments in such entities.
The Company would also no longer be subject to the Equity Limit in the
event that CIBC was no longer deemed to "control" the Company for purposes of
the BHC Act. At such time, the Company would be operated so as to ensure that it
continued to not be viewed as "controlled" by CIBC under the BHC Act.
The Adviser does not expect that the restrictions imposed by the BHC Act
will adversely impact the investment operations of the Company.
The Adviser will not cause the Company to make loans to or receive loans
from the Adviser or its affiliates, except to the extent permitted by the 1940
Act or as otherwise
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permitted by applicable law. The Company may effect brokerage transactions
through affiliates of the Adviser, subject to compliance with the 1940 Act. (See
"Conflicts Of Interest - CIBC WM" and "Brokerage.")
ADDITIONAL RISK FACTORS
INCENTIVE ALLOCATION
The Incentive Allocations (defined below) to the Adviser's Special Advisory
Account (defined below) of 15% of the net profits of the Company attributable to
each Master Fund and 5% of the net profits of the Company may create an
incentive for the Adviser to cause the Company to make investments that are
riskier or more speculative than would be the case in the absence of the
Incentive Allocations. In addition, because the Incentive Allocations are
calculated on a basis that includes unrealized appreciation of the Company's
assets, the Incentive Allocations may be greater than if they were based solely
on realized gains. (See "Capital Accounts and Allocations - Incentive
Allocation.")
TAX RISKS
Counsel to the Company will render an opinion that the Company will be
treated as a partnership and not as an association taxable as a corporation for
Federal income tax purposes. Counsel to the Company will also render its opinion
that, under a "facts and circumstances" test set forth in regulations adopted by
the U.S. Treasury Department, the Company will not be treated as a "publicly
traded partnership" taxable as corporation. If it were determined that the
Company should be treated as an association or publicly traded partnership
taxable as a corporation (as a result of a successful challenge to the opinions
rendered by counsel to the Company or otherwise), the taxable income of the
Company would be subject to corporate income tax and distributions of profits
from the Company would be treated as dividends. (See "Tax Aspects - Tax
Treatment of Company Operations - Classification of the Company.")
LACK OF OPERATING HISTORY
The Company is a recently formed entity and has no operating history upon
which investors can evaluate its performance. However, the members of the
Adviser responsible for managing the Company's investment portfolio (including
such members' employees and affiliates) have substantial experience in managing
investment portfolios and private investment funds. Moreover, the Non-Managing
Members of the Adviser whose personnel is primarily responsible for managing the
Company's investment portfolio and such personnel have substantial experience in
managing investment funds that have investment programs that are substantially
similar to the investment programs they intend to pursue for the Company. (See
"Performance Information," "The Adviser, CIBC WM and the Non-Managing Members"
and "Conflicts of Interest - Participation in Investment Opportunities.")
LIQUIDITY RISKS
Interests will not be traded on any securities exchange or other market and
are subject to substantial restrictions on transfer. Although the Company may
offer to repurchase Interests from time to time, a Member may not be able to
liquidate its Interest in the Company
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for up to two years. The Adviser expects that it will recommend to the Board of
Managers that the Company offer to repurchase Interests from Members at the end
of 2001, and, for each year thereafter, twice each year, effective at the end of
the second fiscal quarter and again at the end of the year. (See "Redemptions,
Repurchases of Interests and Transfers.")
DISTRIBUTIONS TO MEMBERS AND PAYMENT OF TAX LIABILITY
The Company does not intend to make periodic distributions of its net
income or gains, if any, to Members. Whether or not distributions are made,
Members will be required each year to pay applicable Federal and state income
taxes on their respective shares of the Company's taxable income, and will have
to pay applicable taxes from other sources. The amount and times of any
distributions will be determined in the sole discretion of the Board of
Managers.
ACTIVE MANAGEMENT OF PORTFOLIO
The Company's investment program emphasizes active management of the
Company's portfolio. Consequently, the Company's portfolio turnover and
brokerage commission expenses may exceed those of other investment entities.
Although the Company cannot accurately predict its portfolio turnover, the
Adviser generally expects that the Company's portfolio turnover rate may exceed
150%. A high turnover rate may also result in the realization of capital gains,
including short-term gains which will be taxable to the Members as ordinary
income.
BANKING REGULATION
CIBC World Markets ("CIBC WM") is an affiliate of CIBC and, as such, is
subject to certain U.S. and Canadian banking laws, including the BHC Act, and to
regulation by the Federal Reserve. These banking laws, rules, regulations and
guidelines and the interpretation and administration thereof by the staff of the
regulatory agencies restrict the transactions between CIBC WM and its
affiliates, on the one hand, and the Company, on the other hand, and may
restrict the investments and transactions by the Company.
SPECIAL RISKS OF MULTI-MANAGER STRUCTURE
The Adviser will receive an Incentive Allocation with respect to a Master
Fund irrespective of the performance of the other Master Funds and the Company
generally. Accordingly, the Adviser may receive an Incentive Allocation with
respect to a Master Fund that has positive performance even if the Company's
overall investment return is negative.
Investment decisions of the Company are made by its Portfolio Managers
entirely independently of each other. As a result, at any particular time, one
Portfolio Manager may be purchasing shares of an issuer whose shares are being
sold by another Portfolio Manager. Consequently, the Company could directly or
indirectly incur certain transaction costs without accomplishing any net
investment result. In addition, a loss resulting from the sale of a security by
one Portfolio Manager may be disallowed for Federal income tax purposes under
the "wash
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sale" rule if such security is purchased by another Portfolio Manager within a
certain period of time after such sale.
A noncorporate investor's share of the Company's investment expenses
(including the asset-based fees at the Company and Master Fund levels and the
performance-based allocations) may be subject to certain limitations on
deductibility for regular Federal income tax purposes and may be completely
disallowed for purposes of determining the noncorporate investor's alternative
minimum tax liability.
THE OFFSHORE FUND- LISTING ON THE IRISH STOCK EXCHANGE
As mentioned above, it is expected that the Offshore Fund will invest
substantially all of its assets in the Company. The Offshore Fund intends to
list its shares on the Irish Stock Exchange, and will be subject to certain
diversification requirements associated with such listing. If necessary, the
Company will comply with such diversification requirements in order to enable
the Offshore Fund to invest in the Company.
BOARD OF MANAGERS
The Board of Managers has overall responsibility for the management and
supervision of the operations of the Company and has approved the Company's
investment program. It exercises the same powers, authority and responsibilities
on behalf of the Company as are customarily exercised by the board of directors
of a registered investment company organized as a corporation, and it has
complete and exclusive authority to oversee and to establish policies regarding
the management, conduct and operation of the Company's business. The persons
comprising the Board of Managers ("Managers") will not contribute to the capital
of the Company in their capacity as Managers, but may subscribe for Interests,
subject to the eligibility requirements described in this Confidential
Memorandum.
The identity of the members of the Board of Managers, and brief
biographical information regarding each Manager, is set forth below.
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION(S) HELD PRINCIPAL OCCUPATION(S)
AND AGE WITH THE COMPANY DURING PAST 5 YEARS
--------------- ---------------- -----------------------
<S> <C> <C>
Sol Gittleman Manager Mr. Gittleman has been Senior Vice
President and Provost of Tufts University
Ballou Hall since 1981. He is a Director of the Mexico
Tufts University Equity and Income Fund, Inc., CIBC
Medford, MA 02155 Oppenheimer Technology Partners, L.L.C.
Age 66 ("Technology Partners"), as well as an
Individual General Partner ("IGP") of
Augusta Partners, L.P. ("Augusta") and
Troon Partners, L.P. ("Troon"), each of
which is associated with CIBC WM; and a
Manager of Sawgrass Fund, L.L.C.
</TABLE>
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<TABLE>
<CAPTION>
NAME, ADDRESS POSITION(S) HELD PRINCIPAL OCCUPATION(S)
AND AGE WITH THE COMPANY DURING PAST 5 YEARS
--------------- ---------------- -----------------------
<S> <C> <C>
("Sawgrass"), for which the Adviser serves
as investment adviser.
Luis Rubio Manager Dr. Rubio is President of Centro de
Investigation Para el Desarrollo, A.C.
Centro de Investigacion (Center of Research Development), an
Para el Desarrollo, A.C. Adjunct Fellow of the Center of Strategic
Jaime Balmes No. 11, D-2 and International Studies, a Member of the
Los Morales Polanco Advisory Board of the National Council of
Mexico D.F. 11510 Science and Technology of Mexico and a
Age 45 Director of the Human Rights Commission of
Mexico City. He is a Director of India
Fund, Inc., Asia Tigers Fund, Inc.,
Technology Partners and certain other
offshore private investment funds, as well
as an IGP of Augusta and Troon, each of
which is associated with CIBC WM; and a
Manager of Sawgrass, for which the Adviser
serves as investment adviser. From 1991 to
1993, Dr. Rubio was a Director of Banco
National de Mexico S.A.
Janet L. Schinderman Manager Ms. Schinderman has been Associate Dean
for Special Projects and Secretary to the
Columbia Business School Board of Overseers at Columbia Business
Office of the Dean School of Columbia University since 1990.
101 Uris Hall From 1987 to 1990, she served as
Columbia University Executive Assistant to the President at
New York, NY 10027 the Illinois Institute of Technology. Ms.
Age 49 Schinderman is also an IGP of Augusta and
Troon, each of which is associated with
CIBC WM; and a Manager of Sawgrass, for
which the Adviser serves as investment
adviser.
Howard M. Singer* Manager Mr. Singer is a Managing Director, Asset
Management, CIBC WM. He is also an IGP of
CIBC World Markets Corp. Augusta and Troon, each of which is
1 World Financial Center associated with CIBC WM; and a Manager of
New York, New York 10281 Sawgrass, Stratigos Fund, L.L.C.,
Age 37 Whistler Fund, L.L.C., Wynstone Fund,
L.L.C. and Xanthus Fund, L.L.C., for
which the Adviser serves as
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS POSITION(S) HELD PRINCIPAL OCCUPATION(S)
AND AGE WITH THE COMPANY DURING PAST 5 YEARS
--------------- ---------------- -----------------------
<S> <C> <C>
investment adviser.
</TABLE>
* Manager who is an "interested person" (as defined by the 1940 Act) of the
Company.
Each of the Managers was elected to the Board of Managers by the
organizational Member of the Company (who is affiliated with CIBC WM). By
signing the limited liability company agreement (the "Company Agreement") of the
Company, each Member will be deemed to have voted for the election of each of
the Managers.
The Managers serve on the Board of Managers for terms of indefinite
duration. A Manager's position in that capacity will terminate if the Manager is
removed, resigns or is subject to various disabling events such as death,
incapacity or bankruptcy. A Manager may resign, subject to giving 90 days' prior
written notice to the other Managers if such resignation is likely to affect
adversely the tax status of the Company, and may be removed either by vote of
two-thirds (2/3) of the Managers not subject to the removal vote or by a vote of
the Members holding not less than two-thirds (2/3) of the total number of votes
eligible to be cast by all Members. In the event of any vacancy in the position
of a Manager, the remaining Managers may appoint an individual to serve as a
Manager, so long as immediately after the appointment at least two-thirds (2/3)
of the Managers then serving have been elected by the Members. The Board of
Managers may call a meeting of Members to fill any vacancy in the position of a
Manager, and must do so within 60 days after any date on which Managers who were
elected by the Members cease to constitute a majority of Managers then serving.
The following table sets forth certain information regarding the
compensation expected to be received by the Managers who are not "interested
persons" (as defined by the 1940 Act) of the Company or the Adviser (the
"Independent Managers") from the Company and from all registered investment
companies for which the Adviser or its affiliates serve as investment adviser
for the calendar year ending December 31, 2001. No compensation is paid by the
Company to Managers who are "interested persons" (as defined by the 1940 Act) of
the Company or the Adviser.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or
Retirement
Benefits Total
Accrued as Part Estimated Annual Compensation
Compensation of Company Benefits Upon from CIBC WM
Name of Person from Company Expenses Retirement Registered Funds
-------------- ------------ ------------ ---------- ----------------
<S> <C> <C> <C> <C>
Sol Gittleman $8,000 0 0 $39,000
Luis Rubio $8,000 0 0 $46,800
Janet Schinderman $8,000 0 0 $31,200
</TABLE>
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<PAGE>
Currently, the Independent Managers are each paid an annual retainer of
$5,000 and per meeting fees of $700 (or $100 in the case of telephonic meetings)
by the Company, and are reimbursed by the Company for their reasonable
out-of-pocket expenses. The Managers do not receive any pension or retirement
benefits from the Company.
The Board of Managers has formed an Audit Committee, comprised of the
Independent Managers, the functions of which are: (i) to oversee the Company's
accounting and financial reporting policies and practices, its internal controls
and, as the Audit Committee may deem necessary or appropriate, the internal
controls of certain service providers; (ii) to oversee the quality and
objectivity of the Company's financial statements and the independent audit
thereof; and (iii) to the extent there are Managers who are not members of the
Audit Committee, to act as a liaison between the Company's independent auditors
and the Board of Managers.
THE ADVISER, CIBC WM AND THE NON-MANAGING MEMBERS
The Adviser serves as the Company's investment adviser and has been given
the responsibility to manage the investment portfolio of the Company, subject to
the ultimate supervision of and subject to any policies established by the Board
of Managers, pursuant to the terms of an investment advisory agreement entered
into between the Company and the Adviser dated and effective as of March 1, 2001
(the "Investment Advisory Agreement"). The Adviser also serves as the investment
adviser of each Master Fund and will be responsible for managing the investment
portfolio of each Master Fund.
The Adviser was formed as a Delaware limited liability company in October
1997 and is registered as an investment adviser under the Investment Advisers
Act of 1940 (the "Advisers Act"). The Adviser serves as an investment adviser or
general partner of other registered and private investment companies. The
offices of the Adviser are located at One World Financial Center, 31st Floor,
200 Liberty Street, New York, New York 10281, and its telephone number is (212)
667-4225.
CIBC WM is the managing member of (and therefore controls) the Adviser and
oversees the Adviser's provision of investment advice to the Company.
Buttonwood, Clareville and Scudder are the initial non-managing members of the
Adviser and have agreed to provide the Adviser with such of their personnel,
research and facilities as the Adviser requires to manage the Company's
investment portfolio. Such personnel have the responsibility, subject only to
the supervision of the personnel of CIBC WM and the Board of Managers, for the
investment advisory services provided to the Company. Based upon its continuing
evaluation of the performance of each Portfolio Manager and its adherence to the
Company's investment objective, the Adviser may allocate a greater or lesser
portion of the Company's assets for management by any Portfolio Manager and may,
subject to the approval of the Board of Managers, reallocate the assets of the
Company in order to increase, decrease or eliminate the use of certain
investment strategies with respect to the assets of the Company. The interests
of CIBC WM and each Non-Managing Member in the Adviser, as such interests relate
to the Adviser's business of providing services to the Company, are represented
by a separate series of interests in the Adviser relating specifically to such
business. Pursuant to applicable law, the debts, liabilities and obligations of
the Adviser related to a particular series are enforceable against the assets of
that series only, and not against the assets of any other series or of the
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<PAGE>
Adviser generally. Similarly, the debts, liabilities and obligations of the
Adviser relating to any other series of interests in the Adviser are not
enforceable against the assets of the series relating to the Company. Other
series of interests in the Adviser represent interests in other business
activities of the Adviser.
As described above, CIBC WM will rely on Kenneth Stemme, an Executive
Director of CIBC WM, to oversee the activities and performance of the Portfolio
Managers. Mr. Stemme will regularly assess the allocation of the Company's
assets among various investment strategies and styles, and determine the
recommended investment strategies to be used in managing the Company's assets.
Mr. Stemme will be the person primarily responsible for allocation of the
Company's assets among the Master Funds and Portfolio Manager selection
recommendations, subject to such policies as may be adopted by and such
approvals as may be required by the Board of Managers.
Mr. Stemme joined CIBC WM in January 1999 as an Executive Director for
Hedge Fund Consulting, and serves as the member of CIBC WM's Hedge Fund Due
Diligence Committee primarily responsible for the day-to-day management of
Whistler Fund, L.L.C., a closed-end, non-diversified, management investment
company substantially all the assets of which are invested in private investment
funds. Prior to joining CIBC WM, Mr. Stemme spent eight and one-half years at
Harris Associates. Harris Associates is a money management firm located in
Chicago with approximately $15 billion under discretionary management at
December 31, 1998. While at Harris, Mr. Stemme participated in a group that
managed up to $1.3 billion in assets in multi-strategy hedge fund portfolios
allocated among up to 60 investment managers. For his last five years with
Harris, Mr. Stemme was one of three professionals responsible for these
portfolios, performing quantitative and qualitative due diligence on existing
and prospective managers, as well as asset allocation among strategies and
managers. Mr. Stemme holds a B.A. in Mathematics and Economics from Cornell
University (1989) and an M.B.A. (with High Honors) from DePaul University
(1994). Mr. Stemme is also a CFA.
The Adviser and companies controlling the Adviser (including CIBC WM, its
managing member, and CIBC, CIBC WM's parent) may be deemed to "control" the
Company, as such term is defined by the 1940 Act. CIBC and its affiliates
(including CIBC WM and the Adviser) are subject to the BHC Act and the rules and
regulations of the Federal Reserve. Because CIBC may be deemed to control the
Company for purposes of the BHC Act, certain activities of the Company may be
restricted by the BHC Act and the rules and regulations of the Federal Reserve
thereunder, as described elsewhere in this Confidential Memorandum.
CIBC WM is a member of the New York Stock Exchange and other principal
securities exchanges. As a registered broker-dealer, CIBC WM is subject to the
informational requirements of the U.S. Securities Exchange Act of 1934, as
amended, and in accordance therewith files reports with the SEC. Such reports
filed by CIBC WM with the SEC will be made available to any prospective investor
upon request. CIBC WM is also registered as an investment adviser with the SEC
under the Advisers Act.
CIBC WM is the U.S. corporate, investment, institutional and private client
banking arm of CIBC, which currently is the second-largest bank in Canada, with
assets of approximately U.S. $175.8 billion and a market capitalization of U.S.
$12.0 billion as of
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<PAGE>
October 31, 2000. Although CIBC has conducted business in the United States for
over a century, the name "CIBC Oppenheimer Corp." was adopted in November 1997
when CIBC Wood Gundy Securities Corp. acquired Oppenheimer & Co., Inc., one of
the largest privately owned, full-service securities firms in the U.S. At the
time of the acquisition, the combined company was renamed "CIBC Oppenheimer
Corp." Effective May 3, 1999, CIBC Oppenheimer Corp. changed its name to CIBC
World Markets Corp. Known globally under the marketing name CIBC World Markets,
this worldwide business offers a complete range of investment and corporate
banking, capital markets, asset management and brokerage activities. CIBC WM
also provides wealth management and retail brokerage services under the
marketing name CIBC Oppenheimer. CIBC WM has approximately 4,500 employees in
the United States and 9,000 worldwide.
Pursuant to the Investment Advisory Agreement, the Adviser is responsible,
subject to the supervision of the Board of Managers, for formulating a
continuing investment program for the Company. It makes all decisions regarding
the Company's assets, including the selection, monitoring and allocation of the
Company's assets across various investment strategies and styles in accordance
with the investment objective and policies of the Company. The Adviser makes all
decisions regarding investment strategies and styles to be pursued by the
Portfolio Managers on behalf of the Company (subject to the supervision of the
Board of Managers).
The Investment Advisory Agreement was approved by the Board of Managers
(including a majority of the Independent Managers), at a meeting held in person
on January [15], 2001, and was also approved on that date by the then sole
Member of the Company. The Investment Advisory Agreement is terminable without
penalty, on 60 days' prior written notice: by the Board of Managers; by vote of
a majority (as defined by the 1940 Act) of the outstanding voting securities of
the Company; or by the Adviser. The initial term of the Investment Advisory
Agreement expires on March 1, 2003. However, the agreement may be continued in
effect from year to year thereafter if such continuance is approved annually by
either the Board of Managers or the vote of a majority (as defined by the 1940
Act) of the outstanding voting securities of the Company, provided that in
either event the continuance is also approved by a majority of the Independent
Managers by vote cast in person at a meeting called for the purpose of voting on
such approval. The Investment Advisory Agreement also provides that it will
terminate automatically in the event of its "assignment," as defined by the 1940
Act and the rules thereunder.
The Investment Advisory Agreement provides that, in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations to the Company, the Adviser and any member, director, officer or
employee thereof, or any of their affiliates, executors, heirs, assigns,
successors or other legal representative, will not be liable to the Company for
any error of judgment, for any mistake of law or for any act or omission by such
person in connection with the performance of services to the Company. The
Investment Advisory Agreement also provides for the Company to indemnify, to the
fullest extent permitted by law, the Adviser, or any member, director, officer
or employee thereof, and any of their affiliates, executors, heirs, assigns,
successors or other legal representatives, against any liability or expense to
which such person may be liable and which arises in connection with the
performance of services to the Company, provided that the liability or expense
is not incurred by
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<PAGE>
reason of the person's willful misfeasance, bad faith, gross negligence or
reckless disregard of its obligations to the Company.
The Investment Advisory Agreement provides that in consideration of the
services provided by the Adviser, the Adviser shall be entitled to be the
Special Advisory Member of the Company. In such capacity, the Adviser is
entitled to receive the Incentive Allocations. (See "Capital Accounts and
Allocations -- Incentive Allocations.") The Incentive Allocations arrangement
between the Company and the Adviser was also approved by the Board of Managers
(including a majority of the Independent Managers), and by vote of the then sole
Member of the Company, on January [15], 2001.
As mentioned above, personnel of the Non-Managing Members will manage the
assets of the Company on behalf of the Adviser subject to the supervision of
CIBC WM. Each of the Non-Managing Members and their personnel who will serve as
Portfolio Managers of the Company are described below.
BUTTONWOOD CAPITAL PARTNERS LIMITED
Buttonwood was incorporated in England on March 4, 1999 and is ultimately
owned by a trust established by Jeffrey M. Weingarten. Buttonwood serves as the
general partner of Buttonwood Capital Partners Limited Partnership, which, by
delegation from Buttonwood Capital Management Company Limited, manages the
investment portfolio of Buttonwood Focus Fund II, L.P., a private investment
partnership. Buttonwood was admitted to Investment Management Regulatory
Organisation ("IMRO") membership in 1999. As of November 30, 2000, Buttonwood
had approximately $50 million in assets under its management. The key personnel
of Buttonwood who will be managing assets of the Company on behalf of Buttonwood
and the Adviser are Buttonwood's directors, Jeffrey M. Weingarten, Francois
Langlade-Demoyen and Paul Feldman, each of whom is described below.
JEFFREY M. WEINGARTEN, age 52, was a Managing Director and Global
Strategist in the International Equity Research division at Goldman Sachs
International from 1995 until 1999, having previously been, from 1987 to 1991,
director of International Research and an International Portfolio Strategist.
From 1991 to 1995, he was a Managing Director and Chief Investment Officer at
Goldman Sachs Asset Management International. From 1977 to 1987, he was a
securities analyst and Vice President and Director of Research in the Equity
Research division at Goldman Sachs & Co. in New York. He became a partner of
Goldman Sachs & Co. in 1990. From 1971 to 1977, Mr. Weingarten was Vice
President and a securities analyst at Scheinman Hochstein & Trotta, New York.
Mr. Weingarten holds a BS in Economics (cum laude) from The Wharton School,
University of Pennsylvania, is a Certified Financial Analyst and is a Member of
the New York Society of Security Analysts and International Investment Analysts
Group.
FRANCOIS LANGLADE-DEMOYEN, age 40, was a Managing Director at Credit Suisse
First Boston Limited with responsibility for European equity strategy and value
based analysis from 1994 until June 1999. He also managed the research associate
program during that time. From 1990 to 1993, Mr. Langlade-Demoyen was a director
and Member of the Board of Credit Suisse First Boston France where he was Head
of the Equity Research and Sales Departments
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<PAGE>
and was a strategist on the French equity market. From 1987 to 1990, he was an
executive director at Goldman Sachs International where he was also a strategist
on the French equity market and a member of the French strategy committee. From
1984 to 1987, he worked for JP Morgan & Co. in Paris and New York. He holds a
PhD (ABD) in Philosophy from Paris Sorbonne University and a PhD (ABD) in
Finance from Paris Dauphine University as well as holding an ESSEC (Ecole
Superieure des Sciences Economiques et Commerciales) diploma, the French
equivalent of an MBA.
PAUL FELDMAN, age 36, was the Chief Investment Officer at Safra Republic
Investments Limited from 1996 until June 1999. From 1991 to 1996, Mr. Feldman
was a quantitative portfolio manager at Goldman Sachs Asset Management
International and from 1987 to 1991, he was a global portfolio strategist at
Goldman Sachs International. Mr. Feldman holds a BA in Mathematics and
Management from Brunel University, London.
CLAREVILLE CAPITAL LIMITED
Clareville was founded in 1995 and admitted to IMRO membership in June
1996. Clareville, which is based in London, specializes in investing in United
Kingdom and continental European equities. The Pegasus Fund Limited ("Pegasus"),
a Bermuda domiciled fund started in November 1997, is Clareville Capital's
flagship investment vehicle, for which Clareville serves as investment manager.
As of December 1, 2000, Clareville had approximately $48 million in client
assets under management.
The key employee of Clareville who will be managing assets of the Company
as a Portfolio Manager is David Yarrow, whose biography appears below.
DAVID YARROW, age 34, is currently the Managing Director and majority
shareholder of Clareville, as well as the portfolio manager for Pegasus. He
joined County Natwest in London as a graduate trainee and worked there as an
institutional stockbroker until moving to New York to join HSBC in 1992. In
1993, he returned to the United Kingdom as a senior European equity salesman at
Natwest Markets and was appointed a Director in 1994. At Natwest Markets his
responsibilities included control of stock selection with the broker's research
department. In April 1996, Mr. Yarrow left Natwest Markets to establish
Clareville Capital. He graduated with an honors degree in Business Studies and
Accounting from Edinburgh University in June 1988.
ZURICH SCUDDER INVESTMENTS, INC.
Scudder provides investment advice to individuals and institutions,
including providing investment advice to over [____] open and closed-end
registered investment companies. Scudder was founded as Scudder, Stevens &
Clark, Inc. in 1919 and in 1953 introduced the first mutual fund available in
the U.S. investing in securities of issuers in several foreign countries.
Scudder is controlled by Zurich Financial Services, Inc., and, as of September
30, 2000, managed approximately $297 billion in assets. The key employee of
Scudder, who will be managing assets of the Company as a Portfolio Manager is
Carol Franklin, whose biography appears below.
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<PAGE>
CAROL FRANKLIN, age 48, is a Managing Director of Scudder and a member of
the firm's Global Equity Group. She serves as Lead Portfolio Manager for the
Kemper New Europe Fund and Scudder Greater Europe Growth Fund and is a member of
the portfolio management team for Scudder International Fund and the IG Scudder
European Growth Fund. In addition, Ms. Franklin manages institutional
international equity portfolios and researches investment opportunities in
several western and eastern European countries. Prior to joining Scudder in
1981, Ms. Franklin was with The Boston Company and Bank of America. Ms. Franklin
studied at the Sorbonne and L'Institute d'Etudes Politiques and received a B.A.
degree with distinction in French Literature from Smith College. She received an
M.B.A. degree in Finance from Columbia University. She is also a Chartered
Financial Analyst and has served as President and Secretary of the New York
Association of International Investors.
PERFORMANCE INFORMATION
Appendix B-1 contains performance information for Buttonwood Focus Fund II,
L.P., which is managed by Buttonwood in accordance with investment objectives
and policies substantially similar to those that Messrs. Weingarten,
Langlade-Demoyen and Feldman intend to maintain with respect to the assets of
the Company under their management. The future performance of Buttonwood Focus
Fund II, L.P. may vary from the future performance of the Company.
Appendix B-2 contains performance information for The Pegasus Fund Limited,
for which David Yarrow serves as portfolio manager and maintains investment
objectives and policies substantially similar to those that he intends to
maintain with respect to the assets of the Company under his management. The
future performance of The Pegasus Fund Limited may vary from the future
performance of the Company.
Appendix B-3 contains performance information for Scudder Greater Europe
Growth Fund, which is managed by Scudder in accordance with investment
objectives and policies substantially similar to those that Carol Franklin
intends to maintain with respect to the assets of the Company under her
management. The future performance of Scudder Greater Europe Growth Fund may
vary from the future performance of the Company.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. This Confidential
Memorandum does not constitute an offer to sell interests in Buttonwood Focus
Fund II, L.P., The Pegasus Fund Limited or Scudder Greater Europe Growth Fund,
the performance of which is presented in Appendices B-1, B-2 and B-3,
respectively.
VOTING
Each Member has the right to cast a number of votes based on the value of
the Member's respective capital account at a meeting of Members called by the
Board of Managers or by Members holding 25% or more of the total number of votes
eligible to be cast. Members will be entitled to vote on any matter on which
shareholders of a registered investment company organized as a corporation would
normally be entitled to vote, including election of Managers, approval of the
agreement with the investment adviser of the Company, and approval of the
Company's auditors, and on certain other matters. Except for the exercise of
their voting
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<PAGE>
privileges, Members in their capacity as such are not entitled to participate in
the management or control of the Company's business, and may not act for or bind
the Company. The interest of the Special Advisory Member is non-voting.
CONFLICTS OF INTEREST
CIBC WM
In addition to serving as the managing member of the Adviser, CIBC WM
(directly or through its affiliates, including the Adviser) carries on
substantial investment activities for its own account and for other registered
investment companies, private investment partnerships, institutions and
individual clients (collectively, "CIBC WM Clients"). The Company has no
interest in these activities. As a result of the foregoing, CIBC WM and its
officers or employees who assist CIBC WM in its management 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 activities between the
Adviser and CIBC WM Clients. Nevertheless, CIBC WM and its officers and
employees will devote only so much time to the affairs of the Adviser as in
their judgment is necessary and appropriate.
CIBC WM acts as the placement agent for the Company and will bear costs
associated with its activities as placement agent. CIBC WM, as managing member
of the Adviser and in its capacity as placement agent for the Company, intends
to compensate its account executives for their ongoing servicing of CIBC WM
Clients with whom they have placed Interests. CIBC WM intends to compensate its
account executives based upon a formula that takes into account the amount of
client assets being serviced as well as the investment results attributable to
clients' assets invested in the Company. Additionally, in connection with
initial and additional purchases of Interests, an investor's account executive
may charge the investor a sales commission of up to 3% of the amount transmitted
for such purchase (up to 3.1% of the amount invested), in the sole discretion of
the account executive. (See "Fees and Expenses," "Capital Accounts and
Allocations - Incentive Allocation" and "Subscriptions for Interests - Sales
Charge.")
Situations may arise in which accounts affiliated with CIBC WM or its
affiliates have purchased securities that would have been suitable for
investment by the Company, but which the Company, for various reasons, did not
choose to purchase. This could affect the availability (or price) of investments
to the Company at a later time. From time to time, in the course of its
brokerage, investment or dealer activities, CIBC WM or its affiliates may trade,
position or invest in, for its own account, the same securities, as those in
which the Company invests. This could have an adverse impact on the Company's
investment performance.
CIBC WM and its affiliates may provide brokerage and other services from
time to time to one or more accounts or entities managed by the Non-Managing
Members or one of their affiliates.
THE NON-MANAGING MEMBERS
The Non-Managing Members, their respective affiliates and certain of the
investment professionals who are principals of or employed by the Non-Managing
Members or
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their respective affiliates (collectively with the Non-Managing Members, the
"NMM Affiliates") carry on substantial investment activities for other advised
accounts and for their own accounts. In addition, the NMM Affiliates advise (or
serve as general partners of) investment funds, and may in the future serve in a
similar capacity for other pooled investment vehicles, including registered
investment companies and private investment funds, established by the
Non-Managing Members, the Portfolio Managers or others, with investment programs
similar to that of the Company. (All accounts managed by the NMM Affiliates,
excluding the Company and the Master Funds, are referred to collectively as the
"NMM Accounts.") The Company has no interest in these activities. As a result of
the foregoing, the Non-Managing Members and the investment professionals of the
Non-Managing Members who, on behalf of the Adviser, will manage the Company's
investment portfolio 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 Company and the NMM Accounts. These persons will
devote only so much time to the affairs of the Adviser as in the judgment of the
applicable Non-Managing Member is necessary and appropriate.
In addition, the NMM Affiliates may receive research products and services
in connection with the brokerage services that CIBC WM and its affiliates may
provide from time to time (i) to one or more NMM Accounts or (ii) to the
Company.
PARTICIPATION IN INVESTMENT OPPORTUNITIES
The Adviser and the NMM Affiliates serve or may serve as the investment
adviser for certain private investment companies and may be appointed in the
future to serve as the investment adviser to other registered investment
companies, private investment partnerships or managed accounts that may pursue
an investment strategy similar to that of the Company (the "Other Accounts"). As
a general matter, the Adviser (subject to any policies established by the Board
of Managers) will consider participation by the Company in all appropriate
investment opportunities that are under consideration by the Adviser or the NMM
Affiliates for investment for the Other Accounts. There may be circumstances,
however, under which the Adviser or the NMM Affiliates will cause one or more of
the Other Accounts to commit a different percentage of their respective assets
to an investment opportunity than to which the Adviser will commit the Company's
assets. There may also be circumstances under which the Adviser or the NMM
Affiliates will consider participation by the Other Accounts in investment
opportunities in which the Adviser does not intend to invest on behalf of the
Company.
The Adviser will evaluate for the Company, and it is anticipated that the
NMM Affiliates will evaluate for each NMM Account, a variety of factors that may
be relevant in determining whether, and to what extent, a particular investment
opportunity or strategy is appropriate and feasible for the Company or an NMM
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
Company and the NMM Accounts in the context of any particular investment
opportunity, the investment activities of the Company and the NMM Accounts may
differ from
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<PAGE>
time to time. In addition, the fees and expenses of the Company may differ from
those of the NMM Accounts. Accordingly, prospective Members should note that the
future performance of the Company and the NMM Accounts or Other Accounts may
vary.
When the Adviser and an NMM Affiliate determine that it would be
appropriate for the Company and one or more NMM Accounts, respectively, to
participate in an investment opportunity at the same time, orders will be
aggregated, placed and allocated on a basis believed to be fair and equitable,
consistent with the Adviser's responsibilities under the Advisers Act and the
1940 Act and Adviser's and NMM Affiliate's own internal procedures. Decisions in
this regard are necessarily subjective and there is no requirement that the
Company participate, or participate to the same extent as the NMM Accounts, in
all trades. However, no participating entity or account will receive
preferential treatment over any other and the Adviser and the NMM Affiliates
will take steps to ensure that no participating entity or account (including the
Company) will be systematically disadvantaged by the aggregation, placement and
allocation of orders.
Situations may occur, however, where the Company could be disadvantaged
because of the investment activities conducted by the NMM Affiliates for the NMM
Accounts. These situations may be based on, among other things, the following:
(1) legal restrictions on the combined size of positions that may be taken for
the Company and the NMM Accounts, thereby limiting the size of the Company's
position; (2) the difficulty of liquidating an investment for the Company and
the NMM Accounts where a Portfolio Manager 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 these options or other instruments. In particular, the
Company may be legally restricted from entering into a "joint transaction" (as
defined by the 1940 Act) with the NMM Accounts with respect to the securities of
an issuer without first obtaining exemptive relief from the SEC. (See "Conflicts
Of Interest - Other Matters.")
The members of the Adviser, and their directors, officers and employees,
may buy and sell securities or other investments for their own accounts and may
have actual or potential conflicts of interest with respect to investments made
by the Adviser on behalf of the Company. As a result of differing trading and
investment strategies or constraints, positions may be taken by directors,
officers and employees of CIBC WM, the Adviser or a Portfolio Manager, or by the
NMM Affiliates for the NMM Accounts, that are the same, different or made at a
different time than positions taken for the Company. In order to mitigate the
possibility that the Company will be adversely affected by this personal
trading, the Company and the Adviser have adopted a Joint Code of Ethics ("Joint
Code of Ethics") in compliance with Section 17(j) of the 1940 Act that restricts
securities trading in the personal accounts of investment professionals and
others who normally come into possession of information regarding the Company's
or Master Funds' portfolio transactions. Investment professionals and others
that are subject to a code of ethics of a Non-Managing Member which complies
with Section 17(j) of the 1940 Act shall be expected to comply with the
provisions of the Non-Managing Member's code of ethics, as incorporated in the
Joint Code of Ethics and attached to the Joint Code of Ethics in Exhibit B
thereof. The Joint 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 Joint
Code of Ethics is also available on the EDGAR Database on the SEC's
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Internet site at http://www.sec.gov, and copies of the Joint Code of Ethics may
be obtained, after paying a duplicating fee, by E-mail at [email protected] or
by writing the SEC's Public Reference Section, Washington, D.C. 20549-0102.
OTHER MATTERS
CIBC WM and the Adviser and its members (and affiliated persons of its
members) will not purchase securities or other property from, or sell securities
or other property to, the Company except that CIBC WM and its affiliated
broker-dealers may act as broker for the Company in effecting securities
transactions. (See "Brokerage.") In addition, the Company may effect certain
principal transactions in securities with one or more NMM Accounts, except for
accounts in which a Non-Managing Member or any affiliate thereof serves as a
general partner or certain accounts in which it has a financial interest (other
than an interest that results solely from a Non-Managing Member's or any
affiliate's appointment as an investment adviser to the account). These
transactions would be effected in circumstances where the Adviser has determined
that it would be appropriate for the Company to purchase and it has been
determined that it would be appropriate for an NMM Account to sell, or the
Company to sell and an NMM Account to purchase, the same security or instrument
on the same day. The purchases and sales would be made pursuant to procedures
adopted by the Company pursuant to Rule 17a-7 under the 1940 Act. Among other
things, those procedures are intended to ensure that: (1) each transaction will
be effected for cash consideration at the current market price of the particular
securities; (2) no transaction will involve restricted securities or other
securities for which market quotations are not readily available; and (3) no
brokerage commissions, fees (except for customary transfer fees) or other
remuneration will be paid in connection with the transaction.
The Company is not permitted to purchase or sell securities of any issuer
as to which the Adviser has obtained material, non-public information, until
such time as the information is no longer material or has become publicly known.
This policy could adversely affect the Company's investment performance because
the Company may (i) hold securities of an issuer with respect to which the
Adviser has adverse information, or (ii) not purchase securities of any issuer
with respect to which the Adviser has favorable information.
As a result of the investment banking and corporate finance activities of
CIBC WM or CIBC, the Company may be subject to future restrictions on its
ability to purchase or sell certain securities. Additionally, the Company may
purchase securities during the existence of an underwriting or selling syndicate
in which CIBC WM or any of its affiliates is participating only subject to
certain conditions. This could have an adverse impact on the Company's
investment performance.
Under the BHC Act and other U.S. banking laws, and the rules, regulations,
guidelines and policies of the regulatory agencies and the staff thereof, CIBC
WM and its affiliates are subject to restrictions on the transactions that they
may make with the Company, and their restrictions may affect the investments
made by the Company.
Future investment activities of CIBC WM (or its affiliates) or the
Investment Mangers (or their respective affiliates) and their principals,
partners, directors, officers or employees may give rise to additional conflicts
of interest.
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BROKERAGE
The Adviser is responsible for placing orders for the execution of the
Company's portfolio transactions and the allocation of brokerage. Transactions
on the great majority of foreign stock exchanges involve the payment of a
combination of fixed and negotiated commissions, while transactions on U.S.
stock exchanges and on some foreign stock exchanges involve the payment of
negotiated brokerage commissions. No stated commission is generally applicable
to securities traded on a principal basis in over-the-counter markets, but the
prices of those securities include undisclosed commissions or mark-ups.
Transactions may also be executed on an agency basis in over-the-counter
markets, which will involve the payment of negotiated or fixed commissions, when
deemed consistent with the Company's brokerage policies.
In selecting brokers and dealers to effect transactions on behalf of the
Company, the Adviser seeks to obtain the best price and execution for the
Company, taking into account factors such as price, size of order, difficulty of
execution and operational facilities of a brokerage firm, the scope and quality
of brokerage services provided, and in the case of transactions effected by the
Company with unaffiliated brokers, the firm's risk in positioning a block of
securities. Although the Adviser generally seeks reasonably competitive
commission rates, the Company will not necessarily pay the lowest commission
available on each transaction. The Company has no obligation to deal with any
broker or group of brokers in executing transactions in portfolio securities.
Consistent with the principle of seeking best price and execution, the
Adviser may place brokerage orders on behalf of the Company with brokers
(including affiliates of CIBC WM) that provide the Adviser, the Non-Managing
Members, the Portfolio Managers or their respective affiliates with supplemental
research, market and statistical information, including advice as to the value
of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, and furnish 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, the Non-Managing Members, the Portfolio Managers or their respective
affiliates in providing services to clients other than the Company. In addition,
not all of the supplemental information is used by the Adviser in connection
with the Company. Conversely, the information provided to the Adviser by brokers
and dealers through which other clients of the Adviser, the Non-Managing
Members, the Portfolio Managers or their respective affiliates effect securities
transactions may be useful to the Adviser in providing services to the Company.
Although the Company cannot accurately predict its portfolio turnover, the
Company generally expects that its annual portfolio turnover rate may exceed
150%. The Company's portfolio turnover rate may exceed that of certain other
private investment companies or other registered investment companies, resulting
in brokerage expenses that may exceed those of other investment companies. A
high turnover rate may also result in the realization of capital gains,
including short-term gains which will be taxable to the Members as ordinary
income.
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The Company may execute portfolio brokerage transactions through CIBC WM or
its affiliates. These transactions would be effected pursuant to procedures
adopted by the Company pursuant to Section 17(e) of the 1940 Act and Rule 17e-1
thereunder. Among other things, Section 17(e) and those procedures provide that
when acting as broker for the Company in connection with the sale of securities
to or by the Company, neither CIBC WM nor any of its affiliates may receive any
compensation exceeding the following limits: (1) if the sale is effected on a
securities exchange, the compensation may not exceed the "usual and customary
broker's commission" (as defined in Rule 17e-1 under the 1940 Act); (2) if the
sale is effected in connection with a secondary distribution of securities, the
compensation cannot exceed 2% of the sale price; and (3) the compensation for
sales otherwise effected cannot exceed 1% of the sales price. Rule 17e-1 defines
a "usual and customary broker's commission" as one that is fair compared to the
commission received by other brokers in connection with comparable transactions
involving similar securities being purchased or sold on an exchange during a
comparable period of time. Morgan Stanley & Co., Inc. will serve as the
Company's prime broker.
FEES AND EXPENSES
CIBC WM will provide certain administration and investor services to the
Company, including, among other things, providing office space and other support
services to the Company, screening potential investors, preparing investor
communications, maintaining and preserving certain records of the Company,
preparing and filing various materials with state and Federal regulators,
providing legal and regulatory advice in connection with administrative
functions and reviewing and arranging for payment of the Company's expenses. In
consideration for these services, the Company will pay CIBC WM a monthly
administration fee of approximately 0.10417% (1.25% on an annualized basis) of
the Company's net assets (the "CIBC WM Fee"). Net assets means the total value
of all assets of the Company, less an amount equal to all accrued debts,
liabilities and obligations of the Company.
In addition to the services described above, CIBC WM will provide certain
other services to the Company, including, among other things: identifying,
making arrangements for and retaining Portfolio Managers on behalf of the
Company; monitoring adherence to the various investment strategies employed by
the Company; due diligence with respect to the selection of Portfolio Managers
and monitoring their performance; regularly assessing the allocation of the
Company's assets among various Master Funds; the establishment and continuance
of Master Funds; and determining the investment strategies desired by the
Adviser for investment of the Company's assets. In consideration for these
services, each Master Fund will pay CIBC WM a monthly administration fee of
approximately 0.02083% (.25% on an annualized basis) of the Master Fund's net
assets (the "Administrative Fee").
The CIBC WM Fee and the Administrative Fee will each be computed based on
the net assets of the Company or a Master Fund, respectively, as of the start of
business on the first business day of each month, after adjustment for any
subscriptions effective on that date, and are due and payable in arrears within
five business days after the end of that month. The CIBC WM Fee and the
Administrative Fee will each be an expense paid to CIBC WM out of the Company's
assets and each Master Fund's assets, respectively. The CIBC WM Fee will be
reflected in each Member's capital account (including the Adviser's capital
account in the
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Company but excluding the Special Advisory Account) as a reduction to net
profits or an increase to net losses credited to or debited against each
Member's capital account. The Administrative Fee will be reflected in the
Company's capital account in the applicable Master Fund. A portion of each of
the CIBC WM Fee and the Administrative Fee will be paid by CIBC WM to the
Non-Managing Members for services provided by them pursuant to the terms of
separate sub-administration agreements.
PFPC Inc. ("PFPC") provides administration, accounting and investor
services to the Company and the Master Funds, which are in addition to the
services provided by CIBC WM, as described above. In consideration for these
services, the Company will pay PFPC a fee (the "PFPC Fee") that is not
anticipated to exceed [0.50]% (annualized) of the Company's net assets, plus
reimbursement of certain out-of-pocket expenses.
In addition, the capital accounts of Members (except the Special Advisory
Account (defined below)) may be subject to Incentive Allocations depending upon
the investment performance of the Company and each Master Fund. (See "Capital
Accounts and Allocations - Incentive Allocation.")
The Company will bear all expenses incurred in its business and operations,
other than those specifically required to be borne by CIBC WM. Expenses borne by
the Company include, but are not limited to, the following:
o all costs and expenses directly related to portfolio transactions and
positions for the Company's or a Master 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 but not yet
purchased, custodial fees, margin fees, transfer taxes and premiums,
taxes withheld on foreign dividends and indirect expenses from
investments;
o all costs and expenses associated with the organization and registration
of the Company and the Master Funds, certain offering costs and the
costs of compliance with any applicable Federal or state laws;
o attorneys' fees and disbursements associated with updating the Company's
Confidential Memorandum and subscription documents (the "Offering
Materials"); the costs of printing the Offering Materials; the costs of
distributing the Offering Materials to prospective investors; and
attorneys' fees and disbursements associated with the review of
subscription documents executed and delivered to the Company in
connection with offerings of Interests;
o the costs and expenses of holding meetings of the Board of Managers and
meetings of Members;
o fees and disbursements of any attorneys, accountants, auditors and other
consultants and professionals engaged on behalf of the Company or a
Master
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Fund; however, in the event that consultants and professionals are
retained for the benefit of the Company or a Master Fund and one or more
other accounts managed by the Adviser or the Non-Managing Members, such
fees will be allocated among all such accounts based on relative net
assets;
o the CIBC WM Fee and the fees of custodians and persons (such as PFPC)
providing administrative services to the Company and the Master Funds;
o the costs of a fidelity bond and any liability insurance obtained on
behalf of the Company or the Board of Managers;
o all expenses of computing the Company's or a Master Fund's net asset
value, including any equipment or services obtained for these purposes;
o all charges for equipment or services used in communicating information
regarding the Company's or a Master Fund's transactions among the
Adviser and any custodian or other agent engaged by the Company; and
o such other types of expenses as may be approved from time to time by the
Board of Managers.
The Adviser will be reimbursed by the Company for any of the above expenses
that it pays on behalf of the Company.
The Company's organizational expenses are estimated at $200,000, and the
Company will also bear certain expenses, not to exceed $100,000, associated with
the initial offering of Interests. Before a recent change to the guidelines
followed by the American Institute of Certified Public Accountants applicable to
the Company, the Company 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. In order to achieve a
more equitable distribution of the impact of those expenses among Members, an
amount equal to the organizational expenses incurred by the Company will be
allocated among and credited to or debited against the capital accounts
(described below) of all Members based on the percentage that a Member's
contributed capital to the Company bears to the total capital contributed to the
Company by all Members 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 Members are made. These allocations will thereafter be adjusted
as of each date, through and including December 31, 2001, on which additional
capital is contributed to the Company by Members. Offering costs cannot be
deducted by the Company or Members.
CAPITAL ACCOUNTS AND ALLOCATIONS
CAPITAL ACCOUNTS
The Company will maintain a separate capital account for each Member
(including the Adviser in respect of any capital contribution to the Company by
the Adviser, as a Member), which will have an opening balance equal to the
Member's initial contribution to the
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capital of the Company. Each Member's capital account will be increased by the
sum of the amount of cash and the value of any securities constituting
additional contributions by the Member to the capital of the Company, plus any
amounts credited to the Member's capital account as described above with respect
to organization expenses or as described below. Similarly, each Member's capital
account will be reduced by the sum of the amount of any repurchase by the
Company of the Interest, or portion thereof, of the Member, plus the amount of
any distributions to the Member which are not reinvested, plus any amounts
debited against the Member's capital account as described above with respect to
organization expenses or as described below.
Capital accounts of Members are adjusted as of the close of business on the
last day of each fiscal period. Fiscal periods begin on the day after the last
day of the preceding fiscal period and end at the close of business on the first
to occur of the following: (1) the last day of a fiscal year; (2) the day
preceding any day on which a contribution to the capital of the Company is made;
(3) any day on which the Company repurchases any Interest or portion of an
Interest of any Member; or (4) any day on which any amount is credited to or
debited against the capital account of any Member other than an amount to be
credited to or debited against the capital accounts of all Members in accordance
with their respective investment percentages. An investment percentage will be
determined for each Member as of the start of each fiscal period by dividing the
balance of the Member's capital account as of the commencement of the period by
the sum of the balances of all capital accounts of all Members as of that date.
The Company will maintain a "Special Advisory Account" for the Adviser
solely for the purpose of receiving the Incentive Allocation, as described
below.
ALLOCATION OF NET PROFITS AND NET LOSSES
Net profits or net losses of the Company for each fiscal period will be
allocated among and credited to or debited against the capital accounts of all
Members (but not the Special Advisory Account) as of the last day of each fiscal
period in accordance with Members' respective investment percentages for the
fiscal period. Net profits or net losses will be measured as the net change in
the value of the net assets of the Company (including any net change in
unrealized appreciation or depreciation of investments and realized income and
gains or losses and expenses (including organizational expenses) during a fiscal
period), before giving effect to any repurchases by the Company of Interests or
portions thereof, and excluding the amount of any items to be allocated among
the capital accounts of the Members other than in accordance with the Members'
respective investment percentages.
Allocations for Federal income tax purposes generally will be made among
the Members so as to reflect equitably amounts credited to or debited from each
Member's capital account for the current and prior fiscal years. (See "Tax
Aspects - Allocation of Profits and Losses.")
INCENTIVE ALLOCATIONS
So long as the Adviser serves as the investment adviser of the Company, the
Adviser will be entitled to be the Special Advisory Member of the Company. In
such capacity,
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the Adviser will be entitled to receive: (i) an incentive allocation with
respect to each Master Fund (each, a "Master Fund Incentive Allocation"),
charged to the capital account of each Member as of the last day of each
"allocation period," of 15% of the amount by which any "allocated gain"
attributable to the Master Fund during an "allocation period" exceeds the
positive balance in the "loss recovery account" with respect to the Master Fund;
and thereafter, (ii) an incentive allocation (the "Company Incentive Allocation"
and together with the Master Fund Incentive Allocations, the "Incentive
Allocations"), charged to the capital account of each Member as of the last day
of each "allocation period," of 5% of the amount by which the "allocated gain"
during an "allocation period" exceeds the positive balance in the Member's "loss
recovery account" with respect to the Company. Each Incentive Allocation will be
credited to the Special Advisory Account of the Adviser.
For purposes of calculating the Incentive Allocations, "allocated gain"
means the excess of the balance of a Member's capital account at the end of an
"allocation period" (after giving effect to allocations other than the Incentive
Allocations, but before giving effect to repurchases of Interests by the
Company, withdrawals of assets from a Master Fund or debits to a Member's
capital account to reflect any item not chargeable ratably to all investors),
over the balance of the Member's capital account at the start of the "allocation
period." Consequently, any Incentive Allocation to be credited to the Adviser
will be increased by a portion of the amount of any net unrealized appreciation,
as well as net realized gains, allocable to a Member.
An Incentive Allocation is charged only with respect to any "allocated
gain" in excess of the positive balance of a "loss recovery account" maintained
for each Member with respect to the Company or such Master Fund, whichever is
applicable. A "loss recovery account" is a memorandum account maintained by the
Company for each Member which has an initial balance of zero and is (1)
increased after the close of each "allocation period" by the amount of any
negative performance for the Member that is attributable to the Company or a
Master Fund, whichever is applicable, during the "allocation period", and (2)
decreased (but not below zero) after the close of each "allocation period" by
the amount of any allocated gain for the Member that is attributable to the
Company or a Master Fund, whichever is applicable, during the "allocation
period." Any positive balance in a Member's "loss recovery account" maintained
with respect to the Company would be reduced as a result of a repurchase or
certain transfers with respect to the Member's Interest in proportion to the
reduction of the Member's capital account attributable to the repurchase or
transfer. Any positive balance in a Member's "loss recovery account" maintained
with respect to a Master Fund would be reduced as a result of a withdrawal or a
repurchase or certain transfers with respect to the Member's Interest in
proportion to the reduction of the Member's capital account attributable to the
repurchase or transfer or as a result of a withdrawal by the Company of assets
invested in a Master Fund pro rata according to the Member's capital account in
the Company in proportion to the reduction of the Company's assets withdrawn
from the Master Fund. A separate "loss recovery account" will be maintained with
respect to the Company and each Master Fund for each Member.
An "allocation period" as to each Member is a period commencing on the
admission of the Member to the Company, and thereafter each period commencing as
of the day following the last day of the preceding allocation period with
respect to such Member, and ending as of the close of business on the first to
occur of (1) the last day of a fiscal year of the Company, (2) the day as of
which the Company repurchases the entire Interest of the Member,
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(3) the day as of which the Company admits as a substitute Member a person to
whom the entire Interest of the Member has been transferred or (4) the day as of
which the Investment Advisory Agreement terminates. The measurement of any
Incentive Allocation for an "allocation period" must take into account any
negative performance from a prior allocation period to the extent reflected in
the applicable "loss recovery account." Therefore, an Incentive Allocation with
respect to the Company or a Master Fund for any allocation period after the
initial allocation period in effect is a reflection of the extent to which
cumulative performance achieved that is attributable to the Company or such
Master Fund with respect to the account of a Member since the Member's admission
to the Company exceeds the highest previous level of performance achieved
through the close of any prior allocation period that is attributable to the
Company or such Master Fund.
By the last business day of the month following the date on which an
Incentive Allocation is made, the Adviser may withdraw up to 100% of the
Incentive Allocation (computed on the basis of unaudited data) that was credited
to the Special Advisory Account and debited from the Member's capital account
with respect to the allocation period. Within 30 days after the completion of
the audit of the Company's books, the Company will pay to the Adviser any
additional amount determined to be owed to the Adviser based upon the audit, and
the Adviser will pay to the Company any excess amount determined to be owed to
the Company.
ALLOCATION OF SPECIAL ITEMS - CERTAIN WITHHOLDING TAXES AND OTHER EXPENDITURES
Withholding taxes or other tax obligations incurred by the
Company which are attributable to any Member will be debited against the capital
account of that Member as of the close of the fiscal period during which the
Company paid those obligations, and any amounts then or thereafter distributable
to the Member will be reduced by the amount of those taxes. If the amount of
those taxes is greater than the distributable amounts, then the Member and any
successor to the Member's Interest is required to pay upon demand to the
Company, as a contribution to the capital of the Company, the amount of the
excess. The Company is not obligated to apply for or obtain a reduction of or
exemption from withholding tax on behalf of any Member, although in the event
that the Company determines that a Member is eligible for a refund of any
withholding tax, it may, at the request and expense of that Member, assist the
Member in applying for a refund.
Generally, any expenditures payable by the Company, to the extent paid or
withheld on behalf of, or by reason of particular circumstances applicable to,
one or more, but fewer than all of the Members, will be charged to only those
Members on whose behalf the payments are made or whose particular circumstances
gave rise to the payments. These charges shall be debited to the capital
accounts of the applicable Members as of the close of the fiscal period during
which the items were paid or accrued by the Company.
RESERVES
Appropriate reserves may be created, accrued and charged against net assets
and proportionately against the capital accounts of the Members for contingent
liabilities as of the date the contingent liabilities become known to the
Company. Reserves will be in such amounts (subject to increase or reduction)
which the Company may deem necessary or appropriate. The
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amount of any reserve (or any increase or decrease therein) will be
proportionately charged or credited, as appropriate, to the capital accounts of
those investors who are Members at the time when the reserve is created,
increased or decreased, as the case may be; provided, however, that if the
reserve (or any increase or decrease therein) exceeds the lesser of $500,000 or
1% of the aggregate value of the capital accounts of all those Members, the
amount of the reserve, increase, or decrease shall instead be charged or
credited to those investors who were Members at the time, as determined by the
Company, of the act or omission giving rise to the contingent liability for
which the reserve was established, increased or decreased in proportion to their
capital accounts at that time.
NET ASSET VALUATION
The value of the net assets of the Company will be determined as of the
close of business at the end of any fiscal period in accordance with the
procedures set forth below or as may be determined from time to time pursuant to
policies established by the Board of Managers.
Domestic exchange traded and NASDAQ listed equity securities (other than
options) will be valued at their last composite sale prices as reported on the
exchanges where those securities are traded. If no sales of those securities are
reported on a particular day, the securities will be valued based upon their
composite bid prices for securities held long, or their composite ask prices for
securities held short, as reported by those exchanges. Securities traded on a
foreign securities exchange will be valued at their last sale prices on the
exchange where the securities are primarily traded, or in the absence of a
reported sale on a particular day, at their bid prices (in the case of
securities held long) or ask prices (in the case of securities held short) as
reported by that exchange. Listed options will be valued at their bid prices (or
ask prices in the case of listed options held short) as reported by the exchange
with the highest volume on the last day a trade was reported. Other securities
for which market quotations are readily available will be valued at their bid
prices (or ask prices in the case of securities held short) as obtained from one
or more dealers making markets for those securities. If market quotations are
not readily available, securities and other assets will be valued at fair value
as determined in good faith by, or under the supervision of, the Board of
Managers.
Debt securities (other than convertible debt securities) will be valued in
accordance with the procedures described above, which with respect to these
securities may include the use of valuations furnished by a pricing service
which employs a matrix to determine valuations for normal institutional size
trading units. The Board of Managers will periodically monitor the
reasonableness of valuations provided by the pricing service. Such debt
securities with remaining maturities of 60 days or less will, absent unusual
circumstances, be valued at amortized cost, so long as this method of valuation
is determined by the Board of Managers to represent fair value.
If in the view of the Adviser, the bid price of a listed option or debt
security (or ask price in the case of any such security held short) does not
fairly reflect the market value of the security, the Adviser may request a
valuation committee comprised of two Managers to instead adopt procedures to
value the security at fair value. In any such situation, the valuation committee
will consider the recommendation of the Adviser, and, if it determines in good
faith
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that an override of the value assigned to the security under the procedures
described above is warranted, will adopt procedures for purposes of determining
the fair value of the security.
All assets and liabilities initially expressed in foreign currencies will
be converted into U.S. dollars using foreign exchange rates provided by a
pricing service compiled as of 4:00 p.m. London time. Trading in foreign
securities generally is completed, and the values of foreign securities are
determined, prior to the close of securities markets in the U.S. Foreign
exchange rates are also determined prior to such close. On occasion, the values
of foreign securities and exchange rates may be affected by events occurring
between the time as of which determination of values or exchange rates are made
and the time as of which the net asset value of the Company is determined. When
an event materially affects the values of securities held by the Company or its
liabilities, such securities and liabilities may be valued at fair value as
determined in good faith by, or under the supervision of, the Board of Managers.
Prospective investors should be aware that situations involving
uncertainties as to the valuation of portfolio positions could have an adverse
effect on the Company's net assets if the Board's judgments regarding
appropriate valuations should prove incorrect.
SUBSCRIPTION FOR INTERESTS
SUBSCRIPTION TERMS
For the first twelve months from the date the Company commences operations,
the Board of Managers may accept initial and additional subscriptions for
Interests as of the first day of each month. Thereafter, the Board of Managers
may accept initial and additional subscriptions for Interests by eligible
investors at such times as may be determined by the Board of Managers, but not
more frequently than as of the first day of each calendar quarter, unless the
Board of Managers has received a letter from counsel to the Adviser stating
that, under applicable banking laws, the Board of Managers may accept initial
and additional subscriptions from eligible investors on a more frequent basis.
All subscriptions are subject to the receipt of cleared funds on or before the
acceptance date in the full amount of the subscription, plus the applicable
sales charge, if any. (See "Subscription for Interests - Sales Charge.") The
investor must also submit a completed subscription document before the
acceptance date. The Board of Managers reserves the right to reject any
subscription for Interests. The Board of Managers may, in its sole discretion,
suspend subscriptions for Interests at any time. The minimum initial investment
in the Company is $150,000 and the minimum additional investment in the Company
is $25,000. The minimum initial and additional contributions may be reduced by
the Board of Managers. In connection with initial and additional investments, an
investor's account executive may impose a sales charge of up to 3% of the amount
transmitted for such investments. Amounts paid as sales charges, if any, are
included for purposes of determining whether applicable minimum investment
requirements have been satisfied. The Board of Managers has authorized the
Company to accept initial subscriptions for Interests in the amount of $50,000
or more from eligible investors who are: Managers of the Company; Managers or
Individual General Partners of any investment company registered under the 1940
Act for which the Adviser or certain of its affiliates serves as investment
adviser; directors, officers, partners, members or employees of the Adviser or
its affiliates or of organizations that serve as counsel to the Company or to
the Independent Managers or provide services to the Company (including
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solicitors for the Company); parents, spouses or children of any of the
foregoing individuals; trusts and retirement accounts for the benefit of such
persons; and entities of which such persons are the sole beneficial owners.
Interests may not be purchased by nonresident aliens, foreign corporations,
foreign partnerships, foreign trusts or foreign estates, all as defined in the
Internal Revenue Code of 1986, as amended (the "Code"). In addition, because the
Company may generate "unrelated business taxable income" ("UBTI"), charitable
remainder trusts may not want to purchase Interests because a charitable
remainder trust will not be exempt from Federal income tax under Section 664(c)
of the Code for any year in which it has UBTI.
Except as otherwise permitted by the Board of Managers, initial and any
additional contributions to the capital of the Company by any Member will be
payable in cash, and all contributions must be transmitted by the time and in
the manner that is specified in the subscription documents of the Company.
Initial and any additional contributions to the capital of the Company will be
payable in one installment and will be due at least three business days prior to
the proposed acceptance date of the contribution, although the Board of Managers
may accept, in its sole discretion, a subscription prior to receipt of cleared
funds.
Each new Member will be obligated to agree to be bound by all of the terms
of the Company Agreement. Each potential investor will also be obligated to
represent and warrant in a subscription agreement, among other things, that the
investor is purchasing an Interest for its own account, and not with a view to
the distribution, assignment, transfer or other disposition of the Interest.
If and when the Board of Managers determines to accept securities as a
contribution to the capital of the Company, the Company will charge each Member
making a contribution of securities an amount determined by the Board of
Managers and not exceeding 2% of the value of the contribution in order to
reimburse the Company for any costs it incurs in liquidating and accepting the
securities. This charge will be due and payable by the contributing Member in
full at the time of the contribution to the capital of the Company to which the
charge relates.
ELIGIBLE INVESTORS
Each prospective investor will be required to certify that the Interest
subscribed for is being acquired directly or indirectly for the account of an
"accredited investor" as defined in Regulation D under the 1933 Act, and that
the investor (as well as each of the investor's beneficial owners under certain
circumstances) has a net worth immediately prior to the time of subscription of
at least $1.5 million or such greater amount as may be required by applicable
law or by the Board of Managers, in its sole discretion. Existing Members who
subscribe for additional Interests will be required to meet the foregoing
eligibility criteria at the time of the additional subscription. The relevant
investor qualifications will be set forth in a subscription agreement that must
be completed by each prospective investor.
SALES CHARGE
In connection with initial and additional purchases of Interests, an
investor's account executive may charge the investor a sales commission of up to
3% of the amount
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transmitted for such purchase (up to 3.1% of the amount invested), in the sole
discretion of the account executive.
REDEMPTIONS, REPURCHASES OF
INTERESTS AND TRANSFERS
NO RIGHT OF REDEMPTION
No Member or other person holding an Interest or a portion of an Interest
acquired from a Member will have the right to require the Company to redeem that
Interest or portion thereof. There is no public market for Interests, and none
is expected to develop. Consequently, investors may not be able to liquidate
their investment other than as a result of repurchases of Interests by the
Company, as described below. (The Adviser will have certain rights to withdraw
amounts from its Special Advisory Account.)
REPURCHASES OF INTERESTS
The Board of Managers, may from time to time and in sole discretion,
determine to cause the Company to repurchase Interests or portions thereof from
Members (other than the Adviser in its capacity as the Special Advisory Member)
pursuant to written tenders by Members on such terms and conditions as it may
determine. In determining whether the Company should repurchase Interests or
portions thereof from Members pursuant to written tenders, the Board of Managers
will consider the recommendation of the Adviser. The Adviser expects that it
will recommend to the Board of Managers that the Company offer to repurchase
Interests from Members at the end of 2001. Thereafter, the Adviser expects that
generally it will recommend to the Board of Managers that the Company offer to
repurchase Interests from Members twice each year, effective June 30 and
December 31. The Board of Managers will also consider the following factors,
among others, in making its determination:
o whether any Members have requested to tender Interests or portions
thereof to the Company;
o the liquidity of the Company's assets;
o the investment plans and working capital requirements of the Company;
o the relative economies of scale with respect to the size of the Company;
o the history of the Company in repurchasing Interests or portions
thereof;
o the economic condition of the securities markets; and
o the anticipated tax consequences of any proposed repurchases of
Interests or portions thereof.
The Company will repurchase Interests or portions thereof from Members
pursuant to written tenders on terms and conditions that the Board of Managers
determines to be fair to the Company and to all Members or persons holding
Interests acquired from Members, or
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to one or more classes of Members, as applicable. When the Board of Managers
determines that the Company shall repurchase Interests or portions thereof,
notice will be provided to Members describing the terms thereof, containing
information Members should consider in deciding whether to participate in the
repurchase opportunity and containing information on how to participate. Members
who are deciding whether to tender their Interests or portions thereof during
the period that a repurchase offer is open may ascertain the net asset value of
their Interests from PFPC during the period.
The Company Agreement provides that the Company shall be dissolved if the
Interest of any Member that has submitted a written request to tender its entire
Interest for repurchase by the Company has not been repurchased within a period
of two years of such request.
Repurchases of Interests or portions thereof from Members by the Company
may be made, in the discretion of the Company, in part or in whole for cash or
for securities of equivalent value and shall be effective after receipt by the
Company of all eligible written tenders of Interests or portions thereof from
Members. The amount due to any Member whose Interest or portion thereof is
repurchased shall be equal to the value of the Member's capital account or
portion thereof based on the net asset value of the Company's assets as of the
effective date of repurchase, after giving effect to all allocations to be made
to the Member's capital account as of that date. Payment of the purchase price
pursuant to a tender of Interests will consist of, first, cash and/or marketable
securities traded on an established securities exchange (valued at net asset
value in accordance with the Company Agreement and distributed to tendering
Members on a pari passu basis) in an aggregate amount equal to at least 95% of
the estimated unaudited net asset value of the Interests tendered, determined as
of the expiration date of the tender offer (the "expiration date"). Payment of
this amount will be made promptly after the expiration date (the "cash payment")
in accordance with the terms of the written offer from the Company to repurchase
Interests. Generally, payment pursuant to a tender will also consist of a
promissory note (the "note") that is not expected to bear interest and is not
transferable, entitling the holder thereof to a contingent payment equal to the
excess, if any, of (a) the net asset value of the Interests tendered as of the
expiration date, determined based on the audited financial statements of the
Company, over (b) the cash payment. The note would be delivered to the tendering
Member promptly after the expiration date and would be payable in cash promptly
after completion of the annual audit of the financial statements of the Company.
The audit of the Company's financial statements will be completed within 60 days
after the end of each year. The Company does not impose any charges on a
repurchase of Interests or portion of Interests.
The Company intends to maintain daily a segregated account on its books or
with its custodian consisting of cash or liquid securities in an amount equal to
the aggregate estimated dollar amount of the notes. Payment for repurchased
Interests may require the Company to liquidate portfolio holdings earlier than
the Adviser would otherwise liquidate these holdings, potentially resulting in
losses, and may increase the Company's portfolio turnover. The Adviser intends
to take measures (subject to such policies as may be established by the Board of
Managers) to attempt to avoid or minimize potential losses and turnover
resulting from the repurchase of Interests.
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A Member who tenders for repurchase only a portion of such Member's
Interest shall be required to maintain a capital account balance equal to the
greater of: (i) $150,000, net of the amount of the Incentive Allocation, if any,
that is to be debited from the capital account of the Member and credited to the
Special Advisory Member Account of the Adviser on the date of expiration of the
tender offer or would be so debited if such date of expiration were a day on
which an Incentive Allocation was made (the "Tentative Incentive Allocation");
or (ii) the amount of the Tentative Incentive Allocation, if any. If a Member
tenders an amount that would cause the Member's capital account balance to fall
below the required minimum, the Company reserves the right to reduce the amount
to be purchased from such Member so that the required minimum balance is
maintained.
The Company may repurchase an Interest or portion thereof of a Member or
any person acquiring an Interest or portion thereof from or through a Member in
the event that:
o the Interest or a portion thereof has been transferred or the Interest
or a portion thereof has vested in any person by operation of law as the
result of the death, dissolution, bankruptcy or incompetency of a
Member;
o ownership of the Interest by a Member or other person will cause the
Company to be in violation of, or require registration of any Interest
or portion thereof under, or subject the Company to additional
registration or regulation under, the securities, commodities or other
laws of the United States or any other relevant jurisdiction;
o continued ownership of the Interest may be harmful or injurious to the
business or reputation of the Company, the Board of Managers or the
Adviser, or may subject the Company or any Members to an undue risk of
adverse tax or other fiscal consequences;
o any of the representations and warranties made by a Member in connection
with the acquisition of an Interest or portion thereof was not true when
made or has ceased to be true; or
o it would be in the best interests of the Company for the Company to
repurchase the Interest or a portion thereof.
In the event that the Adviser holds an Interest in its capacity as a
Member, such Interest or a portion thereof may be tendered for repurchase in
connection with any repurchase offer made by the Company. The Adviser is also
entitled to make withdrawals from its Special Advisory Account at the times
described under "Capital Accounts and Allocations - Incentive Allocation."
TRANSFERS OF INTERESTS
Except as otherwise described below, no person shall become a substituted
Member without the written consent of the Board of Managers, which consent may
be withheld for any reason in its sole discretion. Interests held by Members may
be transferred only with the
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written consent of the Board of Managers, which may be withheld in its sole
discretion and is expected to be granted, if at all, only under extenuating
circumstances. Without limiting the foregoing, the Board of Managers generally
will not consent to a transfer unless the transfer is: (i) by operation of law
pursuant to the death, divorce, bankruptcy, insolvency or dissolution of a
Member; (ii) one in which the tax basis of the Interest in the hands of the
transferee is determined, in whole or in part, by reference to its tax basis in
the hands of the transferring Member (e.g., certain transfers to affiliates,
gifts and contributions to family entities); (iii) to members of the
transferring Member's immediate family (siblings, spouse, parents and children);
(iv) a distribution from a qualified retirement plan or an individual retirement
account; (v) a "block transfer" within the meaning of Treasury Regulations ss.
1.7704-1(e)(2); or (vi) one which does not cause interests in the Company to be
readily tradable on a secondary market or the substantial equivalent thereof, as
determined under Treasury Regulations ss. 1.7704-1(j), unless it consults with
counsel to the Company and such counsel confirms that such transfer will not
cause the Company to be treated as a publicly traded partnership taxable as a
corporation. In addition, the Board of Managers will not consent to a transfer
unless the transferring Member has been a Member for at least six months and the
proposed transfer is to be made on the effective date of an offer by the Company
to repurchase Interests. The foregoing permitted transferees will not be allowed
to become substituted Members without the consent of the Board of Managers,
which may be withheld in its sole discretion. Notice to the Company of any
proposed transfer must include evidence satisfactory to the Board of Managers
that the proposed transfer is exempt from registration under the 1933 Act, that
the proposed transferee meets any requirements imposed by the Company with
respect to investor eligibility and suitability, including the requirement that
any investor (or investor's beneficial owners in certain circumstances) has a
net worth immediately prior to the time of subscription of at least $1.5 million
or such greater amounts as may be required by applicable law or by the Board of
Managers, in its sole discretion, and must be accompanied by a properly
completed subscription agreement. The Board of Managers may not consent to a
transfer of an Interest by a Member unless such transfer is to a single
transferee or after the transfer of a portion of the Interest, the balance of
the capital account of each of the transferee and transferor is not less than
$150,000. A Member who transfers an Interest may be charged reasonable expenses,
including attorneys' and accountants' fees, incurred by the Company in
connection with the transfer.
Any transferee that acquires an Interest or portion thereof in the Company
by operation of law as the result of the death, divorce, dissolution, bankruptcy
or incompetency of a Member or otherwise, shall be entitled to the allocations
and distributions allocable to the Interest so acquired, to transfer the
Interest in accordance with the terms of the Company Agreement and to tender the
Interest for repurchase by the Company, but shall not be entitled to the other
rights of a Member unless and until the transferee becomes a substituted Member
as provided in the Company Agreement.
If a Member transfers an Interest or portion thereof with the approval of
the Board of Managers, the Company shall promptly take all necessary actions so
that each transferee or successor to whom the Interest or portion thereof is
transferred is admitted to the Company as a Member. Each Member and transferee
may be charged for all expenses, including attorneys' and accountants' fees,
incurred by the Company in connection with the transfer.
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By subscribing for an Interest, each Member agrees to indemnify and hold
harmless the Company, the Board of Managers, the Adviser, each other Member and
any affiliate of the foregoing against all losses, claims, damages, liabilities,
costs and expenses (including legal or other expenses incurred in investigating
or defending against any losses, claims, damages, liabilities, costs and
expenses or any judgments, fines and amounts paid in settlement), joint or
several, to which such persons may become subject by reason of or arising from
any transfer made by that Member in violation of these provisions or any
misrepresentation made by that Member in connection with any such transfer.
The Adviser may not transfer its interest as the Special Advisory Member.
TAX ASPECTS
The following is a summary of certain aspects of the income taxation of the
Company and its Members which should be considered by a prospective Member. The
Company has not sought a ruling from the Internal Revenue Service (the
"Service") or any other Federal, state or local agency with respect to any of
the tax issues affecting the Company, nor has it obtained an opinion of counsel
with respect to any Federal tax issues other than the characterization of the
Company as a partnership for Federal income tax purposes.
This summary of certain aspects of the Federal income tax treatment of the
Company is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), judicial decisions, Treasury Regulations (the "Regulations") and
rulings in existence on the date hereof, all of which are subject to change.
This summary does not discuss the impact of various proposals to amend the Code
which could change certain of the tax consequences of an investment in the
Company. This summary also does not discuss all of the tax consequences that may
be relevant to a particular investor or to certain investors subject to special
treatment under the Federal income tax laws, such as insurance companies.
EACH PROSPECTIVE MEMBER SHOULD CONSULT WITH ITS OWN TAX ADVISER IN ORDER
FULLY TO UNDERSTAND THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME TAX
CONSEQUENCES OF AN INVESTMENT IN THE COMPANY.
In addition to the particular matters set forth in this section, tax-exempt
organizations should review carefully those sections of the Memorandum regarding
liquidity and other financial matters to ascertain whether the investment
objectives of the Company are consistent with their overall investment plans.
Each prospective tax-exempt Member is urged to consult its own counsel regarding
the acquisition of Interests.
Tax Treatment of Company Operations
Classification of the Company. The Company will receive an opinion of
Schulte Roth & Zabel LLP, counsel to the Company, that under the provisions of
the Code and the Regulations, as in effect on the date of the opinion, as well
as under the relevant authority interpreting the Code and the Regulations, and
based upon certain representations of the Adviser, the Company will be treated
as a partnership for Federal income tax purposes and not as an association
taxable as a corporation.
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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 Company will
not be traded on an established securities market. Regulations concerning the
classification of partnerships as publicly traded partnerships (the "Section
7704 Regulations") provide certain safe harbors under which interests in a
partnership will not be considered readily tradable on a secondary market (or
the substantial equivalent thereof). The Company may not be eligible for any of
those safe harbors. In particular, it will not qualify under the private
placement safe harbor set forth in the Section 7704 Regulations if the Company
has more than 100 Members.
The Section 7704 Regulations specifically provide that the fact that a
partnership does not qualify for the safe harbors is disregarded for purposes of
determining whether interests in a partnership are readily tradable on a
secondary market (or the substantial equivalent thereof). Rather, in this event
the partnership's status is examined under a general facts and circumstances
test set forth in the Section 7704 Regulations. Schulte Roth & Zabel LLP also
will render its opinion that, under this "facts and circumstances" test, and
based upon the anticipated operations of the Company as well as the legislative
history to Section 7704, the text of the Section 7704 Regulations and certain
representations of the Adviser, the interests in the Company will not be readily
tradable on a secondary market (or the substantial equivalent thereof) and,
therefore, that the Company will not be treated as a publicly traded partnership
taxable as a corporation.
Neither of the opinions of counsel described above, however, is binding on
the Service or the courts. If it were determined that the Company should be
treated as an association or a publicly traded partnership taxable as a
corporation for Federal income tax purposes (as a result of a successful
challenge to such opinions by the Service, changes in the Code, the Regulations
or judicial interpretations thereof, a material adverse change in facts, or
otherwise), the taxable income of the Company would be subject to corporate
income tax when recognized by the Company; distributions of such income, other
than in certain redemptions of Interests, would be treated as dividend income
when received by the Members to the extent of the current or accumulated
earnings and profits of the Company; and Members would not be entitled to report
profits or losses realized by the Company.
As a partnership, the Company is not itself subject to Federal income tax.
The Company files an annual partnership information return with the Service
which reports the results of operations. Each Member is required to report
separately on its income tax return its distributive share of the Company's net
long-term capital gain or loss, net short-term capital gain or loss and all
other items of ordinary income or loss. Each Member is taxed on its distributive
share of the Company's taxable income and gain regardless of whether it has
received or will receive a distribution from the Company.
Certain partnerships such as the Company with 100 or more partners may
elect to have a special set of rules and procedures apply that are intended to
simplify the calculation and reporting of certain partnership items, and the
handling of partnership audits. Among the items that would be affected by the
election are the calculation of long-term capital gains and the tax treatment of
expenses, if any, that are treated as itemized deductions by the partners. If
the
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Company is eligible, the Adviser may elect to have such rules and procedures
apply to the Company if it believes that they may be beneficial to a majority of
the Members. Once the election is made, it cannot be revoked without the consent
of the Service. There can be no assurance that, if such an election is made, the
anticipated benefits will be realized. Furthermore, in certain cases, it is
possible that the election would have an adverse effect on the Members.
Allocation of Profits and Losses. Under the Company Agreement, the
Company's net capital appreciation or net capital depreciation for each
accounting period is allocated among the Members and to their capital accounts
without regard to the amount of income or loss actually recognized by the
Company for Federal income tax purposes. The Company Agreement provides that
items of income, deduction, gain, loss or credit actually recognized by the
Company for each fiscal year generally are to be allocated for income tax
purposes among the Members pursuant to Regulations issued under Sections 704(b)
and 704(c) of the Code, based upon amounts of the Company's net capital
appreciation or net capital depreciation allocated to each Member's capital
account for the current and prior fiscal years.
Under the Company Agreement, the Adviser has the discretion to allocate
specially an amount of the Company's capital gain and loss for Federal income
tax purposes to itself and to a withdrawing Member to the extent that the
Member's capital account exceeds, or is less than, as the case may be, its
Federal income tax basis in its partnership interest. There can be no assurance
that, if the Adviser makes any such special allocations, the Service will accept
such allocations. If such allocations are successfully challenged by the
Service, the Company's gains or losses allocable to the remaining Members would
be affected.
Tax Elections; Returns; Tax Audits. The Code provides for optional
adjustments to the basis of partnership property upon distributions of
partnership property to a partner and transfers of partnership interests
(including by reason of death) provided that a partnership election has been
made pursuant to Section 754. Under the Company Agreement, at the request of a
Member, the Adviser, in its sole discretion, may cause the Company to make such
an election. Any such election, once made, cannot be revoked without the
Service's consent. As a result of the complexity and added expense of the tax
accounting required to implement such an election, the Adviser presently does
not intend to make such election.
The Adviser decides how to report the partnership items on the Company's
tax returns, and all Members are required under the Code to treat the items
consistently on their own returns, unless they file a statement with the Service
disclosing the inconsistency. Given the uncertainty and complexity of the tax
laws, it is possible that the Service may not agree with the manner in which the
Company's items have been reported. In the event the income tax returns of the
Company are audited by the Service, the tax treatment of the Company's income
and deductions generally is determined at the limited liability company level in
a single proceeding rather than by individual audits of the Members. The
Adviser, designated as the "Tax Matters Partner", has considerable authority to
make decisions affecting the tax treatment and procedural rights of all Members.
In addition, the Tax Matters Partner has the authority to bind certain Members
to settlement agreements and the right on behalf of all Members to extend the
statute of limitations relating to the Members' tax liabilities with respect to
Company items.
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Tax Consequences to a Withdrawing Member
A Member receiving a cash liquidating distribution from the Company, in
connection with a complete withdrawal from the Company, generally will recognize
capital gain or loss to the extent of the difference between the proceeds
received by such Member and such Member's adjusted tax basis in its partnership
interest. Such capital gain or loss will be short-term, long-term, or some
combination of both, depending upon the timing of the Member's contributions to
the Company. However, a withdrawing Member will recognize ordinary income to the
extent such Member's allocable share of the Company's "unrealized receivables"
exceeds the Member's basis in such unrealized receivables (as determined
pursuant to the Regulations). For these purposes, accrued but untaxed market
discount, if any, on securities held by the Company will be treated as an
unrealized receivable, with respect to which a withdrawing Member would
recognize ordinary income. A Member receiving a cash nonliquidating distribution
will recognize income in a similar manner only to the extent that the amount of
the distribution exceeds such Member's adjusted tax basis in its partnership
interest.
As discussed above, the Company Agreement provides that the Adviser may
specially allocate items of Company capital gain and loss to a withdrawing
Member to the extent its capital account would otherwise exceed or be less than,
as the case may be, its adjusted tax basis in its partnership interest. Such a
special allocation of gain may result in the withdrawing Member recognizing
capital gain, which may include short-term gain, in the Member's last taxable
year in the Company, thereby reducing the amount of long-term capital gain
recognized during the tax year in which it receives its liquidating distribution
upon withdrawal. Such a special allocation of loss may result in the withdrawing
Member recognizing capital loss, which may include long-term loss, in the
Member's last taxable year in the Company, thereby reducing the amount of
short-term loss recognized during the tax year in which it receives its
liquidating distribution upon withdrawal.
Distributions of Property. A partner's receipt of a distribution of
property from a partnership is generally not taxable. However, under Section 731
of the Code, a distribution consisting of marketable securities generally is
treated as a distribution of cash (rather than property) unless the distributing
partnership is an "investment partnership" within the meaning of Section
731(c)(3)(C)(i) and the recipient is an "eligible partner" within the meaning of
Section 731(c)(3)(C)(iii). The Company will determine at the appropriate time
whether it qualifies as an "investment partnership." Assuming it so qualifies,
if a Member is an "eligible partner", which term should include a Member whose
contributions to the Company consisted solely of cash, the recharacterization
rule described above would not apply.
Tax Treatment of Company Investments
In General. The Company expects to act as a trader or investor, and not as
a dealer, with respect to its securities transactions. A trader and an investor
are persons who buy and sell securities for their own accounts. A dealer, on the
other hand, is a person who purchases securities for resale to customers rather
than for investment or speculation.
Generally, the gains and losses realized by a trader or an investor on the
sale of securities are capital gains and losses. Thus, subject to the treatment
of certain currency
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exchange gains as ordinary income (see "Currency Fluctuations - 'Section 988'
Gains or Losses" below) and certain other transactions described below, the
Company expects that its gains and losses from its securities transactions
typically will be capital gains and capital losses. These capital gains and
losses may be long-term or short-term depending, in general, upon the length of
time the Company maintains a particular investment position and, in some cases,
upon the nature of the transaction. Property held for more than one year
generally will be eligible for long-term capital gain or loss treatment. The
application of certain rules relating to short sales, to so-called "straddle"
and "wash sale" transactions and to Section 1256 Contracts (defined below) may
serve to alter the manner in which the Company's holding period for a security
is determined or may otherwise affect the characterization as short-term or
long-term, and also the timing of the realization, of certain gains or losses.
Moreover, the straddle rules and short sale rules may require the capitalization
of certain related expenses of the Company.
The maximum ordinary income tax rate for individuals is 39.6% and, in
general, the maximum individual income tax rate for long-term capital gains is
20% (unless the taxpayer elects to be taxed at ordinary rates - see "Limitation
on Deductibility of Interest" below), although in all cases the actual rates may
be higher due to the phase out of certain tax deductions, exemptions and
credits. The excess of capital losses over capital gains may be offset against
the ordinary income of an individual taxpayer, subject to an annual deduction
limitation of $3,000. For corporate taxpayers, the maximum income tax rate is
35%. Capital losses of a corporate taxpayer may be offset only against capital
gains, but unused capital losses may be carried back three years (subject to
certain limitations) and carried forward five years.
The Company may realize ordinary income from dividends and accruals of
interest on securities. The Company may hold debt obligations with "original
issue discount." In such case, the Company would be required to include amounts
in taxable income on a current basis even though receipt of such amounts may
occur in a subsequent year. The Company may also acquire debt obligations with
"market discount." Upon disposition of such an obligation, the Company generally
would be required to treat gain realized as interest income to the extent of the
market discount which accrued during the period the debt obligation was held by
the Company. The Company may realize ordinary income or loss with respect to its
investments in partnerships engaged in a trade or business. Income or loss from
transactions involving certain derivative instruments, such as swap
transactions, will also generally constitute ordinary income or loss. In
addition, amounts, if any, payable by the Company in connection with equity
swaps, interest rate swaps, caps, floors and collars likely would be considered
"miscellaneous itemized deductions" which, for a noncorporate Member, may be
subject to restrictions on their deductibility. See "Deductibility of Company
Investment Expenditures by Noncorporate Members" below. Moreover, gain
recognized from certain "conversion transactions" will be treated as ordinary
income.(2)
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(2) Generally, a conversion transaction is one of several enumerated
transactions where substantially all of the taxpayer's return is
attributable to the time value of the net investment in the transaction.
The enumerated transactions are (i) the holding of any property (whether or
not actively traded) and entering into a contract to sell such property (or
substantially identical property) at a price determined in accordance with
such contract, but only if such property was acquired and such contract was
entered into on a substantially contemporaneous basis, (ii) certain
straddles, (iii) generally any other transaction that is marketed or sold
on the basis that it would have the economic
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Currency Fluctuations - "Section 988" Gains or Losses. Since a significant
portion of its investments will be made in securities denominated in a foreign
currency, gain or loss realized by the Company frequently will be affected by
the fluctuation in the value of such foreign currencies relative to the value of
the dollar. Generally, gains or losses with respect to the Company's investments
in common stock of foreign issuers will be taxed as capital gains or losses at
the time of the disposition of such stock. However, under Section 988 of the
Code, gains and losses of the Company on the acquisition and disposition of
foreign currency (e.g., the purchase of foreign currency and subsequent use of
the currency to acquire stock) will be treated as ordinary income or loss.
Moreover, under Section 988, gains or losses on disposition of debt securities
denominated in a foreign currency to the extent attributable to fluctuation in
the value of the foreign currency between the date of acquisition of the debt
security and the date of disposition will be treated as ordinary income or loss.
Similarly, gains or losses attributable to fluctuations in exchange rates that
occur between the time the Company accrues interest or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time the Company actually collects such receivables or pays such liabilities may
be treated as ordinary income or ordinary loss.
As indicated above, the Company may acquire foreign currency forward
contracts, enter into foreign currency futures contracts and acquire put and
call options on foreign currencies. Generally, foreign currency regulated
futures contracts and option contracts that qualify as "Section 1256 Contracts"
(see "Section 1256 Contracts" below), will not be subject to ordinary income or
loss treatment under Section 988. However, if the Company acquires currency
futures contracts or option contracts that are not Section 1256 Contracts, or
any currency forward contracts, any gain or loss realized by the Company with
respect to such instruments will be ordinary, unless (i) the contract is a
capital asset in the hands of the Company and is not a part of a straddle
transaction and (ii) the Company 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. A
Section 1256 Contract includes certain regulated futures contracts, certain
foreign currency forward contracts, and certain options contracts. Under these
rules, Section 1256 Contracts held by the Company at the end of each taxable
year of the Company are treated for Federal income tax purposes as if they were
sold by the Company for their fair market value on the last business day of such
taxable year. The net gain or loss, if any, resulting from such deemed sales
(known as "marking to market"), together with any gain or loss resulting from
actual sales of Section 1256 Contracts, must be taken into account by the
Company in computing its taxable income for such year. If a Section 1256
Contract held by the Company at the end of a taxable year is sold in the
following year, the amount of any gain or loss realized on such sale will be
adjusted to reflect the gain or loss previously taken into account under the
"mark to market" rules.
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characteristics of a loan but the interest-like return would be taxed as
capital gain or (iv) any other transaction specified in Regulations.
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Capital gains and losses from such Section 1256 Contracts generally are
characterized as short-term capital gains or losses to the extent of 40% thereof
and as long-term capital gains or losses to the extent of 60% thereof. Such
gains and losses will be taxed under the general rules described above. Gains
and losses from certain foreign currency transactions will be treated as
ordinary income and losses. (See "Currency Fluctuations - 'Section 988' Gains or
Losses.") If an individual taxpayer incurs a net capital loss for a year, the
portion thereof, if any, which consists of a net loss on Section 1256 Contracts
may, at the election of the taxpayer, be carried back three years. Losses so
carried back may be deducted only against net capital gain to the extent that
such gain includes gains on Section 1256 Contracts.
Mixed Straddle Election. The Code allows a taxpayer to elect to offset
gains and losses from positions which are part of a "mixed straddle." A "mixed
straddle" is any straddle in which one or more but not all positions are Section
1256 Contracts. Pursuant to Temporary Regulations, the Company may be eligible
to elect to establish one or more mixed straddle accounts for certain of its
mixed straddle trading positions. The mixed straddle account rules require a
daily "marking to market" of all open positions in the account and a daily
netting of gains and losses from positions in the account. At the end of a
taxable year, the annual net gains or losses from the mixed straddle account are
recognized for tax purposes. The application of the Temporary Regulations' mixed
straddle account rules is not entirely clear. Therefore, there is no assurance
that a mixed straddle account election by the Company will be accepted by the
Service.
Short Sales. Gain or loss from a short sale of property is generally
considered as capital gain or loss to the extent the property used to close the
short sale constitutes a capital asset in the Company's hands. Except with
respect to certain situations where the property used to close a short sale has
a long-term holding period on the date the short sale is entered into, gains on
short sales generally are short-term capital gains. A loss on a short sale will
be treated as a long-term capital loss if, on the date of the short sale,
"substantially identical property" has been held by the Company for more than
one year. In addition, these rules may also terminate the running of the holding
period of "substantially identical property" held by the Company.
Gain or loss on a short sale will generally not be realized until such time
that the short sale is closed. However, if the Company holds a short sale
position with respect to stock, certain debt obligations or partnership
interests that has appreciated in value and then acquires property that is the
same as or substantially identical to the property sold short, the Company
generally will recognize gain on the date it acquires such property as if the
short sale were closed on such date with such property. Similarly, if the
Company holds an appreciated financial position with respect to stock, certain
debt obligations, or partnership interests and then enters into a short sale
with respect to the same or substantially identical property, the Company
generally will recognize gain as if the appreciated financial position were sold
at its fair market value on the date it enters into the short sale. The
subsequent holding period for any appreciated financial position that is subject
to these constructive sale rules will be determined as if such position were
acquired on the date of the constructive sale.
Effect of Straddle Rules on Members' Securities Positions. The Service may
treat certain positions in securities held (directly or indirectly) by a Member
and its indirect interest in similar securities held by the Company as
"straddles" for Federal income tax purposes. The
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application of the "straddle" rules in such a case could affect a Member's
holding period for the securities involved and may defer the recognition of
losses with respect to such securities.
Limitation on Deductibility of Interest and Short Sale Expenses. For
noncorporate taxpayers, Section 163(d) of the Code limits the deduction for
"investment interest" (i.e., interest or short sale expenses for "indebtedness
properly allocable to property held for investment"). Investment interest is not
deductible in the current year to the extent that it exceeds the taxpayer's "net
investment income," consisting of net gain and ordinary income derived from
investments in the current year less certain directly connected expenses (other
than interest or short sale expenses). For this purpose, any long-term capital
gain is excluded from net investment income unless the taxpayer elects to pay
tax on such amount at ordinary income tax rates.
For purposes of this provision, the Company's activities will be treated as
giving rise to investment income for a Member, and the investment interest
limitation would apply to a noncorporate Member's share of the interest and
short sale expenses attributable to the Company's operation. In such case, a
noncorporate Member would be denied a deduction for all or part of that portion
of its distributive share of the Company's ordinary losses attributable to
interest and short sale expenses unless it had sufficient investment income from
all sources including the Company. A Member that could not deduct losses
currently as a result of the application of Section 163(d) would be entitled to
carry forward such losses to future years, subject to the same limitation. The
investment interest limitation would also apply to interest paid by a
noncorporate Member on money borrowed to finance its investment in the Company.
Potential investors are advised to consult with their own tax advisers with
respect to the application of the investment interest limitation in their
particular tax situations.
Deductibility of Company Investment Expenditures by Noncorporate Members.
Investment expenses (e.g., investment advisory fees) of an individual, trust or
estate are deductible only to the extent they exceed 2% of adjusted gross
income.(3) In addition, the Code further restricts the ability of an individual
with an adjusted gross income in excess of a specified amount (for 2001,
$132,950 or $66,475 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.
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(3) However, Section 67(e) of the Code provides that, in the case of a trust or
an estate, such limitation does not apply to deductions or costs which are
paid or incurred in connection with the administration of the estate or
trust and would not have been incurred if the property were not held in
such trust or estate. The Federal Court of Appeals for the Sixth Circuit,
reversing a Tax Court decision, has held that the investment advisory fees
incurred by a trust were exempt (under Section 67(e)) from the 2% of
adjusted gross income floor on deductibility. The Service, however, has
stated that it will not follow this decision outside of the Sixth Circuit
and the U.S. Court of Federal Claims has recently ruled in favor of the
Service on this issue. Members that are trusts or estates should consult
their tax advisors as to the applicability of this case to the investment
expenses that are allocated to them.
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It is unclear whether all or a portion of the Company's operations will
qualify as trading -- rather than investment -- activities, the expenses for
which would not be treated as investment expenses. Therefore, pursuant to
Temporary Regulations issued by the Treasury Department, these limitations on
deductibility may apply to a noncorporate Member's share of the expenses of the
Company, including the Management Fee.
The consequences of these limitations will vary depending upon the
particular tax situation of each taxpayer. Accordingly, noncorporate Members
should consult their tax advisers with respect to the application of these
limitations.
Application of Rules for Income and Losses from Passive Activities. The
Code restricts the deductibility of losses from a "passive activity" against
certain income which is not derived from a passive activity. This restriction
applies to individuals, personal service corporations and certain closely held
corporations. Pursuant to Temporary Regulations issued by the Treasury
Department, income or loss from the Company's securities investment and trading
activity generally will not constitute income or loss from a passive activity.
Therefore, passive losses from other sources generally could not be deducted
against a Member's share of such income and gain from the Company. Income or
loss attributable to the Company's investment in a partnership engaged in a
non-securities trade or business may constitute passive activity income or loss.
"Phantom Income" From Company Investments. Pursuant to various
"anti-deferral" provisions of the Code (the "Subpart F," "passive foreign
investment company" and "foreign personal holding company" provisions),
investments (if any) by the Company in certain foreign corporations may cause a
Member to (i) recognize taxable income prior to the Company's receipt of
distributable proceeds, (ii) pay an interest charge on receipts that are deemed
as having been deferred or (iii) recognize ordinary income that, but for the
"anti-deferral" provisions, would have been treated as long-term or short-term
capital gain.
Foreign Taxes
It is possible that certain dividends and interest received by the Company
from sources within foreign countries will be subject to withholding taxes
imposed by such countries. In addition, the Company may also be subject to
capital gains taxes in some of the foreign countries where it purchases and
sells securities. To the extent applicable, tax treaties between certain
countries and the United States may reduce or eliminate such taxes. It is
impossible to predict in advance the rate of foreign tax the Company will pay
since the amount of the Company's assets to be invested in various countries is
not known.
The Members will be informed by the Company as to their proportionate share
of the foreign taxes paid by the Company which they will be required to include
in their income. The Members generally will be entitled to claim either a credit
(subject to the limitations discussed below and provided that, in the case of
dividends, the foreign stock is held for the requisite holding period) or, if
they itemize their deductions, a deduction (subject to the limitations generally
applicable to deductions) for their share of such foreign taxes in computing
their Federal income taxes. A Member that is tax exempt will not ordinarily
benefit from such credit or deduction.
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Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the Member's Federal tax (before the credit) attributable to its
total foreign source taxable income. A Member's share of the Company's dividends
and interest from non-U.S. securities generally will qualify as foreign source
income. Generally, the source of gain and loss realized upon the sale of
personal property, such as securities, will be based on the residence of the
seller. In the case of a partnership, the determining factor is the residence of
the partner. Thus, absent a tax treaty to the contrary, the gains and losses
from the sale of securities allocable to a Member that is a U.S. resident
generally will be treated as derived from U.S. sources (even though the
securities are sold in foreign countries). Certain currency fluctuation gains,
including fluctuation gains from foreign currency denominated debt securities,
receivables and payables, will also be treated as ordinary income derived from
U.S. sources.
The limitation on the foreign tax credit is applied separately to foreign
source passive income, such as dividends and interest. In addition, the foreign
tax credit is allowed to offset only 90% of the alternative minimum tax imposed
on corporations and individuals. Furthermore, for foreign tax credit limitation
purposes, the amount of a Member's foreign source income is reduced by various
deductions that are allocated and/or apportioned to such foreign source income.
One such deduction is interest expense, a portion of which will generally reduce
the foreign source income of any Member who owns (directly or indirectly)
foreign assets. For these purposes, foreign assets owned by the Company will be
treated as owned by the investors in the Company and indebtedness incurred by
the Company will be treated as incurred by investors in the Company.
Because of these limitations, Members may be unable to claim a credit for
the full amount of their proportionate share of the foreign taxes paid by the
Company. The foregoing is only a general description of the foreign tax credit
under current law. Moreover, since the availability of a credit or deduction
depends on the particular circumstances of each Member, Members are advised to
consult their own tax advisers.
Unrelated Business Taxable Income
Generally, an exempt organization is exempt from Federal income tax on its
passive investment income, such as dividends, interest and capital gains,
whether realized by the organization directly or indirectly through a
partnership in which it is a partner.(4) This type of income is exempt even if
it is realized from securities trading activity which constitutes a trade or
business.
This general exemption from tax does not apply to the "unrelated business
taxable income" ("UBTI") of an exempt organization. Generally, except as noted
above with respect to certain categories of exempt trading activity, UBTI
includes income or gain derived (either directly or through partnerships) from a
trade or business, the conduct of which is substantially unrelated to the
exercise or performance of the organization's exempt purpose or function. UBTI
also includes "unrelated debt-financed income," which generally consists of (i)
income derived
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(4) With certain exceptions, tax-exempt organizations which are private
foundations are subject to a 2% Federal excise tax on their "net investment
income." The rate of the excise tax for any taxable year may be reduced to
1% if the private foundation meets certain distribution requirements for
the taxable year. A private foundation will be required to make payments of
estimated tax with respect to this excise tax.
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by an exempt organization (directly or through a partnership) from
income-producing property with respect to which there is "acquisition
indebtedness" at any time during the taxable year, and (ii) gains derived by an
exempt organization (directly or through a partnership) from the disposition of
property with respect to which there is "acquisition indebtedness" at any time
during the twelve-month period ending with the date of such disposition. With
respect to its investments in partnerships engaged in a trade or business, the
Company's income (or loss) from these investments may constitute UBTI.
The Company may incur "acquisition indebtedness" with respect to certain of
its transactions, such as the purchase of securities on margin. Based upon a
published ruling issued by the Service which generally holds that income and
gain with respect to short sales of publicly traded stock does not constitute
income from debt financed property for purposes of computing UBTI, the Company
will treat its short sales of securities as not involving "acquisition
indebtedness" and therefore not resulting in UBTI.(5) To the extent the Company
recognizes income (i.e., dividends and interest) from securities with respect to
which there is "acquisition indebtedness" during a taxable year, the percentage
of such income which will be treated as UBTI generally will be based on the
percentage which the "average acquisition indebtedness" incurred with respect to
such securities is of the "average amount of the adjusted basis" of such
securities during the taxable year.
To the extent the Company recognizes gain from securities with respect to
which there is "acquisition indebtedness" at any time during the twelve-month
period ending with the date of their disposition, the percentage of such gain
which will be treated as UBTI will be based on the percentage which the highest
amount of such "acquisition indebtedness" is of the "average amount of the
adjusted basis" of such securities during the taxable year. In determining the
unrelated debt-financed income of the Company, an allocable portion of
deductions directly connected with the Company's debt-financed property is taken
into account. Thus, for instance, a percentage of losses from debt-financed
securities (based on the debt/basis percentage calculation described above)
would offset gains treated as UBTI.
Since the calculation of the Company's "unrelated debt-financed income" is
complex and will depend in large part on the amount of leverage used by the
Company from time to time,(6) it is impossible to predict what percentage of the
Company's income and gains will be treated as UBTI for a Member which is an
exempt organization. An exempt organization's share of the income or gains of
the Company which is treated as UBTI may not be offset by losses of the exempt
organization either from the Company or otherwise, unless such losses are
treated as attributable to an unrelated trade or business (e.g., losses from
securities for which there is acquisition indebtedness).
To the extent that the Company generates UBTI, the applicable Federal tax
rate for such a Member generally would be either the corporate or trust tax rate
depending upon the nature of the particular exempt organization. An exempt
organization may be required to
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(5) Moreover, income realized from option writing and futures contract
transactions generally would not constitute UBTI.
(6) The calculation of a particular exempt organization's UBTI would also be
affected if it incurs indebtedness to finance its investment in the
Company. An exempt organization is required to make estimated tax payments
with respect to its UBTI.
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support, to the satisfaction of the Service, the method used to calculate its
UBTI. The Company will be required to report to a Member which is an exempt
organization information as to the portion of its income and gains from the
Company for each year which will be treated as UBTI. The calculation of such
amount with respect to transactions entered into by the Company is highly
complex, and there is no assurance that the Company's calculation of UBTI will
be accepted by the Service.
In general, if UBTI is allocated to an exempt organization such as a
qualified retirement plan or a private foundation, the portion of the Company's
income and gains which is not treated as UBTI will continue to be exempt from
tax, as will the organization's income and gains from other investments which
are not treated as UBTI. Therefore, the possibility of realizing UBTI from its
investment in the Company generally should not affect the tax-exempt status of
such an exempt organization.(7) However, a charitable remainder trust will not
be exempt from Federal income tax under Section 664(c) of the Code for any year
in which it has UBTI. A title-holding company will not be exempt from tax if it
has certain types of UBTI. Moreover, the charitable contribution deduction for a
trust under Section 642(c) of the Code may be limited for any year in which the
trust has UBTI. A prospective investor should consult its tax adviser with
respect to the tax consequences of receiving UBTI from the Company. (See "ERISA
Considerations.")
Certain Issues Pertaining to Specific Exempt Organizations
Private Foundations. Private foundations and their managers are subject to
excise taxes if they invest "any amount in such a manner as to jeopardize the
carrying out of any of the foundation's exempt purposes." This rule requires a
foundation manager, in making an investment, to exercise "ordinary business care
and prudence" under the facts and circumstances prevailing at the time of making
the investment, in providing for the short-term and long-term needs of the
foundation to carry out its exempt purposes. The factors which a foundation
manager may take into account in assessing an investment include the expected
rate of return (both income and capital appreciation), the risks of rising and
falling price levels, and the need for diversification within the foundation's
portfolio.
In order to avoid the imposition of an excise tax, a private foundation may
be required to distribute on an annual basis its "distributable amount," which
includes, among other things, the private foundation's "minimum investment
return," defined as 5% of the excess of the fair market value of its
nonfunctionally related assets (assets not used or held for use in carrying out
the foundation's exempt purposes), over certain indebtedness incurred by the
foundation in connection with such assets. It appears that a foundation's
investment in the Company would most probably be classified as a nonfunctionally
related asset. A determination that an interest in the Company is a
nonfunctionally related asset could conceivably cause cash flow problems for a
prospective Member which is a private foundation. Such an organization could be
required to make distributions in an amount determined by reference to
unrealized appreciation in the value of its interest in the Company. Of course,
this factor would create less of a problem to the extent
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(7) Certain exempt organizations which realize UBTI in a taxable year will not
constitute "qualified organizations" for purposes of Section
514(c)(9)(B)(vi)(I) of the Code, pursuant to which, in limited
circumstances, income from certain real estate partnerships in which such
organizations invest might be treated as exempt from UBTI. A prospective
tax-exempt Member should consult its tax adviser in this regard.
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that the value of the investment in the Company is not significant in relation
to the value of other assets held by a foundation.
In some instances, an investment in the Company by a private foundation may
be prohibited by the "excess business holdings" provisions of the Code. For
example, if a private foundation (either directly or together with a
"disqualified person") acquires more than 20% of the capital interest or profits
interest of the Company, the private foundation may be considered to have
"excess business holdings." If this occurs, such foundation may be required to
divest itself of its interest in the Company in order to avoid the imposition of
an excise tax. However, the excise tax will not apply if at least 95% of the
gross income from the Company is "passive" within the applicable provisions of
the Code and Regulations. Although there can be no assurance, the Adviser
believes that the Company will meet such 95% gross income test.
A substantial percentage of investments of certain "private operating
foundations" may be restricted to assets directly devoted to their tax-exempt
purposes. Otherwise, generally, rules similar to those discussed above govern
their operations.
Qualified Retirement Plans. Employee benefit plans subject to the
provisions of ERISA, Individual Retirement Accounts and Keogh Plans should
consult their counsel as to the implications of such an investment under ERISA.
(See "ERISA Considerations.")
Endowment Funds. Investment managers of endowment funds should consider
whether the acquisition of an Interest is legally permissible. This is not a
matter of Federal law, but is determined under state statutes. It should be
noted, however, that under the Uniform Management of Institutional Funds Act,
which has been adopted, in various forms, by a large number of states,
participation in investment partnerships or similar organizations in which funds
are commingled and investment determinations are made by persons other than the
governing board of the endowment fund is allowed.
State and Local Taxation
In addition to the Federal income tax consequences described above,
prospective investors should consider potential state and local tax consequences
of an investment in the Company. State and local tax laws differ in the
treatment of limited liability companies such as the Company. A few
jurisdictions may impose entity level taxes on a limited liability company if it
is found to have sufficient contact with that jurisdiction. Such taxes are
frequently based on the income and capital of the entity that is allocated to
the jurisdiction. Although there can be no assurance, except as noted below, the
Company intends to conduct its activities so that it will not be subject to
entity level taxation by any state or local jurisdiction.
State and local laws often differ from Federal income tax laws with respect
to the treatment of specific items of income, gain, loss, deduction and credit.
A Member's distributive share of the taxable income or loss of the Company
generally will be required to be included in determining its reportable income
for state and local tax purposes in the jurisdiction in which it is a resident.
A partnership in which the Company acquires an interest may conduct business in
a jurisdiction which will subject to tax a Member's share of the partnership's
income from that
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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
Member is a resident.
The Company, which is treated as a partnership for New York State and New
York City income tax purposes, should not be subject to the New York City
unincorporated business tax, which is not imposed on a partnership which
purchases and sells securities for its "own account." (This exemption may not be
applicable to the extent a partnership in which the Company invests conducts a
business in New York City.) By reason of a similar "own account" exemption, it
is also expected that a nonresident individual Member should not be subject to
New York State personal income tax with respect to his share of income or gain
realized directly by the Company. A nonresident individual Member will not be
subject to New York City earnings tax on nonresidents with respect to his
investment in the Company.
Individual Members 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. These limitations may apply to a Member's share of some
or all of the Company's expenses. Prospective Members 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 partnership interest in a
partnership which does business in New York State and New York City,
respectively.(8) Each of the New York State and New York City corporate taxes
are imposed, in part, on the corporation's taxable income or capital allocable
to the relevant jurisdiction by application of the appropriate allocation
percentages. Moreover, a non-New York corporation which does business in New
York State may be subject to a New York State license fee. A corporation which
is subject to New York State corporate franchise tax solely as a result of being
a non-managing member 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.
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 Company's qualification as such a portfolio investment
partnership must be determined on
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(8) New York State (but not New York City) generally exempts from corporate
franchise tax a non-New York corporation which (i) does not actually or
constructively own a 1% or greater limited partnership interest in a
partnership doing business in New York and (ii) has a tax basis in such
limited partnership interest not greater than $1 million.
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an annual basis and, with respect to a taxable year, the Company 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 Member should consult its tax adviser with
regard to the New York State and New York City tax consequences of an investment
in the Company.
United Kingdom Taxation
The following is a summary prepared by Ernst & Young UK of the expected
United Kingdom ("U.K.") taxation treatment of the Company and the Master Funds,
and of participation by non-U.K. resident Members in the Fund based upon current
law and practice (which, in either case, may change). This summary is of a
general nature only, and should not be construed as tax advice to any particular
investor. Prospective Members should consult their own professional advisers on
the taxation implications of their investment in the Company.
Under current laws of the U.K., companies such as the Company and the
Master Funds, which are not incorporated in the U.K. will be liable for (i) U.K.
corporation tax on their worldwide profits if they are residents in the U.K. for
tax purposes; (ii) U.K. corporation tax in respect of profits of a branch,
agency or fixed place of business which they have in the U.K.; and (iii) U.K.
income tax on U.K. source income. The affairs of the Company and the Master
Funds will be conducted in such a way so that the control and management of the
Company and the Master Funds are situated outside the U.K. for U.K. tax
purposes. Therefore, none of the Company, the Company's non-U.K. resident
Members or the Master Funds should be liable for U.K. tax on their worldwide
income. The Company's and the Master Funds' affairs will also be conducted in
such a way so that no U.K. tax is assessable on any branch, agency or fixed
place of business of the Company or the Master Funds in the U.K. in respect of
the profits of the Company or the Master Funds. In particular, it is intended
that the Company and the Master Funds will operate in accordance with the
conditions of Section 127 Finance Act 1995 so that, in the event that the
activities of the Company or the Master Funds are regarded as trading
activities, no liability for U.K. tax should arise on the profits from those
activities. The Company, the Company's Members and the Master Funds may be
liable for U.K. income tax in respect of U.K. source income.
ERISA CONSIDERATIONS
Persons who are fiduciaries with respect to an employee benefit plan, IRA,
Keogh plan or other arrangement subject to the Employee Retirement Income
Security Act of 1974, as
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<PAGE>
amended ("ERISA") or the Code (an "ERISA Plan") should consider, among other
things, the matters described below before determining whether to invest in the
Company.
ERISA imposes certain general and specific responsibilities on persons who
are fiduciaries with respect to an ERISA Plan, including prudence,
diversification, prohibited transaction and other standards. In determining
whether a particular investment is appropriate for an ERISA Plan, Department of
Labor ("DOL") regulations provide that a fiduciary of an ERISA Plan must give
appropriate consideration to, among other things, the role that the investment
plays in the ERISA Plan's portfolio, taking into consideration whether the
investment is designed reasonably to further the ERISA Plan's purposes, an
examination of the risk and return factors, the portfolio's composition with
regard to diversification, the liquidity and current return of the total
portfolio relative to the anticipated cash flow needs of the ERISA Plan, the
income tax consequences of the investment (see "TAX ASPECTS - Unrelated Business
Taxable Income" and "- Certain Issues Pertaining to Specific Exempt
Organizations"), and the projected return of the total portfolio relative to the
ERISA Plan's funding objectives. Before investing the assets of an ERISA Plan in
the Company, a fiduciary should determine whether such an investment is
consistent with its fiduciary responsibilities and the foregoing regulations.
For example, a fiduciary should consider whether an investment in the Company
may be too illiquid or too speculative for a particular ERISA Plan, and whether
the assets of the ERISA Plan would be sufficiently diversified. If a fiduciary
with respect to any such ERISA Plan breaches his responsibilities with regard to
selecting an investment or an investment course of action for such ERISA Plan,
the fiduciary may be held personally liable for losses incurred by the ERISA
Plan as a result of such breach.
Because the Company is registered as an investment company under the 1940
Act, the underlying assets of the Company should not be considered to be "plan
assets" of the ERISA Plans investing in the Company for purposes of ERISA's
fiduciary responsibility and prohibited transaction rules. Thus, neither the
Adviser nor any of the Managers will be fiduciaries within the meaning of ERISA.
The Board of Managers requires an ERISA Plan proposing to invest in the
Company to represent that it, and any fiduciaries responsible for the Plan's
investments, are aware of and understand the Company's investment objective,
policies and strategies, that the decision to invest plan assets in the Company
was made with appropriate consideration of relevant investment factors with
regard to the ERISA Plan and is consistent with the duties and responsibilities
imposed upon fiduciaries with regard to their investment decisions under ERISA.
Certain prospective Plan investors may currently maintain relationships
with the Adviser or the Managers, or with other entities which are affiliated
with the Adviser or the Managers. Each of such persons may be deemed to be a
party in interest to and/or a fiduciary of any ERISA Plan to which it provides
investment management, investment advisory or other services. ERISA prohibits
ERISA Plan assets to be used for the benefit of a party in interest and also
prohibits an ERISA Plan fiduciary from using its position to cause the ERISA
Plan to make an investment from which it or certain third parties in which such
fiduciary has an interest would receive a fee or other consideration. ERISA Plan
investors should consult with counsel to determine if participation in the
Company is a transaction which is prohibited by ERISA or the Code. Fiduciaries
of ERISA or Benefit Plan investors will be required to represent that the
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<PAGE>
decision to invest in the Company was made by them as fiduciaries that are
independent of such affiliated persons, that are duly authorized to make such
investment decision and that have not relied on any individualized advice or
recommendation of such affiliated persons, as a primary basis for the decision
to invest in the Company.
The provisions of ERISA are subject to extensive and continuing
administrative and judicial interpretation and review. The discussion of ERISA
contained in this Confidential Memorandum, is, of necessity, general and may be
affected by future publication of regulations and rulings. Potential investors
should consult with their legal advisors regarding the consequences under ERISA
of the acquisition and ownership of interests.
ADDITIONAL INFORMATION AND SUMMARY OF
LIMITED LIABILITY COMPANY AGREEMENT
The following is a summary description of additional items and of select
provisions of the Company Agreement which may not be described elsewhere in this
Confidential Memorandum. The description of such items and provisions is not
definitive and reference should be made to the complete text of the Company
Agreement, which is attached hereto as Appendix A.
MEMBER INTERESTS
Persons who purchase Interests in the offering being made hereby will be
Members. The Adviser and its affiliates may contribute capital to and maintain
an investment in the Company, and to that extent will be Members of the Company.
The Adviser, or its successor as investment adviser of the Company, will also be
a Special Advisory Member of the Company. In that regard, the Company has
established a Special Advisory Account solely for the purpose of receiving the
Incentive Allocation. The interest of the Special Advisory Member does not
participate in the income or gains of the Company, has no voting rights and has
no right to a share of the assets of the Company upon its liquidation, except to
the extent that the Special Advisory Member has received or is entitled to
receive the Incentive Allocation credited to the Special Advisory Account and
all or a portion of that Incentive Allocation has not been withdrawn. The
Adviser may not contribute capital to the Company as Special Advisory Member.
LIABILITY OF MEMBERS
Under Delaware law and the Company Agreement, each Member will be liable
for the debts and obligations of the Company only to the extent of any
contributions to the capital of the Company (plus any accretions in value
thereto prior to withdrawal) and a Member, in the sole discretion of the Board
of Managers, may be obligated to return to the Company amounts distributed to
the Member in accordance with the Company Agreement in certain circumstances
where after giving effect to the distribution, certain liabilities of the
Company exceed the fair market value of the Company's assets.
-87-
<PAGE>
DUTY OF CARE OF MANAGERS
The Company Agreement provides that a Manager shall not be liable to the
Company or any of the Members for any loss or damage occasioned by any act or
omission in the performance of the Manager's services as such in the absence of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the Manager's office. The Company Agreement
also contains provisions for the indemnification, to the extent permitted by
law, of a Manager by the Company (but not by the Members individually) against
any liability and expense to which the Manager may be liable which arise in
connection with the performance of the Manager's activities on behalf of the
Company. Managers shall not be personally liable to any Member for the repayment
of any positive balance in the Member's capital account or for contributions by
the Member to the capital of the Company or by reason of any change in the
Federal or state income tax laws applicable to the Company or its investors. The
rights of indemnification and exculpation provided under the Company Agreement
shall not be construed so as to provide for indemnification of a Manager for any
liability (including liability under Federal securities laws which, under
certain circumstances, impose liability even on persons that act in good faith),
to the extent (but only to the extent) that such indemnification would be in
violation of applicable law, but shall be construed so as to effectuate the
applicable provisions of the Company Agreement to the fullest extent permitted
by law.
AMENDMENT OF THE COMPANY AGREEMENT
The Company Agreement may generally be amended, in whole or in part, with
the approval of the Board of Managers (including a majority of the Independent
Managers, if required by the 1940 Act) and, without the approval of the Members,
unless the approval of Members is required by the 1940 Act. However, certain
amendments to the Company Agreement involving capital accounts and allocations
thereto may not be made without the written consent of any Member adversely
affected thereby or unless each Member has received written notice of the
amendment and any Member objecting to the amendment has been allowed a
reasonable opportunity (pursuant to any procedures as may be prescribed by the
Board of Managers) to tender its entire interest for repurchase by the Company.
POWER OF ATTORNEY
By subscribing for an interest in the Company, each Member will appoint
each of the Managers his or her attorney-in-fact for purposes of filing required
certificates and documents relating to the formation and maintenance of the
Company as a limited liability company under Delaware law or signing all
instruments effecting authorized changes in the Company or the Company Agreement
and conveyances and other instruments deemed necessary to effect the dissolution
or termination of the Company.
The power-of-attorney granted as part of each Member's subscription
agreement is a special power-of-attorney and is coupled with an interest in
favor of the Board of Managers and as such shall be irrevocable and will
continue in full force and effect notwithstanding the subsequent death or
incapacity of any Member granting the power-of-attorney, and shall survive the
delivery of a transfer by a Member of all or any portion of an Interest, except
that where the
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<PAGE>
transferee thereof has been approved by the Board of Managers for admission to
the Company as a substitute Member, or upon the withdrawal of a Member from the
Company pursuant to a periodic tender or otherwise this power-of-attorney given
by the transferor shall terminate.
TERM, DISSOLUTION AND LIQUIDATION
The Company shall be dissolved:
o upon the affirmative vote to dissolve the Company by: (1) the Board of
Managers or (2) Members holding at least two-thirds (2/3) of the total
number of votes eligible to be cast by all Members;
o upon the expiration of any two year period which commences on the date
on which any Member has submitted a written notice to the Company
requesting to tender its entire interest for repurchase by the Company
if that interest has not been repurchased by the Company;
o upon the failure of Members to elect successor Managers at a meeting
called by the Adviser when no Manager remains to continue the business
of the Company; or
o as required by operation of law.
Upon the occurrence of any event of dissolution, the Board of Managers or
CIBC WM, acting as liquidator under appointment by the Board of Managers (or
another liquidator, if the Board of Managers does not appoint CIBC WM to act as
liquidator or is unable to perform this function) is charged with winding up the
affairs of the Company and liquidating its assets. Net profits or net loss
during the fiscal period including the period of liquidation will be allocated
as described in the section titled "Capital Accounts and Allocations -
Allocation of Net Profits and Net Loss."
Upon the liquidation of the Company, its assets will be distributed (1)
first to satisfy the debts, liabilities and obligations of the Company (other
than debts to Members) including actual or anticipated liquidation expenses, (2)
next to repay debts owing to the Members, and (3) finally to the Members
proportionately in accordance with the balances in their respective capital
accounts. Assets may be distributed in kind on a pro rata basis if the Board of
Managers or liquidator determines that the distribution of assets in kind would
be in the interests of the Members in facilitating an orderly liquidation.
REPORTS TO MEMBERS
The Company will furnish to Members as soon as practicable after the end of
each taxable year such information as is necessary for them to complete Federal
and state income tax or information returns, along with any other tax
information required by law. The Company will send to Members an unaudited
semi-annual and an audited annual report within 60 days after the close of the
period for which it is being made, or as otherwise required by the 1940 Act.
Quarterly reports regarding the Company's operations during the period will also
be sent to Members.
-89-
<PAGE>
FISCAL YEAR
The Company's fiscal year is the 12-month period ending on December 31. The
first fiscal year of the Company will commence on the date of the initial
closing and will end on December 31, 2001.
AUDITORS AND LEGAL COUNSEL
The Board of Managers has selected Ernst & Young LLP as the independent
public accountants of the Company. Ernst & Young LLP's principal business
address is located at 787 Seventh Avenue, 15th Floor, New York, New York 10019.
Schulte Roth & Zabel LLP, New York, New York, serves as legal counsel to
the Company. The firm also acts as legal counsel to the Adviser, CIBC WM and its
affiliates with respect to certain matters. Stroock & Stroock & Lavan LLP, New
York, New York, acts as legal counsel to the Independent Managers.
CUSTODIAN
PFPC Trust Company ("PFPC Trust") serves as the primary custodian of the
Company's and the Master Funds' assets, and may maintain custody of the
Company's and Master Funds' assets with domestic and foreign subcustodians
(which may be banks, trust companies, securities depositories and clearing
agencies), approved by the Board of Managers of the Company in accordance with
the requirements set forth in Section 17(f) of the 1940 Act and the rules
adopted thereunder. Assets of the Company and Master Funds 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 a custodian. PFPC Trust's
principal business address is 103 Bellevue Parkway, Wilmington, Delaware 19809.
INQUIRIES
Inquiries concerning the Company and Interests (including information
concerning subscription and withdrawal procedures) should be directed to:
CIBC Oppenheimer Advisers, L.L.C.
c/o CIBC World Markets Corp.
One World Financial Center - 31st Floor
200 Liberty Street
New York, New York 10281
Telephone: 212-667-4225
Telecopier: 212-667-5689
For additional information contact:
Howard M. Singer
Managing Director
CIBC World Markets Corp.
-90-
<PAGE>
* * * * *
All potential investors in the Company are encouraged to consult
appropriate legal and tax counsel.
-91-
<PAGE>
APPENDIX A
LIMITED LIABILITY COMPANY AGREEMENT
(to be filed by amendment)
A-1
<PAGE>
APPENDIX B-1
BUTTONWOOD FOCUS FUND II, L.P.
INVESTMENT PERFORMANCE
(INCEPTION THROUGH , 2000) (1)
<TABLE>
<CAPTION>
BUTTONWOOD FOCUS
FUND II, L.P.
RATE OF RETURN PRO
FORMA NET MORGAN STANLEY
AFTER INCENTIVE CAPITAL
ALLOCATION INTERNATIONAL-
PERIOD AND FEES (2) EUROPE INDEX (3)
------ ------------------ ----------------
<S> <C> <C> <C
1999 4Q (Nov. 1 - Dec. 31) % %
1999 % %
2000 1Q % %
2Q % %
3Q % %
4Q % %
2000 % %
CUMULATIVE RETURN (4) % %
(NOV. 1, 1999 - DEC. 31, 2000)
</TABLE>
THIS TABLE MUST BE READ IN CONJUNCTION WITH THE ACCOMPANYING FOOTNOTES APPEARING
ON THE FOLLOWING PAGE THAT ARE AN INTEGRAL PART HEREOF.
B-1-1
<PAGE>
[NOTES TO BE REVISED]
1. The above hypothetical returns are based upon the results that would have
been achieved by an investor investing [$1 million] in Buttonwood Focus Fund II,
L.P. if, instead of the investor being charged the fees actually charged by such
fund, the investor was charged fees comparable to those charged by the Company
(i.e., an aggregate 20% annual performance-based allocations and a 1.50% annual
asset-based fees). The returns do not reflect deductions for any other expenses
which would have been incurred by the Company. PAST PERFORMANCE IS NOT A
GUARANTY OF FUTURE RESULTS.
2. At all times under consideration, Buttonwood's assets under management were
between $__ million and $___ million. As of [ ], 200__, Buttonwood's
capital was approximately $___ million, adjusted for contributions and
withdrawals. The managing general partner of Buttonwood is Buttonwood Capital
Management Company Limited and the advising general partner is Buttonwood
Capital Partners Limited Partnership. Jeffrey M. Weingarten and Francois
Langlade-Demoyen are primarily responsible for the investment decisions of the
advising general partner.
3. The Morgan Stanley Capital International - Europe Index is designed to
measure the performance of the entire range of stocks available to investors in
Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy,
Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United
Kingdom. The Index aims for 60% coverage of the total market capitalization for
this market. Each stock in the index is weighted by market capitalization and
each country is proportionally weighted by its total market capitalization in US
dollars.
4. The Cumulative Return is calculated by using a compounded, time-weighted
return.
B-1-2
<PAGE>
APPENDIX B-2
THE PEGASUS FUND LIMITED
INVESTMENT PERFORMANCE
(INCEPTION THROUGH , 2000) (1)
<TABLE>
<CAPTION>
PEGASUS FUND
RATE OF RETURN PRO
FORMA NET MORGAN STANLEY
AFTER INCENTIVE CAPITAL
ALLOCATION INTERNATIONAL-
PERIOD AND FEES (2) EUROPE INDEX (3)
------ ------------------ ----------------
<S> <C> <C> <C>
1999 1Q % %
2Q % %
3Q % %
4Q % %
1999 % %
2000 1Q % %
2Q % %
3Q % %
4Q % %
2000 % %
CUMULATIVE RETURN (4) % %
([DATE] - DEC. 31, 2000)
</TABLE>
THIS TABLE MUST BE READ IN CONJUNCTION WITH THE ACCOMPANYING FOOTNOTES APPEARING
ON THE FOLLOWING PAGE THAT ARE AN INTEGRAL PART HEREOF.
B-2-1
<PAGE>
[NOTES TO BE REVISED]
1. The above hypothetical returns are based upon the results that would have
been achieved by an investor investing [$1 million] in The Pegasus Fund Limited
if, instead of the investor being charged the fees actually charged by such
fund, the investor was charged fees comparable to those charged by the Company
(i.e., an aggregate 20% annual performance-based allocations and a 1.50% annual
asset-based fees). The returns do not reflect deductions for any other expenses
which would have been incurred by the Company. PAST PERFORMANCE IS NOT A
GUARANTY OF FUTURE RESULTS.
2. At all times under consideration, the Pegasus Fund's assets under management
were between $__ million and $___ million. As of [ ], 200__, the
Pegasus Fund's capital was approximately $___ million, adjusted for
contributions and withdrawals. David Yarrow of Clareville Capital Limited has
been the portfolio manager of the Pegasus Fund since its inception.
3. The Morgan Stanley Capital International - Europe Index is designed to
measure the performance of the entire range of stocks available to investors in
Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy,
Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United
Kingdom. The Index aims for 60% coverage of the total market capitalization for
this market. Each stock in the index is weighted by market capitalization and
each country is proportionally weighted by its total market capitalization in US
dollars.
4. The Cumulative Return is calculated by using a compounded, time-weighted
return.
B-2-2
<PAGE>
APPENDIX B-3
SCUDDER GREATER EUROPE GROWTH FUND
INVESTMENT PERFORMANCE
(INCEPTION THROUGH , 2000) (1)
<TABLE>
<CAPTION>
SCUDDER GREATER
EUROPEAN GROWTH FUND MORGAN STANLEY
PRO FORMA NET AFTER CAPITAL
INCENTIVE ALLOCATION INTERNATIONAL-
PERIOD AND FEES (2) EUROPE INDEX (3)
------ -------------------- ----------------
<S> <C> <C> <C>
1994 4Q (Oct. __ - Dec. 31) % %
1994 % %
1995 1Q % %
2Q % %
3Q % %
4Q % %
1995 % %
1996 1Q % %
2Q % %
3Q % %
4Q % %
1996 % %
1997 1Q % %
2Q % %
3Q % %
4Q % %
1997 % %
1998 1Q % %
2Q % %
3Q % %
4Q % %
1998 % %
1999 1Q % %
2Q % %
3Q % %
4Q % %
1999 % %
2000 1Q % %
2Q % %
3Q % %
4Q % %
2000 % %
CUMULATIVE RETURN (4) % %
([OCT. __, 1994] - DEC. 31, 2000)
</TABLE>
THIS TABLE MUST BE READ IN CONJUNCTION WITH THE ACCOMPANYING FOOTNOTES APPEARING
ON THE FOLLOWING PAGE THAT ARE AN INTEGRAL PART HEREOF.
B-3-1
<PAGE>
[NOTES TO BE REVISED]
1. The above hypothetical returns are based upon the results that would have
been achieved by an investor investing [$1 million] in Scudder Greater European
Growth Fund if, instead of the investor being charged the fees actually charged
by such fund, the investor was charged fees comparable to those charged by the
Company (i.e., an aggregate 20% annual performance-based allocations and a 1.50%
annual asset-based fees). The returns do not reflect deductions for any other
expenses which would have been incurred by the Company. PAST PERFORMANCE IS NOT
A GUARANTY OF FUTURE RESULTS.
2. At all times under consideration, the Scudder European Fund's assets under
management were between $__ million and $___ million. As of [ ],
200__, the Scudder European Fund's capital was approximately $___ million,
adjusted for contributions and withdrawals. [Carol Franklin has been the
portfolio manager of Scudder European Fund since its inception.]
3. The Morgan Stanley Capital International - Europe Index is designed to
measure the performance of the entire range of stocks available to investors in
Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy,
Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United
Kingdom. The Index aims for 60% coverage of the total market capitalization for
this market. Each stock in the index is weighted by market capitalization and
each country is proportionally weighted by its total market capitalization in US
dollars.
4. The Cumulative Return is calculated by using a compounded, time-weighted
return.
B-3-2
<PAGE>
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements:
As Registrant has no assets, financial statements are omitted.
(2) Exhibits:
(a) (1) Certificate of Formation of Limited Liability Company.
(2) Certificate of Amendment of Certificate of Formation of
Limited Liability Company
(3) Limited Liability Company Agreement.* See Appendix A of
Registrant's Confidential Memorandum, which is included in
this Registration Statement.
(b) Not Applicable.
(c) Not Applicable.
(d) See Item 24(2)(a)(3).
(e) Not Applicable.
(f) Not Applicable.
(g) Investment Advisory Agreement.*
(h) Placement Agency Agreement.*
(i) Not Applicable.
(j) Custody Agreement.*
(k) (1) Administrative Services Agreement.*
(2) Administration, Accounting and Investor Services
Agreement.*
(l) Not Applicable.
(m) Not Applicable.
(n) Not Applicable.
(o) Not Applicable.
(p) Not Applicable.
(q) Not Applicable.
(r) Code of Ethics.*
ITEM 25. MARKETING ARRANGEMENTS
Not Applicable.
----------
* To be filed by amendment.
C-1
<PAGE>
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
All figures are estimates:
Blue Sky Fees and Expenses (including fees
of counsel)................................... $ 10,000
Transfer Agent fees............................... N/A
Accounting fees and expenses...................... 10,000
Legal fees and expenses........................... 125,000
Printing and engraving............................ 25,000
Offering Expenses................................. 50,000
Miscellaneous..................................... 5,000
--------
$225,000
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
After completion of the private offering of interests, Registrant expects
that no person will be directly or indirectly under common control with
Registrant.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
Title of Class Number of Record Holders
-------------- ------------------------
Limited Liability Company Interests 1 (Registrant anticipates
that as a result of the
initial private offering of
interests there will be
more than 100 record
holders of such interests.)
ITEM 29. INDEMNIFICATION
Reference is made to Section 3.7 of Registrant's Limited Liability Company
Agreement (the "Company Agreement"), which will be filed as Exhibit 2(a)(3)
hereto. Registrant hereby undertakes that it will apply the indemnification
provision of the Company Agreement in a manner consistent with Release 40-11330
of the Securities and Exchange Commission under the Investment Company Act of
1940, so long as the interpretation therein of Sections 17(h) and 17(i) of such
Act remains in effect.
Registrant, in conjunction with the CIBC Oppenheimer Advisers, L.L.C. (the
"Adviser") and Registrant's Managers, maintains insurance on behalf of any
person who is or was an Independent Manager, officer, employee, or agent of
Registrant, against certain liability asserted against him or her and incurred
by him or her or arising out of his or her position. However, in no event will
Registrant pay that portion of the premium, if any, for insurance to indemnify
any such person or any act for which Registrant itself is not permitted to
indemnify.
C-2
<PAGE>
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
A description of any other business, profession, vocation, or employment of
a substantial nature in which the Adviser, and each director, executive officer,
managing member or partner of the Adviser, is or has been, at any time during
the past two fiscal years, engaged in for his or her own account or in the
capacity of director, officer, employee, managing member, partner or trustee, is
set forth in Registrant's Confidential Memorandum in the section entitled "THE
ADVISER, CIBC WM AND THE NON-MANAGING MEMBERS." Information as to the directors
and officers of the Adviser is included in its Form ADV as filed with the
Commission (File No. 801-55640), 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 Registrant at PFPC Inc., 400 Bellevue Parkway,
Wilmington, Delaware 19809. The other required books and records are maintained
by the Adviser at One World Financial Center, 200 Liberty Street, New York, New
York 10281.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
Not Applicable.
C-3
<PAGE>
FORM N-2
DEAUVILLE EUROPE FUND, L.L.C.
SIGNATURES
Pursuant to the requirements of the Investment Company Act of 1940, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and State of New York, on the 18th day of December, 2000.
DEAUVILLE EUROPE FUND, L.L.C.
By: /s/
------------------------------------
Name: Howard M. Singer
Title: Organizational Member
C-4
<PAGE>
FORM N-2
DEAUVILLE EUROPE FUND, L.L.C.
EXHIBIT INDEX
EXHIBIT NUMBER DOCUMENT DESCRIPTION
-------------- --------------------
(a) (1) Certificate of Formation of Limited Liability Company
(2) Certificate of Amendment of Certificate of Formation of
Limited Liability Company
(3) Limited Liability Company Agreement.*
(b) Not Applicable
(c) Not Applicable
(d) Limited Liability Company Agreement.*
(e) Not Applicable
(f) Not Applicable
(g) Investment Advisory Agreement*
(h) Placement Agency Agreement*
(i) Not Applicable
(j) Custody Agreement*
(k) (1) Administrative Services Agreement*
(2) Administration, Accounting and Investor Services
Agreement*
(l) Not Applicable
(m) Not Applicable
(n) Not Applicable
(o) Not Applicable
(p) Not Applicable
(q) Not Applicable
(r) Code of Ethics*
--------
* To be filed by amendment.
C-5
