by date← Dec 31, 2008·Dec 31, 2008 →

EFTA01097561

Dataset 9

December 31, 200845 pages16,499 words

https://www.justice.gov/epstein/files/DataSet%209/EFTA01097561.pdf

Extracted Text

Highlighting: “"FSP"”

D.B. Zwirn Special Opportunities Fund, L.P. Consolidated Financial Statements December 31, 2008 EFTA01097561 D.B. Zwirn Special Opportunities Fund, L.P. Index December 31, 2008 Page(s) Report of Independent Auditors 1 Consolidated Financial Statements Consolidated Statement of Assets, Liabilities and Partners' Capital 2 Consolidated Condensed Schedule of Investments 3-13 Consolidated Statement of Operations 14 Consolidated Statement of Changes in Partners' Capital 15 Consolidated Statement of Cash Flows 16 Notes to Consolidated Financial Statements 17-43 EFTA01097562 PRICEWATERHOUsECODPERS PrIcewatorhouseCoopors LLP PrieewaterhcxiseCoepere Center 300 Madison Avenue New York NY 100, 7 TelephOnallIMII Fee.Senile Report of Independent Auditors To the General and Limited Partners of D.B. Zwim Special Opportunities Fund, L.P.: In our opinion, the accompanying consolidated statement of assets, liabilities and partners' capital. including the consolidated condensed schedule of Investments, and the related consolidated statements of operations, of changes in partners' capital and of cash flows present fairly, in all material respects, the consolidated financial position of D.B. Zwirn Special Opportunities Fund, L.P. and its subsidiaries (collectively, the -Fund") at December 31. 2008. and the results of their operations, the changes in their partners' capital and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United Slates of America. These consolidated financial statements are the responsibility of the Fund's General Partner. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit of these financial statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by the Fund's General Partner, and evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. As discussed in Notes 7 and 8 to the financial statements, the Fund adopted FASB Statements No. 157, Fair Value Measurement and No. 159, The Fair Value Option for Financial Assets and Liabilities ("SFAS 15r). As part of its SFAS 159 election, the Fund has measured the notes payable at fair value in the consolidated statement of assets and liabilities. As more fully described in Notes 11 and 13 to the financial statements, the Fund has begun implementing an orderly disposition of the Fund's portfolio and the Investment Manager was replaced during 2009 which resulted in c Mein changes. \s s December 23, 2009 EFTA01097563 D.B. Zwirn Special Opportunities Fund, L.P. Consolidated Statement of Assets, Liabilities and Partners' Capital December 31, 2008 (in U.S. Dollars) Assets Cash and cash equivalents (including $24.6 million held by collateralized loan obligation) S 57,737,617 Cash collateral pledged 44,486,830 Investments owned, at fair value (cost $2,096,304,462) 1,243,954,530 Unrealized appreciation on derivative contracts 133,491,418 Receivable for investments sold 275,493 Due from brokers and counterparties 14,939,839 Due from affiliates 2,649,988 Interest receivable 8,596,787 Other assets 19 067 253 Total assets 1 525 199 755 Liabilities and Partners' Capital Investments sold, but not yet purchased, at fair value (proceeds 53,253,732) 2,507,126 Unrealized depreciation on derivative contracts 145,474,380 Due to affiliates 121,786,335 Interest payable 409,026 Notes payable, at fair value (par $544,097,565) 458,253,075 Withdrawal payables 82,462,069 Management fees payable 2,081,547 Taxes payable 4,198,847 Accrued expenses and other liabilities 18 602 895 Total liabilities 835,775,300 Minority interest 4,057,761 Partners' capital 685,366,694 Total liabilities and partners' capital $ 1,525,199,755 The accompanying notes are an integral part of these consolidated financial statements. 2 EFTA01097564 D.B. Zwirn Special Opportunities Fund, L.P. Consolidated Condensed Schedule of Investments December 31, 2008 (in US. Dollars) % of Parterre' Par Amount / Capital Fair Value Quantity Description Investments Owned Asset Backed Securitia North America (primarily United States) Diversified 0.26% S 1,795.983 0.01% 73,328 Financials 0.03% 238.296 Health Cure 121% 8,243.937 Home Equity 1.51% 18,351,544 North Amerke (primarily United States) Total (cost 526,805,804) 131% 10,351,544 Asset Backed Securities Total (cost 526,503,804) North America (primarily United States) 0.00% 2,434 Cotoomer Goods 0.17% 1,194,681 Consumer Services Industrials 0.18% 1236010 Real Estate Investment Trust 550o:0706i 20 0,083% 51 Transportation 0.46% 3,183,892 North America (primarily United States) Total (cost $7,181,342) Corporate and Distressed Debt Total (cost 57,181,342) 0.46% 3,183,892 Corporate and Real Estate Loans Africa Energy 0.00% Africa Total (con $1,637,511) 0.00% Asia Construction 002% 126.845 2_20% 15,077,271 Real Estate 2.22% 15,204.116 Asia Total (cost $13,980,315) Europe Divasified 1.00% 6.879,310 0.41% 2,802,316 Financials Europe Total (con $14,352.963) 1.41% 9,681,626 The accompanying notes are an integral part of these consolidated financial statements. 3 EFTA01097565 D.B. Zwirn Special Opportunities Fund, L.P. Consolidated Condensed Schedule of Investments December 31, 2008 (in US. [b!/a , % of Par Amount I Partners' Quantity De cription Capital Fair Value Investments Owned, continued Corporate and Real Estate Loans. continued North America (primarily United States) Basic Materials 3.92% S 260972,593 Communications S 22,801,121 FR Wireless, Inc., Term Loan A, Libor + 6.00%, Due 06424012 116% 21,659293 S 22,790.625 PR Wireless, Inc., Tarn Loan B. Libor + 600%. Due 0622/2012 2.79% 19.139.685 Other 11.50% 78,815,320 Consumer Goods 13.80% 94.572.010 Consumer Unica 10.48% 71.832,673 Diversified S 21,005,413 Chtrchill Financial Holdings LLC, Tam Loan A.8.75%, Due 11/01/2011 2.50% 17,146,921 S 31,198051 Dunhill Finn-Kiel Holdings LW, Tarn Loan B.810%. Due 11/012011 3.74% 25030.450 Other 0.30% 2067036 Energy 6.19% 42,454,128 Entertairunesst S 43,202,100 CTI Holdings, LW, Term Loan A, Libor + 11.00%, Due 053 I/2009 2.77% 19,008,430 S 16,197252 CT* Holdings. LLC. Terra Loan. Libor + 22.00%. Due 08/302008 1.02% 6,969,738 S 10,180,057 Capitol Films Group, Ltd.. Term Loan, 18.00%, Due 01/20/2009 1.28% 8,746,913 Other 14.75% 101.022,257 Fin,mtials 1.050.951 Law Finance Group. Inc 2.21% 15,158,438 Other 4.23% 28,973,093 Health Care 1.65% 11286.584 Industrials 3.04% 20,858,207 Real Estate 9.85% 67.508,428 Technology 6.12% 41,921,108 Transportation 1.60% 10,974,206 North America (primarily United States) Total (cost 51,227,764526) 106.90% 732,617,507 Oceania (Funnily Australia) Technology 1.08% 7,418079 Oceania (primarily Australia) Total (cost $14,482,219) 1.08% 1,418,079 Latin America Real Estate 0.25% 1491,137 Latin AmerIts Total (cost $5,196,501) 0.25% 1,691,137 Corporate and Real Estate Loans Total (cost S1,277,414035) 111.86% 764612.465 Municipal Bonds North America (primarily United States) Government 0.79% 5,429,235 North America (printarily United Stales) Total (cost $6,331,103) 0.79% 5,429,235 Municipal Bonds Total (cost $6,331,103) 0.79% 5,429,235 The accompanying notes are an integral part of these consolidated financial statements. 4 EFTA01097566 D.B. Zwirn Special Opportunities Fund, L.P. Consolidated Condensed Schedule of Investments December 31, 2008 fin US. Dullard) V. of Par Amount / Partner? Capital Fair Value Quantity Description Investments Owned, continued Options Asia 0.01% 5 73,488 Basic Materials 0.01% 59367 Consumer Goods 0.02% 132,855 Asia Total (cost 540,084) North America (primarily United States) Con.sumer Goods 0.11% 661,313 0.00% 5.07E Utilities North America (primarily United States) Total (cow 5338,929) 0.11% 666,389 013% 799.244 Options Total (cost 5379,013) Pnwite Equity and Asset Cumin:at' Mia Dive fief 0.55% 3,802,911 Financials 021% 1,822,520 Private Equity Fund 0.49% 3367,900 Real Estate 1.76% 12,049,905 Technikagy 0.69% 4,737,252 3.76% 25,780,488 Asia Total (cost 536.607,74D Europe Diversified Stepson e Acquisition Siar.l. 0.99% 6,751,241 4,832325 2.48% 16995,763 C 16.543.706 StepSIOnt Acquisition Sta, Terra Loan A. 2.313%, Due 12/312011 0.89% 6,127,799 C 7,248.488 Stepstonc Acquisition S.a.r.L, Term Loan 13,2 313%. Due 12/31/2011 3.09% 21,164,754 Other Effertairunent SN Al S.p.A. Term Loan B.5.749%. Due 3/312011 1.04% 7,161.012 € 5,868,986 0.43% 2,949,416 C 2,348047 SNA1S.p A., Tarn Lan C, 14.899%, Duc 3/31/2011 Other 1.34% 9,207.749 Financials Transaction One 0.52% 3,568,904 2,916308 Other 239% 17,721,555 Real Estate 0.10% 677.413 Real Estate Fund T.R. Estate Uno S.r.1., Tenn Loan. 6.219%, Due 10202009 0.25% 1,702.722 E 2.491,739 Europe Total (cost 5128,130,630) 13.72% 94,028,328 The accompanying notes are an integral part of these consolidated financial statements. 5 EFTA01097567 D.B. Zwirn Special Opportunities Fund, L.P. Consolidated Condensed Schedule of Investments December 31, 2008 ;in US. DoIlan' % oaf Par Amount / Partners' Quantity Destription Capital Fair Value Investments Owned, continued Private Equity and Asset Invert:rents. continued North America (primarily United States) Basic Materials 0.12% $ 824,499 Communications 0.01% 64,498 Consumer Goods aciox 17,464 Diversified 3.38% 23,187227 Energy 1.20% 8229,166 Entertaitunent 4.09% 28,033315 Financials 19.436,459 law Finance Group. Inc 4.04% 27,721,211 Other 6.62% 45338,564 Health Care 1.03% 7.025.341 Home Equity 183% 19,369,906 [advent's 3.44% 23,565,911 Private Equity Fund 3.29% 22,571,475 Real Estate 4.60% 31,552,621 Real Estate Flmd 160.553.640 Ackerman/2%cm Real Estate Partnas, LLC 11.30% 77,429,505 Retail 0.04% 260.573 Technology 0_23% 1,608.281 Transportation 0.92% 6,294,044 North America (primarily United States) Total (cost 5579,130,229) 47.14% 323,093,601 Private Equity and Asset Investments Total (cost 3743,868,600) 64.624 442,902,417 Public Equities Asia Basic Materials 0.00% 5,975 Financials 0.89% 6.053.962 Real Estate 0.01% 80,122 Asia Total (cost 513,427,462) 0.90% 6,140,059 Europe Financials 0.18% 1,232304 Real Estate Investment Trust 001% . 102.469 Europe Tot al (cost 52,707,618) 0.19% 1,334,773 The accompanying notes are an integral part of these consolidated financial statements. 6 EFTA01097568 D.B. Zwirn Special Opportunities Fund, L.P. Consolidated Condensed Schedule of Investments December 31, 2008 (in US. Dollars) % of Par Ammon / Panlien' Quantity Capital Fib Valve Description Investments Owned, continued Public Emetics, continued North America (primarily United States) Conant Goods 0.06% 385,454 0.11% 738,141 Consumer Services Energy 0.11% 724,967 Health Care 0.14% 1,050,489 Industrials 0.00% 3.231 North America (primarily United States) Total (cost 58,727,722) 0.42% 2,902,282 Public Equities Total (cost 524,862,802) 1.5114 10,377,114 Wrenn; North America (primarily United States) Biotechnology 0.00% 23.473 Communications 0.02% 118490 0.26% 1,721,538 Emig), 0.09% 637,497 Health Care 0.02% 166,311 Technology 0.39% 2,674,509 North America (primarily United States) Total (cost 52,664.265) Warrants Total (cost 32,664,765) 0.391/. 2,674,509 Convertibk Bonds North America (primarily United States) 0 12% 792,492 Health Care North America (primarily United Stales) Total (cost S1,369,998) 0.12% 792,492 0.12% 792,492 Convertible Bonds Total (cost 51,369,998) Collateralized Debt Obligations Total (cost $5,729,736) 0.12% 831,618 Investments Owned Total (cost 52.096.104,462) 181.50% $ 1 243 954,530 The accompanying notes are an integral part of these consolidated financial statements. 7 EFTA01097569 D.B. Zwirn Special Opportunities Fund, L.P. Consolidated Condensed Schedule of Investments December 31, 2008 (In U.S. Dollars) % of Partners' Par Amount / Capital Fair Value QuAnfl“ Description Investments Sold, Bat Not Vet Purchased Corporate and Distrtssed Debt Holt America (primarily United Slates) 0.03% $ 200.000 Tnuisportation 0.03% 200,000 North America (primarily United States) Total (proceeds $0) 0.03% 200,000 Corporate and Distressed Debt Total (proceeds SO) Options North America (pnenarily United Slates) Consumer Goods 0 09% 611.022 0.00% 5,076 Utilities North America (primarily United States) Total (proceeds $250,450) 0.09% 616,098 0.097. 616,098 Options Total (proceeds $250,450) Public Equities North America (primarily United States) COIISUMCI Services 0.00% 11432 0.08% 520,001 Industrials 0.08% 531,633 North America (printarily United States) Total (proceeds $1,913,542) Public Equities Total (proceeds $1,913,542) 0.08% 531,633 U.S. Treasuries North America (United Sates) 0.17% 1,159,395 Government North Amities (United States) Total (proceeds 51,089,740) 0.17%, 1,159,395 0.17% 1,159,395 U.S. Treasuries Total (proceeds 51,089,740) 037% S 2.507,526 Investments Sold, But Not Yet Purchased Total (proceeds S3,2$3,732) The accompanying notes are an integral part of these consolidated financial statements. 8 EFTA01097570 D.B. Zwirn Special Opportunities Fund, L.P. Consolidated Condensed Schedule of Investments December 31, 2008 fin US. Dollars) %of Par Amount / Partners' Capital Fair Value Quantity Description Derivative Contracts With Long Positions Credit Default Swaps. Indices and Trenches Africa 0.80% S 5,463,401 Consumer Services Africa Total 0.10% 5,463,401 Asia 0.02% 130,170 Basic Materials Communications 0.27% 1247,890 0.00% 28.930 Consumer Goods 0.00% 17,035 Energy Financials 1.11% 7230.777 Government 0.09% 598,114 Health Care 0.02% 127.302 Industrials 0.57% 3.928,759 Technology 0.05% 369,103 Utilities 0.05% 326991 Asia Total 2.18% 14005.071 Europe Basic Materials 6.21% 42,573,851 Communications 1.56% 10,690,104 Consumer Goods 4.55% 31,175.917 Consumer Services 8.79% 60232,999 Diversified 337% 29833918 Energy 0.55% 3,763.339 1.66% 11,348.963 Financials Government atm% 404,510 Health Care 0.06% 430,238 Index 23.92% 163.973345 Industrials 6.30% 43,171,290 Technology 0.34% 2,322.363 Utilities 029% 1.995,857 Europe Total 58.06% 397,917,094 North America (pranarily United States) Basic Materials 14.35% 98225.793 O01% 55,769 Commercial Services Communications 3.11% 21.322.100 Consumer GAMS 19.75% 135,342.459 Consumer Services 29.99% 205,510.172 Diversified 75.94% 520,448,283 Itnergy 2.63% 18,043,311 Entemainment 0.03% 177,711 Financials 13.08% 89652,825 Government 0.23% 1,585,967 Health Care 2.71% 18,568980 Index 32.71% 224,204.691 Industrials 5.96% 40249238 Real Estate Invesummt Trust 0.06% 439,316 Retail 0.03% 231.015 1.83% 12,514,036 Technology 4.49% 30,789.808 Utilities North America (primarily Veiled States) Total 206.91% 1212052274 The accompanying notes are an integral part of these consolidated financial statements. 9 EFTA01097571 D.B. Zwirn Special Opportunities Fund, L.P. Consolidated Condensed Schedule of Investments December 31, 2008 On US. DoIlats) % of Par Amount Partners' Quantity Description Capital Fair Value Derivative Contracts With Long Positions, combined Credit Default Swaps. Indices and Trenches. continued Oceania (primarily Australia) Basic Maietials 0.01% 37.897 Communications 0.03% 204,579 Consumer Goods 0.09% 647.749 Consumes Services 038% 2,644,130 Financials 0.03% 179,240 Health Care 0.17% 1,142,993 Industrials 0.13% 894,855 Utilities 0.05% 314.460 Oceania (primarily Australia) Total 0.89% 6,065,903 Latin America Consumer Services 0.15% 1,005.179 Latin America Total 0.15% 1,005,179 Credit Default Swaps, Indices and Tranebes Total 268.99% 1,843,509,122 Forwards North America (primarily United States) Currency 0.0l% 43,049 North America (primarily United States) Total 621% 43,049 Forwards Total 0.01% 43,049 Total Rettrn Swaps Asia Communications (0.01%) (38.832) Comm = Goods (0.02%) (138,696) Financials (0.03%) (200266) Utilities (0.02%) (l06.111) Ash Total (0.08%) (484,505) North America (primarily United States) Communications (0.07%) (468,667) North America (primarily United States) Total (0.07%) (468,667) Total Return Swaps Total (0.15%) (953,172) Derivative Contracts With Long Positions Total 268.85% S 1,842,598,999 The accompanying notes are an integral part of these consolidated financial statements. 10 EFTA01097572 D.B. Zwirn Special Opportunities Fund, L.P. Consolidated Condensed Schedule of Investments December 31, 2008 (in US. Dollars) % of Portions Par Amount! Capital Fair Value Quin0 Description Derivative Contracts With Short Positions Commodities Swaps North America (primarily United States) 0.01% S 81,121 Energy 0.01% 81,121 North America (primarily United States) Total O.01% 81,121 Commodities Swaps Total Credit Default Swaps, Indices and Trenches Africa (0.77%) (5287,415) Consumer Services (0.77%) (3,287,415) Africa Total Asia (0.02%) (124704) Basic Materials (0.26%) (1.774.484) Communications 0.00% (25.686) Consumer Goods 0.00% (14,062) Ellett (7,283656) Financials (1.06%) Government (0.01%) (81.345) (0.02%) (148,991) Health Care (0.51%) (3,878.196) Industrials (0.06%) (386.963) Technology Utilities (0.05%) (349,349) Asia Total (2A5%) (14,066,436) Europe Basic Materials (6.19%) (42,453,806) Communications (1.64%) (11,219,039) (4.48%) (30,689.384) Consumer Goods (8.92%) (61,117,106) Consumer Services (3.77%) (25,833.918) Diversified (0331) (3650,764) Energy (1.60%) (10,992,133) Financials Government (0.06%) (420,193) (0.07%) (448,224) Health Care (23.93%) (163,973744) Index (6.13%) (42.032,757) Indusaials Technology (0.34%) (3.350320) (028%) (1,927.174) Utilities Europe Total (37.94%) (387,108362) The accompanying notes are an integral part of these consolidated financial statements. 11 EFTA01097573 D.B. Zwirn Special Opportunities Fund, L.P. Consolidated Condensed Schedule of Investments December 31, 2008 (in US Dollars) % of rertsers' Par Amount Capital Fair Value Quantity Description Derivative Contracts With Short Positions, continued Credit Default Swaps. Indica and Trains. continued North America (primarily United States) (14.51%) S (99,450.715) Basic Materials (3.60%) (24,671,753) Communications (21.71%) (148,824,760) Constar Goods (3223%) (220,883.618) Consumer Senices (75.95%) (520,425,465) Diversified (2.75%) (18,851,571) Energy (0.03%) (182.372) Entertainment (12.725) (87,185,923) Financials (0.24%) (1,614,995) Government (2.74%) (18,774,381) Heahh Care (29.66%) (203,272.439) index (5.95%) (40,802,163) Industrials (0.06%) (408.179) Real Estate Investment Trust (2.14%) (14.690.410) Technology Utilities (4.54%) (31.139.502) (208.83%) (1,431,178,266) North America (primarily Hailed States) Total Oceania (primarily Australia) 0.00% (21,300) Basic Materials (0.03%) (195,183) Communications (0.09%) (626,041) Consumer Goods (038%) (2,566,010) Consumer Sat (0.03%) (211.155) Financials (0.17%) (1,183,600) Health Case Mdustnals (0.13%) (907.919) (0.05%) (314,256) Utilities (028%) (6,025,464) Oceania (primarily Australia) Total Latin America (0.145) (986,207) Consumer Services (0.14%) (986,207) Latin America Total Credit Default Swaps, Indices and Tranebes Total (270.61%) (1,854,652,350) The accompanying notes are an integral part of these consolidated financial statements. 12 EFTA01097574 D.B. Zwirn Special Opportunities Fund, L.P. ts Consolidated Condensed Schedule of Investmen December 31, 2008 an US Dollars) 54 of Partners' Par Amount / Capital Fair Value Quantity Description Derivative Contracts With Short Positions, continued Forwards North America (primarily. United States) (0.0290 S (156.385) Currency (1564105) (0.02%) North America (primarily United Statn)Total (0.02%) (156085) Forwards Total Futurm Aria 0.00% 5.126 Index 0.00% 5,126 Asia Total Europe 0.00% (16.627) Basic Materials 0.00% 1,757 Financials 0.00% (14,870) Europe Total 0.00% (9,744) Futures Total Total Return Swaps Asia 0.01% 36,474 Consumer Services 0.01% 46.328 Divasitled 0.00% 93.660 Utilities 0.02% 178,462 Asia Total Europe 0.00% (12,363) Utilities 0.00% (12,363) Europe Total North America (pnmarily United States) 0.00% (10,701) Co:minter Goodt 0.00% (10,701) North America (primarily United States) Total 0.02% 155,398 Total Return Swaps Total (270.60%) S (1,854,581,961) Derivative Contracts tdith Short Positions Total short positions: Unrealized depreciation on derivative contracts, by long and S 1,842,598,999 Derivative contracts with long positions (1,854381.961) Derivative contracts with short positions S (11,982,962), party: Unrealized depreciation on derivative contracts, net by counter S 133,491,418 Unrealized appreciation on derivative contacts (143,474,380) Unrealized depreciation on derivative contracts (11,982,962) lidated financial statements. The accompanying notes are an integral part of these conso 13 EFTA01097575 D.B. Zwirn Special Opportunities Fund, L.P. Consolidated Statement of Operations Year Ended December 31, 2008 (in U.S. Dollars) investment income income Interest S 147,513,079 Dividends 1,102,379 Other 4 456 909 153,072,367 Expenses interest 71,801,690 Dividends 102,080 Management fees 25,447,640 Tax (14,239,572) Professional fees 10,713,733 Investment related 20,103,675 Other 4 064 994 117,994,240 Net investment income 35 078,127 Net realized loss and change in unrealized gain / (loss) on investments, derivative contracts and notes payable Net realized loss on investments and derivative contracts (112,158,919) Net change in unrealized loss on investments and derivative contracts (911,146,137) Net change in unrealized gain on notes payable 90,387,474 Net realized loss and change in unrealized gain / (loss) on investments, derivative contracts and notes payable (932,917,582) Net decrease in partners' capital from operations before minority interest (897,839,455) Share of net decrease in partners' capital attributable to minority interest 2,988 625 Net decrease in partners' capital from operations S (894,850,830), The accompanying notes are an integral part of these consolidated financial statements. 14 EFTA01097576 D.B. Zwirn Special Opportunities Fund, L.P. Consolidated Statement of Changes in Partners' Capital Year Ended December 31, 2008 General Limited Partner Partners Total (in U.S. Dollars) Partners' capital, December 31, 2007 $ 3,711,232 $ 1,586,792,092 S 1,590,503,324 Adjustment due to adoption of fair value option on notes payable (Note 8) (23,647) (10,112,494) (10,136,141) 3,687,585 1,576,679,598 1,580,367,183 Withdrawals (149,659) (149,659) Allocation ofnet decrease in partners' capital from operations (2,056,704) (892,794,126) (894,850,830) Partners' capital, December 31, 2008 $ 1,630,881 S 683,735,813 S 685,366,694 The accompanying notes are an integral part of these consolidated financial statements. I5 EFTA01097577 D.B. Zwirn Special Opportunities Fund, L.P. Consolidated Statement of Cash Flows Year Ended December 31, 2008 (0, U.S Dollars) Cada Rom front operating *MAME Net decrease in partners' capital horn operations before minority interest $ (897,839,455) Net decrease In pitmen' capital attributable to rrinonty interest 2,988,625 Adjustments to reconcile net decrease in partners' capital from operations to net cash and cash equivalents provided by operating activities Purchases and drawdowns of investments (1,046,480.020) Payments to cova investments sold, but not yet purchased (123.134,630) Proceeds from investments sold mid paydowns 1,700,212,490 Proceeds from investments soli, but no; yet purchased 21,772,786 Net iodized Its on investments 106,896,220 Amortization of closing fees 02,541,75D Non-cash Interest from payment tn-kind involutions (16,603,370) Minority interest (106355) Debt issuance costs (10,136,141) (Increases)! decreases in operating assets Net change in unrealized loss on immtmeou 895,200,002 Net change in unrealized appreciation on derivative contacts (69,302.340) Cash collateral pledged (6,236.929) Receivable (or investments sold 10,668.199 Due from broken and counterparties 156,061,330 Interest receivable 20,263,636 Dividend receivable 163,699 Other assets 19942486 Increases l (decreases) in operating liabilities Net change in unrealized depreciation on derivative contacts 64,402,050 Payable for investments purchased (5,545,860) Due to Mokas and cootie:panics (162,241,137) Interest payabla (1,824.793) Dividend payable (101,940) Martagetnau fees payable (4,676,494) Taxes payable (14,748,604) Accrued expenses and other liabilities (15,655,814) 1,504,246,820 Net cash and cash equivalents provided by operating activities 609,39$990 Cash 0ows from financing activities: Withdrawals (32,175,288) Proceeds horn issuance of noses payable 80,929,486 Repayment ofnotes payable (490,860,372) Net change in unrealized gain en notes payable (90,387,474) Realized loss on notes payable 3.837,342 Proceeds fruit issuance of shat tam borrowings 7,624,242 Repayment of shot semi borrowings (229,825,952) Payments for investments sold under agreements to repurchase, net (16,928,422) Due so affilotes, net (100,879,778) Net cash and cash equivalents used in financing activities (868,666.216) Net decease in cash and cash equivalents (259,270,226) Cash and cash equivaknts Beginning of year 317,007,843 End of year S 57,737,617 Supplemental cash flow information Cosh paid during the year for interest S 73,626,483 Cash paid cluing the year lift unincorpmated business taxes S 2,0* 000 Non-cash supplemental Information Interest from payment in-kind Investments S 16,603,370 The accompanying notes are an integral part of these consolidated financial statements. 16 EFTA01097578 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 1. Organization and Business D.B. Zwirn Special Opportunities Fund, L.P. (the "Partnership"), a Delaware limited partnership, commenced operations on May 1, 2002. The investment objective of the Partnership is to achieve attractive risk-adjusted returns through all business cycles. Pursuant to the terms of the Offering Memorandum, the following sub-strategies represent the majority of the Partnership's intended investment focus: 1) Lending: Corporate, Real Estate; 2) Assets: Commercial and Industrial Assets, Structured Finance, Consumer Assets; 3) Corporate Debt: Distressed Debt, Credit Arbitrage, Credit Default Swaps, Trenches and Indices; 4) Public Equity: Event-driven Relative Value, Industry Relative Value, Merger Arbitrage and Strategic Block; and 5) Private Equity: Corporate Private Equity, Real Estate Private Equity, Structured Private Investments/PEPEs. The Partnership's general partner is D.B. Zwirn Partners, LLC (the "General Partner"), a Delaware limited liability company, pursuant to the Partnership's limited partnership agreement (the "Agreement"). Zwirn Holdings, LLC ("71r) is the General Partner's managing member. The General Partner is generally responsible for providing certain management and administrative services to the Partnership. D.B. Zwim & Co., L.P. (the "Investment Manager"), a Delaware limited partnership, is responsible for making investment decisions on behalf of the Partnership. ZH is the general partner of the Investment Manager. The Investment Manager manages other funds and accounts (collectively, the "Other Accounts") with a similar investment objective to that of the Partnership and allocates investment opportunities to the Partnership and the Other Accounts, including, but not limited to, D.B. Zwirn Special Opportunities Fund, Ltd. (the "Offshore Fund") and D.B. Zwim Special Opportunities Fund (TE), L.P. (the "TE Fund"), pursuant to the terms of the Agreement. In March 2008, the Investment Manager of the Partnership began implementing an orderly disposition of the Partnership and Offshore Fund's portfolios. 2. Summary of Significant Accounting Policies Principles of Consolidation The Partnership owns all of the preferred shares of Bernard National Loan Investors, Ltd. ("Bernard"), a collateralized loan obligation ("CLO") (see Note 3) which is an exempted limited liability company incorporated in the Cayman Islands. The Partnership also owns all of the preferred shares of Woodhaven Drive I, LW ("Woodhaven"), a collateralized financing facility (see Note 4) which is an exempted limited liability company incorporated in the Cayman Islands. The consolidated financial statements include the accounts of the Partnership and its consolidated subsidiaries (collectively, the "Fund"): Bernard, Woodhaven, and certain Investment Platforms in which the Partnership holds a controlling interest (see Note 9). The minority interest in these Investment Platforms held by the various Investment Platform Partners are shown separately. All material intercompany accounts and transactions have been eliminated in consolidation. 17 EFTA01097579 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 Cash and Cash Equivalents At December 31, 2008, cash and cash equivalents primarily consist of deposits held in banks and short-term, highly liquid instruments with original maturities of three months or less. At December Such 31, 2008, cash and cash equivalents include $24.6 million of cash held in a bank by Bernard. cash is not generally available for use by the Partnership other than by Bernard. The Fund maintains substantially all its cash deposits with a major U.S. bank, LaSalle N.A., at amounts which generally exceed the FDIC insurable limits. Due from and to Broken and Counterparties The Fund's due from broken and counterparties balances consist of domestic and foreign cash balances on deposit with, or amounts borrowed from, brokers and balances due from/to counterparties on realized transactions. These balances are recognized on a gross asset and gross liability basis on the consolidated statement of assets, liabilities and partners' capital. At December 31, 2008, these balances were held primarily with J.P. Morgan. Cash Collateral Pledged In relation to derivatives, the Fund's cash collateral pledged balance consists of amounts held by counterparties. At December 31, 2008, these balances were held primarily with Goldman Sachs. Valuation of Investments The Fund's assets are valued by the General Partner, in consultation with the Investment Manager, subject to the General Partner's discretion as described in the Agreement. Securities that are listed on a national securities exchange and are freely transferable are valued at their closing price on the date of determination on the primary securities exchange on which such securities are listed. Securities which are not listed but are traded over-the-counter ("OTC") and are freely transferable are valued at their closing price as reported by the NASDAQ system. Financial instruments (primarily corporate bonds, bank debt, asset backed and mortgage backed, convertible and distressed securities) whose market quotations are not listed on an available national securities exchange are valued at estimated fair value as determined in good faith by the General Partner after consideration of, among other things, quotations obtained from outside brokers and pricing services, to the extent available. Financial instruments whose market quotations are deemed inappropriate by the General Partner, or are not available, are valued at estimated fair value as determined in good faith by the General Partner after considering one or more of the following: a comparison to market values of similar instruments, recent purchase and sales activity, investment risk, and other factors the General Partner may deem appropriate. Private investments held directly or indirectly (including, but not limited to, corporate and real estate loans, private equity, real estate assets, commercial/industrial and consumer assets, structured products and other illiquid investments) are valued at estimated fair value as determined in good faith by the General Partner. Privately held corporate and real estate loans, either held directly or through a participation, are valued by the General Partner at estimated fair value which generally approximates cost, plus accrued interest, unless a write-down is deemed necessary based on an estimate of ultimate recoverable principal amounts and also considers market yields and 18 EFTA01097580 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 other factors the General Partner may deem appropriate. Non-performing loans ("NPL.s") are valued at estimated fair value as determined in good faith by the General Partner based on factors that include, but are not limited to, the timing and amounts of cash flows versus expectations and the progress towards key milestones established at the time of underwriting. Because the timing and amounts of the cash flows are generally difficult to predict, the valuation of NPlas tend to require significant judgment from the General Partner. On a quarterly basis, the General Partner has engaged the services of several independent third parties to issue opinions on the fair value of certain private investments selected by the General Partner based on the size of the investment and the period of time held. OW derivatives are valued at estimated fair value as determined by the General Partner based on various valuation models which consider the type of derivative and underlying instrument. Generally, a model is used consistently for similar derivative types and model inputs, including, but not limited to, market prices, yield curves, credit spreads, volatilities and implied correlations which are obtained from outside brokers and/or pricing services. In less complex, more liquid derivatives (including, but not limited to, equity options and equity swaps), the valuation model does not require significant judgment from the General Partner. In more complex, less liquid derivatives (including, but not limited to, various types of credit default swaps), the valuation model requires significant judgment from the General Partner regarding the appropriate selection of valuation model and related inputs and the determination of any valuation adjustments to arrive at fair value due to lack of market transparency. At December 31, 2008, the unrealized appreciation and depreciation on derivative contracts amounted to approximately $133.5 million and $145.5 million, respectively. Investments in other investment companies not controlled by the Fund are valued at fair value by the General Partner based on the Fund's share in the net assets of the underlying investment companies, which generally considers the General Partner's estimates of fair value of the investments owned by such entities. Investments in other investment companies do not have readily determinable market values and are subject to certain withdrawal restrictions. The fair values of the Fund's investments in such entities represent the amounts the Fund would expect to receive at December 31, 2008 if it were to liquidate such investments excluding redemption fees that may apply. See also Note 9, Investment Platforms. Investments, whether held directly or indirectly through other investment companies, with legal restrictions on the sale or transfer of the security may be discounted by the General Partner from the quoted market price in estimating the fair value of such restricted securities. The Fund may not be able to sell its investments where no liquid market exists when it desires to do so or to realize what it perceives to be their fair value. Because of the inherent uncertainty of valuation for the Fund's investments described above, the estimate of fair value determined by the General Partner may differ from the values that would have been used had a ready market existed, and the difference could be material. 19 EFTA01097581 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 Consolidated Condensed Schedule of Investments The asset class, industry and geographical classifications included in the consolidated condensed schedule of investments represent the General Partner's belief as to the most meaningful presentation of the classification of the Fund's investments, whether held directly or indirectly through Investment Platforms discussed in Note 9. Investments of the Fund in any one issuer (including certain subsidiaries) or in certain Investment Platforms that exceed, in the aggregate, more than 5% of its partners' capital are separately listed in the consolidated condensed schedule of investments. The Fund's investments are concentrated in the asset classes, industries and geographic regions presented in the consolidated condensed schedule of investments. See also Note 9, Investment Platforms. Portfolios of NPLs are reflected in the appropriate industry category under Asset Investments on the consolidated condensed schedule of investments. Foreign Currency Translation Investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar equivalents using year-end spot foreign currency exchange rates. Purchases and sales of financial instruments and income and expense items arc translated at the rate of exchange on the respective date of such transactions. Realized and unrealized gains and losses resulting from foreign currency changes are reflected in the consolidated statement of operations as a component of net realized and unrealized loss on investments and derivative contracts. Derecognition of Investments The Fund derecognizes investments (including private investments and investments in or through the Investment Platforms discussed in Note 9) which are fully or partially transferred to the Other Accounts when it has surrendered control of the transferred investments, as defined by Statement of Financial Accounting Standards 140, Accountingfor Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement No. 125. The Fund considers the transfer of investments as a sale when the investments have been isolated from the Fund, even in bankruptcy or other receivership, the purchaser has the right to sell the investments transferred and the Fund does not have an option or any obligation to reacquire the investments. Investment transactions and Related Income Purchases and sales of financial instruments, and their related income and expense, are recorded on a trade-date basis or, with respect to private investments, the date when the terms of the transaction are fully negotiated and known. Corresponding gains and losses are recognized in the consolidated statement of operations as a component of net realized and unrealized loss on investments and derivative contracts. Realized gain and losses are recognized on a first-in-first-out basis. Interest income on the debt of issuers who are currently paying in full is accrued and recognized. For those issuers who are not currently paying in full, interest is not accrued and is recognized only if and when received. Interest derived from payment-in-kind securities is accrued as an increase to the cost and to the fair value of the related investments when it is a compounding payment-in-kind, or as interest receivable when it is a simple payment-in-kind. Dividend income on investments owned, and dividend expense on investments sold, but not yet purchased, are recognized on the ex- 20 EFTA01097582 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 s brokerage and bank accounts is dividend date. Interest income on balances held in the Fund' recognized on an accrual basis. e various fees during the life of the When the Fund holds an interest in a loan, it may receiv itment, undrawn, administration, investment. Such fees include, but are not limited to, comm the Fund on an ongoing basis. prepayment, maintenance and amendment fees which are paid to completion of the amendments or Amendment fees (including break up fees) are recognized upon included in other income on the waivers, generally when such fees are receivable. Such fees are the closing of a loan (i.e., closing consolidated statement of operations. Origination fees received at life of the loan. Facility fees are fees) are amortized into interest income over the remaining recorded on an accrual basis. Income Taxes income taxes. Accordingly, no As a partnership, the Fund itself is not subject to U.S. Federal been made in the accompanying provision for federal, state and local income taxes has responsible for their proportionate consolidated financial statements, as the individual partners are share of the Fund's taxable income. non-U.S. sources and capital gains Interest, dividends and other income realized by the Fund from ments of non-U.S. issuers may be realized on the sale of securities and net unrealized gain on invest in which the income is sourced. subject to withholding and other taxes levied by the jurisdiction million of accruals were reversed. For the year ended December 31, 2008, approximately $14.8 statement of operations and are Such taxes are reflected as a contra-expense on the consolidated assets and liabilities. This balance is reflected in taxes payable on the consolidated statement of and additional provisions of $3.2 comprised of a reversal of $18.0 million of non-U.S. deferred tax million of non-U.S. current tax. New York City Unincorporated Certain activities of the Fund may cause the Fund to be subject to e. For the year ended December 31, Business Tax at a rate of 4% of adjusted net taxable incom activit ies may cause partners in 2008, there were no amounts due for such tax. In addition, certain ed withhold state taxes on to the Fund to be subject to state taxes. As a result, the Fund is requir This state tax withholding of $0.4 behalf of certain partners on the amount of state source income. nt of each partner subject to the million has been shown as a reduction in the capital accou withholding. Fund so that the Fund's activities The Investment Manager intends to conduct the business of the ictions in which the Investment do not create a taxable presence in any of the foreign jurisd Manager has offices. Withdrawals Payable tion (as defined in Note 11), Withdrawals arc recognized as liabilities, net of the incentive alloca es fixed. This generally may occur when the amount requested in the withdrawal notice becom on the last day of a fiscal period, either at the time of the receipt of the withdrawal notice, or paid after the end of the year, but depending on the nature of the request. As a result, withdrawals payable at December 31, 2008. based upon year-end capital balances are reflected as withdrawals ed for which the dollar amount is not The amount of capital subject to withdrawal notices receiv Through the effective date of the fixed remains in capital until the amount is determined. 21 EFTA01097583 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 withdrawal, withdrawals payable are treated as capital for purposes of allocations of gains/losses pursuant to the Agreement. Subsequent to the implementation of the orderly disposition of the Partnership and Offshore Fund's portfolios (as discussed in Note 11), withdrawal notices are no longer received by the Partnership and all limited partners will participate in distributed proceeds on a pro-rata basis in accordance with their respective interests in the Partnership. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the General Partner to make estimates and assumptions that affect the fair value of investments, the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. In particular, estimates have been made relating to the valuation of investments fair valued by the General Partner and certain derivatives and the collectability of interest. Actual results could differ from the amounts reflected in these consolidated financial statements and the differences could be material. Accounting Pronouncements In June 2006, the Financial Accounting Standards Board ("the Board") issued FIN No. 48, Accountingfor Uncertainty in Income Tares - an Interpretation of the FASB Statement No. 109 ("FIN 48"). FIN 48 establishes a requirement to assess whether a tax position is more likely than not to be sustained upon examination, including resolution of any related appeals process, based on the technical merits of the position. Upon determination of the more-likely-than-not recognition threshold, a position is measured to determine the amount of benefit to be recognized in the consolidated financial statements. Originally, FIN 48 was to be effective for fiscal years beginning on or after December 15, 2006. On February 1, 2008, the Board issued a Staff Position FIN 48.2, Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises, which allows the Fund to defer the adoption of FIN 48 until annual periods beginning after December 15, 2007. On December 30, 2008, the FASB issued FIN 48-3, Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises ("FSP 48-3"), which once again deferred the effective date of FIN 48. Under FSP 48-3, in the absence of early adoption, FIN 48 will become effective for the Fund at December 31, 2009. The Investment Manager has elected to take advantage of this deferral and will continue to accrue for liabilities relating to uncertain tax positions only when such liabilities are probable and reasonably estimatable. The Investment Manager is in the process of determining whether the adoption of FIN 48 will have a material impact to the Fund's consolidated financial statements. The Investment Manager's conclusions regarding FIN 48 are subject to review and adjustment at a later date based on on-going analyses of tax laws, regulations and interpretations thereof and other factors. In February 2008, the Board issued FASB Staff Position No. FAS 140-3 (

AI Analysis

Summarize this document or ask questions about its contents using Claude.

Typical cost: less than $0.01 per query with Haiku. Model can be changed in Settings.

Add API Key in Settings

), Accountingfor Transfers of Financial Assets and Repurchase Financing Transactions. The FSP applies to a repurchase financing, which is a reverse repurchase agreement that relates to a previously transferred financial asset between the same counterparties (or consolidated affiliates of either 22 EFTA01097584 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 counterparty), that is entered into contemporaneously with, or in contemplation of, the initial transfer. The FSP is effective for years beginning after November 15, 2008. The Investment Manager has determined that there is no impact of the FSP on the Fund's consolidated financial statements. In March 2008, the Board issued FASB Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities. The standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Investment Manager is currently in the process of determining the impact, if any, of the standard on the Fund's consolidated financial statements. In April 2009, the Board issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and identifying Transactions That Are Not Orderly ("FSP 1574"). FSP 157-4 provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, Fair Value Measurements, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. The FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. The standard is applicable for interim and annual reporting periods ending after June 15, 2009. The Investment Manager does not expect the adoption of this guidance to have a material impact on the Fund's consolidated financial statements. In September 2009, the Board issued FASB ASC 820-10, Fair Value Measurements and Disclosures, for estimating the fair value of investments in investment companies that have calculated net asset value per share in accordance with FASB ASC 946-10, Financial Services- Investment Companies (formerly the American Institute of Certified Public Accountants Audit and Accounting Guide, Investment Companies). According to this guidance, which was formerly referred to as FSP FAS 157-g or Accounting Standard Update 2009-12, in circumstances in which net asset value per share of an investment is not determinative of fair value, a reporting entity is permitted, as a practical expedient, to estimate the fair value of an investment in an investment company using the net asset value per share of the investment (or its equivalent) without nuttier adjustment, if the net asset value per share of the investment is determined in accordance with FASB ASC 946-10 as of the reporting entity's measurement date. The guidance also requires certain additional disclosures. The Investment Manager does not expect the adoption of this guidance to have a material impact on the Fund's consolidated financial statements. The Board issued FASB Statement No. 165, Subsequent Events ("FASB 16?) which is effective for interim and annual periods ending after June 15, 2009. FASB 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date 23 EFTA01097585 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 through which an entity has evaluated subsequent events and the basis for that date. The Investment Manager is currently evaluating the impact of the effect of implementing this guidance. In June 2009, the Board issued FASB Statement No. 168, The FASB Accounting Standards Codification ("FASB 168" or "Statement"). FASB 168 establishes that the FASB Accounting Standards Codification ("Codification") will become the source of authoritative U.S. generally accepted accounting principles ("GAAP") recognized by the Board to be applied by nongovernmental entities. On the effective date of FASB 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. Following this Statement, the Board will not issue new standards in the fonn of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The Board will not consider Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates will serve only to update the Codification, provide background information about the guidance, and provide the IngPs for conclusions on the change(s) in the Codification. FASB 168 will be effective for interim and annual periods ending after September 15, 2009. The Investment Manager does not expect the adoption of FASB 168 to have a material impact on the Fund's consolidated financial statements. 3. Notes Payable CLO Bernard is a CLO formed in April 2004, into which the Partnership contributed a portion of its assets at the time of formation. In March 2005 and June 2006, the size of the CLO was increased. At the time of each upsize, the Partnership contributed additional assets into the CLO. To facilitate the leveraged capital structure of the CLO, Bernard entered into an indenture (the "indenture") pursuant to which it issued Class A-1 Senior Secured Term Notes, ("Class A-1 Notes"), Class A-2 Senior Secured Revolving Notes ("Class A-2 Notes"), Class A-3a Notes, and Class A-3b Notes, ("Class A-3 Notes"), and Class B Notes (collectively, the "Notes"), the interest on which Bernard will pay on the dates and in the manner provided for in the indenture. The Notes that are collateralized by the assets (which are primarily corporate and real estate loans) in Bernard and have an aggregate fair value of approximately $616.3 million at December 31, 2008. On March 28, 2008, Bernard had fully drawn down on its existing commitment of the Class A-3 Notes to $53.7 million at the current preferred equity level. The reinvestment period expired on March 28, 2008. For the year ended December 31, 2008, Bernard paid down the Class A-1 Notes, Class A-2 Notes, and Class A-3 Notes, by $27.4 million, $312.1 million and $126.3 million. As of December 31, 2008, $20.1 million (par $22.6 million) of the Class A-1 Notes at Libor plus 0.35%, $265.4 million (par $299.9 million) of the Class A-2 Notes bearing interest at Libor plus 0.37%, $42.5 million (par $44.4 million) of the Class A-3a Notes and Class A-3b Notes bearing interest at Libor plus 0.28%, $45.1 million (par $53.7 million) of the Class A-3c Notes bearing interest at Libor plus 0.36%, and $85.2 million (par $123.5 million) of the Class B Notes bearing interest at Libor plus 8% were issued and outstanding. The Class A Notes and Class B Notes are included in notes payable on the consolidated statement of assets, liabilities and partners' capital. interest on the Notes accrue and are payable on a calendar quarter basis. The Notes mature on March 28, 2013. The trustee of Bernard is LaSalle Bank N.A. 24 EFTA01097586 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 Under the terms of the Indenture, as amended, Bernard is subject to various covenants regarding its investments, including but not limited to, minimum over-collateralization and interest coverage levels, events of default, eligibility criteria and portfolio collateral quality tests. Beginning on August 29, 2008, Bernard failed to meet its minimum Class A over-collateralization ratio test of 144.5%; however, it has maintained its Class A over-collateralization ratio greater than the minimum trigger for an event of default of 115% during the year ended December 31, 2008. On January 8, 2009, the Indenture was amended to increase the events of default measure to maintain the Class A minimum over-collateralization ratio above 120%. Beginning on July 31, 2008, Bernard failed to meet its minimum Class B over-collateralization ratio test of 125.4%. As of the latest measurement date, November 30, 2009, Bernard's Class A and Class B overcollateralization ratios are 131.84% and 89.91%, respectively. Bernard's Class A interest coverage ratio is 737.43%. Bernard's failure to meet the Class A and Class B over collateralization ratios affects the priority of waterfall payments and accelerates repayment of the Class A-1 Notes, Class A-2 Notes and Class A-3 Notes. 4. Short-term Borrowings Woodhaven was formed on August 29, 2006. Woodhaven has repaid $229.8 million on a short- term revolving debt facility. The facility had an interest at Libor plus 2.0% during the year. The facility was fully repaid and terminated on July 18, 2008. 5. Related Party Transactions At December 31, 2008, nearly all of the Partnership's due to affiliates balance reflected on the consolidated statement of assets, liabilities and partners' capital represent payables to the Offshore Fund and the TE Fund for outstanding past advances. The payables are evidenced by promissory notes. For as long as these obligations remain outstanding, the Partnership is prohibited from (i) making any distributions, dividends, or redemption payments to its limited partners and (ii) making any distribution to the General Partner with respect to incentive allocations relating to the 2008 fiscal year and future years. During 2008, the payable incurred interest at 12% per annum, amended to 15% per annum on September 30, 2008. For the year ended December 31, 2.008, interest on such balances amounted to $20.5 million and is included in interest expense in the consolidated statement of operations. In the normal life cycle of private investments (including, but not limited to, corporate and real estate loans, private equity, real estate assets, and commerciaVindustrial and consumer assets held directly or through Investment Platforms), cash transfers occur at the inception of the investment, during the life of the investment (including, but not limited to, follow-on investments, dividends, interest, fees, draws and partial prepayments) and at the close of the transaction. In many of these transactions, the Partnership may sell or participate a portion of such investments to the Other Accounts and thereafter act in an agency capacity for the Other Accounts. In connection with these transactions, the Partnership may, among other things, act as the counterparty to the external party, administer the aggregate flow of funds with the external party and periodically settle related cash transfers with the Other Accounts involved in the transaction. 25 EFTA01097587 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 As discussed above, the Investment Manager will from time to time offer to the Other Accounts and/or unaffiliated third parties participations in and/or assignments or sales of certain investments (or interests therein) that the Partnership has originated or purchased. In connection with such an offer to the Other Accounts and/or unaffiliated third parties, the price of such transaction will be set in accordance with the Investment Manager's established valuation policies which may involve the use of an independent third party, as discussed in Note 2, or in the case of such transaction which occurs at the initial acquisition, at the purchase price of such investment. in determining the amount to invest, the investment Manager will take into consideration various factors, including but not limited to, the fact that it will, from time to time cause the Fund to engage in the transaction with Other Accounts and/or offer such investments to unaffiliated third parties as described above. The Fund makes certain investments (including, but not limited to, corporate and real estate loans and private equity investments) through nominee entities. In such situations, the nominee makes each such investment under the direction of the General Partner and the Fund and Other Accounts are issued participation rights. These rights and any corresponding unfunded obligations, underlying collateral agreements, and financing arrangements are based upon the Fund's and Other Accounts' participation in, and funding of, such investments. The Fund's allocable shares of such investments are recorded on the consolidated statement of assets, liabilities and partner's capital and the consolidated condensed schedule of investments as a component of investments owned. Bernard Capital Funding, LLC ("BCF"), a wholly-owned subsidiary of the Investment Manager, is the investment manager of Bernard and, as such, earns a quarterly servicing fee payable by Bernard. The servicing fee payable to BCF is calculated generally as a percentage of the sum of (i) the aggregate principal balance of the loans and other investments owned by Bernard from time to time (including loans transferred to Bernard by the Partnership) and (ii) any cash held by Bernard representing uninvested principal proceeds. The management fee payable by the Partnership to the investment Manager will be reduced by the amount of the servicing fee paid ($9.1 million) by Bernard to BCF. D.B. Zwim Global Advisors, LLC ("DBZGA"), a wholly-owned subsidiary of the Investment Manager, charges the Fund a fee in connection with the management and servicing of certain portions of the Fund's loan portfolio. This fee is in addition to the management fee already payable by the Fund and is used to facilitate the Investment Manager and DBZGA in engaging personnel and incurring other overhead costs to manage these loans in lieu of hiring an unaffiliated third- party service provider to provide these services. The fee is calculated as 40 basis points on fair value of loan balances for which no other servicing fees are charged by third parties. For the year ended December 31, 2008, the Fund incurred $2.9 million in connection with such fees. Such amount is included in other expense in the consolidated statement of operations. The Investment Manager determines the allocation of expenses to the Fund and Other Accounts. The Investment Manager determines the nature of the expenses charged to the Fund and Other Accounts and the allocation methodology utilized. Factors considered in the allocation of expenses to the Fund include, but are not limited to, the Fund's participation, actual or anticipated, in investments generating investment related expenses and the net assets of the Fund. For certain expenses, the Investment Manager initially paid for the expenses and was reimbursed by the Fund. At December 31, 2008, the Fund owed the Investment Manager $925 thousand for such 26 EFTA01097588 D.B. Zwirn Special Opportunities Fund. L.P. Notes to Consolidated Financial Statements December 31, 2008 reimbursable expenses which is recorded in accrued expenses and other liabilities in the consolidated statement of assets, liabilities and partners' capital. In limited instances, the Partnership provides letters of credit to counterparties in certain transactions. In such cases, the Investment Manager would obtain a letter of credit issued by its bank on behalf of the Partnership and the Partnership would provide the investment Manager with the cash collateral that would support the issuance of the letter of credit. At December 31, 2008, the Investment Manager had letters of credit outstanding on behalf of the Fund of $1.2 million for which the Fund had provided cash collateral. From time to time, principals and employees of the Investment Manager and the General Partner may also make certain investments for their own accounts and may invest in companies, including bankrupt, financially distressed and special situation companies, in which the Fund invests. At December 31, 2008, the Fund has a receivable of approximately $6.1 million from the General Partner for an adjustment to incentive fees related to prior year audit adjustments. This amount is included in other assets on the consolidated statement of assets, liabilities, and partners' capital. The amount was repaid in May 2009 after the conclusion of the prior year audit. At December 31, 2008, the General Partner's capital account was $1.6 million. 6. Financial Instruments The Fund's investments, which may be denominated in any currency, may include, among other things, equity securities (both listed and OTC), convertible bonds, corporate bonds (both investment grade and non-investment grade), distressed debt, commercial and industrial assets (including, but not limited to, asset-based loans, trade claims, specialized equipment leases, litigation claims, NPLs and consumer receivables), structured finance products (asset-backed and mortgage-backed securities and collateralized debt obligations), credit default swaps (including single names, trenches and indices), bank loans, corporate and real estate loans, special situation equity investments, real estate, commodity-related products and derivatives (including, but not limited to, options, flaunts, swaps and forwards). The Fund's investment activities subject it to market risk. Market risk is the potential loss the Fund may incur as a result of changes in the fair value of a particular financial instrument or changes in interest rates. In addition, the Fund's portfolio includes investments in illiquid or thinly traded investments, such as investments in distressed securities, NPLs and non-investment grade securities, that may be subject to greater volatility than more liquid, actively traded investments. One component of market risk is currency risk which arises from the possibility that fluctuations in foreign exchange rates will affect the value of such financial instruments, including foreign currency contracts and direct or indirect investments in securities of non-U.S. companies. The Investment Manager attempts to mitigate the effect of market risk in the portfolio by diversifying the investments of the Fund across markets and regions. The Fund's investment activities subject it to credit risk. Credit risk is the potential loss the Fund may incur as a result of the failure of an issuer or counterparty to make payments according to the terms of a contract. Credit risk arises from investment activities in which the Fund is exposed to the potential default of debtors (including counterparties in the case of loan participations) in the 27 EFTA01097589 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 repayment of principal and interest. Credit risk also arises from the uncertainty that counterparties will fulfill their obligations on derivative contracts in which the Fund stands to make a profit. The Fund's exposure to credit risk at any point in time is limited to amounts recorded as assets in the consolidated statement of assets, liabilities and partners' capital. The Investment Manager attempts to control credit risk by performing due diligence on debtors and investing in the secured, senior tranches of distressed debt, and secured, privately originated corporate and real estate loans. In the case of counterparty credit risk, the Investment Manager attempts to mitigate the risk by generally dealing with well-established counterparties. In the ordinary course of business, the Fund may be exposed to a concentration of credit risk to a particular counterparty, borrower or issuer. At December 31, 2008, substantially all of the Fund's credit derivatives were executed with Goldman Sachs or Merrill Lynch. Certain of the Fund's investment activities subject it to political risk. In pursuing investments in foreign countries, the Fund is exposed to risks not typically associated with domestic investments such as the risks related to legal structure, tax withholding, limitations on the removal of cash or other assets of the Fund and political stability. Investments in derivative instruments, including total return swaps and various types of credit default swaps, subject the Fund to off-balance-sheet market risk, where changes in the fair value of the financial instruments underlying the derivative instruments may exceed the amount recognized in the consolidated statement of assets, liabilities and partners' capital. The change in value of the derivative contracts, net of accrued interest where applicable, is recorded as a component of net change in unrealized loss on investments and derivative contracts on the consolidated statement of operations. Unrealized gains are reported as assets and unrealized losses are reported as liabilities on the consolidated statement of assets, liabilities and partners' capital. Realized gains and losses are recorded upon termination of each derivative contract. The Fund may invest in various types of credit default swaps. Credit default swaps involve an agreement to exchange cash flows based on the creditworthiness of the underlying issuer of a security. The reference obligation of the swap can be a single user, a basket of users or an index. Index and basket credit default swaps are credit default swaps that reference multiple names through underlying baskets or portfolios of single name credit default swaps. In the case of expected credit improvement, the Fund may sell credit default protection in which it receives a premium to take on the risk. In such an instance, the obligation of the Fund to make payments upon the occurrence of a credit event creates leveraged exposure to the credit risk of the referenced entity. The Fund may also buy credit default protection with respect to a referenced entity if, in the judgment of the Investment Manager, there is a high likelihood of credit deterioration. In such instance, the Fund will pay a premium regardless of whether there is a credit event. The credit default swap market in high-yield securities in which the Fund participates is comparatively new and rapidly evolving compared to the credit default swap market for more seasoned and liquid investment-grade securities, creating the risk that the newer markets will be less liquid, and making it potentially more difficult to exit or enter into a particular transaction. The table below summarizes certain information regarding protection sold through credit default swaps as of December 31, 2008: 28 EFTA01097590 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 Protection Sold Maximum Potential Payout/Notional (in millions) Years to Maturity Credit spreads on underlying (basis points) 0-6 months 6-12 months 1-5 years 5-10 years Total 0- 100 S 115.4 S S 1,058.2 S 137.5 S 1,311.1 101 - 250 85.1 1,586.0 306.9 1,978.0 251 • 500 71.1 2,756.8 280.9 3,108.8 501 - 1000 57.2 1.9 2,008.9 190.3 2,258.3 Greater than 1000 99.0 21.9 3,272.5 247.4 3,640.8 Total S 427.8 S 23.8 S 10,682.4 S 1,163.0 S 12,297.0 As of December 31, 2008, the unrealized depreciation of these swap contracts is $1.8 billion. Because the collateral accounts and ISDA agreements cover multiple types of derivatives, it is not possible to segregate collateral specific to the written credit derivatives. The collateral posted in total is $42.4 million. There were no recourse provisions in place as ofDecember 31, 2008. In connection with the above swap contracts, the Fund received upfront fees amounting to $209.4 million. These amounts are reflected on the consolidated statement of assets, liabilities and partners' capital under derivative contracts. Upon termination of the credit default swap contracts, the fees are offset against the fair value of the derivative contracts and recognized in net realized loss on derivative contracts on the consolidated statement of operations. The Fund may enter into total return swap contracts as part of its investment strategy. Total return swaps involve an agreement to exchange cash flows based on the total return of underlying financial instruments and a stated interest rate. Certain of the Fund's ISDA agreements contain provisions that require the Fund to maintain a predetermined level of net assets, and/or provide limits regarding the decline of these predetermined levels over certain defined periods. If the Fund were to violate such provisions, the counterparties to respective agreements in which a violation occurs could terminate such agreement making all open transactions terminated and require immediate settlement or, as an alternative to immediate termination, require the Fund to consent to change the terms of the agreement adversely to the Fund around additional termination provisions or additional collateral requirements. The Fund has pledged collateral amounting to approximately $2.1 million in connection with OTC derivative contracts at December 31, 2008, which is included in cash collateral pledged on the consolidated statement of assets, liabilities and partners' capital. 29 EFTA01097591 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 The Fund may buy and write certain listed and OTC put and call options. The buyer of an option has the right to purchase (in the case of a call option) or sell (in the case of a put option) a specified quantity of a specified financial instrument at a specified price prior to or on a specified expiration date. The writer of an option is exposed to the risk of loss if the market price of the underlying financial instrument declines (in the case of a put option) or increases (in the case of a call option). The writer of a call option can never profit by more than the premium paid by the buyer, but can lose an unlimited amount At December 31, 2008, the Fund had investments in options with a fair value of approximately $799 thousand included in investments owned (options bought) and approximately $616 thousand included in investments sold, but not yet purchased (options written). The Fund uses various forms of leverage including notes, short-term borrowings, short positions, investments sold under agreements to repurchase and purchasing securities on margin. The amount of borrowing will vary depending on market conditions and investment opportunities, as well as the types of investments held by the Fund and the total fair value of such investments. There is no limit, cap or restriction on the amount of borrowing that the Fund may use or the exposure the Fund may have. Leverage will likely vary and could be significant at times. The borrowing arrangements that the Fund may enter into may contain certain covenants which may restrict the Fund's ability to liquidate its assets or otherwise redirect its assets to other uses at times. The Fund may invest, directly or through OTC derivatives, in collateralized debt obligations ("CDOs"), including CDOs managed by the Investment Manager and other affiliates. The value of the CDOs owned by the Fund generally will fluctuate with, among other things, the financial condition of the obligors or issuers of the underlying portfolio of assets of the related CDO ("CDO Collateral"), general economic conditions, the condition of certain financial markets, political events, developments or trends in any particular industry and changes in prevailing interest rates. Holders of CDOs must rely solely on distributions on the CDO Collateral for any cash flows due to the holder. The Fund may invest in asset backed securities, including mortgage backed securities. The value of mortgage backed securities generally will fluctuate with changes in the level of delinquencies and losses with respect to mortgage loans backing the securities, the level of the housing prices on which the mortgage loans arc based and changes in interest rates. Investments sold, but not yet purchased, represent obligations of the Fund to deliver specified securities at contracted prices and thereby create a liability to repurchase the securities at prevailing future market prices. The Fund's ultimate obligation to satisfy the sale of investments sold, but not yet purchased, may exceed the amount recognized in the consolidated statement of assets, liabilities and partners' capital. The approximately $14.9 million shown as due from brokers and counterparties on the consolidated statement of assets, liabilities and partners' capital relates to cash balances on deposit and proceeds from short sales primarily held at clearing brokers. The Fund's cash and exchange traded positions are held in custody primarily by Goldman Sachs and are pledged as collateral to the clearing brokers. The Fund is subject to credit risk should the clearing brokers be unable to meet their obligations to the Fund. This risk is mitigated by the fact that the Fund's domestic accounts are carried by their clearing broker as "customer accounts", and are therefore afforded certain protections under SEC rules with regard thereto and under the Securities Investor Protection 30 EFTA01097592 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 Corporation's insurance program and any supplemental insurance programs maintained by such brokers. Although the Investment Manager monitors and believes its custodians are appropriate, there is no guarantee that the custodians that the Fund may use from time to time will not become insolvent. While both the U.S. Bankruptcy Code and the Securities Investor Protection Act of 1970 seek to protect customer property in the event of a failure, insolvency or liquidation of a broker•dealer, there is no certainty that, in the event of a failure of a broker-dealer that has custody of the Fund's assets, the Fund would not incur losses due to its assets being unavailable for a period of time, which may be ultimately less than full recovery of its assets, or both. In the normal course of its investment activities, the Fund may be required to pledge investments as collateral whereby the custodian has the right, under the terms of its prime brokerage agreement, to sell or repledge the securities. There is no clearinghouse for the Fund's interests in private investments nor is there a depository for custody of any such investments. The processes by which these interests are cleared, settled and held in custody are individually negotiated between the parties to the transaction. This subjects the Fund to operational risk to the extent there are delays and failures in these processes. 7. Fair Value Measurement On January 1, 2008, the Investment Manager adopted SFAS No. 157 Fair Value Measurements ("SFAS 157"), which establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under SFAS 157 are as follows: Level 1: Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access at the measurement date; Level 2: Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; and Level 3: inputs that are unobservable. Inputs are used in applying the various valuation techniques and broadly refer to the assumptions that market participants use to make valuation decisions, including assumptions about risk. Inputs may include price information, volatility statistics, specific and broad credit data, liquidity statistics, and other factors. An investment's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. However, the determination of what constitutes "observable" requires significant judgment by the Investment Manager. The Investment Manager considers observable data to be market data which is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market. The categorization of an investment within the hierarchy is based upon the pricing transparency of the investment and does not necessarily correspond to the Investment Manager's perceived risk of that investment. 31 EFTA01097593 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 Investments whose values arc based on quoted market prices in active markets are classified within level 1. Investments that trade in markets that are not considered to be active, but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within level 2. As level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information. Investments classified within level 3 have significant unobservable inputs, as they trade infrequently or not at all. Level 3 instruments include privately held corporate and real estate loans and private equity investments. When observable prices are not available for these investments, the Investment Manager uses one or more valuation techniques (e.g., the market approach or the income approach) for which sufficient and reliable data is available. Within level 3, the use of the market approach generally consists of using comparable market transactions, while the use of the income approach generally consists of the net present value of estimated figure cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors. Level 3 investments may also be adjusted to reflect illiquidity and/or non-transferability, with the amount of such discount estimated by the Investment Manager in the absence of market information. The fair value measurement of level 3 investments does not include transaction costs that may have been capitalized as part of the investment's cost basis. Assumptions used by the Investment Manager due to the lack of observable inputs may significantly impact the resulting fair value and therefore the Fund's results of operations. As discussed further in Note 8, the Notes are valued based on an independent third party discounted cash flow model which considers collateral assumptions and discount rates for similar instruments. The following table presents the investments carried on the consolidated statement of assets, liabilities and partners' capital by caption and by level within the valuation hierarchy as of December 31, 2008. 32 EFTA01097594 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 Assets at Sir value as of December 31, 2008 Quoted prices Significant in active other Significant markets for observable unobservable identical assets inputs inputs (Level 1) (Level 2) (Level 3) Total Investments owned S 10,369,602 $ 12,393,989 $ 1,221,190,939 S 1,243,954,530 Unrealized appreciation on derivative contracts 526,375 132,965,043 133,491,418 $ 10,895,977 S 145,359,032 $ 1,221,190,939 $ 1,377,445,948 Liabilities at fair value as of December 31,2008 Quoted prices Significant in active other Significant markets for observable unobservable identical assets inputs inputs (Level 1) (Level 2) (Level 3) Total Investments sold, but not yet purchased S (1,691,028) $ (816,098) $ - $ (2,507,126) Unrealized depreciation on derivative contracts (973,358) (144,501,022) (145,474,380) Notes payable (458,253,075) (458,253,075) S (2,664.386) $ (145,317,120) $ (458,253,075) S (606,234,581) The following table includes a rollforward of the amounts for the year ended December 31, 2008 for investments classified within level 3. The classification of an investment within level 3 is based upon the significance of the unobservable inputs to the overall fair value measurement. Fair value measurements using significant unobservable inputs (Level 3) Investments sold Investments but not yet Notes owned purchased payable Total Balance at December 31, 2007 2,448,402,293 $ (3,643,471) $ (954,734,094) $ 1,490,024,728 Net (sales) / cover shorts! repayments (292,017,792) 3,643,471 409,930,887 121,556,566 Amortization ofclosing fees 12,541,751 12,541,751 Net (losses)/ gains Realized (72,987,801) (3,837,342) (76,825,143) Unrealized (874,747,512) 90,387,474 (784,360,038) Balance at December 31, 2008 $ 1,221,190,939 S • $ (458,253,075) $ 762,937,864 All net realized and change in unrealized gains (losses) in the table above are reflected in the accompanying consolidated statement of operations. Net unrealized loss of $636.7 million relates to those assets and liabilities held by the Fund at December 31, 2008. 33 EFTA01097595 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 8. Fair Value Elections In February 2007, the Board issued Statement No. 159, The Fair Yalue Option for Financial Assets and Financial Liabilities ("SPAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, with changes in fair value recognized in earnings. SFAS 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Fund adopted SFAS 159 effective January 1, 2008 and elected to apply the fair value option to the Notes, as the Investment Manager believes this would more accurately reflect the manner in which market participants would fair value the Notes. The change in fair value of the Notes is attributable to the liquidity risk of the Notes, as well as the credit quality of the Fund's investments. The change in fair value of the Notes due to instrument-specific credit risk was derived based on the cumulative change in credit risk of each of the Fund's individual investments. The adoption of SFAS 159 resulted in a cumulative decrease of approximately $10.1 million to the January 1, 2008 partners' capital. As of December 31, 2008, the fair value of the Notes, measured pursuant to SFAS 159, as well as the changes in fair value for the year ended December 31, 2008 are as follows: Net change in unrealized gains on notes payable Fair value at for the year ended December 31, 2008 December 31, 2008 Notes payable 458,253,075 $ 85,844,490 The aggregate unpaid principal balance exceeds the aggregate fair value of these notes payable by approximately $85.8 million as of December 31, 2008. The change in fair value is reported as net change in unrealized gain on notes payable in the consolidated statement of operations. Interest expense related to those notes payable is reported as interest expense in the consolidated statement of operations. The cumulative effect of electing the fair value option for existing eligible items at the time of initial adoption was as follows: 34 EFTA01097596 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 Consolidated Consolidated Statement of Statement of Assets, Assets, Liabilities and Liabilities and Partners' Capital Partners' Capital January 1, 2008 Net effect of January 1, 2008 prior to adoption adoption after adoption $ (954,734,094) - $ (954,734,094) Notes payable 10,136,141 (10,136,141) Debt issuance cost Cumulative effect of adoption of SPAS 159 (charge to partners' capital) $ (10,136,141) 9. Investment Platforms limited partnerships, limited liability The Partnership may invest, directly or indirectly, in in foreign countries (collectively, companies and other vehicles in the United States and formed with related and/or unrelated "Investment Platforms" and each, an "Investment Platform") Platforms typically make various third parties (each, an "Investment Platform Partner"). Investment such investment, an "Investment debt, real estate, asset, equity, leasing and other investments (each ment Platforms (the "Investment Platform Asset"). Generally, the agreements governing the Invest fees to a third party Investment Platform Agreements") provide for the payment of management rm Assets held by, or related to, the Platform Partner based on the total value of Investment Platfo Agreements may provide for the Investment Platform. In addition, the Investment Platform e ("Promotes"), and generally such payment of performance-based fees or allocations of incom Investment Platform Assets (e.g., all Promotes are based on the total return of: (i) a pool of calendar year) or (ii) all Investment investments related to an Investment Platform in a particular ment Platforms also bear certain Platform Assets of a particular Investment Platform. The Invest of which may be funded directly or expenses, such as operational expenses and taxes, some or all In participating in an Investment indirectly by a loan or capital contribution from the Fund. capital or other funding subject to Platform, the Fund may be subject to firm commitments to fund Investment Platform. various conditions and/or approval rights in connection with such participate in particular Investment In certain instances, the Fund and Other Accounts may pating in an Investment Platform, Platform Assets ("Investment Platform Participations"). In partici Platfo rm Assets in that Investment the Fund may have an interest in one, some or all Investment ment Platform Asset, the rm or Invest Platform. With respect to a particular Investment Platfo tes and taxes among the Fund and Investment Manager will allocate income, fees, expenses, Promo or Investment Platform Asset. Such Other Accounts participating in such Investment Platform specific interests in the Investment allocations are based on the Fund's and Other Accounts' results of a particular Investment Platform Assets and may not in all cases reflect the economic results of the Investment Platform Platform Asset on a stand-alone basis, as distinct from the total or any investment pool within the Investment Platform. loans and/or investments which are Certain Investment Platforms originate, source and service nts. For these Investment Platforms, assigned or participated to the Fund and Other Accou the Fund level. The Fund reflects management fees, expenses and Promotes are incurred at 35 EFTA01097597 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 interests in such individual Investment Platform Assets in the respective categories on the consolidated condensed schedule of investments with income, gains and losses reflected in the respective categories on the consolidated statement of operations. The Fund may also participate, directly or indirectly, as a limited partner in an Investment Platform structured as a private equity or real estate fund managed by the Investment Platform Partner. In these limited number of situations, the Fund is generally subject to the standard terms and conditions of a limited partnership agreement. As a result, the Fund generally does not control the investee through ownership, voting and/or liquidation rights and is obliged to fund capital calls up to a specified capital commitment as prescribed by the limited partnership agreement. For these Investment Platforms, management fees, expenses and Promotes are incurred at the investee level. The Fund reflects its gains and losses associated with investments in such entities in net realized and unrealized loss on investments and derivative contracts in the consolidated statement of operations. Also, see Note 2, Valuation of Investments. The Fund may also invest in other entities that the Investment Manager considers to be investment companies for which the Fund either individually or collectively with the Other Accounts control the entity through ownership, voting and/or liquidation rights. In such cases the Fund's commitment to hand capital calls may be subject to the satisfaction of various conditions and/or approval rights. For these Investment Platforms, management fees, expenses and Promotes are incurred at the investee level. Investments in Investment Platforms that are individually controlled by the Fund are consolidated. See Note 2, Principles of Consolidation. Interests in Investment Platform Assets held through Investment Platforms collectively controlled by the Fund and the Other Accounts are presented on the consolidated condensed schedule of investments in the respective asset class, industry and geographical region of the underlying investments as summarized below. The Fund reflects its ownership and applicable gains and losses associated with these entities based on its pro rata share of the income, gains and losses generated from the underlying Investment Platform Assets in the respective categories on the consolidated statement of operations. 36 EFTA01097598 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 %vestment Platform Assets held through Investment Platforms fin U.S Dollars) % of Par Amount / Partners' Description Capital Fair Value Quantity Investments Owned Corporate and Real Estate Loans Asia Real Estate 0.52% S 3,539,331 Asia Total (cost 52,758,795) 0.52% 3,539,331 Europe Diversified 1.00% 6,879.310 Financials 0.41% 2.802.316 Europe Total (cost $11,972,957) 1.41% 9,681.626 North America (prinunly limed States) Communications 0.13% 912,069 Consumer Goods 0.18% 1,200,550 Energy 0.18% 1.209.773 Health Care 0.41% 2,795,730 Real Estate 0.44% 3031333 Technology 0.19% 1,332,547 North America (primarily United Stain) Total (cost $13,715,949) 1.53% 10,481.802 Corporate and Beal F Loans Total (coal $28,450.70D 3.46% 23,702,759 Municipal Bonds North America (primarily United States) Govanment 0.79% 5,429,235 North America (primarily United States) Total (cost S6,331,103) 0.79% 5,429,235 Municipal Bonds Total (cost $6331,103) 0.79% 5,429.235 Private Equity and Asset Investments Asia Financials 0.27% 1,822,520 Private Equity Fund 0.30% 2,035.934 Real Estate 2.32% 15,963.128 Technology 0.83% 5,662,744 Asia Total (cost $22,620,901) 3.72% 25,484,326 Europe Diversified Stepstone Acquisition Soil. 0.99% 6,751,241 4,832,325 Su:panne Acquisition S a r I., Tam loan A, 2.313%, Duc 12/31/2011 2,48% 16,995.763 e 16,543,706 0.89% 6,127,799 E 7.248,488 Stepstone Acquisition S.a.r.L, Term Loan B. 2.313%, Due 12/31/2011 Other 0.02% 131337 Entatainment SNM S.p.A., Term Loan B. 5.749% Due 3/31/2011 1.04% 7,161.012 F 5,868,986 2,949.416 SNAI S.p.A., Tenn Loan C. I ' 443.33. Due Y3[120'1 0.43% E 2.348,047 Financials Transaction One 0.52% 3,568.904 2,916,308 Other 0.06% 425.132 Real Estate Fund T.R. Estate lino Sti., Term Loan. 6.219%, Due 10/202009 0.25% 1.702,722 e 2,491,739 6.611% 45,813,326 Europe Total (cost $56,270,256) 37 EFTA01097599 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 ,in US Polkas) % of Per Amount / Partners' Quantity Description Capital Fair Valve Investments Owned, confined Private Equity and Asset Investments. continued Non), America (primarily United States) Comimmications 0.01% S 64.498 Energy 1.10% 7,538,817 Fimuicials 0.68% 4,687.558 Health Care 0.04% 248.750 Industruda 2.62% 17,955,447 Real Estate 0.45% 3,067,996 Technology 0.02% 127.535 North America (primarily United States) Total (cost $49,763,533) 4.92% 33,690,601 Private Equity and Asset Investments Total (cost $128,654,690) 15.32% 104,988,253 Pubbc Equities Asia Financials 0.01% 93.804 Asia Total (cost SO) 0.01% 93,804 Public Equities Total (cost SO) 0.01% 93,804 Warrants North America (primarily United States) Commtmications 0.02% 118,690 Energy 0.20% 1313.427 Health Care 0.01% 90,862 Technology 0.02% 166311 North America (primarily United States) Total (cost SO) 0.25% 1,689,290 Warrants Total (cost SO) 0.25% 1,689,290 Investments Owned Total (cost $163,436,494) 19.83% S 135,903,341 Investments held through Investment Platfonns above are recorded net of related financing of approximately $14.8 million. The Partnership has directly invested in four CDOs, Parkridge Lane Structured Finance Special Opportunities CDO 1, Ltd. ("Parkridge"), Longridge ABS CDO I, Ltd. ("Longridge"), Longridge ABS CDO IL Ltd. ("Longridge IF'), Highridge ABS CDO II, Ltd. ("Highridge II"). The CDO's purpose is to lever assets on a non-recourse basis. The Partnership's equity and debt investments in such entities are included in collateralized debt obligations on the consolidated condensed schedule of investments. ZS Structured Credit Capital Management, LP ("ZS") is the Investment Manager for Longridge, and Highridge H. Parkridge is managed by BCF. As of December 31, 2008 the Partnership owned $9.2 million (representing 42.37%) of the equity of Parkridge. Pursuant to the leveraged capital structure of Parkridge, it has issued $216.5 million of various classes of notes which are collateralized by the assets in Parkridge. The Partnership owns $10.0 million of such notes at December 31, 2008. Assets owned by Parkridge include asset-backed securities and other types of collateralized debt 38 EFTA01097600 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 ntial and commercial mortgage obligations issued in the U.S. and Cayman islands, and reside backed securities and corporate loans issued in the U.S. n (representing 15%) of the equity of As of December 31, 2008, the Partnership owned $2.4 millio idge, it has issued $309.0 million of Longridge. Pursuant to the leveraged capital structure of Longr in Longridge. in April 2008, various classes of notes which are collateralized by the assets lling class directed the trustee to Longridge went into default. In October 2008, the contro rship did not own any of the notes at artPlerate the Notes and liquidate the collateral. The Partne ralized debt obligations issued in December 31, 2008. Assets owned by Longridge include collate securities issued in the U.S. the U.S. and Cayman Islands, and residential mortgage-backed terminated. As of December 31, 2008, Longridge II was in default and has been n (representing 15%) of the equity of As of December 31, 2008, the Partnership owned $1.2 millio idge U, it has issued $992.0 Highridge U. Pursuant to the leveraged capital structure of Highr the assets in Highridge II. The million of various classes of notes which are collateralized by 2008. Assets owned by Highridge II Partnership did not own any of the notes at December 31, issued in the U.S. include commercial and residential mortgage backed securities 10. Commitments and Contingencies tions of approximately $35.7 At December 31, 2008, the Fund had potential unfunded obliga agreements. Other funding to million on certain debt instruments such as revolving credit approval rights. investment Platforms remains subject to various conditions and/or contracts that contain a variety of in the normal course of business, the Fund enters into nifications. The Fund's maximum representations and warranties and which provide general indem involve future claims that may be exposure under these arrangements is unknown as this would provides indemnification to the made against the Fund that have not yet occurred. The Partnership persons and entities (including investment Manager and the General Partner and certain related General Partner, for certain losses partners and employees) of the Investment Manager and the Manager and the General Partner, incurred in connection with their association with the Investment misfeasance, bad faith or gross subject to certain limitations including with respect to willful negligence. Manager and such investigation There is an ongoing investigation by the SEC into the Investment could adversely affect the operations is not yet concluded. The results of the SEC's investigation partner's interest in the Partnership. of the Investment Manager and, in tura, the value of a limited named as a defendant in legal actions From time to time, the Fund is involved in legal matters or es that the resolution of the matters arising in its ordinary course of business. Management believ al adverse effect on the Fund's that existed on December 31, 2008 will not have a materi consolidated financial statements. 39 EFTA01097601 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 11. Key Partnership Terms The following is a summary of certain information set forth more fully in the Agreement. Capitalized terms are defined in the Agreement unless otherwise defined herein. Allocations and Distributions Each partner in the Partnership has a capital account with an initial balance equal to the amount such partner contributed to the Partnership. At the end of each accounting period, the capital account of each partner is adjusted by increasing in the case of net capital appreciation, or decreasing in the case of net capital depreciation, such capital account, in the ratio that the balance in each capital account bears to the balance of all capital accounts as of the beginning of such accounting period, subject to the incentive allocation described below. At the end of each fiscal year (or earlier with respect to any Limited Partner that makes a partial or complete withdrawal, if permitted by the General Partner), 20% of any net profits allocated to the capital account of a Limited Partner for such fiscal year will be reallocated to the General Partner (the "Incentive Allocation"). Incentive Allocations made upon partial withdrawals will be made solely with respect to the amount withdrawn. The Partnership will maintain a memorandum loss recovery account for each Limited Partner. Each Limited Partner's loss recovery account will be debited with aggregate net losses allocated to such Limited Partner's capital account. The General Partner will not be allocated any Incentive Allocation with respect to a Limited Partner's capital account until such Limited Partner has recovered any net loss debited to its loss recovery account (as reduced proportionately for withdrawals). Management Fees and Expenses The Partnership pays the Investment Manager a fee for management services calculated based on the sum of each Limited Partner's month-end capital account balance (the "Management Fee"). This Management Fee which is accrued monthly and payable quarterly is equal to 0.167% per month (2.0% per annum). Pursuant to the Agreement, the Partnership shall bear its operating expenses including, but not limited to, entity level taxes, investment related expenses, professional fees such as legal fees, audit and tax fees, and other Partnership related expenses, including, but not limited, to out-of-pocket expenses of any service company retained to provide services such as accounting, bookkeeping, asset management, appraisal and administrative services. Investment related expenses includes those expenses which the General Partner determines to be related to the investment of the Partnership's assets, such as brokerage commissions, clearing and settlement charges, loan servicing fees, bank service fees, extraordinary expenses and all other investment related costs, such as consultation expenses, due diligence and appraisal fees. Withdrawals Prior to the orderly disposition in March 2008, limited partners were under one of three withdrawal options: Three-Year, Two-Year (this option was discontinued by the Partnership on January I, 2005) or One-Year Plus Liquidity. 40 EFTA01097602 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 Under the Three-Year option, upon at least 120 days' prior written notice to the General Partner, a Limited Partner may withdraw part or all of its capital account as of the last business day of the calendar quarter ending at least three years after the Limited Partner initially purchases an interest and as of the third anniversary of that date thereafter. Under the Two-Year option, upon at least 120 days' prior written notice to the General Partner, a Limited Partner may withdraw part or all of its capital account as of the last business day of the calendar quarter ending at least two years after the Limited Partner initially purchases an interest and as of the second anniversary of that date thereafter. Under the One-Year Plus Liquidity option, upon at least 120 days' prior written notice to the General Partner, a Limited Partner may withdraw part or all of its capital account as of the last business day of the fiscal year ending at least one year after the Limited Partner initially purchases an interest. An initial distribution is made to such Limited Partner 30 days following year end consisting of a Limited Partner's pro rata share of cash and cash equivalents as determined by the General Partner and, in the General Partner's sole discretion, any other liquid assets of the Partnership. Thereafter, such Limited Partner will be paid quarterly cash distributions from the net proceeds of the sale of any portion of an asset with respect to the withdrawn interest or receipt of other payments relating thereto, after deduction of any accrued Management Fees, Incentive Allocation and allocated expenses. During this period from initial withdrawal and final liquidation, the assets relating to a Limited Partner's One-Year Plus Liquidity capital account will continue to be managed in accordance with the Agreement and remain subject to Management Fees, Incentive Allocation and allocated expenses; however, the Limited Partner's One-Year Plus Liquidity capital account will not be entitled to participate in any new investment or follow-up investment to an existing investment with respect to any portion of its withdrawn interest. In the event that withdrawal requests for a withdrawal date are received representing, in the aggregate, more than 10% of the Partnership's net assets, the General Partner may reduce the withdrawal requests on a pro rata basis (based on the amount of the limited partners' respective withdrawal requests), so that no more than 10% of net assets will be paid out (based on unaudited data) (the "Gate"). In calculating the Gate, the General Partner will not include the withdrawal requests of limited partners that are subject to the One-Year Plus Liquidity option (collectively, the "Withdrawing Limited Partners") and net assets will not include any Withdrawing Limited Partner's portion of the net assets. Any unfulfilled withdrawal request will be paid at the next withdrawal date (subject to further deferral if the deferred withdrawal requests exceed 10% of net assets) in priority to any subsequent withdrawal requests, unless the General Partner in its sole discretion decides to pay such deferred proceeds earlier than the next withdrawal date. Notwithstanding the above, substantial requests for withdrawals by Limited Partners could induce the Fund to liquidate positions sooner than would otherwise be desirable which could adversely affect the performance of the Fund. In addition, regardless of the period of time in which withdrawals occur, the resulting reduction in the Fund's net assets could make it more difficult for the Fund to diversify its holdings and achieve its investment objectives. Under certain circumstances, the General Partner may suspend or limit withdrawals (in whole or in part) as it deems necessary, including pursuant to the Gate (as defined above). 41 EFTA01097603 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 Generally, in the case of withdrawals, ten percent (10%) of the withdrawal proceeds will be withheld by the Partnership until the completion of the Fund's annual audit, although such amount may be waived or reduced by the General Partner. In March 2008, the investment Manager of the Partnership began implementing an orderly disposition of the Partnership and Offshore Fund's portfolios. During the realization period, the Partnership will have no new contributions. All limited partners compulsorily redeemed will participate in distributed proceeds on a pro rata basis in accordance with their respective interests in the Partnership. The Partnership will not make any new investments, except for those that are committed or protective of the Partnership's rights and position in existing relationships. The investment Manager experts the disposition of the Partnerships' portfolio may take up to four years or longer to implement depending upon market conditions. 12. Financial Highlights With respect to the limited partnership interests outstanding during the year, the Fund is required to disclose certain financial highlights. An individual limited partners' results may vary based upon a variety of factors, including different fee arrangements, participation in certain investments and timing of capital transactions. Total Return Total return before Incentive Allocation -56.63% Incentive Allocation 0.00% Total return after Incentive Allocation -56.63% Expense Ratios Total expenses -8.75% Incentive Allocation 0.00% Total Expenses and Incentive Allocation -8.75% Net Investment income Ratio 2.88% Total return is determined using a time-weighted rate of return methodology in which monthly rates of return arc geometrically linked. Total return is calculated net of all expenses as reported on the consolidated statement of operations and presented both before and after any incentive Allocation. The expense ratio is determined by dividing the expenses as reported on the consolidated statement of operations by the Limited Partners' monthly average capital based on beginning of month capital balances ("Average Capital"). The ratio of total expenses is presented both before and after any incentive Allocation. Included in the expense ratio is the reversal of tax accruals as discussed in Note 2. The net investment income ratio is determined by dividing the net investment income by the Average Capital, and does not reflect the effects of the General Partner's incentive Allocation. 42 EFTA01097604 D.B. Zwirn Special Opportunities Fund, L.P. Notes to Consolidated Financial Statements December 31, 2008 The ratios are calculated based on the income and expenses as reported on the consolidated statement of operations which depending on the nature of the relationship, includes the income and expenses from certain Investment Platforms. 13. Subsequent Events Due in part to the impact of the orderly disposition process, the very difficult market environment and the negative performance in 2008 of the Partnership and Other Accounts on the revenues and liquidity needs of the Investment Manager, the Investment Manager explored alternative plans with the limited partners. As a result, on June I, 2009, Fortress VRF Advisors 1 LLC ("New Manager"), an affiliate of Fortress Investment Group LLC, replaced the Investment Manager as a part of an integrated series of transactions. Pursuant to such transactions, the Partnership and Other Accounts purchased certain assets of the Investment Manager and agreed to fund directly and indirectly certain expenses of the Investment Manager during the transition period. Beginning on June 1, 2009, the Partnership no longer pays to the Investment Manager the Management Fee and Incentive Allocation as defined in Note II. Instead, the Partnership will a) reimburse the New Manager for all costs and expenses relating to the Partnership, including allocated overhead and internal expenses, b) pay a monthly management fee equal to 1% of any gross amounts collected by the Partnership and c) pay an incentive fee equal to 5% of all distributions to limited partners in the Partnership in excess of the net asset value the Partnership determined as of May 31, 2009. On June I, 2009, Fortress Value Recovery CM LLC, an affiliate of Fortress Investment Group LLC replaced Bernard Capital Funding, LLC as the Collateral Manager of Bernard. On December 9, 2009 the Partnership changed its name to Fortress Value Recovery Fund I LLC. Unaudited In connection with determining the estimated partners' capital of the Fund as of June 30, 2009, the New Manager decided to reverse the SFAS 159 election made to the Notes. The impact to partners' capital was a decrease of $85.8 million. As of June 30, 2009, the estimated partners' capital for the Fortress Value Recovery Fund I LLC previously known as, "D.B. Zwim Special Opportunities Fund, L.P." as determined by the New Manager has decreased to $251.0 million. 43 EFTA01097605