EFTA00310618

CONFIDENTIAL MEMORANDUM SAB CAPITAL PARTNERS, L.P. CLASS B LIMITED PARTNERSHIP INTERESTS SAB CAPITAL ADVISORS, L.L.C. Mardi 2002 499055.21 EFTA00310618 Copy No. 258 Name: Jeff Epstein SAB CAPITAL PARTNERS, L.P. 650 Madison Avenue 26th Floor New York, NY 10022 (212) 610-9060 Prospective investors should carefully read this Confidential Memorandum in its entirety. However, neither the contents of this Confidential Memorandum nor any subsequent communication from the general partner of the Partnership (the "General Partner") or its respective members, officers, employees or representatives should be considered to be legal or tax advice, and each prospective investor should consult with his or her own counsel and advisers as to all matters concerning an investment in the Partnership. This offering relates solely to Class B Limited Partnership interests. There will be no public offering of limited partnership interests in the Partnership. No offer to sell (or solicitation of an offer to buy) is being made in any jurisdiction in which such offer or solicitation would be unlawful. This Confidential Memorandum has been prepared solely for the information of the person to whom it has been delivered on behalf of the Partnership for the sole purpose of evaluating the private placement described herein and may not be reproduced or used for any other purpose. Each person accepting this Confidential Memorandum agrees to return it to the General Partner promptly upon request. The Partnership is not registered as an investment company under the Investment Company Act of 1940, as amended (the "Company Act"). The General Partner and the management company of the Partnership are not registered as investment advisers under the Investment Advisers Act of 1940, as amended, or any state statute, and neither presently intend to (but may in the future) so register. The Partnership will not engage in any transactions involving commodity futures contracts (and related options) until, to the extent required by applicable regulations, the General Partner registers as a commodity pool operator with the Commodity Futures Trading Commission (the "CFTC") and the National Futures Association, or until the General Partner qualifies for an exemption from such registration under the rules of the CFTC. INTERESTS IN THE PARTNERSHIP ARE SUITABLE ONLY FOR SOPHISTICATED INVESTORS WHO ARE "QUALIFIED PURCHASERS" UNDER ME COMPANY ACT AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER FOR WHOM AN INVESTMENT IN THE PARTNERSHIP DOES NOT CONSTITUTE A COMPLETE INVESTMENT PROGRAM AND WHO FULLY UNDERSTAND AND ARE WILLING TO ASSUME THE RISKS INVOLVED IN THE PARTNERSHIP'S INVESTMENT PROGRAM. THE PARTNERSHIP'S INVESTMENT 499055.21 EFTA00310619 PRACTICES, BY THEIR NATURE, MAY BE CONSIDERED TO INVOLVE A SUBSTANTIAL DEGREE OF RISK. (SEE "CERTAIN RISK FACTORS.") EACH PROSPECTIVE INVESTOR IS INVITED TO MEET WITH THE MANAGING MEMBER OF THE GENERAL PARTNER TO DISCUSS WITH, ASK QUESTIONS OF, AND RECEIVE ANSWERS FROM, SUCH PERSON CONCERNING THE TERMS AND CONDITIONS OF THIS OFFERING OF INTERESTS, AND TO OBTAIN ANY ADDITIONAL INFORMATION, TO THE EXTENT THE GENERAL PARTNER POSSESSES SUCH INFORMATION OR CAN ACQUIRE IT WITHOUT UNREASONABLE EFFORT OR EXPENSE, NECESSARY TO VERIFY THE INFORMATION CONTAINED HEREIN. NO PERSON HAS BEEN AUTHORIZED TO MAKE ANY REPRESEN- TATION, OR GIVE ANY INFORMATION, WITH RESPECT TO THE INTERESTS, EXCEPT THE INFORMATION CONTAINED HEREIN. IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT OR THE MERITS OF AN INVESTMENT IN THE SECURITIES OFFERED HEREBY. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. 499055/1 EFTA00310620 TABLE OF CONTENTS Pace OVERVIEW OF THE PARTNERSHIP 1 INVESTMENT PROGRAM 2 KEY INVESTMENT HIGHLIGHTS/MERITS 7 MANAGEMENT OF THE PARTNERSHIP 8 SUMMARY 11 CERTAIN RISK FACTORS 30 CONFLICTS OF INTEREST 36 BROKERAGE COMMISSIONS 37 TAX ASPECTS 38 ERISA CONSIDERATIONS 53 ADDITIONAL INFORMATION 54 499055.21 EFTA00310621 OVERVIEW OF THE PARTNERSHIP SAB Capital Partners, L.P. (the "Partnership") is a Delaware limited partnership which commenced operations as a value-oriented private investment partnership on January 4, 1999. The affairs of the Partnership, including its investment portfolio, are managed by SAB Capital Advisors, L.L.C. (the "General Partner"), a Delaware limited liability company, of which Scott A. Bommer serves as the managing member (the "Managing Member"). Mr. Bommer also actively manages SAB Capital Partners II, L.P., a Delaware limited partnership, for investors who are not "qualified purchasers," as such term is defined under the Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder (the "3(c)(1) Fund") and SAB Overseas Fund, Ltd., an exempted company organized under the laws of the Cayman islands for non-U.S. investors and for certain tax-exempt U.S. investors (the "Offshore Fund"), each of which has an investment program substantially similar to that of the Fund. The Partnership's investment objective is to earn attractive long-term rates of return while seeking to minimize the risk of permanent capital loss. While the Partnership may pursue a broad array of investment strategies (including those enumerated below), its primary investment focus is to purchase and sell short publicly traded securities of U.S. entities which the General Partner believes are trading at material departures from their "intrinsic" values. The Partnership's investment philosophy encompasses five primary components: (i) applying a "private market" investment approach focused on identifying the "intrinsic" value of a business or security, (ii) employing a research intensive investment methodology, (iii) pursuing opportunities which the General Partner believes possess a "margin of safety" and a low probability of a permanent capital loss, (iv) making concentrated investments (subject to some limitations discussed herein) in situations which the General Partner believes have favorable risk/reward characteristics, and (v) focusing on situations in which the General Partner believes it has a competitive insight through identifying investment attributes which are not widely recognized or are misread by the market. The Partnership currently intends to focus on situations the General Partner believes are underfollowed, misperceived due to complexity or change, or experiencing market overreactions or other structural inefficiencies, and in which the General Partner believes there is a high probability of value creation or value realization over a reasonable period of time. Over time, the Partnership may pursue a broad array of investment strategies which the General Partner believes will minimise the Partnership's risk of permanent capital loss and in the current environment may reduce its exposure and correlation to the U.S. public equity markets generally. These strategies may include: long-term value investments, short sale positions, "paired" or "hedged" investment positions (long one security and short a specific security, basket or index), and event-driven strategies (including investments in distressed debt and entities undergoing liquidations or spin-offs). In addition, the Partnership will have the ability to invest a portion of its assets (but in no event more than 20% of any Primary Capital Account Sub-Account (as defined below under "Summary — Capital Accounts") of a Limited Partner, calculated at the time a position is acquired and including the amount of any unfunded commitments with respect to each such Primary Capital Account Sub-Account) in illiquid 49905511 EFTA00310622 investments, which will allow it to capitalize on privately structured opportunities which are generated by its public market activities. INVESTMENT PROGRAM Investment Objective The Partnership's investment objective is to earn attractive long-term rates of return while seeking to minimize the risk of permanent capital loss. Investment Philosophy Private Market Approach. The Partnership views its public securities holdings as fractional ownership interests in businesses and attempts to pursue opportunities in which the General Partner believes a security's price diverges from its "intrinsic" value. The Partnership defines "intrinsic" value as the present value of the expected cash flows that will be available to the owners of a security over its lifetime discounted at a rate that appropriately reflects the risk and volatility of the cash flows. The Partnership attempts to invest in businesses (or sell short securities), which at their then current prices provide attractive (or the prospect of very poor) rates of return and will not pursue multiple expansion, sector rotation, or technical and other non- fundamental analyses as its primary investment rationale. Rigorous Research. In executing its strategies, the Partnership incorporates much of the research-intensive analysis that a private market buyer might perform in making an investment. While the analysis of a specific investment will vary depending on the type of investment, it will likely include detailed financial, accounting and valuation analysis, and rigorous company, industry and competitive analysis. This analysis may encompass an examination of financial statements, meetings with company management, and interviews with customers, competitors and suppliers, and may focus on evaluating asset values, the sustainability of expected future economic earnings, capital structure, validity of GAAP accounting, company strategy, industry attractiveness, competitive dynamics, cyclicality, potential for operating improvements, and comparisons of competitive product offerings and cost structures. Preservation of Capital. The General Partner believes that targeting situations which are trading at significant departures from their "intrinsic" values provides a "margin of safety" which will afford both a low probability of loss of principal and favorable risk-reward characteristics. The General Partner believes that these situations are generally rare, and as a result, prefers to make concentrated investments in situations which it believes have materially favorable risk/reward characteristics. Concentration. While the degree of the Partnership's concentration at any given time will be a function of a number of factors, including the attractiveness, size, liquidity and perceived risk of an individual investment opportunity, the opportunity set of competing investments, as well as the size of the Partnership, the General Partner believes that a majority of the benefits of diversification can be achieved with a portfolio of fewer than 10 positions and views a concentrated portfolio as a competitive advantage. Although a concentrated portfolio 499055.21 -2- EFTA00310623 amplifies the effect of both good and bad investments, in contrast to portfolios managed by traditional equity analysts and portfolio managers who follow numerous situations with limited information, it will allow the Partnership to perform more extensive research and analysis. While the Partnership plans to pursue a concentrated investment program, it will not invest more than 25% of a Limited Partner's capital account (calculated at the time a position is acquired and including the amount of any unfunded commitments with respect to such capital account) in the securities of a single issuer or group, of affiliated issuers. For purposes of determining whether an investment would cause the Partnership to exceed the 25% limit, long and short positions in the securities of an issuer and/or group of affiliated issuers will not be aggregated. The General Partner believes that the Partnership's degree of concentration may decline over time as the Partnership increases in size. Insight into Mispricina. In pursuing investment strategies, the Partnership may focus on situations in which the General Partner believes it has a competitive insight through identifying investment attributes which are not widely recognized or are misread by the market. The Partnership currently plans to focus on situations which the General Partner believes are mispriced as a result of being underfollowed, misperceived due to complexity or change, or are experiencing market overreactions or other structural inefficiencies. In addition, the Partnership will attempt to pursue situations in which value creation or value rePlization will likely be achieved over time, either through a market catalyst (e.g., specific attributes becoming recognized) or through finding companies with owner/managers focused on enhancing shareholder value. A critical factor in selecting investments will be an assessment of the situational dynamics and the likelihood of explicit company action that will cause value to be created or realized. Investment Focus While over the life of the Partnership its investment focus may change, the General Partner believes that the following areas currently afford attractive investment opportunities and enable the Partnership's research intensive investment methodology to yield it a competitive advantage: Underfollowed Securities. The General Partner believes that there are a meaningful number of companies in the micro-, small- and mid-cap areas ($50 million-$2 billion in market capitalization) which, due to their small size, low level of investment banking business, and low level of liquidity, lack significant Wall Street research coverage and are unfamiliar to the investment community. This lack of coverage and familiarity can often lead to mispricing of securities. Complexity and Change. The General Partner also believes that a large number of opportunities exist which, due to structural, operational, financial, legal or other complexities, or company or industry change (e.g., spin-offs, restructurings, acquisitions etc.), have the potential to be misunderstood. Often complexity and change can lead to mispricing as many analysts lack the time, inclination or capability to perform the intensive analysis necessary to evaluate these situations. 499055.21 -3- EFTA00310624 Market Overreaction and Other Structural Inefficiencies. Finally, the Partnership will pursue companies experiencing irrational sentiment, liquidity and regulatory-driven events, and other structural inefficiencies. While it is difficult to estimate the number and frequency of these opportunities, the General Partner believes that attractive opportunities are often created by capital scarcity, overreaction to events and investment behavior which is based on factors other than a company's "intrinsic" value. In all of the above mentioned areas, the opportunity for significant price appreciation exists as the factors causing the mispricing become resolved or recognized in the marketplace, market sentiment shifts, or companies take steps to create or realize value. Examples of situations which have the potential to be mispriced include: Small companies which are covered only by regional securities firms or not at all; - Companies with multiple operating businesses or with operating businesses which the General Partner believes are not being appropriately recognized by the market; ▪ Companies with equity interests in separately traded securities; Corporate events (e.g., spin-offs, asset acquisitions or dispositions, mergers, etc.); Financial and operational restructurings and recapitalizations; Accounting complexity (e.g., divergence of GAAP from economic earnings for a period of time); Complex financial securities (e.g., rights offerings, merger securities, etc.); ▪ Companies undergoing bankruptcy proceedings, and companies and industries undergoing deregulation or excessive litigation; Industries undergoing structural shifts (e.g., consolidation, product substitution, technology shifts, etc.); Companies facing increasing or decreasing competitive threats; ▪ Opportunities created by purchase and sale behavior based on factors other than "intrinsic" value including: momentum investing, market overreaction to short-term events, market psychology towards in-favor vs. out-of-favor industries, and forced liquidations (e.g., mutual fund redemptions, required sales of distressed securities, etc.). 49905521 -4- EFTA00310625 Investment Strategies Over time, the Partnership may pursue a broad array of investment strategies which the General Partner believes will minimize the Partnership's risk of permanent capital loss and in the current environment may reduce its exposure and correlation to the U.S. public equity markets generally. These strategies may include: long-term value investments, short sale positions, "paired" or "hedged" investment positions and event-driven investments. In addition, the Partnership may invest a portion of its assets (but in no event more than 20% of any Primary Capital Account Sub-Account of a Limited Partner, calculated at the time a position is acquired and including the amount of any unfunded commitments with respect to each such Primary Capital Account Sub-Account) in illiquid investments, which will allow it to capitalize on privately structured opportunities generated by its public market activities. Finally, as part of its investment program, the Partnership may from time to time use leverage. While the Partnership is not limited in the amount of leverage it may utilize, the General Partner currently does not intend to employ total leverage which exceeds 50% of the net assets of the Partnership. Long-Term Value Investments. While the Partnership may purchase securities which the General Partner believes are trading at discounts to their "intrinsic" values within a wide array of valuations and time horizons, it generally has a bias toward purchasing businesses at very attractive prices and quantitatively low multiples of current economic earnings or asset values. The Partnership will generally make investments which, at their then current prices, it is comfortable holding for long periods of time. However, the Partnership will also make shorter- term investments and will generally not hold investments after they have reached "intrinsic" value in an effort to benefit from further price appreciation. "Paired"/"Hedged" Positions. The Partnership may establish "paired" or "hedged" investment positions through the combination of a long investment in a security and a short sale position in a specific security, basket of securities or index. The Partnership may pursue these investments in several circumstances including: (i) to hedge public market securities which a company owns (holding company structure) or a particular business unit of a company by selling short a comparable company, to create the remaining businesses at a discount to the sum of its parts, (ii) to invest in a business which the General Partner believes is mispriced relative to its peers and fits its investment focus, but does not appear attractive on an absolute basis, and (iii) to increase the size of an attractive short position which is mispriced compared to its peers, beyond a level that the Partnership would normally consider, by adding a long position to hedge industry and market risk. Short Sale Positions. The Partnership may establish stand-alone short sale positions in securities which it believes are trading at excessive premiums to their "intrinsic" values. The Partnership will generally pursue opportunities in companies exhibiting factors which the General Partner has found effective in selecting attractive short sale positions including companies which: under a reasonable set of circumstances appear unlikely to grow into their valuations, are earning seemingly unsustainably high returns on capital in commodity businesses ("at risk" companies), possess significantly aggressive accounting practices, have large volumes of insider stock sales, or have deteriorating fundamentals or clear competitive threats. ♦9905521 -5- EFTA00310626 Event-Driven Investments. The Partnership may pursue investments in situations tied to significant events. Examples of these events include: distressed situations, liquidations, spin-offs, and selective risk arbitrage situations. Notwithstanding the existence of an "event," the Partnership will evaluate these investments with the same philosophy by which it examines all investments including a focus on "intrinsic" value and "margin of safety." Illiquid Investments. As part of its investment program the Partnership may invest, from time to time, in investments which, the General Partner believes lack a readily ascertainable market value or which, in the sole discretion of the General Partner, should otherwise be held in separate accounts (each such investment, a "Side-Pocket Investment;" and each such account, a "Side-Pocket Account"). No more than 20% of any Primary Capital Account Sub-Account of a Limited Partner (calculated at the time a position is acquired, with Side-Pocket Investments valued at cost and including the amount of any unfunded commitments with respect to each such Primary Capital Account Sub-Account) may be invested in Side- Pocket Investments or other investments which, due to legal or contractual restrictions, are not freely transferable (as reasonably determined by the General Partner). The General Partner believes that the ability to pursue illiquid investments provides a competitive advantage by enabling the Partnership to capitalize on privately structured opportunities generated by its public market activities. Risk Management The General Partner defines "risk" in the investment context as the possibility of permanent capital loss as well as interim liquidity constraints. In executing its investment strategies, the Partnership applies a variety of techniques which the General Partner believes may help reduce risk including: (i) a value orientation, (ii) hedging, (iii) security analysis, (iv) limited diversification, and (v) investment review and monitoring. Value Orientation. The General Partner believes that an emphasis on purchasing securities which are trading at significant departures from their "intrinsic" values and at low multiples on an absolute basis, provides a "margin of safety' against materially negative changes in an investment thesis. Heat . The Partnership may use short sale positions in the establishment of both "paired" and stand-alone investment positions. In both cases, these short sales may serve to reduce the market exposure of the investment portfolio. It is important to note, however, that the Partnership may choose not to hedge positions and, in many cases, "hedging" may not reduce the risk in a position or the Partnership's portfolio generally. Security Analysis. The General Partner believes that rigorous research contributes to the Partnership's ability to limit its downside through a better understanding of its investments. In addition, the pursuit of situations in which the factors causing a security to trade at a discount to its true value and those likely to resolve the discount in a timely manner are clear, may significantly reduce risk. Limited Diversification. Notwithstanding the Partnership's philosophy of concentrating its investment portfolio, the General Partner believes that limited diversification, 499055.21 -6- EFTA00310627 or the holding of more than one security, can help reduce a portfolio's risk. The General Partner believes that much of diversification's risk-reduction benefits can be achieved in a portfolio of fewer than ten investment positions when the risks underlying those positions are uncorrelated. The Partnership intends to pursue a concentrated investment program; however, no more than 25% of a Limited Partner's capital account (calculated at the time a position is acquired and including the amount of any unfunded commitments with respect to such capital account ) will be invested in a single issuer or group of affiliated issuers. For purposes of determining whether an investment would cause the Partnership to exceed the 25% limit, long and short positions in the securities of an issuer and/or group of affiliated issuers will not be aggregated. Investment Review and Monitoring. The Partnership generally intends to conduct disciplined investment review and monitoring. Before a positi on is established, each investment opportunity will be reviewed against a number of specific risk criteria. In addition, each position will be periodically monitored and depending on the nature of the specific investment, such monitoring may include calls to management and industry sources in order to detect changes in the fundamental investment thesis. The General Partner believ es that these efforts may partially mitigate the effects of potential unforeseen negative developme nts in investments. KEY INVESTMENT HIGHLIGHTS/MERITS The General Partner believes that an investment in the Partnership offers an attractive risk-adjusted long-term opportunity for the following reasons: • Value-Oriented Investment Strategy. The General Partner believes that an emphasis on purchasing securities which are trading at material depar tures from their "intrinsic" values provides a "margin of safety" against permanent capita l loss and may offer the opportunity for substantial appreciation when their "intrinsic" values are realized. • Utilization of Short Sale Investments. The General Partn er believes that the use of short sales in establishing "paired" positions and stand-alone investments may enhance the Partnership's opportunity set of investments and reduce its market exposure. • Rigorous Research and Analysis. The General Partner believ es that rigorous research contributes to the Partnership's ability to limit its downside and to develop competitive insight into situations. • Concentration of Investments. While the degree of concentrati on will likely change over time and a concentrated portfolio will accentuate the effects of both good and bad investments, the General Partner believes that concentration may provide the ability to perform more extensive research and analysis and the poten tial for improved returns by allowing consolidation in situations with the most favorable risk/reward characteristics. The Partnership intends to pursue a concentrated investment program; however, no more than 25% of a Limited Partner's capital account (calculated at the time a position is acquired and including the amount of any unfunded comm itments with respect to such capital account) may be invested in a single issuer or group of affilia ted issuers. 499055.21 -7- EFTA00310628 • Insight into Mispricing and Focus on Value Realization/Crea tion. The Partnership will focus on situations in which the General Partner believes it has a competitive insight through identifying investment attributes which are not widel y recognized or are misread by the market. The Partnership currently plans to focus on situat ions which the General Partner believes are mispriced as a result of being underfollow ed, misperceived due to complexity or change, or are experiencing market overreactio ns or other structural inefficiencies. In addition, the Partnership will attempt to pursu e situations in which value creation or value realization will likely be achieved over a reason able period of time. • Experience and Background of the General Partner. Mr. Somm er has spent over ten years in various capacities conducting valuation analysis, perfor ming operational reviews and industry analysis, and managing a public market invest ment portfolio. His background, including employment at Goldman, Sachs & Co., McKinsey & Co. and Siegler, Collery & Co., has provided him with invaluable direct investment experience and a skill set which is well matched with the Partnership's investment philosophy. • Investment by the General Partner. Each of Mr. Bomm er and the current key employees has invested or committed to invest a substantial portion of his or her net worth in the Partnership. • Involvement of Reservoir. Investment funds (the "Rese rvoir Funds") controlled by Reservoir Capital Group, L.L.C. , a Delaware limited partne rship ("Reservoir"), have made a substantial investment in and commitment to the Partnership and are non- managing members of the General Partner. Reservoir's princi pals were previously investment partners at Ziff Brothers Investments, the entity respo nsible for investing the Ziff family capital. As of February 28, 2002, the Reservoir Funds' limited partner capital accounts in the Partnership had an aggregate value of appro ximately $68 million (net of accrued fees and expenses). THERE CAN BE NO ASSURANCE THAT THE OBJECTIVES OF THE PARTNERSHIP WILL BE ACH INVESTMENT IEVED AND INVESTMENT RESULTS MAY VARY SUBSTANTIALLY ON A QUA RTERLY AND ANNUAL BASIS. IN FACT, THE PRACTICES OF SHORT SELLING, LEVERAGE AND LIMITED DIVERSIFICATION CAN, IN CERTAIN CIRCUMS TANCES, SUBSTANTIALLY INCREASE THE ADVERSE IMPACT TO WHI CH THE PARTNERSHIP'S INVESTMENT PORTFOLIO MAY BE SUBJECT. (SEE "CERTAIN RISK FACTORS") MANAGEMENT OF THE PARTNERSHIP The General Partner SAB Capital Advisors, L.L.C., is the General Partner of the Partnership. The affairs of the Partnership, including its investment portfolio, are managed by Scott A. Bommer who serves as the managing member (the "Managing Member") and President of the General Partner. The Partnership draws on Mr. Bommer's experience in financial, industry and business analysis from his background in investment banking, management consulting, and public equity 499055.21 -8- EFTA00310629 management. While overseeing the activities of the General Partn er and the Partnership, Mr. Bommer also actively manages the 3(c)(1) Fund and the Offsh ore Fund, through the General Partner and/or its affiliates, and may provide services to other funds and accounts advised and/or administrated by the General Partner and/or its affiliates. Scott Bommer, served as a Portfolio Manager from April 1995 to at Siegler, Collery & Co., a value-oriented private investment February 1998 partnership. At Siegler Collery, he was responsible for identifying, researching, executing and monitoring numerous investment positions. During his tenure, Mr. Bommer employed a value-oriented, special situation investment strategy and performed extensive fundamental company, industry and financial analysis on his investments. His portfolio included long, short, and hedged equity positions, including several 13D filing positions, distressed debt and a priva tely structured investment. In addition to investing, Mr. Bommer contributed to recruiting, training and developing a team of investment analysts. Prior to joining Siegler Collery, Mr. Bommer worked from March 1995 as an Associate at McKinsey & Company, September 1993 to where he was involved in the restructuring of the sales and marketing department for a media client and the analysis of a strategic acquisition and joint venture for a global healthcare company. At McKinsey, he developed tools for industry and competitive analysis, basic marke t research skills and customer, supplier and competitor interview techniques. Prior to attend ing business school, Mr. Bommer worked in the Asset Related Finance Group at Goldman, Sachs & Co. from August 1988 to July 1990 where he was active in numerous financing transa ctions, including limited partnership, joint venture, leveraged lease, project related, and several public and private equity financings. Mr. Bommer graduated from Stanford University in 1988 distinction in Quantitative Economics, and from the Harva receiving a B.A. with rd Graduate School of Business in 1993 with an M.B.A. While at Harvard, he earned First Year Honors and served as a Teaching Fellow in a corporate finance class for the University's Depa rtment of Economics. In addition, Mr. Bommer researched several case studies while on a one-y ear Luce Foundation Scholarship in Tokyo, Japan. Brian Jackelow, joined Mr. Bommer in March 2000 and of the General Partner and the Management Company. Prior to serves as the Controller his current position, from August 1996 to February 2000, Mr. Jackelow worked at Basswood Partners, L.P., during which time he served as the Controller. While at Basswood Partners, Mr. Jackelow was primarily responsible for all of the daily accounting and was instrumental in automating back office functions and improving operating and tax efficiency. Prior to his time at Basswood Partners, from September 1994 to August 1996, Mr. Jackelow worked at Goldstein, Golub, Kessler & Co. as a staff accountant in the Financial Services and Hedge Fund division. Mr. Jackelow graduated from the State University of New York at Albany in 1994 with a B.S. in Accounting. Kenney Oh, joined Mr. Bommer in December 1998 President of the General Partner. Prior to his current position, and serves as a Vice- from July 1996 to November 1998 Mr. Oh served as an Investment Analyst and later a Portfo lio Manager at Siegler, Collery & Co. At Siegler Collery he was responsible for sourcing, analy zing, proposing and maintaining investments of the finn as well as training an investment analyst and leading the firm's analyst 499055.21 -9- EFTA00310630 recruiting effort. From July 1994 to July 1996 Mr. Oh was emplo yed as a Financial Analyst in the Mergers, Acquisitions & Restructurings Department of Morg an Stanley & Co., Inc. with a focus on media and telecommunications transactions. Mr. Oh graduated cum laude from the University of Pennsylvania with a B.S. in Finance from the Whar ton School and a B.A. in Intellectual History from the College of Arts and Sciences. At Whar ton, Mr. Oh was recognized as a Benjamin Franklin Scholar and as a Joseph Wharton Scholar. The Reservoir Funds have made a substantial investment in and the Partnership and are non-managing members of the General commitment to Partner and limited partners of the Management Company (defined below). The principals of Reservoir were previously investment partners at Ziff Brothers Investments, the entity respo nsible for investing the Ziff family capital. The Reservoir Funds have no control over investment decisions made on behalf of the Partnership, but provide the Managing Member with suppo rt on strategic, infrastructure and general business matters. (See "Summary - Reservoir Relationsh ip.") The Management Company SAB Capital Management, L.P., a Delaware limited partne "Management Company), provides administrative and manageme rship (the nt services to the Partnership. SAB Capital Management, L.L.C., a Delaware limited liability company controlled by Mr. Bommer, is the general partner of the Management Company. 499055.21 -10- EFTA00310631 SUMMARY The following summary is qualified in its entirety by the terms and conditions of the Limited Partnership Agreement of the Partnership, as amended from time to time (the "Partnership Agreement"), which should be read carefully and in its entirety by a prospective limited partner (a "Limited Partner"). THE PARTNERSHIP SAB Capital Partners, L.P. (the "Partnership") is a Delaware limited partnership which commenced operations on January 4, 1999. Interests in the Partnership are being offered exclusively to "qualified purchasers," as such term is defined under the Investment Company Act of 1940, as amended (the "Company Act"), and the rules and regulations promulgated thereunder. INVESTMENT OBJECTIVE The Partnership's investment objective is to earn attractive long-ter► rates of return while seeking to minimize the risk of permanent capital loss. While the Partnership may pursue a broad array of investment strategies (including those enumerated below), its primary investment focus is to purchase and sell short publicly traded securities of U.S. entities which the General Partner believes are trading at material departures from their "intrinsic" values. The Partnership's investment philosophy encompasses five primary components: (i) applying a "private market" investment approach focused on identifying the "intrinsic" value of a business or security, (ii) employing a research intensive investment methodology, (iii) pursuing opportunities which the General Partner believes possess a "margin of safety" and a low probability of a permanent capital loss, (iv) making concentrated investments (subject to some limitations discussed herein) in situations which the General Partner believes have favorable risk/reward characteristics, and (v) focusing on situations in which the General Partner believes it has a competitive insight through identifying investment attributes which are not widely recognized or are misread by the market. The Partnership currently intends to focus on situations the General Partner believes are underfollowed, misperceived due to complexity or change, or experiencing market 499055.21 -11- EFTA00310632 overreactions or other structural inefficiencies, and in which the General Partner believes there is a high probability of value creation or value realization over a reasonable period of time. Over time, the Partnership may pursue a broad array of investment strategies which the General Partner believes will minimize the Partnership's risk of permanent capital loss and in the current environment may reduce its exposure and correlation to the U.S. public equity markets generally. These strategies may include: long-term value investments, short sale positions, "paired" or "hedged" investment positions (long one security and short a specific security, basket or index), and event-driven strategies (including investments in distressed debt and entities undergoing liquidations or spin-offs). Side-Pocket Investments As part of its investment program the Partnership may invest, from time to time, in investments which lack a readily ascertainable market value or which, in the sole discretion of the General Partner, should otherwise be held in separate accounts (each such investment, a "Side-Pocket Investment" and each such account, a "Side-Pocket Account"). No more than 20% of any Primary Capital Account Sub-Account (as defined below under "Capital Accounts") of a Limited Partner (calculated at the time a position is acquired, with Side-Pocket Investments valued at cost and including the amount of any unfunded commitments with respect to each such Primary Capital Account Sub-Account) may be invested in Side-Pocket Investments or other investments which, due to a legal or contractual restriction, are not freely transferable. In addition, the Partnership may invest in currencies, currency forward contracts, options (for purposes of speculative trading or any other reason) and, subject to applicable regulations, commodity futures contracts, options and other derivative instruments. The Partnership may sell securities short and may borrow money from brokerage firms or banks (subject to applicable regulations) in order to leverage its investment and trading returns, and may finance positions and lend funds through repurchase and reverse repurchase agreements. Diversification. The Partnership intends to pursue a concentrated investment program; however, no more than 499055.21 -12- EFTA00310633 25% of a Limited Partner's capital account (calculated at the time a position is acquired, with Side-Pocket Investments valued at carrying values and including the amount of any unfunded commitments with respect to such capital account) may be invested in the securities of a single issuer or group of affiliated issuers. For purposes of determining whether an investment would cause the Partnership to exceed the 25% limit, long and short positions in the securities of an issuer and/or group of affiliated issuers will not be aggregated. LEVERAGE The General Partner believes that the use of leverage may enable the Partnership to achieve higher rates of return and intends to leverage the Partnership's capital where appropriate. The use of leverage has attendant risks and can, in certain circumstances, substantially increase the adverse impact to which the Partnership's investment portfolio may be subject. In addition, the Partnership is subject to the risk that changes in the general level of interest rates may adversely affect the Partnership's operating results. (See "Certain Risk Factors.") GENERAL PARTNER SAB Capital Advisors, L.L.C., a Delaware limited liability company, is the general partner of the Partnership. Mr. Scott A. Bommer is the managing member of the General Partner (the "Managing Member") and is responsible for the management of the Partnership and its investment portfolio. Mr. Bommer invested a substantial portion of his net worth in the Partnership (the "General Partner's Initial Investment"). LIMITED PARTNERS Each Limited Partner admitted to the Partnership on or after April 1, 2000 shall be a Class B Limited Partner and shall have the rights afforded to the Class B Limited Partners in the Partnership Agreement. Each reference below to a Limited Partner or to the Limited Partners shall constitute a reference to a Class B Limited Partner or to the Class B Limited Partners, as the case may be, unless indicated otherwise. Certain Limited Partners admitted to the Partnership prior to April 1, 2000 are Class A Limited Partners. Class A Limited Partners were subject to an initial lock-up period of not less than three years and have certain other rights described in the Partnership Agreement. MANAGEMENT COMPANY SAB Capital Management, L.P., a Delaware limited partnership (the "Management Company), provides 499055.21 -13- EFTA00310634 administrative and management services to the Partnership. SAB Capital Management, L.L.C., a Delaware limited liability company, is the general partner of the Management Company. Mr. Bonuner is the managing member of SAB Capital Management, L.L.C. INITIAL CLOSING The initial closing of limited partnership interests ("Interests") took place on January 4, 1999 (the "Initial Closing"). CAPITAL ACCOUNTS Each Limited Partner will have a "Primary Capital Account," which will consist of such Limited Partner's capital account in the Partnership excluding its interest in any Side-Pocket Accounts with respect to such Limited Partner. A Limited Partner's initial capital contribution, and each additional capital contribution by a Limited Partner, will each be credited to a separate memorandum sub-account within such Limited Partner's Primary Capital Account (each, a "Primary Capital Account Sub-Account"). MINIMUM CAPITAL COMMITMENT $2,000,000, subject to the discretion of the General Partner to accept lesser amounts. LOCK-UP PERIODS Primary Capital Account Sub-Accounts. A Class B Limited Partner may withdraw all or any portion of any of its Primary Capital Account Sub-Accounts only on the second December 31st after the date such Primary Capital Account Sub-Account was established and thereafter, only as described below (each such period ending on a withdrawal date, a "Lock-Up Period"); provided, that the Lock-Up Period with respect to any Primary Capital Account Sub-Account established as of the first business day of any year shall end on the first December 31st thereafter. Notwithstanding the foregoing, Partners will be entitled to annual Tax Distributions (as defined below under "Tax Distributions"). Any portion of a Primary Capital Account Sub-Account left in the Partnership at the expiration of a Lock-Up Period will automatically be subject to a succeeding one-year Lock-Up Period. Notwithstanding the foregoing, the General Partner may admit additional Limited Partners with Primary Capital Account Sub-Accounts having different Lock-Up Periods. The General Partner generally will be subject to the same Lock-Up Period provisions with respect to its invested 499055.21 -14- EFTA00310635 capital and profits thereon, but may withdraw at the end of each fiscal year an amount equal to any Incentive Allocations made to its capital account and profits thereon (as described below). Notwithstanding the foregoing, the General Partner's Initial Investment, together with any profits thereon, may not be withdrawn until December 31, 2002. Side-Pocket Accounts. Limited Partners may not make withdrawals from their Side-Pocket Accounts. Any proceeds upon a realization or Deemed Realization (as defined below) of a Side-Pocket Investment will be transferred to the Primary Capital Account Sub-Account with respect to which the related Side-Pocket Account was created and will be subject to the Lock-Up Period applicable to such Primary Capital Account Sub-Account. If, however, a Limited Partner has made a complete withdrawal of the Primary Capital Account to which such Side-Pocket Account relates prior to the realization or Deemed Realization of the Side-Pocket Investment, the proceeds of such investment shall be dealt with as described below under "Withdrawals-Remaining Side- Pocket Investments" rather than as described herein. ADDITIONAL CAPITAL CONTRIBUTIONS; ADMISSION OF NEW PARTNERS Limited Partners may make additional capital contributions with the consent of the General Partner. Such additional capital contributions may be made on the first day of any calendar month or at such other times as may be determined by the General Partner. Unless otherwise agreed to by the General Partner and a Limited Partner, additional contributions made by a Limited Partner during a Lock-Up Period will be credited to a separate Primary Capital Account Sub-Account. New Limited Partners may be admitted as of the beginning of any calendar month or at such other times as the General Partner shall determine. ALLOCATION OF GAINS AND LOSSES Primary Investments. At the end of each accounting period of the Partnership, any net capital appreciation or depreciation (both realized and unrealized), other than appreciation or depreciation in Side-Pocket Accounts, will be tentatively allocated to the Primary Capital Accounts of all Limited Partners and the General Partner (collectively, the "Partners") in proportion to their respective opening 499055.21 -15- EFTA00310636 Primary Capital Account balances for such period, and each Limited Partner's share thereof will be allocated among and credited to or debited against the Primary Capital Account Sub-Account balances of such Limited Partner in proportion to the respective opening Primary Capital Account Sub-Account balances thereof. Side-Pocket Investments. Whenever the General Partner determines, in its sole discretion, that an investment should no longer be maintained in a Side-Pocket Account (a "Deemed Realization") or upon any sale, distribution to Partners or other disposition of all or a portion of an investment maintained in a Side-Pocket Account (or any receipt of income with respect to such investment), the value of the investment held or the proceeds thereof (or any income with respect thereto) shall be transferred from the Side-Pocket Account to the related Primary Capital Account Sub-Accounts of each of the Partners participating therein pm rata based on their respective participation in such investments; provided, however, that if a Limited Partner has made a complete withdrawal of the Primary Capital Account to which such Side-Pocket Account relates prior to the realization or Deemed Realization of the Side- Pocket Account, the proceeds of such investment shall be dealt with as described below under "Withdrawals - Remaining Side-Pocket Investments" rather than as described herein. Side-Pocket Investments Write Down. Side-Pocket Investments may be subject to a Write Down. A "Write Down" means the reduction, in the discretion of the General Partner, of the carrying value of a Side-Pocket Investment to reflect material, long-term impairment of such investment. Net Increase or Decrease. The net capital appreciation or depreciation allocated to each Primary Capital Account of a Partner from investments not held in Side-Pocket Accounts will be increased or decreased by the share of (i) the income, gain or loss reflected in the proceeds transferred to such Primary Capital Account from a related Side-Pocket Account upon realization of a Side-Pocket Investment, (ii) the appreciation or depreciation reflected in the value of a Side-Pocket Investment transferred from a related Side- Pocket Account, (iii) the amount of any decrease in the carrying value of a Side-Pocket Investment held in a Side- Pocket Account as a result of a Write Down, (iv) the 499055.21 -16- EFTA00310637 amount of any Management Fee (as defined below) debited to such Primary Capital Account for such year and (v) the Side-Pocket expenses debited to such Primary Capital Account during such fiscal year. Net capital appreciation or depreciation, as so increased or decreased, is referred to as "Net Increase" or "Net Decrease," respectively. INCENTIVE ALLOCATION Overview. At the end of each fiscal year of the Partnership, 20% of the Net Increase credited to each Primary Capital Account of a Class B Limited Partner will be reallocated to the Capital Account of the General Partner (such amount, the "Incentive Allocation"). High water Mark. The Partnership will maintain a memorandum loss recovery account for each Primary Capital Account of a Class B Limited Partner (a "Loss Recovery Account"). Each such Loss Recovery Account will be (i) increased by the aggregate Net Decrease allocated to such Primary Capital Account, (ii) reduced, but not beyond zero, by any Net Increase allocated to such Primary Capital Account and (iii) adjusted for withdrawals of capital. The General Partner will not be allocated any Incentive Allocation with respect to such Primary Capital Account until any balance in the Loss Recovery Account has been recovered. MANAGEMENT FEE; EXPENSES The Partnership will pay to the Management Company a management fee (the "Management Fee") on the first day of each quarter (and, if a capital contribution is made on a day other than the first day of a calendar quarter, a pro rata portion of such Management Fee on such day with respect to such capital contribution) equal to 0.375% (1.5% per annum) of each Limited Partner's beginning capital account (including, for these purposes, assets held in Side-Pocket Accounts, based on their carrying values on the first day of the quarter as well as the amount of any unfunded commitments with respect to such capital account) on the first day of the quarter. If a particular Limited Partner no longer owns an Interest except for its interest in one or more Side-Pocket Accounts, the Management Fee payable with respect to such Limited Partner's interest in such Side-Pocket Accounts will be accrued (at a rate of 0.375% quarterly based on the carrying value of the Side-Pocket Investment as of the first day of 499055.21 -17- EFTA00310638 the quarter). Upon any realization or Deemed Realization (as determined by the General Partner) of the applicable Side-Pocket Investment, any accrued and unpaid Management Fee, with interest at the Treasury Rate (as defined below), will be paid to the Management Company before any proceeds from the investment are distributed to the Partner holding the interest in such Side-Pocket Sub- Account. "Treasury Rate" means the yield on one year U.S. Treasury Securities on the first business day of each calendar year of the Partnership. If the Management Fee (together with interest) exceeds such proceeds, the excess shall be added to the Management Fee payable with respect to any other remaining Side-Pocket Investment held by such Partner. In consideration for the Management Fee, the Management Company bears the Partnership's normal and recurring operating expenses and provides to the Partnership office space and utilities, telephone, news, quotation and computer equipment and services, administrative services, and secretarial, clerical and other personnel (except to the extent provided through soft dollars generated by the Partnership). The General Partner expects that, as the Partnership grows, the Management Fee will exceed the expenses borne by the Management Company. The Partnership will bear all of its other costs and expenses, such as investment expenses (e.g., brokerage commissions, interest expense, consultant expenses and expenses in connection with proposed transactions, including transactions which fail to close), investment- related travel expenses, legal expenses, accounting, audit and tax preparation expenses, expenses relating to the offer and sale of Interests and expenses relating to the organization of the Partnership (which are being amortized over a 60-month period). Such expenses will be shared by all of the Partners, including the General Partner. Any such costs and expenses common to the Partnership and any other funds managed by the General Partner, the Management Company or their affiliates will be paid rata by such entities based on invested capital. The General Partner will specially allocate expenses with respect to a Side-Pocket Investment to the capital accounts of the Partners with an interest therein. Transaction fees (e.g., break-up, transaction and topping fees) and fees for services rendered by the Management 499055.21 -18- EFTA00310639 Company (or its affiliates) to a portfolio company (including consulting and directors' fees) may be received by the Management Company (or an affiliate). An amount equal to 100% (or a pm rata portion thereof if other accounts managed by the General Partner or its affiliates have invested in such company) of such fees will be offset against the Management Fee during the year in which such fees are received, with any excess to be carried forward to be offset against the Management Fee in future years. If any such fee was paid by an issuer in which the Partnership has a Side-Pocket Investment, such fee shall only offset the Management Fee with respect to Partners participating in such investment. ALTERNATIVE TERMS In the discretion of the General Partner, the Incentive Allocation and/or the Management Fee may be calculated differently with respect to, or may not be charged to, the capital accounts of certain Limited Partners, including Limited Partners that are affiliates of the General Partner, members of the immediate families of the Managing Member or trusts or similar vehicles formed for the benefit of such persons. TAX DISTRIBUTIONS Each Partner, including the General Partner, shall have the right to receive, with respect to each fiscal year, a distribution (a "Tax Distribution") in an amount equal to the excess of (i) such Partner's presumed tax liability i.e. the product of the estimated amount of taxable income allocated to such Partners capital accounts for such fiscal year (as determined by the General Partner in good faith) and the highest marginal federal, state and local income tax rates for natural persons residing in New York City, after giving effect to any federal tax deduction for all state and local taxes, and disregarding any limitations on the deductibility of such taxes) with respect to such capital accounts for such fiscal year over (ii) all amounts distributed, if any, from such capital accounts to such Partner pursuant to any withdrawal from such capital account during or effective as of the last day of such fiscal year other than any tax distributions with respect to any prior year. If a Partner desires to receive its Tax Distribution with respect to a fiscal year, such Partner must deliver to the General Partner, no later than 60 days before the end of such fiscal year, a notice (a "Tax Distribution Notice") indicating that such Partner wishes to receive a Tax Distribution. Tax Distributions shall be made on or prior to, and effective as of, March 31 of the following 499055.21 -19- EFTA00310640 year. Any capital distributed to a Limited Partner as a Tax Distribution shall be withdrawn from such Limited Partner's Primary Capital Account Sub-Accounts in the order in which the capital contributions forming the basis of such Primary Capital Account Sub-Accounts were made. WITHDRAWALS Limited Partner Withdrawals. Generally, without the consent of the General Partner, a Limited Partner may not withdraw all or any portion of a Primary Capital Account Sub-Account (except for a Tax Distribution) until the end of the Lock-Up Period with respect thereto. A Limited Partner has the right, at the end of a Lock-Up Period (upon not less than 90 days' prior written notice), to withdraw all or any portion of such Primary Capital Account Sub-Account. Capital shall be withdrawn from a Limited Partner's Primary Capital Account Sub-Accounts in the order in which the capital contributions forming the basis of such Primary Capital Account Sub-Accounts were made. If withdrawal requests with respect to any withdrawal date would require the Partnership to pay withdrawal proceeds in excess of 10% of the net asset value of the Partnership, then the General Partner may, in its discretion, limit withdrawals by reducing rata the amount of withdrawal requests by Limited Partners admitted to the Partnership on or after March 1, 2002, and by Limited Partners admitted to the Partnership before March 1, 2002 who have consented to be bound by this limitation. Such reduction will be in the proportion that (x) the amount that any such Limited Partner requests to be withdrawn on such withdrawal date bears to (y) the amount that all such Limited Partners request to be withdrawn on such withdrawal date until the total amount of withdrawal proceeds payable by the Partnership is less than or equal to 10% of the net asset value of the Partnership or, if such result is not possible, so that such percentage is as close to 10% as can be achieved by limiting the amount of such withdrawals to zero. Any such withdrawal requests that are so limited will be satisfied on the following quarter-end, subject to the same limitation, provided that if any such Limited Partner's withdrawal request is so limited on three consecutive quarter-ends, then the Limited Partner's withdrawal request will be fully paid on the next succeeding quarter-end. Any capital the withdrawal of which is limited pursuant to these provisions will remain invested in the Partnership, 499055.21 -20- EFTA00310641 and will remain subject to adjustment for capital appreciation and capital depreciation, until withdrawal. As stated above, if a Partner's interest in a Side-Pocket Investment is realized (or Deemed Realized) within the Lock-Up Period in which such investment was made, the proceeds from the realization of such investment will be transferred to the related Primary Capital Account Sub-Account and will be subject to the same Lock-Up Period applicable to such Primary Capital Account Sub-Account. Upon expiration of the then-applicable Lock-Up Period, a new Lock-Up Period shall commence. Any unrecovered amounts in the Loss Recovery Account will be carried forward and applied against Incentive Allocations in subsequent Lock-Up Periods. In addition, in the case of the complete withdrawal from a Primary Capital Account, any unrecovered amounts in the Loss Recovery Account at the time of such withdrawal will be applied against any Incentive Allocation with respect to any remaining Side- Pocket Investments with respect to such Primary Capital Account, as described below. Required Withdrawals. The General Partner may, in its sole discretion, terminate the interest of any Limited Partner in the Partnership at the end of any quarter generally upon at least 30 days' prior written notice (and, under certain limited circumstances, on a more immediate basis) and such Partner shall be treated as a Partner who has given notice of withdrawal. Remaining Side-Pocket Investments. If a portion of a withdrawing Primary Capital Account has been allocated to one or more Side-Pocket Accounts, the amount distributed to the withdrawing Partner will not include any interest in such Side-Pocket Accounts. Such withdrawing Partner will retain its interest in any such Side-Pocket Accounts until there is a realization or Deemed Realization of the investment. Within 30 days following the end of the accounting period in which such realization or Deemed Realization occurs, the investment or its proceeds will be distributed (with interest at the brokers' call rate from the end of the accounting period) to the Partner who has withdrawn, net of any Incentive Allocation and Management Fee in respect thereof. 499055.21 -21- EFTA00310642 Payment. The General Partner intends to make distributions in cash. However, distributions may be made in cash or in kind. Any in-kind distribution (prior to liquidation of the Partnership) of securities shall include only those securities which the General Partner reasonably believes are listed or quoted on a United States national securities exchange or quoted on a United States national automated inter-dealer quotation system. If a Limited Partner elects to withdraw more than 90% of its capital account (other than in connection with the exercise of its special withdrawal rights, as described below under "Special Withdrawal Rights"), 90% of its estimated withdrawal proceeds (computed on the basis of unaudited data) will be paid within 30 days after the end of the fiscal year. The Partnership will pay such Partner interest on the balance of its withdrawal proceeds at the average (calculated weekly) per annum short-term (13-week) Treasury Bill rate, and such balance, together with all interest earned thereon, shall be paid (subject to audit adjustments) within 30 days after completion of the audit of the Partnership's books. Reserves. The General Partner may, in its discretion, establish reserves for contingencies (even if such reserves are not otherwise required by generally accepted accounting principles), which could reduce the amount of a distribution upon withdrawal. REMOVAL OF GENERAL PARTNER The General Partner may be removed (and required to withdraw as of the end of the quarter in which such removal takes place) by written consent of Limited Partners whose aggregate capital account balances exceed 50')/0 of the capital account balances of all Limited Partners if (i) the General Partner or the Managing Member has been convicted of a felony, (ii) the General Partner has committed fraud against the Partnership or the Managing Member has committed fraud against the General Partner or the Partnership, or (iii) any act or omission of the General Partner or the Managing Member in connection with the Partnership constitutes gross negligence or willful misconduct. If there are Side-Pocket Investments remaining when the General Partner is removed for cause, the General Partner shall be entitled to receive one-sixth of any Incentive Allocation made with respect to each associated Primary Capital Account to the extent 499055.21 -22- EFTA00310643 attributable to such Side-Pocket Investment at the time such Side Pocket Investments are realized or deemed realized. In addition, if Mr. Bommer is indicted of a felony related to the securities business generally, he will be relieved of his duties until the charges are resolved. As more fully described in the Partnership Agreement, an interim managing member will be appointed by Reservoir Capital Partners, L.P., unless none of its affiliates has an interest in the Partnership, in which case an interim managing member will be appointed by a majority in interest of the Limited Partners. SPECIAL WITHDRAWAL RIGHT Any Limited Partner may withdraw from the Partnership if Mr. Bommer dies, becomes incompetent or disabled (i.e., unable, by reason of illness or injury, to perform his functions as managing member of the General Partner for 90 consecutive days), ceases to control the General Partner or otherwise ceases to spend a substantial portion of his business time on the activities of the General Partner and its affiliates. In addition, any Limited Partner may withdraw if the General Partner is removed from the Partnership as its General Partner and a successor General Partner is designated. Such special withdrawal rights are exercisable by delivery of a withdrawal notice to the Partnership by the 30th day (the "Notice Date") after the Limited Partners are notified of any of the events described in the previous sentence, and such withdrawal shall be effective at the end of the first full calendar month after the Notice Date. A Limited Partner exercising such special withdrawal right will be paid 90% of its capital account(s) (determined as of the end of such calendar month) within 30 days of the withdrawal date. The balance of such Limited Partner's capital account(s) will be paid (subject to reserves and audit adjustments) within 30 days after completion of a special audit of the Partnership as of the end of such calendar month. Notwithstanding the foregoing, a withdrawing Partner's interest in any Side-Pocket Account will be retained and distributed as described above under "Withdrawals - Remaining Side-Pockets." REGULATORY MATTERS The Partnership will not be registered as an investment company and therefore will not be required to adhere to certain investment policies under the Investment Company Act of 1940, as amended (the "Company Act"). The 49905521 -23- EFTA00310644 General Partner and the Management Company do not presently intend to, but may in the future, register as investment advisers under the Investment Advisers Act of 1940. The Partnership will not engage in any transactions involving commodity futures contracts (and related options) until, to the extent required by applicable regulations, the General Partner registers as a commodity pool operator with the CFTC and the National Futures Association, and in connection therewith obtains an exemption with respect to the Partnership from certain of the disclosure, reporting and recordkeeping requirements under the Commodity Exchange Act, or until the General Partner qualifies for an exemption from such registration. If based upon tax or regulatory reasons (or any other reasons which the General Partner, in its good faith judgment, detennine,s) a Partner should not participate in the Partnership's investment in any particular security or type of security, such Partner shall not participate in such investment. If such investment is in a Side-Pocket Account, such Partner shall not participate in such account. However, if such investment is in a Primary Capital Account and a Partner may not participate in gains or losses with respect to a particular investment (ps„ because of rules relating to "hot issues"), as a matter of fairness to the Partners who do not participate in such investment, a use of funds charge will be debited from the capital accounts of all Partners having an interest in the memorandum account for a particular security and credited to the capital accounts of all Partners rata in accordance with their opening capital accounts for the applicable accounting period. RISK FACTORS The investment program of the Partnership is speculative and involves significant risk of loss. (See "Certain Risk Factors.") OTHER ACTIVITIES OF THE GENERAL PARTNER AND THE MANAGEMENT COMPANY The Managing Member intends to devote a substantial portion of his business time on the activities of the General Partner. Limited Partners will have special withdrawal rights if the Managing Member ceases to spend a substantial portion of his business time on the activities of the General Partner or ceases to control the General Partner. (See "—Special Withdrawal Right.") However, the General Partner and its affiliates are not precluded from 499055.21 -24- EFTA00310645 exercising investment responsibility, from engaging directly or indirectly in any other business or from directly or indirectly purchasing, selling, holding or otherwise dealing with any securities for the account of any such other business, for their own accounts or for the accounts of any of their family or other clients. Mr. Bommer also actively manages SAB Capital Partners II, L.P., a Delaware limited partnership for investors that are not "qualified purchasers" as such term is defined under the Company Act and the rules and regulations promulgated thereunder (the "3(c)(1) Fund") and SAB Overseas Fund, Ltd., an exempted company organized under the laws of the Cayman Islands for non-U.S. investors and for certain tax-exempt U.S. investors (the "Offshore Fund"), each of which has an investment program substantially similar to that of the Fund. Each of the 3(c)(1) Fund and the Offshore Fund will invest side-by- side on a pro rata basis with the Partnership (subject to legal, regulatory and tax considerations). (See "Conflicts of Interest.") RESERVOIR RELATIONSHIP The Reservoir Funds are non-managing members of the General Partner and limited partners of the Management Company. As of February 28, 2002, the Reservoir Funds' limited partner capital accounts in the Partnership had an aggregate value of approximately $68 million (net of accrued fees and expenses). The Reservoir Funds will have no control over investment decisions of the Partnership, but have certain rights of approval over actions that do not relate to the ability of the General Partner to select, hold or sell investments on behalf of the Partnership, including the establishment of reserves. In addition, the Reservoir Funds have special withdrawal rights in certain circumstances which are not available to other investors, including upon a significant decline in the value of the Reservoir Funds. The exercise of such withdrawal rights could have significant adverse effects on the interests of other Limited Partners in the Partnership. In addition, under certain circumstances, the Reservoir Funds will have certain priority co-investment rights over other persons on transactions identified by the General Partner and its affiliates that may not be fully utilized by the Partnership or a Parallel Fund. /9905511 -25- EFTA00310646 EFTA00310647 VALUATION OF PARTNERSHIP ASSETS AND LIABILITIES The Partnership's assets and liabilities will be valued by the General Partner in accordance with the terms of the Partnership Agreement. Securities (including options) will generally be valued at their last sales price on the largest national securities exchange on which they are traded, or if trading in such securities on such exchange was reported on the consolidated tape, the last sales price on the consolidated tape. If there were no reported sales at certain dates specified in the Partnership Agreement, the securities will generally be valued at the last "bid" price for long positions and "asked" price for short positions. Securities that are not listed on a national securities exchange or included in the NASDAQ National Market System will be valued based upon their sales prices (if such prices are available). The Partnership Agreement specifies certain exceptions to these procedures. In the event the Partnership acquires securities for which market quotations are not available, such securities will be valued at such value as the General Partner may reasonably determine. Assets held in a Side-Pocket Account will be valued at their carrying value (generally, at cost subject to any Write-Down). If the General Partner determines that the valuation of an asset pursuant to the Partnership Agreement does not fairly represent its market value, the General Partner will value such investment as it reasonably determines. The Partnership's liabilities will be valued by the General Partner in accordance with the terms of the Partnership Agreement. All matters concerning valuation of securities shall be final and conclusive as to all Partners. ELIGIBLE INVESTORS Interests may only be purchased by investors who are "accredited investors" and "qualified purchasers" as defined under Federal securities laws and meet other suitability requirements described herein and in the Partnership's subscription documents. Non-U.S. investors may purchase Interests in the discretion of the General Partner. The General Partner reserves the right to reject subscriptions in its absolute discretion. The Partnership does not intend to register under the Company Act, in reliance on the exclusion provided by Section 3(c)(7) under the Company Act for entities whose securities are owned exclusively by "qualified purchasers" as such term is defined in the Company Act and the rules and regulations thereunder and who do not publicly offer their securities. 499055.21 -26- EFTA00310648 ENTITIES SUBJECT TO ERISA AND OTHER TAX-EXEMPT ENTITIES Entities subject to the U.S. Employee Retirement Security Act of 1974, as amended ("ERISA"), and other tax-exempt entities may purchase Interests. The Partnership does not intend to permit investments by investors subject to ERISA to equal or exceed 25% of the value of the Interests. Investment in the Partnership by entities subject to ERISA and other tax-exempt entities requires special considerations. In particular, the Partnership may utilize leverage in connection with its trading activities which could give rise to "unrelated business taxable income." Trustees or administrators of such entities are urged to carefully review the matters discussed in this Confidential Memorandum. (See "Tax Aspects" and "ERISA Considerations.") SALES COMMISSIONS No sales commissions or similar charges in connection with the offering of Interests will be borne by the Partnership. The General Partner or the Management Company may enter into arrangements with placement agents to solicit Limited Partners, the expenses of which shall be borne by the General Partner or the Management Company. Such agreements may provide for the payment to such placement agents of either a one-time or ongoing fee based upon the value of the Interest of a Limited Partner introduced to the Partnership by such placement agent and/or on a portion of incentive allocations and management fees received by the Management Company or the General Partner, as applicable, with respect to the Interest. TRANSFERS A Limited Partner may not pledge, assign, sell, exchange or transfer its Interest (or any portion thereof), and no assignee, purchaser or transferee may be admitted as a substitute Limited Partner, except with the consent of the General Partner, which consent may be given or withheld in its sole and absolute discretion, provided that a Limited Partner may transfer the economic rights with respect to its Interest to its controlled affiliates and family trusts with the General Partner's consent, which consent shall not be unreasonably withheld. EXCULPATION AND INDEMNIFICATION The General Partner, the Management Company and their affiliates are entitled to the exculpation and indemnification provisions set forth in the Partnership Agreement. 499055.21 -27- EFTA00310649 AMENDMENTS TO PARTNERSHIP AGREEMENT The Partnership Agreement may be modified or amended at any time by the written consent of the Limited Partners (excluding defaulting Partners) having in excess of 50% of the interests in the Partnership (excluding defaulting Partners) and the written consent of the General Partner. Without the consent of the other Partners, however, the General Partner may amend the Partnership Agreement in certain respects, including to reflect changes validly made in the membership of the Partnership and the capital contributions of the Partners; change the Lock-Up Period as permitted in the Partnership Agreement and described above under "Lock-Up Periods;" make changes to the Incentive Allocation as permitted in the Partnership Agreement; satisfy requirements or conditions contained in opinions or rulings of Federal or state agencies or in Federal or state statutes where compliance is necessary or advisable for the Partnership; effect a change that does not adversely affect the Limited Partners in any material respect; or effect a change that is necessary or desirable to cure ambiguities in the Partnership Agreement. Each Partner, however, must consent to any amendment which would (a) reduce its capital account(s), its rights of contribution or withdrawal, its allocable share of income or loss, or its rights to distributions; (b) increase the Incentive Allocation, the Management Fee with respect to such Partner, or its share of expenses or liabilities; or (c) amend the provisions of the Partnership Agreement relating to amendments. BROKERAGE COMMISSIONS Portfolio transactions for the Partnership will be allocated to brokers on the basis of best execution and in consideration of such factors as commission rates, brokers' ability to effect transactions, the brokers' facilities, reliability and financial responsibility and in consideration of the provision or payment of the costs of research and other services or property which are of benefit to the Partnership, the Management Company and related partnerships and accounts. The Partnership may also utilize the services of one or more brokers who specialize in providing trading services in order to coordinate the Partnership's trading activity in certain circumstances. Such brokers' commissions will be added to the commissions charged to the Partnership by the executing broker. (See 'Brokerage Commissions.") 499055.21 -28- EFTA00310650 TERM The Partnership shall continue until the earliest of: (1) December 31, 2050, (ii) the insolvency, bankruptcy, termination or dissolution of the General Farther, (iii) the removal of the General Partner (unless a replacement General Partner is designated) or (iv) at any time after December 31, 2001, if the General Partner has determined, in its sole discretion, to terminate the Partnership at such time. Generally, in the event of the Partnership's dissolution, the General Partner shall liquidate and distribute the Partnership's assets to its Partners. REPORTS TO LIMITED PARTNERS Limited Partners will receive quarterly, unaudited performance reports from the General Partner, and, within 90 days after the end of the fiscal year or as soon as reasonably possible thereafter, an annual audited financial report of the Partnership. In addition, the Partnership will furnish Limited Partners with annual tax information for the preparation of their respective tax returns. FISCAL YEAR-END December 31 of each year. TAXATION The Partnership operates as a partnership and not as an association or a publicly traded partnership taxable as a corporation for Federal income tax purposes. Accordingly, the Partnership should not be subject to Federal income tax, and each Limited Partner will be required to report on its own annual tax return such Limited Partner's distributive share of the Partnership's taxable income or loss. (See "Tax Aspects.") LEGAL COUNSEL Schulte Roth & Zabel LLP, 919 Third Avenue, New York, New York 10022, acts as legal counsel to the Partnership in connection with the offering of the Interests and with regard to ongoing operations of the Partnership. Schulte Roth & Zabel LLP also acts as counsel to the General Partner, the Management Company and their affiliates. In connection with the offering and ongoing advice to the Partnership, Schulte Roth & Zabel LLP does not represent Limited Partners. Schulte Roth & Zabel LLP will not be representing Limited Partners of the Partnership. No independent counsel has been retained to represent Limited Partners of the Partnership. INDEPENDENT AUDITORS The General Partner has designated Ernst & Young, LLP as the independent auditors of the Partnership. 49905521 -29- CERTAIN RISK FACTORS Prospective Limited Partners should carefull investment in. the Partnership, including y consider the risks involved in an but not limited to those discussed below. Limited Partners should consult their own lega Prospective l, tax andfinancial advisers as to all of thes and an investment in the Partnership gen e risks erally. The discussion herein regarding made by the Partnership is deemed to investments include investments made by vehicles in Partnership invests. which the Limited Operating History. The Partnership operating history upon which prospect and the General Partner have a limited ive investors may base an evaluation perfonnance of the Partnership. of the likely Business Dependent Upon Key Individu authority to make decisions or to exercise al. The Limited Partners shall have no business discretion on behalf of the Partners authority for all such decisions is delegated to hip. The the General Partner. The success of the Part expected to be significantly dependent upo ners hip is n the performance of Scott A Sommer, the member of the General Partner. (See "Ma managing nagement of the Partnership.") Unspecified Investments. Investors will investments made by the Partnership. not have the opportunity to evaluate Accordingly, an investor in the Partnership must rely ability of the General Partner (or, with respect on the to entities in which the Partnership invests, the of the managers of such entities) to identify and ability make investments. Limited Liouidity: Side-Pocket Accounts. An be considered an illiquid investment and investment in the Partnership must involves a high degree of risk. There is no market for Interests in the Partnership, and public it is not expected that a public market will An investment in the Partnership provides limi develop. ted liquidity since there are substantial rest on the ability of a Limited Partner to with rictions draw capital or to transfer its Interest in the Part nership. Investments held in Side-Pocket Accounts may from the date of initial investment unti require a significant amount of time l disposition. Sales of securities held as Side Investments may not be possible and, if poss -Pocket ible, may be made at substantial discounts from A withdrawing Partner with an interest in a cost. Side-Pocket Account will not receive any amo respect of such interest until the related Side-Poc unt in ket Investment is liquidated or distributed. Distributions in Kind. The Partnership inte Partner upon a withdrawal from the Limited Part nds to distribute cash to a Limited ner's capital account. However, there can be no assurance that the Partnership will have sufficie nt cash to satisfy withdrawal requests, or that will be able to liquidate investments at the it time of such withdrawal request at favorable pric Under the foregoing circumstances, and under es. other circumstances deemed appropriate by General Partner, a Limited Partner may rece the ive in-kind distributions from the Partnership' portfolio. If distributions (other than liqu s idating distributions) are made in kind, distributions shall be made on a pro rata basis such to participating Partners. 49905521 -30- EFTA00310651 Concentrated Investment Portfolio. The Partnership does not have for diversification and may concentrate investments in partic fixed guidelines ular industries, companies and/or geographic areas, provided that not more than 25% of any Partner's capital account balance (calculated at the time a position is acquired, with Side-Pocket Investments valued at carrying value and including the amount of any unfunded commitmen ts with respect to such capital account) will be invested in the securities of any one issuer or a group of affiliated issuers. For the purposes of determining whether an investment would cause the Partnership to exceed the 25% limit, long and short positions in the securities of an issuer and/or group of affiliated issuers will not be aggregated. At times the Partnership may hold a relatively large concentration in a particular market, industry, company or security type. Appreciatio n or depreciation in the value of concentrated positions will have a greater effect on the Partne rship's portfolio than would be the case in a more diversified portfolio. Accordingly, losses incurred in such investments could have a materially adverse effect on the Partnership's overall financial condi tion. Investment and Trading Risks. A Limited Partner should be lose all or part of its investment in the Partnership. No guara aware that it may ntee or representation is made that the Partnership's program will be successfid. The Partnership 's investment program will utilize investment techniques such as margin transactions, short sales, leverage, options on securities and futures (to the extent utilized and subject to applicable regula tory requirements) and forward contracts, which practices can, in certain circumstances, substantially increase the adverse impact to which the Partnership may be subject. (See "Investment Program.") Incentive Allocation. The Incentive Allocation to the General Partne an incentive for the General Partner to cause the Partnership to make r may create investments that are riskier or more speculative than would be the case if this allocation did not exist. In addition, since the Incentive Allocation is calculated on a basis that includes unrea lized appreciation of the Partnership's assets, it may be greater than if such allocation was based solely on realized gains. The Incentive Allocation (as well as the Management Fee) was set by the General Partner without negotiations with any third party. Illiquid Investments. The Partnership will invest in unregistere publicly held companies and in privately held companies. Such inves d securities of tments, which may be held in Side-Pocket Accounts, will be illiquid and difficult to value and may require a significant amount of time from the date of initial investment before disposition . Sales of securities held in Side-Pocket Accounts may not be possible and, if possible, may be made at substantial discounts from cost. The limited liquidity of these investments may subject them to more extensive fluctuations in value and may impair the ability of the Partnership to exit such investments in times of adversity. Micro. Small and Mid Capitalization Companies. The Partnership may portion of its assets in companies in the micro-, small- and mid-cap areas. invest a While the General Partner believes they often provide significant potential for appre ciation, those stocks, particularly micro- and small-cap stocks, involve higher risks in some respects than do investments in stocks of larger companies. For example, prices of micro - and small-cap and even mid-cap stocks are often more volatile than prices of large-capita lization stocks and the risk of bankruptcy or insolvency of many smaller companies (with the attend ant losses to investors) 499055.21 -31- EFTA00310652 is higher than for larger, "blue-chip" com panies. In addition, due to thin trading in capitalization stocks, an investment in thos some small- e stocks may be illiquid. Investments in Undervalued Securiti speculative investments in securities es. The Partnership may make certain which the General Partner believes to however, there are no assurances that the be undervalued; securities purchased will in fact be underva investments in undervalued securities lued. While offer the opportunities for above-avera appreciation, these investments can result ge capital in substantial losses. The Partnership bonds or other fixed income securities, may invest in including, without limitation, commer "higher yielding" (and, therefore, higher cial paper and risk) debt securities. It is likely that a maj recession could disrupt severely the market or economic for such securities and may have an adverse on the value of such securities. In addition impact , it is likely that any such economic downtur adversely affect the ability of the issuers n could of such securities to repay principal and thereon and increase the incidence of defa pay interest ult for such securities. The Partnership certain speculative investments in secu may take rities which the General Partner believe undervalued; however, there are no assuranc s to be es that the securities purchased will in undervalued. In addition, the Partnership fact be may be required to hold such securitie substantial period of time before realizing s for a their anticipated value. During this period, of the Partnership's assets would be com a portion mitted to the securities purchased, thus preventing the Partnership from investing possibly in other opportunities. Returns generated Partnership's investments may not adequa from the tely compensate for the risks assumed. Troubled Company Investments. The Part private claims and obligations of entities nership may invest in securities and which are experiencing significant financial difficulties, some of which may not be pub or business licly traded and may involve a substantial deg risk. In certain periods, there may be little or ree of no liquidity in markets for these securities. the risks inherent in investments in troubled Among entities is the fact that it frequently may be diff to obtain information as to the true conditio icult n of such entities. Troubled company inve also may be adversely affected by state and stments federal laws relating to, among other thin fraudulent conveyances, voidable preferen gs, ces, lender liability and the bankruptcy discretionary power to disallow, subordinate or court's disenfranchise particular claims. In addition, the public market prices of distressed securities and private claims and obligations may be subj abrupt and erratic market movements and abo ect to ve-average price volatility, and the spread betw the bid and asked prices of such securitie een s may be greater than normally expected for securities. othe r Troubled company investments require acti require participation in business strategy or ve monitoring and may, at times, reorganization proceedings by the General Part To the extent that the General Partner bec ner. omes involved in such proceedings, the Part may have a more active participation in the ners hip affairs of the issuer than that assumed general an investor. In addition, involvement by ly by the General Partner in an issuer's reorgan proceeding could result in the imposition ization of restrictions limiting the Partnership's abil liquidate its position in the issuer for a significa ity to nt period. Use of Leverage. The Partnership may, Partner, leverage its investment positions in the sole discretion of the General by borrowing funds from securities broker-d banks or others. From time to time, the Part ealers, nership may borrow significant amounts to take 499055.21 -32- EFTA00310653 advantage of perceived opportunities, such as short-term price disparities between markets or related securities. Such leverage increases both the possibilitie s for profit and the risk of loss. Borrowings will typically be secured by the Partnership 's securities and other assets. Under certain circumstances, such a lender may demand an increa se in the collateral that secures the Partnership's obligations and if the Partnership were unable to provide additional collateral, the lender could liquidate assets held in the account to satisfy the Partnership's obligations. Liquidation in that manner could have extremely adverse consequences. In addition, the amount of the Partnership's borrowings and the interest rates on those borrowings, which will fluctuate, may have a significant effect on the Partnership's profitability . Use of Options. The Partnership may buy or sell (write) both options, and when it writes options it may do so on a "covered" call options and put or an "uncovered" basis. A call option is "covered" when the writer owns securities of the class and amount of those as to which the call option applies. A put option is covered when the write r has an open short position in securities of the relevant class and amount. The Partnership's options transactions may be part of a hedging tactic (i.e., offsetting the risk involved in another securities position) or a form of leverage, in which the Partnership has the right to benefit from price movements in a large number of securities with a small commitment of capital. These activities involve risks that can be large, depending on the circumstances. In general, the principal risks involved in options trading can be described as follows, without taking into account other positions or transactions the Partnership may enter into. When the Partnership buys an option, a decrease (or inadequate price of the underlying security in the case of a call, or an increa increase) in the se (or inadequate decrease) in the security in the case of a put, could result in a total loss of the Partnership's investment in the option (including commissions). The Partnership could mitig ate those losses by selling short the securities as to which it holds call options or taking a long positi on on securities underlying put options. When the Partnership sells (writes) an option, the risk can be substantially than when it buys an option. The seller of an uncovered call optio greater n bears the risk of an increase in the market price of the underlying security above the exercise price. The risk is theoretically unlimited unless the option is "covered." If it is covered, an increa se in the market price of the security above the exercise price would cause the Partnership to lose the opportunity for gain on the underlying security (assuming it bought the security for less than the exercise price). If the price of the underlying security were to drop below the exercise price, the premium received on the option (after transaction costs) would provide profit that would reduc e or offset any loss the Partnership might suffer as a result of owning the security. The seller of an uncovered put option theoretically could lose an amou the entire aggregate exercise price of the option (an amount which nt equal to would likely be greater than the price of the put option sold), if the underlying security were to become valueless. If the option were covered with a short position in the underlying security, this risk would be limited, but a drop in the security's price below the exercise price would cause the Partnership to lose some or all of the opportunity for profit on the "covering" short position—assuming the Partnership sold short for more than the exercise price. If the price of the underlying security were to increase above the exercise price, the premium on the option (after transaction costs) 499055.21 -33- EFTA00310654 would provide profit that would reduce or offset any loss the Partnership might suffer in closing out its short position. Forward Trading. The Partnership may invest in forward contr thereon, which, unlike futures contracts, are not traded on acts and options exchanges and are not standardized; rather, banks and dealers act as principals in these markets, negotiating each transaction on an individual basis. Forward and "cash" trading is substantially unreg ulated; there is no limitation on daily price movements and speculative position limits are not applicable. The principals who deal in the forward markets are not required to continue to make markets in the currencies or commodities they trade and these markets can experience period s of illiquidity, sometimes of significant duration. There have been periods during which certai n participants in these markets have refused to quote prices for certain currencies or commoditie s or have quoted prices with an unusually wide spread between the price at which they were prepared to buy and that at which they were prepared to sell. Disruptions can occur in any marke t traded by the Partnership due to unusually high or low trading volume, political intervention or other factors. The imposition of controls by government authorities might also limit such forwa rd (and futures) trading to less than that which the General Partner would otherwise recommend, to the possible detriment of the Partnership. Market illiquidity or disruption could result in major losses to the Partnership. Short Selling. The Partnership's investment portfolio will include short positions. Short selling involves selling securities which may or may not be owned and borrowing the same securities for delivery to the purchaser, with an obligation to replac e the borrowed securities at a later date. Short selling allows the investor to profit from declines in the prices of securities. A short sale creates the risk of a theoretically unlimited loss, in that the price of the underlying security could theoretically increase without limit, thus increasing the cost to the Partnership of buying those securities to cover the short position. There can be assura no nce that the securities necessary to cover a short position will be available for purchase. Purch asing securities to close out the short position can itself cause the price of the securities to rise further, thereby exacerbating the loss. In addition, the occurrence of a "short-squeeze" (the inability to maintain a "borrow" on securities) could force the Partnership to cover a short position and realize an investment loss at an inopportune time. Hedging Transactions. The Partnership may utilize a variety instruments, such as derivatives, options, interest rate swaps, caps and of financial floors, futures and forward contracts, both for investment purposes and for risk management purposes. While the Partnership may enter into hedging transactions to seek to reduce risk, such transactions may result in a poorer overall performance and increased (rather than reduced) risk for the Partnership than if it has not engaged in any such hedging transactions. Moreover, it shoul d be noted that the portfolio will always be exposed to certain risks that cannot be hedge d, such as credit risk (relating both to particular securities and counterparties). In addition, the Partnership may choose not to enter into hedging transactions with respect to some or all of its positions. Foreign Investments. The Partnership may invest in securities of foreig corporations and foreign countries. Investing in the equity securities of n non-U.S. companies involves certain considerations not usually associated with investing in securities of United States companies, including political and economic considerations, such as greater risks of expropriation'and nationalization, the potential difficulty of repatr iating funds and general social, 499055.21 -34- EFTA00310655 political and economic instability; the small size of the securi ties markets in such countries and the low volume of trading, resulting in potential lack of liquidity and in price volatility; fluctuations in the rate of exchange between currencies and costs associated with currency conversion; and certain government policies that may restrict the Partnership's investment opportunities. In addition, accounting and financial report ing standards that prevail in foreign countries generally are not equivalent to United States standards and, consequently, less information may be available to investors in companies locate d in foreign countries than is available to investors in companies located in the United States. There is also less regulation, generally, of the securities markets in foreign countries than there is in the United States. Currency. The Partnership may invest a portion of its assets denominated in currencies other than the U.S. dollar, the in instruments price of which is determined with reference to currencies other than the U.S. dollar. The Partnership will, however, value its securities and other assets in U.S. dollars. To the extent unhed ged, the value of the Partnership's assets will fluctuate with U.S. dollar exchange rates as well as the price changes of the Partnership's investments in the various local markets and curren cies. Thus, an increase in the value of the U.S. dollar compared to the other currencies in which the Partnership makes its investments will reduce the effect of increases and magnify the effect of decreases in the prices of the Partnership's securities in their local markets. Conversely , a decrease in the value of the U.S. dollar will have the opposite effect on the Partnership's non-U .S. dollar securities. The Partnership also may utilize options and forward contra cts to hedge against currency fluctuations, but there can be no assurance that such hedging transa ctions will be effective. Liouidity of Futures Contracts. The Partnership may utilize futures as investment program, subject to the registration requirements part of its discussed in this Confidential Memorandum. Futures positions may be illiquid because certai n commodity exchanges limit fluctuations in certain futures contract prices during a single day by regulations referred to as "daily price fluctuation limits" or "daily limits." Under such daily limits, during a single trading day no trades may be executed at prices beyond the daily limits. Once the price of a particular futures contract has increased or decreased by an amount equal to the daily limit, positions in that contract can neither be taken nor liquidated unless traders are willing to effect trades at or within the limit. This could prevent the General Partner from promp tly liquidating unfavorable positions and subject the Partnership to substantial losses. Counterparts Risk. Many of the markets in which the Partnership may effect transactions are "over-the-counter" or "interdealer" markets. The partic its ipants in such markets are typically not subject to credit evaluation and regulatory oversight as are members of "exchange based" markets. This exposes the Partnership to the risk that a counterparty will not settle a transaction in accordance with or because of a credit or liquid ity problem, thus causing the Partnership to suffer a loss. In addition, in the case of a defau lt, the Partnership could become subject to adverse market movements while replacement transactions are executed. Such "counterparty risk" is accentuated for contracts with longer matur ities where events may intervene to prevent settlement, or where the Partnership has conce ntrated its transactions with a single or small group of counterparties. The Partnership is not restric ted from dealing with any particular counterparty or from concentrating any or all of its transa ctions with one counterparty. Moreover, the Partnership has no internal credit function which evalu ates the creditworthiness of its counterparties. The ability of the Partnership to transact busin ess with any one or number of 49905521 -35- EFTA00310656 counterparties, the lack of any meaningful and independen t evaluation of such counterparties financial capabilities and the absence of a regulated marke t to facilitate settlement may increase the potential for losses by the Partnership. Tax-Exempt Investors. Certain prospective Limited Partn Federal and state laws, rules and regulations which may ers may be subject to regulate their participation in the Partnership, or their engaging directly, or indirectly throu gh an investment in the Partnership, in investment strategies of the types which the Partnership may utilize from time to time (a, short sales of securities and the use of leverage and limited diversification) Each type of exempt organization may be subject to different laws, rules and regulations, and prospective Limited Partners should consult with their own advisers as to the advis ability and tax consequences of an investment in the Partnership. Investment in the Partnership by entities subject to ERISA and other tax-exempt entities requires special consideration. Trust ees or administrators of such entities are urged to carefully review the matters discussed in this Confidential Memorandum. Since the Partnership is permitted to borrow, tax-exempt Limit ed Partners may incur income tax liability to the extent that their share of the Partnership's incom e constitutes "unrelated business taxable income." (See "Investment Program," "Tax Aspects" and "ERISA Considerations.") Absence of Regulatory Oversight. While the Partnership similar to an investment company, it is not registered as such may be considered under the Company Act in reliance upon an exemption available to privately offered investment companies and, accordingly, the provisions of the Company Act (which, among other things, require investment companies to have a majority of disinterested directors, require securities held in custody to at all times be individually segregated from the securities of any other perso n and marked to clearly identify such securities as the property of such investment comp any, and regulate the relationship between the adviser and the investment company) are not applic able. Because securities of the Partnership held by brokers are generally not held in the Partn ership's name, a failure of any such broker is likely to have a greater adverse impact on the Partn ership than if such securities were registered in the Partnership's name. The foregoing list of risk factors does not purport to enumeration or explanation of the risks involved in an inves be a complete tment in the Partnership. Prospective investors are urged to read this entire Confidential Mem orandum and consult their own advisers before deciding whether to Invest in the Partnershi p. CONFLICTS OF INTEREST The General Partner and its affiliates are not restricted from engag business activities. Activities outside the Partnership could be viewed as ing in other creating a conflict of interest in that the time and effort of the members of the General Partn er and its officers and employees may not be devoted exclusively to the business of the Partne rship but could be allocated between the business of the Partnership and such other busin ess activities. While overseeing the activities of the General Partner and the Partnership, Mr. Bommer also actively manages the 3(cXI) Fund and the Offshore Fund, through the General Partner and/or its affiliates, and may provide services to other funds and accounts advis ed and/or administrated by the General Partner and/or its affiliates. 499055.21 -36- EFTA00310657 The General Partner's members and employees may buy and client accounts or for their own accounts but, absent appro sell securities for such priate disclosure and consent, may not buy securities from or sell securities to the Partnership. Although the 3(cX1) Fund and the Offshore Fund would invest side-by-side on a rata basis with the Partnership (subject to legal, regulatory and tax considerations), trading for proprietary or other client accounts (including other collective investment vehicles) may or may not parallel the Partnership's trading. The trading records of any other accounts managed by the General Partner or its affiliates are not available for inspection by the Limited Partners. When it is determined that it would be appropriate for the more other investment funds or accounts managed by Partnership and one or the General Partner or its affiliates to participate in an investment opportunity, the General Partne r and its affiliates will seek to execute orders for all of the participating investment accounts, including the Partnership, on an equitable basis, taking into account such factors as the relativ e amounts of capital available for new investments, relative exposures to short-term marke t trends and the investment programs and portfolio positions of the Partnership and the affiliated entities for which participation is appropriate. Orders for public securities may be combined for all such accounts, and if any such order is not filled at the same price, they may be allocated on an average price basis. Similarly, if an order for a public security on behalf of more than one account cannot be fully executed under prevailing market conditions, securities may be allocated among the different accounts on a basis which the General Partner or its affiliates consider equita ble. Situations may occur where the Partnership could be disadvantaged because of the investment activities conducted by the General Partner and its affiliates for other investment accounts. BROKERAGE COMMISSIONS The General Partner has complete discretion in deciding what broke Partnership uses and in negotiating the rates of compensation the rs and dealers the Partnership pays. In addition to using brokers as "agents" and paying commissions, the Partnership may buy or sell securities directly from or to dealers acting as principal at prices that include markups or markdowns, and may buy securities from underwriters or dealers in public offerings at prices that include compensation to the underwriters and dealers. In selecting brokers to effect portfolio transactions for the Partn General Partner will consider such factors as commission ership, the rates, reliability, financial responsibility, strength of the broker and ability of the broker to efficie ntly execute transactions, and the broker's provision or payment of the costs of brokerage, resear ch and other investment management-related services or property which are of benefit to the Partn ership, the General Partner, the Management Company and other accounts managed by the General Partner or its affiliates. The General Partner need not solicit competitive bids and does not have an obligation to seek the lowest available commission cost. Accordingly, if the Gener al Partner determines in good faith that the amount of commissions charged by a broker is reasonable in relation to the value of the brokerage and products or services provided by such broker, the Partnership may pay commissions to such broker in an amount greater than the amount another broker might charge. 499055.21 -37- EFTA00310658 Section 28(e) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), provides a "safe harbor" to investment managers who use commission dollars of their advised accounts to obtain brokerage services and research products and investment management-related services and products which provide lawful and appropriate assistance to the manager in the performance of his investment decision-making responsibilities. Research products or investment management-related services and products provided to the Partnership may include research reports on particular industries and companies, economic surveys and analyses, recommendations as to specific securities and other products or services (e.g., quotation equipment and computer related costs and expenses) providing lawful and appropriate assistance to the General Partner in the performance of its investment decision-making. responsibilities. Conduct outside of the safe harbor afforded by Section 28(e) is subject to the traditional standards of fiduciary duty under state and federal law. It is anticipated that the General Partner's receipt of services and products will generally fit within the safe harbor of Section 28(e). The Partnership may also utilize the services of one or more brokers who specialize in providing trading services in order to coordinate the Partnership's trading activity in certain circumstances. Such brokers' commissions will be added to the commissions charged to the Partnership by the executing broker. In addition, subject to best execution, the Partnership may utilize brokers who refer Limited Partners to the Partnership. A broker is not excluded from receiving business because it has not been identified as providing research and products. The research and products received from brokers may be used by the General Partner in servicing all of its accounts and not all such research and products may be used by the General Partner in connection with the Partnership. Each Limited Partner, in executing the subscription documents relating to acquiring an Interest in the Partnership, will specifically authorize the Partnership to engage in "soft dollar" commission arrangements with qualified brokers. The Partnership uses Goldman, Sachs & Co. to act as the prime broker for the Partnership and to clear the Partnership's securities transactions which are effected through other brokerage firms. Goldman, Sachs and/or its affiliates generally will act as custodian of the Partnership's securities, although, in certain cases other brokers who execute transactions for the Partnership maintain custody of the Partnership's assets. The Partnership will not be committed to continue its prime broker relationship with Goldman, Sachs for any minimum period. The Partnership's securities and other assets are held in securities accounts at Goldman, Sachs and/or its affiliates maintained in the Partnership's name. TAX ASPECTS The following is a summary of certain aspects of the income taxation of the Partnership and its Limited Partners which should be considered by a prospective Limited Partner. The Partnership has not sought a ruling from the Internal Revenue Service (the "Service") or any other Federal, state or local agency with respect to any of the tax issues affecting the Partnership, nor has it obtained an opinion of counsel with respect to any tax issues. 499055.21 -38- EFTA00310659 This summary of certain aspects of the Partnership is based upon the Internal Rev Federal income tax treatment of the enue Code of 1986, as amended (the "Code") decisions, Treasury Regulations (the "Regula , judicial tions") and rulings in existence on the date all of which are subject to change. Thi hereof, s summary does not discuss the impact proposals to amend the Code which cou of various ld change certain of the tax consequence investment in the Partnership. This sum s of an mary also does not discuss all of the tax con that may be relevant to a particular investor sequences or to certain investors subject to special under the Federal income tax laws, such as treatment insurance companies. EACH PROSPECTIVE LIMITED PARTNE OWN TAX ADVISER IN ORDER FUL R SHOULD CONSULT WITH ITS LY TO UNDERSTAND THE FEDERAL, LOCAL AND FOREIGN INCOME TAX STATE, CONSEQUENCES OF AN INVESTMENT PARTNERSHIP. IN THE In addition to the particular matters set organizations should review carefully those forth in this section, tax-exempt sections of the Memorandum regarding liquidity other financial matters to ascertain whether and the investment objectives of the Partnership consistent with their overall investment plan are s. Each prospective tax-exempt Limited Part urged to consult its own counsel regarding the ner is acquisition of Interests. Tax Treatment of Partnership Operations Classification of the Partnership. The Part Federal income tax purposes that is not a nership operates as a partnership for publicly traded partnership taxable as a corp it were determined that the Partnership should oration. If be taxable as a corporation for Federal inco purposes (as a result of changes in the Cod me tax e, the Regulations or judicial interpretations material adverse change in facts, or otherwis thereof, a e), the taxable income of the Partnership wou subject to corporate income tax when reco ld be gnized by the Partnership; distributions of income, other than in certain redemptions of such Interests, would be treated as dividend income received by the Partners to the extent of the curr whe n ent or accumulated earnings and profits of Partnership; and Partners would not be the entitled to report profits or losses realized Partnership. by the As a partnership, the Partnership is not itsel Partnership files an annual partnership info f subject to Federal income tax. The rmation return with the Service which repo results of operations. Each Partner is requ rts the ired to report separately on its income tax retu distributive share of the Partnership's net rn its long-term capital gain or loss, net short-ter gain or loss and all other items of ordinary m capital income or loss. Each Partner is taxed on distributive share of the Partnership's taxa its ble income and gain regardless of whether received or will receive a distribution from it has the Partnership. Allocation of Profits and Losses. Und Partnership's net capital appreciation or net er the Partnership Agreement, the capital depreciation, calculated without rega Side-Pocket Accounts, for each accounting peri rd to od is allocated among the Partners and to thei capital accounts without regard to the amount r of income or loss actually recognized by Partnership for Federal income tax purposes the . The Partnership Agreement provides that item income, deduction, gain, loss or credit actually s of recognized by the Partnership for each fiscal year 49%55.21 -39- EFTA00310660 generally are to be allocated for income tax purposes amon g the Partners pursuant to Regulations issued under Sections 704(b) and 704(c) of the Code, based upon amounts of the Partnership's net capital appreciation or net capital depreciation allocated to each Partner's capital account for the current and prior fiscal years. Under the Partnership Agreement, the General Partner has the discretion to allocate specially an amount of the Partnership's capital gain (including short-term capital gain) for Federal income tax purposes to a withdrawing Partner to the extent that the Partner's capital account, determined without regard to the value attributable to its undistributed Side-Pocket Account, exceeds its Federal income tax basis in its partne rship interest without taking into account the basis attributable to its undistributed Side- Pocket Account. There can be no assurance that, if the General Partner makes such a speci al allocation, the Service will accept such allocation. If such allocation is successfully challenged by the Service, the Partnership's gains allocable to the remaining Partners would be increased. Tax Elections: Returns: Tax Audits. The Code provides for optional adjustments to the basis of partnership property upon distributions of partne rship property to a partner and transfers of partnership interests (including by reason of death ) provided that a partnership election has been made pursuant to Section 754. Unde r the Partnership Agreement, at the request of a Partner, the General Partner, in its sole discretion, may cause the Partnership to make such an election. Any such election, once made, canno t be revoked without the Service's consent. As a result of the complexity and added expense of the tax accounting required to implement such an election, the General Partner presently does not intend to make such election. The General Partner decides how to report the partnership Partnership's tax returns, and all Partners are required under items on the the Code to treat the items consistently on their own returns, unless they file a statement with the Service disclosing the inconsistency. Given the uncertainty and complexity of the tax laws, it is possible that the Service may not agree with the manner in which the Partnership 's items have been reported. In the event the income tax returns of the Partnership are audited by the Service, the tax treatment of the Partnership's income and deductions generally is determined at the limited partnership level in a single proceeding rather than by individual audits of the Partn ers. The General Partner, designated as the "Tax Matters Partner," has considerable authority to make decisions affecting the tax treatment and procedural rights of all Partners. In addition, the Tax Matters Partner has the authority to bind certain Partners to settlement agreements and the right on behalf of all Partners to extend the statute of limitations relating to the Partn ers' tax liabilities with respect to Partnership items. Tax Consequences to a Withdrawing Limited Partner A Limited Partner receiving a cash liquidating distribution from in connection with a complete withdrawal from the Partnership gener the Partnership, , ally will recognize capital gain or loss to the extent of the difference between the proceeds received by such Limited Partner and such Limited Partner's adjusted tax basis in its partne rship interest. Such capital gain or loss will be short-term, long-term, or some combination of both, depending upon the timing of the Limited Partner's contributions to the Partnership. However, a withdrawing Limited Partner will recognize ordinary income to the extent such Limit ed Partner's allocable share of the 49905521 -40- EFTA00310661 Partnership's "unrealized receivables" exceeds the Limited Partner's basis in such unrealized receivables (as determined pursuant to the Regulations). For these purposes, accrued but untaxed market discount, if any, on securities held by the Partnership will be treated as an unrealized receivable, with respect to which a withdrawing Limited Partner would recognize ordinary income. A Limited Partner receiving a cash nonliquidating distribution will recognize income in a similar manner only to the extent that the amount of the distribution exceeds such Limited Partner's adjusted tax basis in its partnership interest. As discussed above, the Partnership Agreement provides that the General Partner may specially allocate items of Partnership capital gain (including short-term capital gain) to a withdrawing Partner to the extent its capital account would otherwise exceed its adjusted tax basis in its partnership interest, without taking into account basis attributable to the undistributed portion of its Side-Pocket Account. Such a special allocation may result in the withdrawing Partner recognizing capital gain, which may include short-term gain, in the Partner's last taxable year in the Partnership, thereby reducing the amount of long-term capital gain recognized during the tax year in which it receives its liquidating distribution upon withdrawal. Distributions of Property. A partner's receipt of a distribution of property from a partnership is generally not taxable. However, under Section 731 of the Code, a distribution consisting of marketable securities generally is treated as a distribution of cash (rather than property) unless the distributing partnership is an "investment partnership" within the meaning of Section 731(c)(3XC)(i) and the recipient is an "eligible partner" within the meaning of Section 731(cX3XC)(iii). The Partnership will determine at the appropriate time whether it qualifies as an "investment partnership." Assuming it so qualifies, if a Limited Partner is an "eligible partner," which term should include a Limited Partner whose contributions to the Partnership consisted solely of cash, the recharacterization rule described above would not apply. Tax Treatment of Partnership Investments In General. The Partnership expects to act as a trader or investor, and not as a dealer, with respect to its securities transactions. A trader and an investor are persons who buy and sell securities for their own accounts. A dealer, on the other hand, is a person who purchases securities for resale to customers rather than for investment or speculation. Generally, the gains and losses realized by a trader or an investor on the sale of securities are capital gains and losses. Thus, subject to the treatment of certain currency exchange gains as ordinary income (see "Currency fluctuations - 'Section 988' Gains or Losses" below) and certain other transactions described below, the Partnership expects that its gains and losses from its securities transactions typically will be capital gains and capital losses. These capital gains and losses may be long-term or short-term depending, in general, upon the length of time the Partnership maintains a particular investment position and, in some cases, upon the nature of the transaction. Property held for more than one year generally will be eligible for long-term capital gain or loss treatment. The application of certain rules relating to short sales, to so-called "straddle" and "wash sale" transactions and to Section 1256 Contracts (defined below) may serve to alter the manner in which the Partnership's holding period for a security is determined or may otherwise affect the characterization as short-term or long-term, and also the 099055.21 -41- EFTA00310662 timing of the realization, of cer tain gains or losses. Moreover rules may require the capitaliza , the tion of certain related expenses of straddle rules and short sale the Partnership. The maximum ordinary incom the maximum individual incom e tax rate for individuals is 38.6% e tax rate for long-term capital 1 and, in general, elects to be taxed at ordinary gains is 20%2 (unless the taxpayer rates - see "Limitation on Deduc Expenses" below), although in all tibility of Interest and Short Sal cases the actual rates may be hig e certain tax deductions, exemp her du e to the pha se ou t of tions and credits. The excess may be offset against the ord of capital losses over capital gai inary income of an individual ns deduction limitation of $3,000 taxpayer, subject to an annual . For corporate taxpayers, the Capital losses of a corporate tax maximum income tax rate is 35% payer may be offset only agains . losses may be carried back thr t capital gains, but unused capital ee years (subject to certain lim years. itations) and carried forward fi ve The Partnership may realize interest on securities. The Par ordinary income from dividends tnership may hold debt obligatio and accruals of In such case, the Partnership ns with "original issue discount." would be required to include am current basis even though rec ounts in taxable income on a eipt of such amounts may occur Partnership may also acquire deb in a subsequent year. The t obligations with "market discou an obligation, the Partnership nt." Upon disposition of such generally would be required to income to the extent of the marke treat gain realized as interest t discount which accrued during was held by the Partnership. Th the period the debt obligation e Partnership may realize ordinary invests in partnerships engaged income or loss to the extent it in a trade or business. Incom involving certain derivative instru e or loss from transactions ments, such as swap transactions, ordinary income or loss. In add will also generally constitute ition, amounts, if any, payable with equity swaps, interest rat by the Partnership in connection e swaps, caps, floors and collar "miscellaneous itemized deduct s likely would be considered ions" which, for a noncorporate restrictions on their deductibility Partner, may be subject to . See "Deductibility of Partnersh Noncorporate Limited Partners" ip Investment Expenditures by below. Moreover, gain recogn transactions" will be treated as ord ized from certain "conversion inary income? Under recently enacted legislation , this rate is reduced in stages unti maximum rate will be 35%. Ho l calendar year 2006 when the wever, this legislation contains a "su top rate being restored to 39.6% in 2011. nset" provision that will result in the 2 The maximum individual long-te rm capital gains tax rate is 18% December 31, 2000 and held for more for certain property purchased afte than five years. r 3 Generally, a conversion transaction is one of several enumerated transac taxpayer's return is attributable to the tions where substantially all of the time value of the net investment transactions are (i) the holding of any in the transaction. The enumerated property (whether or not actively trad to sell such property (or substantial ed) and entering into a contract ly identical property) at a price dete contract, but only if such proper rmined in accordance with such ty was acquired and such contact contemporaneous basis, (ii) certain was entered into on a substantially straddles, (iii) generally any other on the basis that it would have the transaction that is marketed or sold economic characteristics of a loan but taxed as capital gain or (iv) any oth the interest-like return would be er transaction specified in Regulat ions. 499055.21 -42- EFTA00310663 Currency Fluctuations - "Section 988" Gains or Losses. To the extent that its investments are made in securities denominated in a foreign currency, gain or loss realized by the Partnership frequently will be affected by the fluctuation in the value of such foreign currencies relative to the value of the dollar. Generally, gains or losses with respect to the Partnership's investments in common stock of foreign issuers will be taxed as capital gains or losses at the time of the disposition of such stock. However, under Section 988 of the Code, gains and losses of the Partnership on the acquisition and disposition of foreign currency (mg, the purchase of foreign currency and subsequent use of the currency to acquire stock) will be treated as ordinary income or loss. Moreover, under Section 988, gains or losses on disposition of debt securities denominated in a foreign currency to the extent attributable to fluctuation in the value of the foreign currency between the date of acquisition of the debt security and the date of disposition will be treated as ordinary income or loss. Similarly, gains or losses attributable to fluctuations in exchange rates that occur between the time the Partnership accrues interest or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time the Partnership actually collects such receivables or pays such liabilities may be treated as ordinary income or ordinary loss. As indicated above, the Partnership may acquire foreign currency forward contracts, enter into foreign currency futures contracts and acquire put and call options on foreign currencies. Generally, foreign currency regulated futures contracts and option contracts that qualify as "Section 1256 Contracts" (see "Section 1256 Contracts" below), will not be subject to ordinary income or loss treatment under Section 988. However, if the Partnership acquires currency futures contracts or option contracts that are not Section 1256 Contracts, or any currency forward contracts, any gain or loss realized by the Partnership with respect to such instruments will be ordinary, unless (i) the contract is a capital asset in the hands of the Partnership and is not a part of a straddle transaction and (ii) the Partnership makes an election (by the close of the day the transaction is entered into) to treat the gain or loss attributable to such contract as capital gain or loss. Section 1256 Contracts. In the case of Section 1256 Contracts, the Code generally applies a "mark to market" system of taxing unrealized gains and losses on such contracts and otherwise provides for special rules of taxation. A Section 1256 Contract includes certain regulated futures contracts, certain foreign currency forward contracts, and certain options contracts. Under these rules, Section 1256 Contracts held by the Partnership at the end of each taxable year of the Partnership are treated for Federal income tax purposes as if they were sold by the Partnership for their fair market value on the last business day of such taxable year. The net gain or loss, if any, resulting from such deemed sales (known as "marking to market"), together with any gain or loss resulting from actual sales of Section 1256 Contracts, must be taken into account by the Partnership in computing its taxable income for such year. If a Section 1256 Contract held by the Partnership at the end of a taxable year is sold in the following year, the amount of any gain or loss realized on such sale will be adjusted to reflect the gain or loss previously taken into account under the "mark to market" rules. Capital gains and losses from such Section 1256 Contracts generally are characterized'as short-term capital gains or losses to the extent of 40% thereof and as long-term capital gains or losses to the extent of 60% thereof. Such gains and losses will be taxed under the general rules described above. Gains and losses from certain foreign currency transactions 499055.21 -43- EFTA00310664 will be treated as ordinary income and losses. (See "Curr ency Fluctuations - 'Section 988' Gains or Losses.") If an individual taxpayer incurs a net capita l loss for a year, the portion thereof, if any, which consists of a net loss on Section 1256 Contracts may, at the election of the taxpayer, be carried back three years. Losses so carried back may be deducted only against net capital gain to the extent that such gain includes gains on Section 1256 Contracts. Mixed Straddle Election. The Code allows a taxpayer to elect losses from positions which are part of a "mixed straddle." A to offset gains and "mixed straddle" is any straddle in which one or more but not all positions are Section 1256 Contracts. Pursuant to Temporary Regulations, the Partnership may be eligible to elect to establish one or more mixed straddle accounts for certain of its mixed straddle trading positions. The mixed straddle account rules require a daily "marking to market" of all open positions in the account and a daily netting of gains and losses from positions in the account. At the end of a taxable year, the annual net gains or losses from the mixed straddle account are recognized for tax purposes. The application of the Temporary Regulations' mixed straddle account rules is not entirely clear. Therefore, there is no assurance that a mixed straddle account election by the Partne rship will be accepted by the Service. Short Sales. Gain or loss from a short sale of property is gener capital gain or loss to the extent the property used to close ally considered as the short sale constitutes a capital asset in the Partnership's hands. Except with respect to certai n situations where the property used to close a short sale has a long-term holding period on the date the short sale is entered into, gains on short sales generally are short-term capital gains. A loss on a short sale will be treated as a long-term capital loss if, on the date of the short sale, "subs tantially identical property" has been held by the Partnership for more than one year. In additi on, these rules may also terminate the running of the holding period of "substantially identical prope rty" held by the Partnership. Gain or loss on a short sale will generally not be realized until such short sale is closed. However, if the Partnership holds a short time that the sale position with respect to stock, certain debt obligations or partnership interests that has appreciated in value and then acquires property that is the same as or substantially identical to the property sold short, the Partnership generally will recognize gain on the date it acquires such prope rty as if the short sale were closed on such date with such property. Similarly, if the Partnership holds an appreciated financial position with respect to stock, certain debt obligations, or partne rship interests and then enters into a short sale with respect to the same or substantially identical property, the Partnership generally will recognize gain as if the appreciated financial positi on were sold at its fair market value on the date it enters into the short sale. The subsequent holdin g period for any appreciated financial position that is subject to these constructive sale rules will be determined as if such position were acquired on the date of the constructive sale. Effect of Straddle Rules on Limited Partners' Securities Positions. may treat certain positions in securities held (directly or indirectly) The Service by a Partner and its indirect interest in similar securities held by the Partnership as "strad dles" for Federal income tax purposes. The application of the "straddle" rules in such a case could affect a Partner's holding period for the securities involved and may defer the recognition of losses with respect to such securities. 499055.21 EFTA00310665 Limitation on Deductibility of Interest and Short noncorporate taxpayers, Section 163(d) of the Code limits Sale Expenses. For the deduction for "investment interest" (i.e., interest or short sale expenses for "indebtedness prope rly allocable to property held for investment"). Investment interest is not deductible in the current year to the extent that it exceeds the taxpayer's "net investment income," consisting of net gain and ordinary income derived from investments in the current year less certain direct ly connected expenses (other than interest or short sale expenses). For this purpose, any long- term capital gain is excluded from net investment income unless the taxpayer elects to pay tax on such amount at ordinary income tax rates. For purposes of this provision, the Partnership's activities will be treated as giving rise to investment income for a Limited Partner, and the inves tment interest limitation would apply to a noncorporate Limited Partner's share of the intere st and short sale expenses attributable to the Partnership's operation. In such case, a nonco rporate Limited Partner would be denied a deduction for all or part of that portion of its distrib utive share of the Partnership's ordinary losses attributable to interest and short sale expenses unless it had sufficient investment income from all sources including the Partnership. A Limit ed Partner that could not deduct losses currently as a result of the application of Section 163(d ) would be entitled to carry forward such losses to future years, subject to the same limitation. The investment interest limitation would also apply to interest paid by a noncorporate Limit ed Partner on money borrowed to finance its investment in the Partnership. Potential investors are advised to consult with their own tax advisers with respect to the application of the inves tment interest limitation in their particular tax situations. Deductibility of Partnership Investment Expenditures by Noncorpor Partners. Investment expenses (esz, investment advisory fees) of ate Limited an individual, trust or estate are deductible only to the extent they exceed 2% of adjusted gross income/ In addition, the Code further restricts the ability of an individual with an adjusted gross income in excess of a specified amount (for 2002, $137,300 or $68,650 for a married perso n filing a separate return) to deduct such investment expenses. Under such provision, investment expenses in excess of 2% of adjusted gross income may only be deducted to the extent such excess expenses (along with certain other itemized deductions) exceed the lesser of (i) 3% of the excess of the individual's adjusted gross income over the specified amount or (ii) 80% of the amount of certain itemized deductions otherwise allowable for the taxable year? Moreover, such investment expenses are miscellaneous itemized deductions which are not deductible by a noncorporate taxpayer in calculating its alternative minimum tax liability. 4 However, Section 67(e) of the Code provides that, in the case of a trust or an estate, such limitation does not apply to deductions or costs which are paid or incurred in connection with the administration of the estate or trust and would not have been incurred if the property were not held in such trust or estate. There is a disagreement between two Federal Courts of Appeals on the questio n of whether the investment advisory fees incurred by a trust are exempt (under Section 67(e)) from the 2% of adjusted gross income floor on deductibility. Limited Partners that are trusts or estates should consult their tax advisors as to the applicability of these cases to the investment expenses that are allocat ed to them. 5 Under recently enacted legislation, the latter limitation on itemized deduct ions will be reduced starting in calendar year 2006 and will be completely eliminated by 2010. However, this legislation contains a "sunset" provision that will result in the limitation on itemized deductions being restored in 2011. 499055.21 -45- EFTA00310666 It is unclear whether all or a portion of the Partnership's operations will qualify as trading -- rather than investment — activities, the expenses for which would not be treated as investment expenses. Therefore, pursuant to Temporary Regulations issued by the Treasury Department, these limitations on deductibility may apply to a noncorporate limited Partner's share of the expenses of the Partnership, including the Management Fee. The consequences of these limitations will vary depending upon the particular tax situation of each taxpayer. Accordingly, noncorporate Limited Partners should consult their tax advisers with respect to the application of these limitations. Application of Rules for Income and Losses from Passive Activities. The Code restricts the deductibility of losses from a "passive activity" against certain income which is not derived from a passive activity. This restriction applies to individuals, personal service corporations and certain closely held corporations. Pursuant to Temporary Regulations issued by the Treasury Department, income or loss from the Partnership's securities investment and trading activity generally will not constitute income or loss from a passive activity. Therefore, passive losses from other sources generally could not be deducted against a Limited Partner's share of such income and gain from the Partnership. Income or loss attributable to the Partnership's investments, if any, in partnerships engaged in certain trades or businesses may constitute passive activity income or loss. "Phantom Income" From Partnership Investments. Pursuant to various "anti- deferral" provisions of the Code (the "Subpart F," "passive foreign investment company" and "foreign personal holding company" provisions), investments (if any) by the Partnership in certain foreign corporations may cause a Limited Partner to (i) recognize taxable income prior to the Partnership's receipt of distributable proceeds, (ii) pay an interest charge on receipts that are deemed as having been deferred or (iii) recognize ordinary income that, but for the "anti- deferral" provisions, would have been treated as long-term or short-term capital gain. Foreign Taxes It is possible that certain dividends and interest received by the Partnership from sources within foreign countries will be subject to withholding taxes imposed by such countries. In addition, the Partnership may also be subject to capital gains taxes in some of the foreign countries where it purchases and sells securities. Tax treaties between certain countries and the United States may reduce or eliminate such taxes. It is impossible to predict in advance the rate of foreign tax the Partnership will pay since the amount of the Partnership's assets to be invested in various countries is not known. The Limited Partners will be informed by the Partnership as to their proportionate share of the foreign taxes paid by the Partnership, which they will be required to include in their income. The Limited Partners generally will be entitled to claim either a credit (subject, however, to various limitations on foreign tax credits) or, if they itemize their deductions, a deduction (subject to the limitations generally applicable to deductions) for their share of such foreign taxes in computing their Federal income taxes. A Limited Partner that is tax-exempt will not ordinarily benefit from such credit or deduction. 499055.21 -46- EFTA00310667 Unrelated Business Taxable Income Generally, an exempt organization is exempt from passive investment income, such as dividends, interest Federal income tax on its and capital gains, whether realized by the organization directly or indirectly through a partnership in which it is a partner.6 This type of income is exempt even if it is realized from securities trading activity which constitutes a trade or business. This general exemption from tax does not apply to the "unre income" ("UBTP) of an exempt organization. Generally, lated business taxable except as noted above with respect to certain categories of exempt trading activity, UBTI includes income or gain derived (either directly or through partnerships) from a trade or business, the conduct of which is substantially unrelated to the exercise or performance of the organizatio n's exempt purpose or function. UBTI also includes "unrelated debt-financed income," which gener ally consists of (i) income derived by an exempt organization (directly or through a partne rship) from income-producing property with respect to which there is "acquisition indebtedness" at any time during the taxable year, and (ii) gains derived by an exempt organization (directly or through a partnership) from the disposition of property with respect to which there is "acquisition indebtedness" at any time during the twelve-month period ending with the date of such disposition. In the event the Partnership invests in partnerships engaged in a trade or business, the Partnership's income (or loss) from such investments may constitute UBTI. As indicated above, 100% of certain break up fees and simila the Management Company or its affiliates will be applied to r fees received by reduce the Management Fee. There can be no assurance that such reduction of such fees will not be treated as constructive income of a tax exempt Partner that is taxable to it as UBTL The Partnership may incur "acquisition indebtedness" with respec transactions, such as the purchase of securities on margin. Based t to certain of its upon a published ruling issued by the Service which generally holds that income and gain with respect to short sales of publicly traded stock does not constitute income from debt financed prope rty for purposes of computing UBTI, the Partnership will treat its short sales of securities as not involving "acquisition indebtedness" and therefore not resulting in UBTL7 To the extent the Partnership recognizes income i.e. dividends and interest) from securities with respec t to which there is "acquisition indebtedness" during a taxable year, the percentage of such incom e which will be treated as UBTI generally will be based on the percentage which the "aver age acquisition indebtedness" incurred with respect to such securities is of the "average amount of the adjusted basis" of such securities during the taxable year. 6 With certain exceptions, tax-exempt organizations which are private foundations are subject to a 2% Federal excise tax on their "net investment income." The rate of the excise tax for any taxable year may be reduced to 1% if the private foundation meets certain distribution requirements for the taxable year. A private foundation will be required to make payments of estimated tax with respect to this excise tax. 7 Moreover, income realized from option writing and futures contrac t transactions generally would not constitdte UBTI. 499055.21 -47- EFTA00310668 To the extent the Partnership recognizes which there is "acquisition indebtedness" gain from securities with respect to at any time during the twelve-month peri with the date of their disposition, the perc od ending entage of such gain which will be treated be based on the percentage which the highest as UBTI will amount of such "acquisition indebtedness" is "average amount of the adjusted basis" of of the such securities during the taxable year. In the unrelated debt-financed income of the determining Partnership, an allocable portion of deducti connected with the Partnership's debt-fin ons directly anced property is taken into account. Thu instance, a percentage of losses from deb s, for t-financed securities (based on the debt/ba calculation described above) would offset sis perc entage gains treated as UBTI. Since the calculation of the Partnership' complex and will depend in large part on s "unrelated debt-financed income" is the amount of leverage used by the Partners time to time,8 it is impossible to predict hip from what percentage of the Partnership's inco will be treated as UBTI for a Limited Part me and gains ner which is an exempt organization. An organization's share of the income or gain exempt s of the Partnership which is treated as UBT be offset by losses of the exempt organiza I may not tion either from the Partnership or otherwis such losses are treated as attributable to e, unless an unrelated trade or business (e.e., loss securities for which there is acquisition inde es from btedness). To the extent that the Partnership generates for such a Limited Partner generally would UBTI, the applicable Federal tax rate be either the corporate or trust tax rate dep upon the nature of the particular exempt ending organization. An exempt organization may to support, to the satisfaction of the Serv be required ice, the method used to calculate its UBT Partnership will be required to report to a Part I. The ner which is an exempt organization informa to the portion of its income and gains from tion as the Partnership for each year which will be trea UBTI. The calculation of such amount ted as with respect to transactions entered into Partnership is highly complex, and there by the is no assurance that the Partnership's calculat UBTI will be accepted by the Service. ion of In general, if UBTI is allocated to an exem retirement plan or a private foundation, the pt organization such as a qualified portion of the Partnership's income and gain is not treated as UBTI will continue to be exem s which pt from tax, as will the organization's income gains from other investments which are and not treated as UBTI. Therefore, the possibi realizing UBTI from its investment in the Part lity of nership generally should not affect the tax-exe status of such an exempt organization? How mpt ever, a charitable remainder trust will not be exempt front Federal income tax under Section 664(c) of the Code for any year in which it has UBTI. A title-holding company will not be exem pt from tax if it has certain types of UBTI. The calculation of a particular exempt orga nization's UBTI would also be affected if it to finance its investment in the Partnership. incurs indebtedness An exempt organization is required to mak payments with respect to its UBTI. e estimated tax 9 Certain exempt organizations which reali ze UBTI in a taxable year will not cons organizations" for purposes of Section 514(cX9X titute "qualified BXvi)(1) of the Code, pursuant to which, circumstances, income from certain real estat in limited e partnerships in which such organizations treated as exempt from UBTI. A prospective invest might be tax-exempt Limited Partner should consult its this regard. tax adviser in 499055.21 -48- EFTA00310669 Moreover, the charitable contribution deduction for a trust under Section 642(c) of the Code may be limited for any year in which the trust has UBTI. A prospective investor should consult its tax adviser with respect to the tax consequences of receiving UBTI from the Partnership. (See "ERISA Considerations.") Certain Issues Pertaining to Specific Exempt Organizations Private Foundations. Private foundations and their managers are subject to excise taxes if they invest "any amount in such a manner as to jeopardize the carrying out of any of the foundation's exempt purposes." This rule requires a foundation manager, in making an investment, to exercise "ordinary business care and prudence" under the facts and circumstances prevailing at the time of making the investment, in providing for the short-term and long-term needs of the foundation to carry out its exempt purposes. The factors which a foundation manager may take into account in assessing an investment include the expected rate of return (both income and capital appreciation), the risks of rising and falling price levels, and the need for diversification within the foundation's portfolio. In order to avoid the imposition of an excise tax, a private foundation may be required to distribute on an annual basis its "distributable amount," which includes, among other things, the private foundation's "minimum investment return," defined as 5% of the excess of the fair market value of its nonfunctionally related assets (assets not used or held for use in carrying out the foundation's exempt purposes), over certain indebtedness incurred by the foundation in connection with such assets. It appears that a foundation's investment in the Partnership would most probably be classified as a nonfunctionally related asset. A determination that an interest in the Partnership is a nonfunctionally related asset could conceivably cause cash flow problems for a prospective Limited Partner which is a private foundation. Such an organization could be required to make distributions in an amount determined by reference to unrealized appreciation in the value of its interest in the Partnership. Of course, this factor would create less of a problem to the extent that the value of the investment in the Partnership is not significant in relation to the value of other assets held by a foundation. In some instances, an investment in the Partnership by a private foundation may be prohibited by the "excess business holdings" provisions of the Code. For example, if a private foundation (either directly or together with a "disqualified person") acquires more than 20% of the capital interest or profits interest of the Partnership, the private foundation may be considered to have "excess business holdings." If this occurs, such foundation may be required to divest itself of its interest in the Partnership in order to avoid the imposition of an excise tax. However, the excise tax will not apply if at least 95% of the gross income from the Partnership is "passive" within the applicable provisions of the Code and Regulations. Although there can be no assurance, the General Partner believes that the Partnership will meet such 95% gross income test. A substantial percentage of investments of certain "private operating foundations" may be restricted to assets directly devoted to their tax-exempt purposes. Otherwise, generally, rules similar to those discussed above govern their operations. 49905511 -49- EFTA00310670 Qualified Retirement Plans. Employee bene ERISA, Individual Retirement Accounts fit plans subject to the provisions of and Keogh Plans should consult their cou implications of such an investment under nsel as to the ERISA. (See "ERISA Considerations.") Endowment Funds. Investment manager whether the acquisition of an Interest is s of endowment funds should consider legally permissible. This is not a matter of but is determined under state statutes. Federal law, It should be noted, however, that under Management of Institutional Funds Act the Uniform , which has been adopted, in various form number of states, participation in investm s, by a large ent partnerships or similar organizations in are commingled and investment determi which funds nations are made by persons other than board of the endowment fund is allowed. the governing State and Local Taxation In addition to the Federal income tax consequ investors should consider potential stat ences described above, prospective e and local tax consequences of an inve Partnership. State and local laws often stment in the differ from Federal income tax laws with resp treatment of specific items of income, gain ect to the , loss, deduction and credit. A Partner's dist share of the taxable income or loss of the Part ributive nership generally will be required to be incl determining its reportable income for stat uded in e and local tax purposes in the jurisdiction in a resident. If the Partnership acquires an which it is interest in a partnership engaged in a trade or the jurisdiction in which such business is con business, ducted will subject to tax a Limited Partner' of the partnership's income from that busines s share s. Prospective investors should consult thei advisers with respect to the availability of r tax a credit for such tax in the jurisdiction in whi Limited Partner is a resident. ch that The Partnership should not be subject to business tax, which is not imposed on a part the New York City unincorporated nership which purchases and sells securities "own account." (This exemption may not be for its applicable to the extent the Partnership inve partnership that conducts a business in New sts in a York City.) By reason of a similar "own acco exemption, it is also expected that a nonresi unt" dent individual Partner should not be subject York State personal income tax with respect to New to his share of income or gain realized dire the Partnership. A nonresident individual Part ctly by ner will not be subject to New York City earn tax on nonresidents with respect to his investm ings ent in the Partnership. Individual Limited Partners who are residen City should be aware that the New York ts of New York State and New York State and New York City personal income tax limit the deductibility of itemized deducti laws ons and interest expense for individual taxpayer certain income levels. These limitations may s at apply to a Limited Partner's share of some or the Partnership's expenses. Prospective Limited all of Partners are urged to consult their tax adviser with respect to the impact of these provisions s and the Federal limitations on the deductibilit certain itemized deductions and investment exp y of enses on their New York State and New Yor City tax liability. k For purposes of the New York State corporat City general corporation tax, a corporation e franchise tax and the New York generally is treated as doing business in New State and New York City, respectively, and York is subject to such corporate taxes as a result of the 499055.21 -50- EFTA00310671 ownership of a partnership int erest in a partnership which does New York City, respectively.10 business in New York State and Each of the New York State and are imposed, in part, on the New York City corporate taxes corporation's taxable income or jurisdiction by application of the capital allocable to the relevant appropriate allocation percentag corporation which does business es. Moreover, a non-New York in New York State may be sub fee. A corporation which is sub ject to a New York State license ject to New York State corporate of being a limited partner in a Ne franchise tax solely as a result w York partnership may, under compute its New York State cor certain circumstances, elect to porate franchise tax by taking share of such partnership's incom into account only its distributive e and loss. There is currently no purposes of the New York City gen similar provision in effect for eral corporation tax. Regulations under both the New York City general corporation tax York State corporate franchise tax , however, provide an exception to and the New of a "portfolio investment partne this general rule in the case rship," which is defined, generally the gross income requirements of , as a partnership which meets Section 851(bX2) of the Code. Ne York City) has adopted regula w York State (but not New tions that also include incom transactions described in Sectio e and gains from commodity n The Partnership's qualification as 864(bX2)(EXlii) as qualifying gross income for this purpose. such a portfolio investment partne an annual basis and, with respec rship must be determined on t to a taxable year, the Partnership investment partnership. ma y not qualify as a portfolio A trust or other unincorporated org activities is exempt from Federa anization which by reason of its l income tax is also exempt from purposes or City personal income tax. A non New York State and New York stock corporation which is exemp generally presumed to be exemp t from Federal income tax is t from New York State corporate fra City general corporation tax. New nchise tax and New York York State imposes a tax with res on UBTI (including unrelated deb pect to such exempt entities t-financed income) at a rate which New York State corporate franchise is currently equal to the tax rate (plus the corporate surtax City tax on the UBTI of an otherw ). There is no New York ise exempt entity. Each prospective corporate Partne the New York State and New Yo r should consult its tax adviser wit rk City tax consequences of an invest h regard to ment in the Partnership. Foreign Limited Partners A foreign person considering acq consult his or its own tax advise uiring an Interest in the Partne rs as to the Federal, state and loc rship should investment in the Partnership, as al tax consequences of an well as with respect to the treatment from the Partnership under the of income or gain received laws of his or its country of citi incorporation. The previous genera zenship, residence or l discussion of the taxation of Partne not be applicable to foreign invest rs ors. The Federal income tax treatme in the Partnership may nt of a foreign investor in 10 New York State (but not New Yor k City) generally exempts from cor corporation which (1) does not actu porate franchise tax a non-New York ally or constructively own a 1% or a par tnership doing business in New greater limited partnership interest in greater than SI million. York and (ii) has a tax basis in suc h limited partnership interest not 499055.21 -51- EFTA00310672 the Partnership will depend on whether that investor is found , for Federal income tax purposes, to be engaged in a trade or business in the United States as a result of its investment in the Partnership. Generally, a Partner would be deemed to be engaged in a trade or business in the United States, and would be required to file a U.S. tax return (and possibly one or more state or local returns) if the Partnership is so engaged. As long as the Partnership's principal activity is investing securities and commodities for its own account and it and/or trading in stocks, is not a dealer in such items, a "safe harbor" would apply that would exempt foreign persons ownin g interests in the Partnership from being treated as engaged in a United States trade or busin ess as a result of the Partnership's stocks, securities and commodities trading activity, even if such activity otherwise constitutes a U.S. trade or business, provided that such foreign persons are not dealers in stocks, securities or commodities. Accordingly, such foreign persons owning intere sts in the Partnership should be eligible for the safe harbor and would be exempt from Feder al net taxation on the Partnership's activities that fall within the safe harbor (other than for gains on certain securities reflecting interests in United States real property). However, withholding taxes, if any, would be imposed on a foreign Partner's share of the Partnership's U.S. source gross income from dividends and certain interest income arising from safe harbor activities, and certain other income, unless an exception were applicable to reduce or eliminate such withholding . To the extent the Partnership engages in a United States trade or business, income and gain effectively connected with the conduct of that trade or business allocated to a foreign Partner would subject such person to Federal income tax on that income on a net basis at the same rates that are generally applicable to that particular type of investor which is a U.S. person. The Partnership is required to withhold U.S. income tax with respect to each foreign Partner's share of the Partnership's effectively connected income. The amou nt withheld is reportable as a tax credit on the U.S. income tax return that such foreign Partner is required to file. Moreover, effectively connected earnings from the Partnership which are allocated to a foreign corporate Partner and are not reinvested in a United States trade or business may be subject to a "branch profits tax." • As indicated above, 100% of certain break up fees and similar the Management Company or its affiliates will be applied to reduc fees received by e the Management Fee. There can be no assurance that such reduction of such fees will not be treated as constructive income of a foreign Partner that is taxable to it as income effectively connected with the conduct of a United States trade or business. If a foreign individual owns a Partnership interest at the time of foreign individual's interest in the Partnership or its assets may be his death, the subject to U.S. estate taxation unless provided otherwise by applicable treaty. The identity of a foreign Partner may be disclosed on the Partne return. In addition, foreign Partners may have to supply certain benef rship's U.S. tax icial ownership statements to the Partnership (which would be available to the Service) in order to obtain reductions in U.S. withholding tax on interest and to obtain benefits under U.S. incom e tax treaties, to the extent applicable. 499055.21 -52- EFTA00310673 Foreign corporate Limited Partners should be aware that, unles activities in New York are limited solely to those within the s the Partnership's safe harbor, they may be subject to New York State corporation franchise tax and New York City general corporation tax as a result of their investment in the Partnership if the Partnership does not qualify as a "portfolio investment partnership" both for New York State and New York City purposes (Ste "State and Local Taxation"). ERISA CONSIDERATIONS THE FOLLOWING SUMMARY OF CERTAIN ASPECTS BASED UPON ERISA, JUDICIAL DECISIONS, OF ERISA IS DEPARTMENT OF LABOR REGULATIONS AND RULINGS IN EXISTENCE ON THE DATE HEREOF. THIS SUMMARY IS GENERAL IN NATURE AND DOES NOT ADDRESS EVERY ERISA ISSUE THAT MAY BE APPLICABLE TO THE PARTNERSHIP OR A PARTICULAR INVESTOR. ACCORDINGLY, EACH PROSPECTIVE LIMITED PART NER SHOULD CONSULT WITH ITS OWN COUNSEL IN ORDER TO UNDERSTAND THE ERISA ISSUES AFFECTING THE PARTNERSHIP AND THE INVESTOR General Each prospective Limited Partner which is an employee benefit plan "ERISA Plan") within the meaning 44 and subject to the provis or trust (an ions of ERISA, an IRA or Keogh Plan, should consider the matters described below in determ ining whether to invest in the Partnership. In addition, ERISA Plan fiduciaries must give appropriate among other things, the role that an investment in the Partnership consideration to, plays in the ERISA Plan% portfolio, taking into consideration whether the investment is designed reasonably to further the ERISA Plan's purposes, an examination of the risk and return factors, the portfolio's composition with regard to diversification, the liquidity and current return of the total portfolio relative to the anticipated cash flow needs of the ERISA Plan, the projected return of the total portfolio relative to the ERISA Plan's objectives and the limited right of Partners to withd raw all or any part of their capital accounts or to transfer their Interests in the Partnership. Limitation on Investments by Benefit Plan Investors The General Partner will monitor the investments in the Partnership the aggregate investment by benefit plan investors i.e. employee to ensure that benefit plans as defined in Section 3(3) of ERISA, whether or not subject to Title I of ERISA, plans described in Section 4975(eX1) of the Code, government plans, church plans, insura nce company general and separate accounts and entities the underlying assets of which includ e plan assets) does not equal or exceed 25% of the value of the Interests (other than Interests of the General Partner and its affiliates), so that equity participation by benefit plan invest ors will not be considered "significant" under applicable Department of Labor regulations, and, as a result, the underlying assets of the Partnership will not be deemed Plan assets for purpo ses of ERISA or the Code. If the assets of the Partnership would be deemed to be Plan assets of a Plan investor, the General Partner would be a fiduciary (as defined in ERISA) with respec t to such Plan and would be 499055.21 43- EFTA00310674 subject to the obligations and liabilities imposed upon fiduciaries by ERISA. Moreover, the Partnership would be subject to various other requirements of ERISA. Representations by Plans The fiduciaries of each Plan proposing to invest in the Partnership will be required to represent that they have been informed of and understand the Partnership's investment objectives, policies and strategies, and that the decision to invest Plan assets in the Partnership is consistent with the provisions of ERISA that require diversification of Plan assets and impose other fiduciary responsibilities. In particular, exempt organizations should consider the applicability to them of the provisions related to "unrelated business taxable income." (See "Tax Aspects.") ERISA Plans Having Prior Relationships with Affiliates of the Partnership Certain prospective ERISA Plan investors may currently maintain relationships with the General Partner or entities which are affiliated with the General Partner. Each of such entities may be deemed to be a party in interest to and/or a fiduciary of any ERISA Plan to which it provides investment management investment advisory or other services. ERISA prohibits Plan assets to be used for the benefit of a party in interest and also prohibits a Plan fiduciary from using its position to cause the Plan to make an investment from which it or certain third parties in which such fiduciary has an interest would receive a fee or other consideration. In this circumstance, ERISA Plan investors should consult with counsel to determine if the participation in the Partnership is a transaction which is prohibited by ERISA or the Code. ADDITIONAL INFORMATION The General Partner is available for a discussion of the terms and conditions of this offering and will provide any additional information, to the extent it possesses it or can acquire it without unreasonable effort or expense, nernsary to verify the information contained in this Confidential Memorandum. Potential investors may contact Mr. Bommer at (212) 610- 9061. 499055.21 -54- EFTA00310675