EFTA01084083.pdf

EMPIRE VALUATION CONSULTANTS. ac REVISED DRAFT FOR DISCUSSION PURPOSES ONLY PRIVATE & CONFIDENTIAL October 4, 2007 Carlyn McCaffrey, Esq. Weil Gotshal & Manges LLP 767 Fifth Avenue New York, NY 10153-0119 Dear Ms. McCaffrey: You have requested Empire Valuation Consultants, LLC ("Empire") to render its opinion as to the fair market value of a 24.64% limited partnership interest in AAA Associates, L.P. ("AAAALP" or the "Partnership") as of June 6, 2007 (the "Valuation Date"). It is our understanding that this valuation will be used by your client, Leon Black, for gift tax reporting purposes. This report is an Appraisal Report as defined in Standards Rule 10 of The Appraisal Foundation's Uniform Standards of Professional Appraisal Practice ("USPAP"), which specifically applies to the preparation of valuation reports of business interests. Methodology AAAALP has been valued on a going concern basis. Since the Partnership is closely-held, and thus without a public market for its ownership interests, this appraisal was conducted according to guidelines established by the Internal Revenue Service ("IRS") and USPAP, and in conformity with the American Society of Appraisers' Principles of Appraisal Practice and Code of Ethics, together with other standards that were deemed relevant to this engagement. This appraisal considered all pertinent factors outlined in USPAP Standards Rule 9 and IRS Revenue Ruling 59-60, including, but not limited to, the following: • the nature and history of AAAALP; 350 Fifth Avenue Suite 5513 New York, NY 10118 T: www.empireval.com New York Rochester West Hanford EFTA01084083 Carlyn McCaffrey, Esq. October 4, 2007 Page 2 • the financial and economic conditions affecting the general economy, the Partnership, and its industry; • the past results, current operations, and future prospects of AAAALP; • the earning capacity and dividend-paying capacity of the Partnership; • the economic benefit to the Partnership of both its tangible and intangible assets; • the market price of actively traded interests in public entities engaged in the same or similar lines of business as AAAALP, as well as sales of ownership interests in entities similar to the Partnership; • the prices, terms, and conditions of past sales of ownership interests in AAAALP; and • the impact on the value of ownership interests in AAAALP resulting from the existence of buy-sell and option agreements, investment letter stock restrictions, restrictive shareholders agreements, or other such agreements. In defining "fair market value," IRS Revenue Ruling 59-60 refers to Section 25.2512-1 of the Gift Tax Regulations. Fair market value is described therein as the price at which ownership interests would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Executive Summary As will be detailed in this report, Empire has concluded that the fair market value of a 24.64% limited partnership interest in AAAALP is reasonably stated as $53,800,000 as of June 6, 2007, for use by Leon Black for gift tax reporting purposes. Sources of Information Information used in determining the fair market value of a 24.64% limited partnership interest in AAAALP was provided by the documents and sources listed below: EFTA01084084 Carlyn McCaffrey, Esq. October 4, 2007 Page 3 • Copy of AAAALP's Amended and Restated Limited Partnership Agreement, dated June 8, 2006 (the "AAAALP Partnership Agreement"); • Copy of the First Amended and Restated Limited Partnership Agreement for AAA Investments, L.P. (the "Investment Partnership"), dated June 8, 2006 (the "Investment Partnership Agreement"); • Copy of AAAALP's audited financial statements for the period from May 31, 2006 (date of formation) to December 31, 2006; • Copy of the Investment Partnership's audited financial statements for the period from June 15, 2006 (date of commencement of operations) to December 31, 2006, as contained in the financial report for AP Alternative Assets, L.P. ("APAALP") for the period from June 15, 2006 to December 31, 2006; • Copy of the Investment Partnership's audited financial statements for the quarter ended March 31, 2007, as contained in the financial report for APAALP as of that same date; • Copy of the Investment Partnership's audited financial statements for the six months ended June 30, 2007, as contained in the financial report for APAALP as of that same date; • Copy of the Amended and Restated Limited Partnership Agreement of Apollo Investment Fund VI, L.P. ("Fund VI"), dated August 26, 2005 ("Fund VI Partnership Agreement"); • Copies of Amended and Restated Limited Partnership Agreements of Apollo Overseas Partners VI, L.P.; Apollo Overseas Partners (Delaware) VI, L.P.; Apollo Overseas Partners (Delaware 892) VI, L.P.; and Apollo Overseas Partners (Germany) VI, L.P. (together the "Co-Investing Entities"), and all dated August 26, 2005; • Copies of Management Agreements — between Fund VI and Apollo Management VI, L.P. ("AMVILP"), dated August 26, 2005; and between the Co-Investing Entities and AMVILP, dated August 26, 2005; • Copy of Quarterly Report to Investors ("QR") of Fund VI for the quarter ended December 31, 2006; EFTA01084085 Carlyn McCaffrey, Esq. October 4, 2007 Page 4 • Copy of the Private Placement Memorandum for Fund VI ("PPM"); • Projections provided by management; • Ownership schedule of Mr. Black's interests provided by the Apollo Group ("Apollo"), as of the Valuation Date; • Conversations and correspondence with John Suydam, Apollo's Chief Legal Officer; Barry Giarraputo, Chief Financial Officer for AP Alternative Investments; and Michael Gullace, Director of Special Projects; as well as attorneys from the firm of Weil Gotshal & Manges, LLP; and • Other reviews, analyses, and research as were deemed necessary. Apollo & Investment Partnership Overview Founded in 1990 by a group of four experienced investment management individuals from Drexel Burnham Lambert, the Apollo umbrella covers a variety of mainly private investment vehicles. It is considered a leading global alternative asset manager. Alongside its traditional private equity funds, Apollo also oversees distressed debt and mezzanine investing. Typically, Apollo has concentrated its investments in middle-market companies. Apollo's managing partners are Leon Black, Joshua Harris, and Marc Rowan, who have worked together for more than 20 years and, as of June 2007, led a team of over 70 investment specialists. Apollo has offices in New York, London, Los Angeles, Singapore, Frankfurt, and Paris. As of the Valuation Date, Apollo had assets under management ("AUM") of approximately $27 billion. Over time, the firm hopes to assemble a balance between its private equity and capital market funds, but as of June 2007, nearly $20 billion was concentrated in private equity. In the context of the Apollo funds, private equity funds raise pools of capital from institutional investors and high net worth individuals. These funds typically seek to acquire significant controlling ownership interests in businesses and typically invest in the common equity or preferred stock of private and sometimes public companies. Private equity funds are typically structured as unregistered limited partnership funds with terms of eight to ten years, and can contain provisions to extend the life of the fund under certain circumstances. Investors in private equity funds provide a commitment to the fund that is called by the fund as investments are made and equity capital is required. Private equity fund managers typically earn EFTA01084086 Carlyn McCaffrey, Esq. October 4, 2007 Page 5 fees as follows: (i) management fees based on the amount of invested or committed capital; (ii) transaction and advisory fees as capital is invested and portfolio companies are managed; and (iii) a carried interest based on the performance of the fund, which is often subject to a preferred return for investors, or "hurdle." Apollo's capital market funds are essentially "hedge funds."' Hedge funds are typically structured as limited partnerships, limited liability companies or offshore corporations. Hedge fund managers earn a base management fee typically based on the net asset value ("NAV") of the fund, and incentive fees based on a percentage of the fund's profits. Some hedge funds set a "hurdle rate" under which the fund manager does not earn an incentive fee until the fund's performance exceeds a benchmark rate. Another feature common to hedge funds is the "high water mark" under which a fund manager does not earn incentive fees until the net asset value exceeds the highest historical value on which incentive fees were last paid. Typical hedge fund investors include high net worth individuals and institutions. These investors can invest and withdraw funds periodically in accordance with the terms of the funds, which may include lock-up periods on withdrawals. Hedge fund managers often commit a portion of their own capital in the funds they manage to align their interests with the investors. As of March 31, 2007, the Apollo private equity funds have collectively generated a gross annual return of 41% and a net annualized return of 29%, since inception. Management was forecasting existing and targeted AUM (for both private equity and capital markets) for the end of 2007 at $43.7 billion. Over half of that amount was in play at the end of 2006. It should be noted that the return levels achieved by Apollo's funds varied significantly depending on the nature of the funds and the investments made. This valuation is for a specific minority interest, which is dependent upon the results of one fund. Therefore, the overall investment return of Apollo may not be indicative of AAAALP's returns given the current environment or of AAAALP's expected returns going forward. The Investment Partnership is the partnership through which APAALP and AAAALP make investments. These include investments in Apollo-sponsored private equity funds and capital markets-focused funds. The investments in private equity consist primary of (i) co-investments alongside private equity funds sponsored by Apollo, and (ii) purchases of secondary interests in such funds. At the Valuation Date, APAALP had a co-investment agreement with Fund VI, along with its Hedge fund is a managed portfolio that has targeted a specific return goal regardless of market conditions and can use a wide variety of different investing strategies to achieve this goal, and generally those strategies are managed and executed by a portfolio manager. EFTA01084087 Carlyn McCaffrey, Esq. October 4, 2007 Page 6 respective parallel co-investment funds. In addition to investments in private equity, the Investment Partnership invests in capital markets-focused funds, including the Apollo Strategic Value Offshore Fund, Ltd. (the "SVF Fund," a debt and equity investment fund focused on value-oriented and distressed securities), AP Investment Europe Limited (the "Europe Fund," a European mezzanine and leveraged debt investment vehicle), and Apollo Asia Opportunity Offshore Fund, Ltd. (the "Asia Fund," a vehicle focused on value driven, mezzanine and special opportunity corporate investments in the Asia Pacific region). At the Valuation Date, the Investment Partnership had some $1.7 billion invested in the SVF Fund, Fund VI, the Europe Fund, and the Asia Fund (together, the "AAA Funds"). Each of the AAA Funds will be discussed in more detail later in this report. Partnership Profile AAAALP is a Guernsey limited partnership that was formed on May 31, 2006 under the Limited Partnerships (Guernsey) Law, 1995, as amended (the "Law"). The Partnership is the general partner of the Investment Partnership, and, as of the Valuation Date, owned less than 1% of the Investment Partnership. The Partnership earns a "carried interest" on certain Investment Partnership profits. According to the Partnership's financial statements, for 2006 AAAALP generated a pre-tax loss of ($57,037) on investment income of $53,277. At the end of December 2006, the book value of AAAALP's total assets was $1.1 million and its partners' deficit was ($57,699). The Partnership did not make any distributions in 2006. However, the Partnership's position improved in 2007. Through the Valuation Date, AAAALP was allocated some $23 million related to carried interest on private equity co-investments and approximately $0.4 million was distributed to AAAALP for carried interest on realized gains on private equity co-investments. The Partnership's financial statements for 2006 are presented in Exhibits A through C. A. Partnership Ownership The Partnership's general partner is AAA MIP Limited ("AAA MIP" or the "GP"), a Guernsey limited company. According to management, Apollo Advisors VI (EH), L.P. ("VIEHLP") owns the 24.64% limited partnership interests in AAAALP.2 The Partnership's Investment Manager is Apollo Alternative Assets, L.P. ("AAALP"), a 2 According to management, Mr. Black indirectly owned a 24.64% limited partnership interest in AAAALP through his 24.64% limited partnership interest in VIEHLP. EFTA01084088 Carlyn McCaffrey, Esq. October 4, 2007 Page 7 Caymen Islands limited partnership. AAALP is also the Investment Manager for the Investment Partnership. B. Qualifications as General Partner of the Investment Partnership The Partnership has several principals. All of the principals served on numerous boards of well-known companies and were active in civic and charitable foundations. Brief descriptions of AAAALP's principals' and their qualifications are listed below. Barry Giarraputo, with Apollo since 2006: Prior to that time, Mr. Giarraputo was a senior managing director at Bear Stearns where he served in a variety of finance roles over 9 years. Previous to that, Mr. Giarraputo was with the accounting and auditing firm of PricewaterhouseCoopers LLP for 12 years where he worked in the firm's Audit and Business Services Group and was responsible for a number of capital markets clients including broker-dealers, money-center banks, domestic investment companies and offshore hedge funds and related service providers. Mr. Giarraputo has also served as an Adjunct Professor of Accounting at Baruch College where he graduated cum laude in 1985 with a BBA in Accountancy. John Suydam with Apollo since 2006: From 2002 through 2006, Mr. Suydam was a partner at O'Melveny & Myers LLP, where he served as head of Mergers & Acquisitions and co-head of the Corporate Department. Prior to that, Mr. Suydam served as chairman of the law firm O'Sullivan, LLP which specialized in representing private equity investors. Mr. Suydam serves on the boards of directors of the Big Apple Circus and Quality Distribution. Mr. Suydam received his JD from New York University and graduated magna cum laude with a BA in History from the State University of New York at Albany. C. AAAALP Partnership Agreement Provisions The following provisions of the Partnership Agreement were considered relevant to the valuation of a 24.64% limited partnership interest. Any capitalized terms below that have not been specifically defined elsewhere in this report shall have the meanings set forth in the AAAALP Partnership Agreement. • Purpose: The principal purpose of AAAALP is to act as the General Partner of the Investment Partnership (2.5). • Management: Subject to the AAAALP Partnership Agreement, the GP has complete and exclusive responsibility (i) for all management decisions to be made on behalf of the Partnership and (ii) for the conduct of the business and affairs of the Partnership, including all such decisions and all such EFTA01084089 Carlyn McCaffrey, Esq. October 4, 2007 Page 8 business and affairs to be made or conducted by the Partnership in its capacity as general partner of the Investment Partnership (5.1). • Expenses: The Partnership will pay, or will reimburse the GP for, all costs and expenses arising in connection with the organization and operations of the Partnership (5.4a). • Transfers: A limited partner ("LP") may assign to any other partner or to any Related Party of such partner all or any portion of such LP's rights to share in and receive allocations and distributions associated with such LP's Partnership share. No other transfer of any LP's interest, whether voluntary or involuntary, shall be valid or effective, and no transferee shall become a substituted LP, unless the prior written consent of the GP has been obtained, which consent may be given or withheld (6.3.) • Withdrawals: A LP holding Class Shares of any Class may request a complete or partial withdrawal at any time after the Fund GP Book Accounts, with respect to all such Classes in which the LP holds any Class Shares, have been extinguished. The GP may require any LP to withdraw at any time after the Fund GP Book Accounts, with respect to all such Classes in which the LP holds any Class Shares, have been extinguished and at such earlier time as may be consistent with the provisions of the applicable Class Designation Schedule of each Class in which the LP holds any Class Shares (6.4.) • Allocation of Profits & Losses: The GP shall designate a separate Class relating to each Fund GP Book Account by adopting a separate Class Designation Schedule, which shall be maintained with the books and records of the Partnership. The Class Designation Schedule for each Class shall specify: (1) the Fund GP Book Account to which the Class relates; (2) the number of Class Shares into which the Class is divided (or the formula or method for dividing the Class allocations and distributions into Class Shares); (3) the LPs from time to time holding the Class Shares comprising the Class; and (4) such other terms applicable to the Class and the interests of LPs therein as the GP may determine (which terms may include, among other things, vesting provisions, eligibility or service requirements or conditions, provisions for involuntary dilution or involuntary divestiture with or without cause, and requirements for the grant of consideration to the Partnership in exchange for a Class Share in the form of capital contributions, restrictive covenants or both). All items of income, gain, loss, deduction or credit derived by the Partnership from such Fund GP Book Account shall be allocated to the Class associated with such Fund GP Book EFTA01084090 Carlyn McCaffrey, Esq. October 4, 2007 Page 9 account and shall be apportioned among LPs in accordance with their Class Shares with respect to such Class. Any other net income or loss shall be allocated to the LPs in such manner as the GP may determine (3.4). • Distributions: The GP is not entitled to any allocations or distributions from the Partnership (3.2a). The GP may cause the Partnership to pay distributions to the partners at any time. Distributions of any amounts derived by the Partnership from any Fund GP Book Account shall be made to the LPs in proportion to their respective Class Shares in the Class associated with such Fund GP Book Account, determined immediately prior to giving effect to such distribution or as otherwise specified in the applicable Class Designation Schedule. Distributions to any LP of amounts relating to any Class shall be subject to reduction to reflect any items of loss or deduction allocated to such LP with respect to any other Class or any allocation to such partner of other net losses. Distributions of any amounts attributable to other net profits shall be made at such times as the GP may determine and in accordance with the manner in which such other net profits were allocated to the LPs (4.1.) • Reports: As soon as is practicable after the end of each taxable year, the GP shall furnish to each LP: (i) such information as may be required to enable each LP to properly report for U.S, federal and state income tax purposes such LP's distributive share of each Partnership item of income, gain, loss, deduction, or credit for such year; and (ii) a statement of the total amount of net profit or net loss for such year and a reconciliation of any difference between such net profit or loss and the aggregate net profits or losses allocated by the Investment Partnership to the Partnership for such year. • Term: The term of the Partnership shall continue until the dissolution (without continuation) of the Investment Partnership or the earlier of: (i) at any time there are no LPs, unless the business of the Partnership is continued in accordance with the Law; and (ii) any event that results in the GP ceasing to be a GP of the Partnership under the Law, provided that the Partnership shall not be dissolved and required to be wound up in connection with any such event if: (i) at the time of the occurrence of such event there is at least one remaining GP of the Partnership who is hereby authorized to and does carry on the business of the Partnership, or (ii) within 90 days after the occurrence of such event, a majority of the LPs agree in writing or vote to continue the business of the Partnership and to the appointment, effective as of the date of such event, if required, of one or more additional GPs of the Partnership (2.4). EFTA01084091 Carlyn McCaffrey, Esq. October 4, 2007 Page 10 Investment Partnership Profile The Investment Partnership commenced operations in June of 2006. In connection with the formation of the Investment Partnership, AAAALP made a $1.0 million cash contribution in respect of its general partner's interest. In addition, APAALP contributed approximately $1.8 billion (which, in turn, represented substantially all of the cash contributions received by APAALP upon its initial offering and related transactions). APAALP owned 100% of the limited partnership interests of the Investment Partnership as of the Valuation Date. A. Investment Strategy - AAA Funds As noted, the Investment Partnership had some $1.7 billion invested in the AAA Funds as of the Valuation Date. A brief description of each is provided below. Fund VI: Fund VI is a private equity partnership that succeeded Funds I, II, III, IV, and V. Fund VI closed in January 2006 with $10.1 billion of commitments. To date, invested capital was over $2.3 billion (in 12 classic buyout investments) with realized proceeds of $0.9 billion. The investment objective of Fund VI is to achieve long-term capital appreciation by making investments in: (1) control or influential minority equity and equity equivalent positions; and (2) debt or other securities providing equity-like returns. Fund VI seeks investments across a range of industries, markets, and regions and generally pursues individual investments ranging in size from approximately $150 million to $600 million. Fund VI uses three approaches to generate value: (1) classic buyouts; (2) distressed buyouts; and (3) corporate partner buyouts. Classic buyouts are essentially leveraged buyouts and have tended to be in: (1) situations that involved consolidation through merger or follow-on acquisitions; (2) carve-outs of larger organizations looking to shed non-core assets; (3) situations in which the seller had difficult tax or accounting goals; or (4) situations in which the business plan involved substantial departures from past practice to maximize the value of its assets. In terms of geographic orientation, without the consent of its Advisory Board, Fund VI may not invest more than 25% of its aggregate commitments in securities of issuers organized and operating primarily outside of North America. SVF Fund: The SVF Fund was formed to invest in absolute-value investment opportunities, primarily among the securities of distressed companies in North America and Europe. The fund invests in the securities of leveraged companies using three primary strategies: (1) distressed investments (primarily a long-only strategy focused on the debt securities of companies in the periods before, during, and after bankruptcy); (2) value driven investments (long and short investments that EFTA01084092 Carlyn McCaffrey, Esq. October 4, 2007 Page 11 span the capital structure of leveraged companies and seek to profit from identified catalysts that will typically develop within six to nine months from the initial investments); and (3) special opportunities (primarily a long only strategy focused on control opportunities and illiquid securities). At the end of 2006, the SVF Fund had investments in securities with a fair value of approximately $553.8 million. By type, about half of its investment portfolio was invested in corporate debt, with the remainder split between bank loans and common stock. Most (i.e., some 85%) of the investment portfolio was invested in North American companies, and distributed over several industries. Since inception, the SVF Fund has generated a 22.9% gross annualized return and a 16.0% net annualized return. Asia Fund: The Asia Fund is a private equity partnership that seeks to generate attractive risk-adjusted returns across market cycles by capitalizing on investment opportunities in the Asian markets. This fund primarily invests in the securities of public and private companies in need of capital for acquisitions, refinancings, monetization of assets and distressed fmancings, among other special situations. The Asia Fund commenced operations in December of 2006 with $200.0 million of committed capital from Apollo Alternative Assets, LP. and made its first investment in February of 2007. Since its inception, the Asia Fund had generated a 33.6% gross annualized return and a 24.4% net annualized return. Europe Fund: The Europe Fund is a limited liability Guernsey incorporated investment company that commenced operations in July 2006 with $250 million in invested capital from APAALP. This is a capital markets fund that invests in mezzanine, debt, and equity investments of both public and private, companies primarily located in Europe (although the Europe Fund had a significant portion of its portfolio invested in North American companies at the Valuation Date). This fund seeks to generate current income and capital appreciation. As of the Valuation Date, about half of the Europe Fund's investments were in the form of bank loans, with the remainder in notes receivable and corporate debt, and allocated across a spectrum of industries. From its inception, this fund had generated a 17.8% gross annualized return and a 12.0% net annualized return. B. Economic Structure The economic structure of the Investment Partnership is outlined below, based on the terms set forth in the Investment Partnership Agreement. Any capitalized terms below that have not been specifically defined elsewhere in this report shall have the meanings set forth in the Investment Partnership Agreement. EFTA01084093 Carlyn McCaffrey, Esq. October 4, 2007 Page 12 • Management Fees: Paid to AAALP rather than to AAAALP. AAAALP is paid an incentive allocation as described later in this section. • Investment Pools & Book Accounts: The Investment Partnership maintains a series of memorandum accounts referred to as Investment Pools to reflect, on a segregated basis, the assets, liabilities, and investment results, of: (i) each investment in an Apollo Fund; (ii) each series of Co-investments made pursuant to a single Committed Co-investment Facility; (iii) each Additional Investment; and (iv) all Temporary Investments. For each Investment Pool, the Investment Partnership shall maintain for each partner a memorandum account referred to as a Book Account to reflect such partner's financial participation in the investment results of such Investment Pool. A separate new Investment Pool shall be established whenever the Investment Partnership: (i) enters into a new Committed Co-investment Facility: (ii) makes a new additional investment; (iii) makes a new commitment to any Apollo Fund that requires investors to make capital commitments; or (iv) makes a new purchase of equity interests in any Apollo Fund that does not require investors to make capital commitments. Whenever a new Investment Pool is established, a new Book Account and a Pool Share shall be established for each partner with respect to such Investment Pool. When all investment positions in an Investment Pool have been liquidated and all investment operations to be conducted therein have been completed, such Investment Pool and the Book Accounts associated with such Investment Pool shall be closed. Any balances remaining in any such Book Account of a partner at that time shall be transferred to such partner's Temporary Book Account (3.4). • Incentive Allocation or "Carried" Interests: Each investment that is made by the Investment Partnership is subject to one carried interest, which will generally entitle an affiliate of Apollo to receive a portion of the profits generated by the investment. There will not be any duplication of carried interest on a given investment. In particular: EFTA01084094 Carlyn McCaffrey, Esq. October 4, 2007 Page 13 1) Private Equity Fund Investments: The general partner of each Apollo- sponsored private equity fund in which an investment is made is generally entitled to a carried interest that will allocate to it 20% of the net returns generated by the fund after capital contributions in respect of realized investments and expenses have been returned to limited partners and subject to realized gains and losses of portfolio investments will not be netted across funds and each carried interest will apply only to the results of an individual fund. 2) Co-investment Facilities: AAAALP as the general partner, is generally entitled to a carried interest that will allocate to it 20% of the realized gains on each co-investment made pursuant to a co-investment facility (such as the agreement with Fund VI) after capital contributions in respect of realized investments made pursuant to that co-investment facility have been recovered. The general partner's carried interest in respect of each investment made pursuant to the co-investment agreement with Fund VI is subject to the Investment Partnership first achieving a preferred return of 8% per annum on the capital invested pursuant to the agreement. Once such preferred return has been achieved, the general partner will be entitled to the next 2% (25% of 8%) of net realized gains and, thereafter, such gains will be allocated as 80% to the Investment Partnership and as to 20% to AAAALP. Realized gains and losses on investments made pursuant to one co-investment facility will not be netted against other co-investment facilities in future Apollo private equity funds. 3) SVF Fund: An affiliate of Apollo will be entitled to a carried interest for each year amounting to 20% of any appreciation in net asset value, subject to first making up any losses carried forward from prior years other than losses attributable to capital that the Investment Partnership withdraws from the SVF Fund after losses were incurred. 4) Europe Fund: An affiliate of Apollo will be entitled to receive a performance-based incentive fee in respect of the Europe Fund. The general partner will be entitled to receive a carried interest in respect to Apollo Investment Corporation ("AIC") Co-investments. The fee for the Europe Fund and the carried interest for AIC Co-investments is calculated in two parts: the first payable quarterly and calculated as 20% of the investment income (excluding any realized capital gain) on investments of the Europe Fund or AIC Co-Investments (as the case may be), subject to a preferred return of 7% per annum (with a full catch-up) and the second payable annually and calculated as 20% of the realized capital gains of the Europe Fund or AIC Co-investments (as may be the case) and in each case EFTA01084095 Carlyn McCaffrey, Esq. October 4, 2007 Page 14 net of realized capital losses and unrealized capital depreciation. The performance of the Europe Fund will not be netted against the performance of AIC Co-investments. 5) Asia Fund: For an interim period, an affiliate of Apollo will be entitled to a carried interest that will allocate to it 20% of the realized returns of returns on each investment made by this fund. Realized gains and losses on one such investment will not be netted against any other such investments. If and when significant third party investors are admitted to the aforementioned fund, it is anticipated that the carried interest payable in respect of investments made by such fund will be subject to change. 6) Additional Investments: The general partner is generally entitled to a carried interest that will allocate to it 20% of the realized returns of each of the additional investments made by the Investment Partnership. Realized gains and losses on an additional investment will not be netted against any other additional investments. The general partner will not be entitled to a carried interest in respect to temporary investments (3.5). • Operating Expenses: The Investment Partnership shall pay all costs and expenses arising in connection with its operations (4.3). • Withdrawal: AAAALP, as the general partner, may withdraw from the Investment Partnership only with the prior written consent of the APAALP and upon AAAALP's appointment of a replacement general partner that agrees to assume the rights and undertake the obligations of AAAALP under the Investment Partnership Agreement. The general partner may voluntarily withdraw any portion of its interest attributable to the general partner's Incentive Allocations at any time (5.5). • Term: The Investment Partnership shall be dissolved upon the first to occur of the following: (i) the bankruptcy, insolvency, dissolution or liquidation of AAAALP; (ii) the election of AAAALP and the consent of the APAALP; or (iii) the dissolution or liquidation of APAALP (or the making of a definitive determination to initiate such a dissolution or liquidation). In the event of the bankruptcy, insolvency, dissolution or liquidation of AAAALP, the Investment Partnership shall not be dissolved if, within 90 days of the date of such bankruptcy, insolvency, dissolution or liquidation, the remaining partners agree in writing to the continuation of the Investment Partnership's business and a new general partner that is an affiliate of AAAALP or the Investment Manager (i.e., AAALP) assumes the rights and undertakes the obligations of AAAALP (6.1). EFTA01084096 Carlyn McCaffrey, Esq. October 4, 2007 Page 15 C. Financial Position & Summary of Investments As of March 31, 2007, the Investment Partnership's investments had a fair value of $1.3 billion, net assets were $2.0 billion, and partners' capital was $1.8 billion. By the Valuation Date, the fair value of investments was closer to $1.7 billion. The Investment Partnership's total annualized return for 2007 (through the Valuation Date) was approximately 20%. As can be seen in Exhibit D, as of March 31, 2007, just under half of the investment portfolio was invested in the SVF Fund, 27.9% in the Europe Fund, 17.5% in Fund VI, and 5.2% in the Asia Fund. Between March 31, 2007 and the Valuation Date, the Investment Partnership's portfolio had shifted so that close to a third of its investments were in Fund VI. Below is a brief description of the Investment Partnership's co-investments and commitments as of May 18, 2007, as taken from the APAALP March 31, 2007 financial statements. Table I Investment Partnership's Investments Company Name Company Description Berry Plastics Group, Inc, One of the world's leading manufacturers and suppliers of value-added plastic packaging products. CEVA Logistics Formerly TNT Group's logistics division which employs approximately 38,000 transportation people. operates in 26 countries and manages 7.4 million square meters of warehouse space. Countrywide plc The leading provider of residential real estate services in the UK. The company has a leading market position in all of its business areas in the UK with the number one market share in residential property sales, residential property lettings and property management, arranging mortgages, insurance and related financial products, surveying and valuation services for mortgage lenders and prospective homebuyers, and residential property conveyance services. Jacuzzi Brands A global leader in whirlpool baths, outdoor spas and shower products marketed under the Jacuzzi Sundance Spas, Bathcraft, and Astracast brands. Upon the completion of Apollo's investment in Jacuzzi Brands, the Zurn business unit of Jacuzzi Brands was acquired by Rexnord Corporation. Momentive Performance Materials Formerly General Electric's advanced materials Holdings, Inc. division, which manufactures silicone-based products (including sealants, urethane additives, and EFTA01084097 Carlyn McCaffrey, Esq. October 4, 2007 Page 16 Company Name Company Description adhesives), high-purity fused quartz and ceramics materials, and employs over 5,000 people worldwide. Noranda Aluminum A vertically integrated producer of commodity grade primary aluminum as well as high quality rolled coils. Through a 50/50 joint venture with Century Aluminum, Noranda owns a bauxite mine in Jamaica and an alumina refinery in Gramercy, LA. Gramercy supplies alumina (primary input to make aluminum) to Noranda's 100% owned aluminum smelter in New Madrid, MO, which produces 10% of North America's primacy aluminum production. Through four world-class rolling mills, Noranda produces 22% of North America's aluminum foil and light gauge sheet. Noranda's target markets are in the U.S. and Mexico. Oceania Cruises A leading cruise line focused on the destination- oriented, upper premium cruise market. Oceania owns three 684-berth vessels and offers itineraries in the Mediterranean, Far East, South America, the Caribbean, Australia and New Zealand. Realogy Leading provider of residential real estate and relocation services in the world. Through its portfolio of leading brands (Coldwell Banker, Century 21, Sotheby's International Realty, ERA, Corcoran Group and Coldwell Banker Commercial), Realogy is the world's largest real estate brokerage franchisor and the largest U.S. residential real estate brokerage firm. Realogy is also the largest U.S. provider and a leading global provider of outsourced employee relocation services, as well as a provider of title and settlement services. Rexnord Corporation A leading diversified, multi-platform manufacturer of highly-engineered products primarily focused on the power transmission and water management sectors. Concurrent with Apollo's investment in Jacuzzi Brands, the Zurn water management business unit of Jacuzzi Brands was acquired by Rexnord Verso Paper Holdings, LLC Formerly International Paper's coated papers division, which produces annually approximately 2 million tons of coated freesheet and coated groundwood papers for the magazine, catalog and retail insert markets. Harrahs Entertainment, Inc. One of the premier gaming and lodging companies in the world, with a #1 or #2 share in each market in which it competes. The company owns, operates, EFTA01084098 Carlyn McCaffrey, Esq. October 4, 2007 Page 17 Company Name Company Description or manages 56 casinos in eight countries, representing approximately 40,000 hotel rooms and 3 million square feet of casino gaming space under the Harrah's, Caesars, Horseshoe and Bally's brand names, among others. Economic, Industry & Company Outlook In the appraisal of any company, the general economic factors prevailing at the valuation date, as well as those foreseen then, must be considered. Assimilation of these facts and forecasts provides insight into the economic climate in which investors are dealing. Although individual factors may or may not have a direct impact upon a particular industry, the overall economy and its outlook have a strong influence on how investors perceive investment opportunities. A. General Economy For this analysis, the general economic climate that prevailed through the second quarter of 2007 was considered, as was the outlook for the domestic economy. This section of the report contains an overview of selected economic factors, such as gross domestic product ("GDP"), inflation, and U.S. monetary and fiscal policy. The Value Line forecast closest to the Valuation Date was utilized, as it was considered to be most reasonable. In its Quarterly Economic Review, dated May 25, 2007, Value Line maintained that the economy was on a slow yet sustainable growth path that should see the nation's GDP increase by an average of little more than 2% over the next several quarters. A modestly stronger pace of business activity was then likely to take hold in 2008. Value Line believed the possibility of a recession remained, but that the odds of such an occurrence were remote. The principal risks included a series of missteps by the Fed, resource bottlenecks stemming from high factory utilization rates, an increase in inflation, a sustained rise in energy prices, or deterioration in the global arena. The economy slowed abruptly in the past year, with the rate of growth declining from a high of 5.6% in the first quarter 2006 to just 1.3% in 2007's first quarter. However, supported by increases in the rates of manufacturing activity and industrial production and a likely increase in non-residential construction spending, Value Line expected growth to return to the 2% range for the remainder of 2007. GDP growth of 2.5% to 3.0% was then expected for 2008. This forecast assumed that the Fed would vote for between one and three interest rate cuts, that the auto EFTA01084099 Carlyn McCaffrey, Esq. October 4, 2007 Page 18 market would enjoy somewhat stronger demand, and that both the consumer and capital goods sectors would stabilize at comfortable levels. In addition, housing would no longer be a drag on the economy, oil prices were expected to hold near then-current levels, and global events would be neither supportive nor disruptive, on balance. According to Value Line, the rate of inflation should gradually decline, with the core rate stabilizing at approximately 2%. In 2006, producer prices rose 2.9% versus a gain of 4.9% in 2005, while consumer prices rose 3.2%, down from 3.4% in 2005. Producer prices were expected to increase by 4.8% in 2007, and consumer prices were expected to increase by 3.5%. The change in industrial production was estimated to be 1.9% in 2007, and was expected to average 2.6% from 2008 through 2011. While the Fed opted to leave interest rates unchanged at its May Federal Open Market Committee meeting, Value Line expected the Fed to vote for interest rate cuts over the next year. The three-month Treasury bill rate was 4.9% at the publication date and was expected to increase slightly to 5.0% in the second quarter of 2007. The Prime Lending Rate was 8.25% at the publication date and was forecast to fluctuate between 7.9% and 8.5% through 2011. Value Line believed that the Fed would maintain a stable monetary policy. With regard to corporate earnings, Value Line thought earnings were up 5% to 10% in the first quarter of 2007, and that gains near that level would continue for the year despite the expectation that GDP may not rise by more than 2.0%. A similar rate of earnings improvement was forecasted for 2008. In sum, Value Line was forecasting real, inflation-adjusted GDP to rise at a rate of 2.0% for all of 2007. Longer-term projections called for real GDP growth to increase from 2.6% in 2008 to 3.3% in 2011, based on assumptions that oil prices would decline, that the Fed would maintain short-term interest rates at relatively constant levels through 2011, and that ther