Watershed Asset Management LLC

Fees and Compensation

Management Fees and Incentive Compensation

Watershed receives compensation from its Fund clients based on a percentage of assets
under management (management fees) and WS Partners, L.L.C., the General Partner of
the Funds, receives performance-based allocations (incentive compensation) calculated
according to an agreed upon standard fee schedule. Watershed’s fee schedule is omitted
here because this brochure is being delivered only to qualified purchasers as defined in
the Investment Company Act of 1940.

Performance fees are subject to a high watermark should loss years occur. Depending on
the arrangement with the Fund client, Watershed either deducts fees from client assets or
bills the client or Fund investors, as applicable, for the fees incurred. Management fees
are generally billed or deducted quarterly and incentive compensation is generally billed
or deducted annually, or when earned or crystallized. Management fees must be paid in
advance and are not refundable. With respect to any separately managed account, fee
arrangements will be negotiated prior to the engagement of Watershed as an investment
adviser.
Clients should refer to the offering documentation for the pertinent Fund, which contains
a more complete description of such Fund’s management fee and incentive compensation
arrangements. Clients should also refer to the disclosure below under Item 6 pertaining
to the payment of performance-based fees and the conflicts of interest such fees raise.

Other Fees and Expenses Borne by Clients

In addition to management fees and incentive compensation, Watershed’s Fund clients
are responsible for paying the offering and organizational expenses, including external
legal and accounting expenses, incurred in connection with the offering of interests in the
Funds. Watershed bears the cost of all personnel, general research (except to the extent
provided through “soft dollars”), office space, office equipment, supplies and other
necessary operating, administrative and clerical services to the Funds, and all of its own
operating expenses. All other expenses are borne by the Funds, including, without
limitation, legal, accounting, auditing, administrator and other professional expenses,
insurance, transaction-related research expenses (including research consultants and
services providing analysis on investments and potential investments), custodian fees,
taxes on securities transactions, interest on borrowed monies, brokerage fees and
commissions and any other similar fees, clearing expenses, due diligence expenses
related to actual or potential investments (whether or not consummated), litigation
expenses and extraordinary expenses. Clients will incur brokerage and other transaction
costs in addition to many or all of those other expenses discussed above.
Clients should refer to the offering documentation for the pertinent Fund, which contains
a more complete description of such Fund’s fees and expenses. Clients are encouraged

to read and review carefully the disclosure under Item 12 “Brokerage Practices” set
forth below.

Types of Clients

As noted above, Watershed principally acts as an advisor to the Funds, although from
time to time, Watershed may also provide investment advisory services to a select group
of managed account clients and/or additional private funds. Should any such new
accounts be established, Watershed will endeavor to reduce any conflicts among new and
existing clients through pre-established allocation procedures. Clients must satisfy
certain criteria indicative of sophistication and capability to understand and participate in
the types of investments Watershed makes.