CGNFIDENTIAL LEHMAN BROTHERS

MEMORANDUM

To:

Special Situations Investment Committee

As of 1122101

Committee Members

Steven L'Berkenfeld (19)

Joseph M. Gregory (Co-Chairman) (10) Theodore P. Janulis (9)

Allan S. Kaplan (16)

Ian T. Lowitt (24)

Herbert H. McDade, III (9) Robert B. Millard (11) Maureen J. Miskovic (10) Roger BiNagioff (London-d)

'\t

Michael J~ Odrich (18)

James A. Rosenthal (Co-Chairman) (10) Robert S: Shafir (6)

Steven B. Wolitzer (18)

Paul G. Zoidis (18)

Committee Secretary

Jeffrey Welikson (27-1 WFC) 2 Copies

cc: Lance F. Bylow (15) (full copy) Scott 1. Freidheim (10) (full copy) David Goldfarb (10)

Edward S. Grieb (7)

Martin H. Kurtz (15) (full copy) Andrew J. McElaney (15) (full copy)

FROM:

Kyle Miller George Fraser

MEETING DATE: March 9, 2001

SUBJECT:

LEH ASSET-BACKED CONDUIT

Please call Kyle Miller (5-2012) for additional information

Table of Contents

I. Executive Summary

Il, Summary of Terms and Conditions: LEH/IBEX Alliance

III. Equity Valuation: IBEX Capital Markets

IV. December 2000 FID Executive Committee Presentation (Excerpt)

V. IBEX Due Diligence Analysis

LEHMAN BROTHERS

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PURPOSE

The Conduit Finance Group ("CFG"; FID business headed by Kyle Miller and formed under Global Structured FinanceBill Lighten) seeks approval from the Special Situations Investment Committee to (i) form an Asset-Backed Conduit (a "Conduit"), (ii) make certain direct and contingent credit and liquidity investments into the Conduit, (iii) make a strategic equity investment in a management company (the "Management Company") which will control the business activities of, and provide administrative and operational support to, the Conduit, and (iv) charge CFG with the responsibility of overseeing the Management Company and serving as the internal and external "gatekeeper" for all business activities conducted by the Firm with the Management Company and the Conduit.

CFG believes the Firm has a unique opportunity to participate in the Asset-Backed Conduit Market. Through this Conduit proposal, CFG believes the Firm can achieve the following:

D Gain a new business development tool which can complement the Firm's existing structured finance expertise and equip FID and IBD bankers with a third party balance sheet which can be leveraged to provide competitive lending solutions to core clients.

D Gain a new financing structure which will have more favorable all-in financing costs (funding, cash capital, balance sheet) to bankers than is currently available internally.

D Gain a new financing structure which will have minimal impact on the Firm's overall liquidity management profile, including corporate-level borrowing capacity.

D Gain a new financing structure which can fund most collateral types across businesses and geographies within the Firm.

D Gain a new financing structure which will maximize the Firm's "control" over the Conduit's activities without jeopardizing the off-balance sheet accounting treatment the Firm seeks under current and proposed consolidation accounting rules.

D Gain a new financing structure which will be least obtrusive to the Firm in terms of (i) current and future human resource commitment, particularly relating to systems/back-office personnel required to administer the Conduit, (ii) current and future financial resource commitment, particularly relating to operating the Conduit, and (iii) any adverse financial and relationship impact which a Conduit could have on existing client business the Firm transacts with "competitors" of LEH' s Conduit.

D Gain a new financing structure which will minimize the Firm's start-up costs and timing of entering the Conduit market.

D Gain a new financing structure which will minimize the Firm's "moral obligation" to support the Conduit and minimize the Firm's "headline" risk in the transaction.

Specifically, CFG recommends that LEH enter into a strategic alliance with IBEX Capital Markets, Inc. ("IBEX"), a Boston-based Conduit Management company formed in 1996, whereby (i) the Firm will make a strategic equity investment in IBEX which will provide LEH with effective "control" over IBEX and the Conduit and (ii) IBEX will form, sponsor, manage and administer one or more Conduits which LEH will exclusively use to provide financing to its clients. The proposal outlined in this Memorandum has been approved by IBEX's Board of Directors and IBEX is prepared to enter into a strategic alliance with LEH under the terms outlined in the attached Summary of Terms and Conditions (see Section II).

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DESCRIPTION OF AN ASSET BACKED CONDUIT

A Conduit is a nominally capitalized ($10,000 in equity) unregulated, independent (off-balance sheet) limited-purpose finance company or fund which generally acquires high-quality, diversified asset portfolios from multiple counterparties and finances the portfolios through the issuance of highly rated short-term and term debt. Most commonly, Conduits are established to achieve an accounting, tax and/or regulatory arbitrage or to create highly leveraged returns against a diversified portfolio of assets. Since 1995, assets under management in the Conduit market have increased from $100 billion to the current level of over $650 billion. The key driver to this remarkable growth rate has been the aggressive use of Conduits by US, European, Canadian and Asian commercial banks to (i) provide asset-based financing to their clients off-balance sheet, (ii) remove 100% risk-weighted assets from their balance sheet and (iii) accumulate floating rate investment portfolios off-balance sheet - in many cases, commercial banks have been able to fund these transactions through Conduits they sponsor (as such, the Conduit "Sponsor") at less than 10% of the regulatory capital which would be required for financing these activities on balance sheet (although the cost of funding through a Conduit is comparatively higher for a commercial bank). Today, 50 of the top 100 commercial banks in the world have established Conduits, including Citigroup (over $55 billion in AUM), Bank One (over $36 billion in AUM), Bank of America (over $33 billion in AUM), and JP Morgan Chase (over $33 billion in AUM).

Conduits are generally structured to very high investment grade credit rating standards in order to achieve the most efficient funding and appeal to the broadest fixed income investor base. Most Conduits carry short-term credit ratings of at least A-I from S&P and Prime-I from Moody's and long-term credit ratings of at least AA from S&P and Aa2 from Moody's (occasionally, F-I and AA credit ratings are obtained from Fitch in addition to, or in lieu of, an S&P or Moody's credit rating). The credit ratings of a Conduit are generally based on (i) a legal analysis of the independence and bankruptcy-remoteness of the Conduit (from that of the Sponsor and any seller of assets into the Conduit), (ii) the credit quality of the assets acquired by the Conduit, (iii) the amount and credit quality of any credit and/or liquidity support provided to individual transactions and to the Conduit, and (iv) the operational capabilities of any parties providing portfolio servicing/administration to the Conduit. Since most Conduit Sponsors establish Conduits to achieve a regulatory, accounting and/or funding arbitrage and seek to maximize their portfolio returns, few Conduit structures transfer meaningful credit risk to third parties.

Conduit financing facilities work similar to traditional asset-based revolving credit facilities with one principal distinction. Conduit facilities are structured to an implied investment grade credit rating standard and must meet fairly rigid rating agency structural requirements (including rating agency pre-review prior to purchase by the Conduit) designed to isolate the credit risk of the borrower from that of the collateral. For this reason, Conduit transactions typically afford better protection to lenders than traditional secured revolving credit facilities.

In order to achieve the "AA" credit rating, the typical capital structure of a Conduit is as follows:

o First-loss credit protection (i.e., the "equity") for each transaction sold into a Conduit is provided on a dealby-deal basis by the seller or transferor of the assets into the Conduit through either overcollateralization or direct seller recourse (provided the seller is at least "A" rated). The sizing of the first-loss credit protection is typically determined by the structuring advisor for the transaction and presented to the rating agencies for approval and, if necessary, modification.

The first-loss credit protection is typically structured to an implied "A" rating standard (first-loss credit protection is deal specific and is not cross-collateralized across portfolios). First-loss credit protection is typically at least 5% of the portfolio size but is formulaic based on, among other things, historical losses and obligor concentrations in the portfolio.

o Second-loss credit protection is a fungible layer of credit support provided directly to the Conduit and is available to cover credit defaults occurring in any portfolio sold into the Conduit but only after the first-loss credit protection for the specific transaction has been fully utilized. Second-loss credit protection is determined by the rating agencies based on a portfolio-wide analysis of all the assets/transactions sold into the Conduit (including the first-loss credit protection for those portfolios) and is generally 8%-10% of the aggregate assets under management in the Conduit.

Second-loss credit protection, which is typically provided by the Conduit Sponsor, elevates the credit quality of the Conduit's assets from implied "A" to at least "AN'. Historically, second-loss credit protection is rarely, if ever, drawn in the Conduit market since portfolio-specific triggers in transactions result in the

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winddown/amortization of the transaction when first-loss credit protection is initially drawn. Several Conduit Sponsors have sold down a significant portion of the risk of the second-loss credit protection in their Conduits to monoline insurance companies.

D The third-loss credit exposure in a Conduit is borne by the senior debt holders/lenders to the Conduit. In the history of the Conduit market, no senior debt holder to a Conduit has ever incurred a credit loss on their investment.

The underlying assets of a Conduit are typically long-term (greater than one year) in maturity (amortization), therefore, funding a Conduit's assets in the short-term capital markets (to maximize returns) requires a traditional backstop liquidity facility to cover the maturity mismatch between the Conduit's assets and liabilities. Rating agencies require that Conduit liquidity facilities be provided by institutions which are rated at least as highly as the short-term credit ratings of the Conduit (at least A-I and Prime-I) and generally in an amount equal to 100% of the Conduit's outstanding commercial paper. If these liquidity facilities are properly structured, current BIS risk-based capital regulations allow commercial banks to book these liquidity lines as 0% risk-weighted assets (this explains the regulatory capital arbitrage which Conduits convey to banks - converting 100% risk-weighted credit facilities into 0% risk-weighted liquidity facilities). Historically, commercial banks have under priced the risk of these liquidity facilities and have created a funding arbitrage for their clients in the short-term capital markets, explaining why Conduits fund the vast majority of their assets inside of one year - commercial paper and short-dated medium-term notes.

Consolidation accounting rules have historically and will, in the future, continue to play an integral role in the securitization market. A critical aspect of the consolidation analysis for a Conduit revolves around control of the business activities and decision making of a Conduit. The most favorable Conduit construct under current and proposed consolidation accounting rules is one in which control of the activities of a Conduit resides with a substantially capitalized third party who is not, in turn, controlled by the party who directly or indirectly benefits from the financing of assets in the Conduit. Currently, the convention in the market is for the Conduit Sponsor to effectively control the activities of their Conduit through an administration agreement - this approach is under scrutiny under the FAS #140 proposed accounting rules changes. Several independent Management Companies have recently emerged in the Conduit market to provide the construct for circumventing critical control provisions of consolidation accounting rules; unfortunately, few of these entities qualify as substantially capitalized third parties.

LEH MOTIVATIONS FOR FORMING A CONDUIT

Industry consolidation trends, coupled with the aggressive use of credit by commercial banks to "tie-in" investment banking business, is placing enormous pressure on traditional investment banks to participate in bank lending facilities in order to preserve and grow their existing banking and fixed income franchises. Increasingly, capital commitments are being weighed more heavily by issuers in awarding securities underwriting mandates than an underwriters' structuring and distribution expertise. To effectively compete under this new market paradigm, commercial banks and investment banks are aggressively seeking the most capital efficient means of extending credit and Conduits appear to be critical to their strategy. Given the Firm's comparatively smaller balance sheet and lower credit ratings, a Conduit would provide LEH with a highly capital-efficient, non-consolidated "balance sheet" which can be strategically leveraged to competitively finance client transactions in the capital markets.

Historically, the Firm has been reluctant to establish a Conduit for the following reasons:

D The Firm has been able to maintain its leadership in underwriting asset and mortgage-backed transactions (top 3) by delivering superior product solutions and distribution; any secured financing to support the Firm's structured finance agenda has been executed through the Principal Finance Group ("PFG", formerly GABLE) as part of that group's broader platform (acquisition financing).

Through consolidation, the vast majority of the Firm's competitors in the structured finance sector now have access to a Conduit (and are aggressively tying Conduit financing into term underwriting lock-ups) and the PFG model is less effective at competing (cost and balance sheet capacity) on traditional warehouse financing transactions.

D The Firm is a leader (16% market share) in distributing commercial paper and medium-term notes on behalf of most of the largest Conduit operators in the market, grossing in excess of $40 million per annum in fees. If

LEHMAN BROTHERS

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the Firm is perceived to be competing with this client base by establishing its own Conduit, this high-return annuity stream could be at risk.

CFG, which has managed the client side of this business internally, believes the economic downside with our Conduit client base can be mitigated with a properly controlled roll-out strategy of the LEH Conduit internally and externally.

o The commercial paper market has proven to be the most cost-effective funding source for Conduits. As noted above, Conduit commercial paper programs have historically required 100% backstop liquidity facilities from highly rated counterparties to cover potential mismatches between asset and liability maturities. Historically, the Firm has not had the appropriate short-term credit ratings (at least A-I and P-l), liquidity profile or risk appetite to assume the refinancing risk inherent with commercial paper. Furthermore, it has not been prudent for the Firm to tie-up counterparty lines with commercial banks (in lieu of the Firm directly writing the liquidity lines) to finance these off-balance sheet activities.

Over the past 18 months, CFG has developed a number of new financing instruments for the Conduit market that reduce/transfer the refinancing risk of short-term debt to third-parties for up to one year and which can be integrated into a LEH Conduit without cannibalizing the Firm's counterparty lines with critical lenders to the Firm.

CONDUIT USES AND APPLICATIONS AT LEH

A Conduit will have several important applications within the Firm as a global new business development tool and a more cost effective (all-in) funding structure for existing financing positions at the Firm. The operating strategy for the Conduit will be to strategically tie Conduit financing facilities into broader FID and lED initiatives with target market accounts. Similar to any credit extension at the Firm, each transaction purchased and funded in the Conduit will (i) finance collateral types where the Firm has acknowledged expertise in the underlying asset class and/or rely on direct recourse to a counterparty approved by Corporate Credit and (ii) have at least one viable exit strategy such that the Conduit will never be the "lender of last resort" in any transaction.

The most practical immediate use of a Conduit at the Firm will be to provide bridge and/or warehouse financing to clients in advance of a permanent capital markets take-out which LEH would expect to lead manage. Examples of bridge or warehouse financings include the following:

o Secured financing lines for frequent ABS/MBS issuers to (i) fund the "ramp up" of their portfolio (building critical mass) prior to a term securitization, (ii) provide quarter-end/year-end balance sheet management during periods of term spread/market volatility and (iii) fund seasonal borrowing needs. These warehouse facilities in general could be as short in duration as 1-2 months and as long as 6 months to 1 year; however, with certain frequent issuers the warehouse-to-term process is continual so the line would become a revolving evergreen facility.

o Secured financing lines for CDO portfolio managers to provide funding during the portfolio accumulation phase in advance of a term CBO/CLO. These warehouse lines would probably mirror the execution timing of a CDO (3-6 months).

o Secured financing lines to an lED corporate finance client to bridge finance a component of a merger, acquisition or other form of leverage financing prior to more permanent financing in the debt or equity markets. This form of bridge financing could be short term (3 months) or long-term (l year) term in nature depending upon market conditions for the existing strategy.

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In each of the examples described above, the Conduit would acquire and finance the underlying assets and (never touch LEH's balance sheet) and the transaction would be structured in all cases, where possible, as a securitization and, if not possible, a secured loan with appropriate structural protections/triggers. It is expected that commitments to provide the types of Conduit bridge/warehousing financings described above would be conditioned upon tying LEH into other more significant revenue opportunities with the client.

For illustrative purposes, the following provides an example of a typical transaction which will be executed in the LEH Conduit:

Warehouse Financing Transaction-Fleet Financing for Avis Rent A Car

:----- Avis Rent A Car

1

1

Retains Subordinate I

Interests in Reet Portfolio: Transfers Eligible 1 consistent with implied 1 Vehicles (Finance and 1 BBB credit rating 1 Operating Leases :

(overcollateralization) : 1 1

: ,----t------L---,

1 1 1 Enhances credit quality

~ - - - - - --j 1 of Fleet Portfolio from

1 1 "BBB" to "AA"

: LEH Conduit ~----------

1 1

1 1

1 1

----;-------f---~

1 1

Finances Collateral 1 1

Purchase the Issuance ! I

of Short-Term : :

1 1

1--- -y--- - __ ...1~ ---,

1 1

1 1

1 1

: Investors :

1 1

1 1

1 1

----------------~

• Avis seeks fleet financing to meet seasonal demand and approaches LEH for a 90 day facility. LEH negotiates a term lock-up on future Term ABS underwriting with A vis as a condition to the financing.

• Avis transfers eligible fleet to the Conduit as collateral for the facility - the facility is structured as a securitization, thereby isolating Avis' solvency risk from the credit quality of the underlying collateral.

• Avis transfers collateral in the amount of 110% of the borrowing base and retains a subordinated interest in the 10% overcollateralization. The overcollateralization level is consistent with an implied BBB rating standard.

• In order to elevate the collateral pool from BBB to AA (rating at which the Conduit finances its liabilities). the Conduit will have the benefit of additional credit protection through the second-loss credit tranche which will initially be held by LEH.

• The Conduit finances the collateral by issuing short-term debt.

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The types of collateral that CFG would envision the Conduit acquiring for warehouse/bridge financings are asset types in which the Firm has dedicated professionals to monitor and model the performance characteristics across issuers including the following:

,/ Residential mortgages ,/ High yield loans
,/ Home equity loans ,/ Aircraft leases
,/ Home improvement loans ,/ Motorcycle and sport vehicle loans
,/ Manufactured housing contracts ,/ Utility stranded costs
,/ Credit card receivables ,/ Tax liens
,/ Automobile loans and leases ,/ Recreational vehicle loans
,/ Unsecured consumer loans ,/ Catastrophe reinsurance
-r Commercial bank loans (CLOs) ,/ Franchise receivables
,/ Student loans ,/ Lottery winnings and court settlements
,/ Equipment and computer leases ,/ Trade receivables
,/ Structured securities (ABS/MBS) ,/ Rental vehicles
,/ Whole business securiiizations Another important use of the Conduit will be to more efficiently finance transactions in which the Firm intends to make (or has previously made) a direct credit investment. Examples of this form of financing in the Conduit would include certain secured (PFG/Leverage Finance) and unsecured (high-yield/high-grade loan take-downs) loans which are currently financed on balance sheet. In these examples, the Conduit would either acquire the asset directly from the borrower or LEH and fund in the capital markets. Any asset acquired directly from LEH or LEH's clients with at least 3% first-loss credit protection could achieve off-balance sheet treatment for the Firm. Depending upon the structure of the transaction, CFG believes the Firm could achieve significant funding cost savings (including cash capital) and, potentially, balance sheet relief by using a Conduit; however, credit risk (beyond the first-loss) would most likely initially reside with LEH.

A final use of the Conduit will be to provide more permanent financing (1-2 years) as an accommodation to core clients where LEH can earn acceptable returns and all risk in the portfolio is borne by the seller/originator of that portfolio. For instance, in the Conduit market there are a number of highly rated institutions who would prefer to "rent-a-Conduit" rather than establish their own vehicle (due to insufficient portfolio size or to maintain anonymity). This is particularly prevalent among financial institutions who have used Conduits to finance high-grade securities portfolios and high-grade and middle market corporate loan portfolios (balance sheet management). In these transactions, the financial institution will generally write an unconditional put for the par value of the assets and the only risk the Conduit bears is performance risk under the put to an A-I (or higher) and P-l rated financial institution.

In all circumstances described above, the Conduit operating strategy will be more re-active to clients than pro-active; the intent is not to build Conduit volume for volume's sake but to enhance target market client relationships and grow LEH's market and revenue share in FID and IBD. With this in mind, CFG believes LEH's Conduit volume within 24 months could reach $15-$20 billion.

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CFG RECOMMENDA nONS

Recommended Conduit Structure

CFG recommends that the LEH Conduit be structured as follows:

o Seek to obtain short-term credit ratings for the Conduit of A-I from S&P and Prime-I from Moody's and long-term credit ratings of at least AA from S&P and Aa2 from Moody's. CFG will also explore the possibility of obtaining a short-term credit rating of F-I and long-term credit rating of AA from Fitch in lieu of either S&P or Moody's ratings if doing so would result in more favorable economics to the Firm. Regardless, longer-term CFG recommends that LEH establish a second Conduit which is rated by one of S&P or Moody's and Fitch to provide more flexibility to the Firm's clients.

o Require that each transaction financed in the Conduit is (i) structured to at least an implied BBB credit rating standard with at least 3% first loss credit protection provided either by the seller/originator of the portfolio or an acceptably rated third party (other than LEH) or (ii) fully wrapped by a counterparty which is rated at least as highly as the ratings of the Conduit's liabilities (which may include LEH).

o Structure the second-loss credit protection to be available to cover credit defaults on any transaction in the Conduit but only after the first-loss credit protection for the transaction has been fully utilized; provided that, the second-loss protection will not be required to cover any credit defaults relating to transactions/assets which are explicitly rated at least AAI Aa2.

Depending upon the credit ratings of the underlying portfolios financed in the Conduit, the (i) size of the second-loss credit protection for the LEH Conduit should approximate between 10%-15% of the aggregate assets of the Conduit and (ii) rating of the second-loss credit protection for the LEH Conduit should approximate BBB/BB in credit quality. CFG recommends that LEH initially purchase the second-loss credit protection in the Conduit and that LEH provide a commitment of up to $500 million in such credit support (can be levered approximately 10 times). Over time, as the Conduit builds a portfolio of transactions, the second-loss credit protection in the Conduit can be credit tranched, with the senior-most class (investment grade quality) sold to third-party investors, thereby reducing LEH' s aggregate credit risk in the Conduit.

o Require that any hedging requirements (interest rate/currency) for individual transactions sold in the Conduit are covered by the seller/originator of the assets (if appropriately rated) or a highly-rated third party, and if provided by LEH, with a back-to-back swap to the seller/originator (provided Corporate Credit approves the counterpartyexposure).

o Any Conduit-wide hedging strategies required for the Conduit will be covered by LEH or a highly-rated third party financial institution that will probably require a back-to-back swap to LEH.

o Any transaction-specific liquidity support to the Conduit will be provided by one or more A-I (or higher) and Prime-I rated financial institutions, which may include LEH.

Recommended Conduit Financing Strategy

Developing appropriate and competitive liability structures has been one of the most challenging aspects of creating the LEH Conduit. The vast majority of the players in the Conduit market are commercial banks who have the ability to write (and willingness to absorb the refinancing risk associated with) multi-billion dollar same-day backstop liquidity lines to their Conduits, which has allowed them to raise the bulk of their funding in the highly cost-competitive commercial paper market. As noted earlier, it would not be prudent for LEH to similarly write (or raise from relationship banks) multibillion dollar same-day liquidity lines. This means that the LEH Conduit will require a more term-oriented liability structure and, consequently, will probably be a comparatively higher-cost Conduit operation. In devising a recommended financing strategy, CFG was mindful of the following:

o All-in cost of funding the LEH Conduit vs. All-in cost of funding commercial bank-sponsored Conduits.

o Estimated financing term for the LEH Conduit assets (mainly bridge or warehouse lines that will be refinanced in the term market generally within 6 months).

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o Estimated financing volumes in the LEH Conduit versus market liquidity for the LEH Conduit's liabilities across the curve.

o Minimizing (i) LEH's liquidity and event risk to the Conduit, (ii) the cannibalization by the Conduit of LEH' s borrowing capacity in the bank and capital markets, and (iii) LEH's moral obligation to support the Conduit's liabili ties.

Based on the foregoing, CFG recommends that the LEH Conduit access the following debt instruments:

Anticipated Expected
Instrument Credit Refmancing Downgrade Implications to LEH
ebt Instrument Liquidity Ratings Frequency Provisions Liquidity Profile
1. Secured Commercial Highly A-I and P-I 1-)80 days Downgrade of liquidity Most adverse Cash Capital
Paper Liquid (avg maturity provider triggers and Liquidity Risk Profile if
30 days) replacement or Firm writes liquidity
immediate liquidity facilities.
draw
2. Secured Liquidity Notes Fairly A-I and Pvl 300-365 days If swap or liquidity More favorable (vs,
(Extendibles) Liquid provider is downgraded. commercial paper) Cash
security is downgraded Capital and Liquidity Risk
(no acceleration of Profile if Firm writes swap or
funding obligation) liquidity put
3. Secured Callable Liquid A-) andP-I At least 365 days If liquidity provider is Very favorable Cash Capital
Monthly Floaters downgraded, security is and Liquidity Risk Profile;
downgraded (no Call mechanism provides for
acceleration of funding rolling 365 day maturity.
obligation)
4. Secured Money Market Liquid AA/Aa2 Term Instrument Risk of security Full Liquidity Risk Transfer
Preferred Securities downgrade is borne by
investor
5. Secured Medium-Term Liquid AA/Aa2 Term Instrument Risk of security Full Liquidity Risk Transfer
Notes downgrade is borne by
investor Applications in LEH Conduit

Recommended for transactions where liquidity support is provided by third-parties.

Recommended for transactions where collateral generates substantial liquidity based on cash collections or sale of collateral.

Recommended for most transactions as proxy for commercial paper; need to monitor LEH exposure lines.

Recommended for transactions which can be explicitly rated AAJ Aa2 and can support term fee structure.

Recommended for transactions which can be explicitly rated AA/Aa2

and can support term fee structure.

Any security issued by the Conduit which provides investors with a "liquidity put" to a third party will in some form cannibalize a portion of that put provider's borrowing capacity in the capital markets. Currently, investor appetite/capacity for short-dated LEH risk is very high, particularly secured LEH risk which trades at a premium to unsecured LEH risk. To the extent that the Conduit is "refinancing" existing on balance sheet credit facilities (or any credit facility that the Firm would normally intend to fund on balance sheet) and LEH is writing a liquidity put, the Conduit should not be viewed as cannibalizing the Firm's aggregate borrowing capacity (re-allocating lines among investors). To the extent that concerns exist regarding LEH's borrowing capacity in the capital markets owing to LEH writing liquidity puts, CFG would recommend approaching non-strategic lenders (banks and non-banks) to front LEH's liquidity commitments (with a back-to-back to LEH) so LEH's name will remain blind to the market. As will be discussed below, treasury management of the LEH Conduit must be executed in close coordination with LEH Treasury Finance, particularly as it relates to LEH writing liquidity puts.

Management Company Structure

CFG considered multiple constructs for the LEH Conduit. The construct which provides the Firm with the greatest operating flexibility, strongest non-consolidation accounting platform and most discreet and cost-effective entry into the Conduit market is for LEH to participate in an established third party sponsored Conduit and outsource the principal Conduit back-office functions to that party. CFG considered two third-party options: (a) IBEX Capital Markets, Inc ("IBEX"), a Boston based Conduit management and administration company formed in 1996; and (b) Westdeustche Landesbank ("WestLB"), a premier player in the Conduit market that is considering spinning off it's portfolios and Conduit management and administration team (as an independent, stand-alone entity) as part of the bank's broader reorganization. Attached as Section II is a comparative analysis of the IBEX and WestLB alternatives. Given the Firm's desire to establish a Conduit this year and the favorable terms CFG and PFG have negotiated with IBEX (with IBEX's Board consent), CFG recommends selecting IBEX as the Firm's Conduit management and administration company. A comprehensive overview and due diligence ofIBEX is provided in Section V.

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Since its inception in 1996, IBEX has slowly built out an infrastructure and technology platform which can provide the following Conduit services: (i) funding and treasury management, (ii) settlement management, (iii) administration and documentation management and (iv) accounting management. IBEX has approximately $28 million of paid-in capital provided principally by Phoenix Home Life and several high-net worth individuals and fund managers. Currently, IBEX serves as sponsor, manager and administrator for two Conduits with aggregate assets under management totaling approximately $1.7 billion. IBEX's business model is to build-out a global high-grade financing and Conduit administration platform for companies which either have decided not to establish their own Conduit or who seek anonymity as to their funding/securitization plans. IBEX's strength is in the management/administration of Conduits, not in the advisory or principal business. IBEX has been seeking a strategic partner who can provide the risk management, structuring and origination platform to complement their strengths.

Given the high degree of control which the Firm would have to cede to any Management Company in the Conduit business (which could impact the Firm's liquidity, credit and headline risk in the transaction), CFG believes it is important for the Firm to make a strategic equity investment in IBEX in order to gain sufficient rights to effectively "control" the Management Company and protect the Firm's risk profile.

CFG and PFG have teamed up on a comprehensive analysis and due diligence of IBEX and have negotiated the terms and conditions of an alliance between LEH and IBEX which has been approved by IBEX's board. The principal terms and conditions of the alliance are as follows (preliminarily reviewed and approved by internal/external (E&Y) accountants):

o LEH will make a strategic equity investment in IBEX as part of an alliance and IBEX will sponsor and provide management and administrative services to one or more new Conduits and LEH will serve as originator and structuring advisor for transactions sold into the Conduit.

o LEH will make approximately a 26% equity investment in IBEX (making LEH IBEX's largest shareholder), consisting of approximately a $4 million cash investment and $3 million non-cash investment (includes systems and transaction management resource support).

o LEH will become the Series A Preferred Shareholder (pari passu with the most senior stock class) with full voting rights and a first priority position in liquidation.

o LEH will control the Board of Directors of the Management Company with 5 of the 9 board seats (3 LEH employees, 1 senior manager in the Management Company appointed by LEH and 1 independent director appointed by LEH) and relevant Executive Committees.

o LEH will have tag-along rights, registration rights and anti-dilution protection with respect to its investment in IBEX.

o LEH will have blocking rights on all major decisions made by IBEX which would impact the value of the Firm's investment and lower the value of the LEH Conduit(s).

CFG recommends that the five appointed seats on IBEX's Board be filled as follows:

Appointee

Responsibilities

Kyle Miller (*)

Managing Director,

Global Head of Conduit Finance Group

Senior Vice President

CFO of Structured Finance. Real Estate and Liquid Markets

Senior Vice President, Credit Risk Management

President, IBEX

Independent Director (unaffiliated with LEH)

Lonnie Rothbort (*)

Hugh Boyle (*) Stacy Sullivan TBD

(*) LEl-l employees

----- ~.-------- ..

LEHMAN BROTHERS

1-9

Confidential and Proprietary

CFG believes that to effectively manage IBEX, LEH's Board appointees must have a strong working knowledge of structured finance. The principal areas where CFG believes IBEX is particularly in need of guidance is in accounting/financial control and risk/portfolio management. Rothbort and Boyle will be valuable resources for IBEX on the accounting/financial control and risk management fronts, respectively. Stacy Sullivan, a former Senior Vice President at LEH (14 years in fixed income sales, derivative products and investment banking), will be an important liaison for CFG at IBEX and has strong risk/portfolio management skills. Initially, Sullivan will work about 3 days a week at IBEX and will be functionally the President (Stacy has expressed interest in making the role a full-time position over time). Kyle Miller will have a critical role in the day-to-day operations and strategy of IBEX.

Centralize the Firm's Conduit Activities

The Conduit can be a very powerful financing tool for FID and IBD bankers if properly managed. Without formal control mechanisms around the marketing/pricing, deal execution, risk management and liability management of the Conduit, the Firm will be exposed to greater credit, liquidity and moral/headline risk and client relationships could be impaired.

CFG recommends LEH's Conduit activities be organized and managed internally as follows:

o Designate CFG, specifically Kyle Miller, as gatekeeper to the Firm's activities in the Conduit and with IBEX, including determining and managing the Conduit marketing strategy, managing the deal execution process, overseeing the Conduit's risk and treasury management functions and executing IBEX's business plan.

o Transaction deal teams will consist of an execution banker from CFG (structuring expertise) and the relationship/product bankers (asset class expertise).

o Process for monitoring transaction/portfolio performance will be first line into CFG in close coordinate with Credit Risk Management (Hugh Boyle).

o Process for determining and monitoring the liabilities of the Conduit will be first line into CFG through Mike Milversted (Lehman Brothers) in close coordination with LEH Treasury Finance Committee.

o Conduit Credit Committee will consist of Kyle Miller, one of Bill Lighten/Kurt LocherlPaul Sveen, George Janes, Gordon Sweely and Hugh Boyle (in addition, the Firm's normal Commitment Committee approvals will be obtained).

o CFG and PFG will provide a monthly report (and meet as necessary) to FID, IBD, Treasury and Credit Risk Management on the Conduit's portfolio and the status of any of the Firm's debt and equity investments in the transaction.

o LEH's equity investment in IBEX and subordinated debt investment in the Conduit will be booked as part of the FID/IBD joint venture and monitored by each business.

o Any direct or contingent commitments contemplated by the Firm for the Conduit and/or IBEX will be separately reviewed with Treasury (in addition to the normal credit approval processes).

o CFG will work closely with the FID CFOs, IBD and Risk Management to develop a pricing matrix for the Conduit and review periodically.

LEHMAN BROTHERS

I-1O

Confidential and Proprietary

COMPARATIVE ANALYSIS OF ALTERNATIVE CONDUIT MANAGEMENT COMPANY ALLIANCES

RISKS AND MITIGANTS OF CFG RECOMMENDATIONS

1. Recommended Conduit Structure

o Risk: Transactions funded in the Conduit (which are not wrapped by a highly rated counter party) will be structured to at least an implied "BBB" rating standard (versus market convention of at least "A"), increasing the Firm's second loss credit risk exposure.

Mitigant: The collateral types funded in the Conduit will be asset classes in which the Firm has an acknowledged expertise; as a leading underwriter in the ABS/MBS market, CFG believes the Firm is far more seasoned at analyzing, modeling and monitoring asset classes than less experienced and sophisticated Conduit market players. Furthermore, (i) the transactions in the Conduit will have a mix of deals ranging from BBB to AA (first-loss protection), and CFG would expect the average transaction rating in the portfolio to be high BBB, and (ii) transactions with lower first-loss levels, will have tighter deal triggers to protect the Firm.

o Risk: The Firm will be exposed to BBB/BB credit risk to the Conduit through the second-loss credit tranche which will be up to $500 million.

Mitigant: Each transaction acquired by the Conduit will be structured with deal triggers that will force the wind-down of the portfolio after a pre-determined amount of first-loss credit protection is eroded (but before a significant amount of the first-loss credit protection is eroded) such that the probability of loss on the second-loss tranche is remote (zero loss standard)). CFG believes the second-loss credit tranche can be bifurcated over time into an investment grade rated and noninvestment grade rated tranche-the investment grade rated tranche can be sold to investors (or mono line insurance companies) to sell-down LEH's credit risk.

o Risk: The Firm will be required to write liquidity puts on certain transactions placing pressure on LEH's liability management profile, and exposing the Firm to incremental credit risk.

Mitigant: CFG envisions that LEH would principally write liquidity puts against transactions where the Firm cunently (or intends to) fund on-balance sheet. Furthermore, CFG's proposed financing structures will have very favorable Cash Capital treatment given the term nature of the Firm's liability. Therefore, the Conduit would be re-allocating investor lines and not exposing the Firm to greater credit/liquidity ri sk.

2. Proposed Conduit Financing Strategy

o Risk: Short-term financing strategy (commercial paper, extendibles and floaters) will expose the Firm to liquidity risk and could cannibalize the Firm's borrowing capacity in the capital markets.

Mitigant: CFG recommends the Conduit make greater use of extendible and floating note structures where the Firm's refinancing risk is extended for approximately one year. Commercial paper backstop lines should be written sparingly and only with approval from LEH's Treasury Finance Group. Currently, the investor appetite for LEH debt in the short-term market remains very high, as the Firm has not issued much debt inside of one year. To the extent that LEH Treasury believes cannibalization is becoming an issue, CFG can approach highly-rated non-strategic financial institutions to wrap LEH's risk and remove the Firm's name from the market.

3. Management Company Structure:

o Risk: IBEX and its principals are not well known to LEH, are performing an integral back-office function for the LEH Conduit and serve other clients all of which could expose the Firm to unforeseen risk (including headline risk).

Mitigant: CFG has addressed this concern by structuring the alliance whereby (i) LEH through effective Board control will dictate all of the activities of IBEX, (ii) LEH will appoint the President (former LEH employee) to IBEX, who will oversee the day-to-day operations of IBEX, and (iii) CFG will dedicate a team of seasoned structured finance professionals to monitor and oversee IBEX's activities, with Kyle Miller ultimately responsible for the relationship.

LEHMAN BROTHERS

I-II

Confidential and Proprietary

COMPARATIVE ANALYSIS OF ALTERNATIVE CONDUIT MANAGEMENT COMPANY ALLIANCES

4. Management Company Structure (cont'd):

o Risk: The return on LEH's equity investment depends heavily upon the Firm's ability to generate Conduit volume and resources to IBEX.

Mitigant: The Firm's investment in IBEX is a strategic, not a financial investment. IBEX provides the Firm with a Conduit platform at $5.5 million (cash plus non-cash) which is substantially less than if the Firm were to establish its own Conduit. Any equity returns on this investment should be viewed as upside in the strategic alliance.

5. Internal Management of Conduit:

o Risk: If not properly managed and centralized internally, the Conduit could expose the Firm to greater liquidity, credit and headline risk.

Mitigant: CFG will be the "gatekeeper" for (i) all origination and transaction management activity in the Conduit, (ii) portfolio wide risk management of the Conduit and (iii) treasury management of the Conduit. CFG has a highly experienced team of Conduit professionals with a combined 30 year track record in the business. CFG's team is very experienced at originating, structuring, and managing Conduit transactions.

BENEFITS OF CONDUIT

CFG's recommendations can provide the following important benefits to the Firm:

o Provide a highly capital-efficient, non-consolidated "balance sheet" which can be strategically leveraged to competitively finance client transactions in the capital markets more efficiently than on-balance sheet alternatives-should enable Firm to grow market and revenue share with target clients.

o Low-risk, low-cost, turn-key construct for the Firm to enter the Conduit business.

o Provides Firm with a cost-effective balance sheet and cash capital management tool- -projected all-in cost of funding Conduit through callable floaters: LIBOR + 25-30 bps.

o As a truly independent company which LEH effectively controls, IBEX provides LEH longer term with potentially broader platform than Conduit Management.

LEHMAN BROTHERS I-12

Confidential and Proprietary

COMPARA TIVE ANALYSIS OF ALTERNATIVE CONDUIT MANAGEMENT COMPANY ALLIANCES

LEH Consideration IBEX Alliance Advantage WestLB Alliance
Description of Proposed Transaction Lehman would make a strategic equity An independent Management Company
investment in IBEX Capital Markets, Inc. would be created by certain individuals
as part of an alliance with IBEX whereby approved by Lehman and West LB. The
IBEX will create, sponsor and provide Management Company initially would be
management and administrative services capitalized with $10 million in equity
to one or more new Conduits and Lehman contributed by Lehman, West LB and one
would serve as originator and structuring or more Senior Managers of the
advisor for transactions sold to the Management Company ("Senior
Conduit(s). Management"). The principal business
activities of the Management Company
initially would consist of (i) providing
certain management and administrative
services to certain Conduits sponsored by
Lehman and West LB, (ii) providing
certain management and administrative
services to Conduits sponsored by the
Management Company and (iii) certain
other activities approved by the Member's
Committee of the Management Company.
Lehman and West LB would serve as
originators and structuring advisors for
transactions between the Management
Company and the Conduits.
Strategic Alliance Synergies Limited: Phoenix Mutual (significant 0 0" Significant: Ideal deep pocket strategic
shareholder in IBEX) presents a potential partner who could provide liquidity and
deep-pocket strategic partner and has credit support to LEH Conduit; however,
expressed an interest in forming a broad WestLB has provided no assurance that
strategic alliance with LEH; however, they will write liquidity/credit
Phoenix is not very experienced in commitments to the LEH Conduit. Ideal
structured finance and would probably partner for co-syndicated deals who is able
only be interested in CDO-related to take-down large commitments. Since
transactions-would not be an ideal WestLB is a significant player in the
partner for syndicated structured deals. Conduit market, LEH could find itself
Phoenix would probably not be interested competing with WestLB for deals
in or have the capacity to write particularly in Europe. Benefits of
liquidity/credit lines for LEH transactions. alliance could be muted depending upon
outcome ofWestLB re-org plan.
-
Turn-Key Conduit Management and Conduit Management and Administration 0" 0 Premier Conduit Management and
Administration Platform platform is in place and fully operational; Administration platform in place at
could immediately handle LEH deal flow WestLB; however, it has not been
while systems enhancements are determined which systems/personnel
performed; currently manage $1.5 billion would be transferred to Management
in assets with a dedicated 7 person staff. Company by WestLB as part of the
alliance. Currently manage in excess of
$20 billion in assets with a 12-15 person
staff. Transition time to start-up concern
is uncertain-could have personnel issues.
Control of Management Company Effective Control of Board: LEH would 0" 0 LEH would have 40% control of
Activities control 3 of 9 Board seats, appoint the Management Company, equivalent to
President (former LEH employee) of the WestLB. Management of the
Management Company (l Board seat) and Management Company (former WestLB
appoint I independent Director to the employees) would control the remaining
Board. LEH would also have standard 20%. WestLB would also have same
blocking rights. LEH would dictate the blocking rights as LEH which could
operating strategy of the Management impede our flexibility to broaden the
Company. platform of the Management Company.
As an important lender to LEH, WestLB
may have more leverage around control
that is implied by ownership stake.
- -------------- ~---- .. ----- .... -

LEHMAN BROTHERS

1-13

Confidential and Proprietary

COMPARA TIVE ANALYSIS OF ALTERNATIVE CONDUIT MANAGEMENT COMPANY ALLIANCES

LEH Consideration IBEX Alliance Advantage WestLB Alliance
Non-Consolidation Treatment Strong non-consolidation argument for It} 0 Strong non-consolidation argument for
LEH under current and proposed LEH under current and proposed
accounting rules; stronger argument than accounting rules; $10 million paid-in-
WestLB alliance due to significant paid- capital is threshold for substantial
in-capital base ($28 million) and diverse capitalization in a Conduit.
equity investor base.
Alliance Terms and Conditions Fully negotiated and approved by IBEX It} 0 LEH Terms and Conditions presented to
Board; only detail not negotiated at WestLB for review; if Board approval is
present is key management Compensation obtained, negotiations would begin. No
Agreements. Terms and Conditions have been
approved.
Management Company Profitability and Realistically LEH would represent the vast 0 It} WestLB could be expected to generate a
LEH Return on Equity majority (80%) of the asset volume of the significant percentage of the Management
Management Company. LEH would Company's revenue which should enhance
receive 25% of the return generated by the the returns on LEH's equity investment.
Management Company. Unknown is LEH would receive 40% of the return
performance of Phoenix CBO which could jointly generated by WestLB and LEH for
drag cash flow in the Management the Management Company.
Company if collateral default rate exceeds
Moody's historical default rate studies.
Current Resource Commitment Approximately $4 million in cash to It} It} Projected "start-up" costs of at least $4 to
substantially upgrade systems, hire key $5 million in cash to create Management
resources, expand premises and build LEH Company (including RE and leasehold
Conduit. LEH would supply dedicated improvements), hire key resources,
deal management and systems design upgrade systems and build LEH Conduit.
resources as in-kind contribution. This assumes that WestLB transfers the
Probably heavy use of CFG' s time given Conduit Management systems as an in-
newness of relationship. kind contribution. Cash contributions
between LEH and WestLB have not been
negotiated. Dedicated deal management
and system design resources would be
supplied by LEH as in-kind contribution.
Probably less involvement of CFG given
strength of Firm relationship with
management team.
Future Resources Commitment Management has not requested a Working It} 0 Management believes it will need a $2.5
Capital Facility. LEH's stake in Company million to $5 million Working Capital
can be increased up to 40% if future Facility. LEH's equity stake in
cash/in-kind contributions are required. Management Company could not be
increased above current level.
Execution Timing Fairly Certain; IBEX Board of It} 0 Uncertain: Board approval which would
DirectorlShareholder approval has been allow for formal negotiations to begin has
obtained and critical deal terms have been been postponed until week of 3112;
negotiated. IBEX believes April time WestLB believes May time frame for
frame for closing is very realistic. closing is best case. WestLB Board
member is not certain that LEH is the
appropriate strategic partner for this type
of transaction.
Exit Strategy Clearer exit strategy from transaction It} 0 Exit strategy from the transaction would
because LEH controls Management become a negotiation between LEH and
Company and no clear strategic WestLB, which may have broader
relationships exist between LEH and any relationship implications.
parties to the transaction. " ,-,--_-,----

LEHMAN BROTHERS

1-14

Confidential and Proprietary

COMPARATIVE ANALYSIS OF ALTERNATIVE CONDUIT MANAGEMENT COMPANY ALLIANCES

LEH Consideration IBEX Alliance Advantage WestLB Alliance
Moral Obligation and Headline Risk More Discreet: Moral obligation always 0' 0 More Public: WestLB would share in our
exists in a Conduit transaction; IBEX moral obligation on the Conduit;
option is more discreet (in the short run) Publicity surrounding transaction would
since they are an established player in the be significant since WestLB would
market. Headline risk can be managed probably make a press release regarding
since LEH controls Board and business the transaction and given McCormick's
activities of Management Company. profile in the market. Since LEH would
have equal control rights with WestLB, it
will be difficult to control WestLB's
activities and any potential headline risk
associated with those activities.
Management Team Experience IBEX has been operating as a stand-alone 0' 0' The proposed management team has been
entity for 4 years and has a strong Conduit operating under the umbrella of a bank
management and administration platform; and is not experienced at running a
IBEX's management team lacks company. The management team is very
risk/portfolio management skills. LEH experienced at risk/portfolio management
will appoint a President to the Company and is a premier Conduit management and
who has portfolio management skills. administration shop.
LEH Resource Commitment CFG would dedicate the same number of 0 0' CFG would dedicate the same number of
deal origination/management, deal origination/management,
Treasury/Risk Management and Systems Treasury/Risk Management and Systems
resources under both alternatives. Day-to- resources under both alternatives. Strong
day involvement of K. Miller with familiarity with management team
Management Company will be greater institutionally.
than with WestLB given less familiarity
with IBEX management team.
Management Company Projected by management at $2.5 0' 0 Projected by management at $4.4
Compensation and Benefits million/annum. million/annum. -----.~------~----------

LEHMAN BROTHERS

1-15

Confidential and Proprietary

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I. SUMMARY }<'INANCIAL RESULTS AND PROJECTIONS

A. Financial Results

IBEX officially began operations on August 4, 1998. This coincided with the issuance of Series C Convertible Preferred Shares which resulted in net proceeds of $25.3mm at a post-money valuation of $45mm. By March 31, 1999, the Company had invested $22.6mm in securities. Principal investments were consistent with the Company's business plan at the time.

The following represents the Company's financial results versus plan:

$ in thousands Actual Plan! Variance
FYE March 1999:
Net Income $ 496 $ (786) $ 1,282
Investment in Securities 20,900 21,580 (680)
Assets Under Administration 400,000 495,528 (95,528)
FYE March 2000:
Net Income 392 3,015 (2,623)
Investment in Securities 21,700 40,300 (18,600)
Assets Under Administration 600,000 2,894,968 (2,294,968)
1 Business Plan From Series C Private Placement Memorandum 8/98 The Company attributes their inability to achieve the planned financial results to the 1998 liquidity crisis and the inability to raise additional equity as planned ($40.3mm of additional equity was planned but not issued 1999). The Company has now shifted its business focus from principal investing to a service related business providing asset management and administration for sellers/borrowers seeking conduit financing of their assets. The recent closing of the VistaOne conduit, with initial assets of $500mm. supports the Company's new business orientation.

While the Company's financial performance has been disappointing, investments in the development of policies, procedures and infrastructure, including capital investments of $371m, have been significant and have positioned the Company to operate as a conduit management platform.

Year-to-Date financial results for FY 2001 appear in Section V, Appendix E.

~~-~------- ~ ~~~-- - -~~----~--~~-------~~- ---

-------~ ---

~~~-~~---~---- .... -------.--

LEHMAN BROTHERS

III-I

Confidential and Proprietary

IBEX CAPITAL MARKETS, INC.-VALUA TION

II. SUMMARY FINANCIAL RESULTS AND PROJECTIONS

A. Projections

December-OO
$ in Thousands Projected Adjustments Pro-Forma
Assets
Cash $ 1,282 $ 4,000 $ 5,282
Investments 20,610 20,610
Fixed Assets 124 124
Other Assets 3,701 3,000 6,701
Total Assets 25,716 7,000 32,716
Liabilities
Current Liabilities 478 478
Notes Payable 10,008 10,008
Other Liabilities 670 670
Total Liabilities 11,156 11,156
Stockholders Equity
Stock (Par Value) 8 8
Additional Paid In Capital 16,481 7,000 23,481
FAS 115 Adjustments (1,180) (1,180)
Retained Earnings (749) (749)
Total Stockholders Equity 14,560 7,000 21,560
Total Liabilities & 25,716 7,000 32,716
Stockholders Equi ty Lehman Brothers has prepared a review of three scenarios that differ with respect to the additions to assets under administration ("AVA") to IBEX's current business lines. These projections do not include any ancillary benefits, i.e. incremental fee revenue for Lehman's Conduit Finance Business, that will be realized as a result of this investment. The following summarizes the cases:

Base Case

• Includes base assumptions for Lehman generated assets under administration ("Project Nassau") over the 4 year

horizon.

• Includes the expected additions to the Company's 3rd party conduit AVA based on due diligence.

• Includes the expected additions to the Company's to PrincipallPhoenix AVA based on due diligence.

Optimistic Case

• Lehman volume held at base volume.

• Increases additions by 25% over base for 3rd party conduit and Principal/Phoenix AVA.

Pessimistic Case

• Lehman volume held at base volume.

• Decreases additions by 25% below base for 3rd party conduit and Principal/Phoenix AVA.

All three cases assume that the Company does not add to its own principal portfolio (Opening book value of $20.6 million).

----_ .~---~ ... - .. ---~

LEHMAN BROTHERS

III~2

Confidential and Proprietary

IBEX CAPITAL MARKETS, INC.-VALUATION

The following tables summarize the financial projections and analyses for each of the cases. Additional assumptions used by IBEX in preparing the projections appear at the end of this section.

{$ in thousands} Year Ended:
Assets Under Management (ADM) December-Ot December-02 December-03 December-04
Additions
Project Nassau (Lehman Generated) 3.750.000 s 7,875.000 $ 7,750,000 $ 5,949,478
All Other VistaOne 341,120 $ 2,211,840 $ 1,232,896 $ 1,820,262
Principal (Phoenix) 85,280 552,960 308,224 455,066
Total 4,176,400 10,639,800 9,291,120 8,224,806
Average Balance
Project Nassau (Lehman Generated) 1,687,500 8,343,750 16,687,500 23,013,315
All Other VistaOne 1,201,120 2,823,520 4,423,520 6,023,520
Principal (Phoenix) 770,880 1,176,480 1,576,480 1,976,480
Total 3,659,500 12,343,750 22,687,500 31,013,315
Revenues 4,080 11,385 21,430 $ 29,453
Net Income (264) 1,822 5,633 $ 9,718
InvestmentlReturns
Equity Injected by Lehman 7,000 $
Cumulative Equity Injected by Lehman 7,000 7,000 7,000 $ 7,000
ROE -1% 8% 20% 25%
Cumulative ROE -1% 4% 10% 15%
IRR - Cash Basis (Net Income Method)! 44%
Assumes and exit multiple of 13.0x LTM Net Income at the end of year 4 {$ in thousands} Year Ended:
Assets Under Management (AUM) December-Ot December-02 December-03 December-04
Additions
Project Nassau (Lehman Generated) 3,750,000 $ 7,875,000 $ 7,750,000 $ 5,949,478
All Other VistaOne 426,400 $ 2,764,800 $ 1,541,120 $ 2,275,328
Principal (Phoenix) 106,600 691,200 385,280 568,832
Total 4,283,000 11,331,000 9,676,400 8,793,638
Average Balance
Project Nassau (Lehman Generated) 1,687,500 8,343,750 16,687,500 23,013,315
All Other VistaOne 1,226,400 3,254,400 5,254,400 7,254,400
Principal (Phoenix) 777,200 1,284,200 1,784,200 2,284,200
Total 3,691,100 12,882,350 23,726,100 32,551,915
Revenues 4,101 11,924 22,710 $ 31,401
Net Income (252) 2,135 6,375 $ 10,848
InvestmentlReturns
Equity Injected by Lehman $ 7,000 $ $ $
Cumulative Equity Injected by Lehman $ 7,000 $ 7,000 $ 7,000 7,000
ROE -1% 9% 21% 27%
Cumulative ROE -1% 4% 11% 17%
IRR - Cash Basis (Net Income Method)! 48%
Assumes and exit multiple of 13, Ox LTM Net Income at the end of year 4 Confidential and Proprietary

LEHMAN BROTHERS

III-3

IBEX CAPITAL MARKETS, INC.-VALVA nON

($ in thousands)
Assets Under Management (AUM) December-Ol December-02 December-03 December-04
Additions
Project Nassau (Lehman Generated) 3,750,000 7,875,000 $ 7,750,000 $ 5,949,478
VistaOne 255,840 1,658,880 924,672 $ 1,365,197
IBEX Principal Holdings (Phoenix) 63,960 414,720 231,168 341,299
Total 4,069,800 9,948,600 8,905,840 7,655,974
Average Balance
Project Nassau (Lehman Generated) 1,687,500 8,343,750 16,687,500 23,013,315
VistaOne 1,175,840 2,392,640 3,592,640 4,792,640
IBEX Principal Holdings (Phoenix) 764,560 1,068,760 1,368,760 1,668,760
Total 3,627,900 11,805,150 21,648,900 29,474,715
Revenues $ 4,060 10,846 20,150 27,505
Net Income (276) 1,510 4,890 8,589
Investment/Returns
Equity Injected by Lehman 7,000
Cumulative Equity Injected by Lehman 7,000 7,000 7,000 7,000
ROE -1% 7% 18% 24%
Cumulative ROE ~1% 3% 9% 14%
IRR - Cash Basis (Net Income Method)! 39% Assumes and exit multiple of 13_0x LTM Net Income at the end of year 4

Fees Lehman generated and other Party assets under administration are assumed to be 8 basis points (after rating agency

expenses).

2. Headcount

March 31, 2001

March 31, 2003

March 31, 2004

March 31, 2002

23

35

39

13

3. Capital Expenditures will include the following:

• Personal Computers for new hires

• LAN/W AN technology (servers, routers, etc.)

• Associated office equipment

• Leasehold improvements related to increase of office size

$ in thousands

Year Ended:

December-Ol

December-04

December-02

December-03

$852

$548

$463

Capital Expenditures

$823

4. Occupancy will increase in two phases based on employee growth

• Phase I will occur in June 2001 and include expansion of space in the 60 State Street site.

• Phase II will occur in June 2002 and entails moving to a single new location.

5. The technology plan includes the development of a "hot site" disaster recovery program with an annual end-state cost of $420m per year.

6. The acquisition of a risk management system has been included at a cost of $250m per year.

Confidential and Proprietary

LEHMAN BROTHERS

IIl-4

IBEX CAPITAL MARKETS, INC.-VALUATION

III. SUMMARY VALUATION ANALYSIS

A. Valuation Methodology

Lehman Brothers' valuation is based on IBEX's current financial operations and conditions. The Company has been examined using several market-based approaches:

Multiple Analysis

- Price to L TM Net Income

- Market Value of Equity to Assets Under Management

- This ratio relevant to asset managers/administrators

- Price to Book was excluded because of the Company's low earnings profile.

- Price to Book = PIE * ROE

- Given the Company's ROE, the PIE would need to be 5 to 6 times market value to result in a market Price to

Book ratio.

As,~ets Under Management Contains Global Custody A.~sets, Mutual Fund Administration, Cash Management and misc.

Current Current 12/31100 MVEI
Company Symbol PIE 3/6/2001 PIB 3/6/2001 ($il1milliol1) ($inmillioll) AUM
Banks
Northern Trust NTRS 32.8 6.8 $ 15,302 $ 723,300 2,12%
Investors Financial IFiN 73.1 13.2 $ 2,472 $ 303,327 0.81%
Bank of New York BK 26.3 6.1 $ 37,570 $ 2,000,000 1.88%
State Street SIT 28.1 5.1 $ 16,495 $ 711,000 4 2.32%
Asset Managers
Eaton Vance EV 19.3 8.2 $ 2,192 49,200 4.46%
Waddell & Reed WDR 19.7 20.7 $ 2,640 40,020 6.60%
Minimum 19.3 5.1 Min 0.8%
Midrange 26.0 12.9 Weighted Avg tzs
Maximum 32.8 20.7 Max 6.6%
Excluded: lFIN IFlN Note: ADM = A.uet.~ Under Managemellt

A.\',\'ets Under Management Contains Managed As.~et,~ plus Global Custody A.~wts

A.~set.~ Under Management Contains Global Cll.Hody A'isets

A,\'sets Under Management Contains Managed Asset.~

A,~.\·et.~ Under Monagemem Contains Mutual Funds, Institutional and Private A.~sets

Comparable Companies Bank of New York

Bank of New York provides banking and other financial services to corporations worldwide through its business segments, which includes: Servicing and Fiduciary Businesses and Global Markets. The Servicing and Fiduciary segment provides fee based services, which includes the Company's securities servicing and cash processing. The Global Markets segment includes trading of foreign exchange and interest rate products, investing and leasing activities, and treasury services to other segments.

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LEHMAN BROTHERS

III-5

Confidential and Proprietary

IBEX CAPITAL MARKETS, INC.-VALUATION

- Northern Trust

Northern Trust is an international provider of institutional investment management services. Northern Trust provides security clearance services for all non-depository eligible securities held by trust, agency, and fiduciary accounts administered by the Company's subsidiaries.

State Street

State Street Bank and Trust Company services institutional investors. The Company provides global custody, multi-currency accounting, institutional transfer agency, performance measurement, cash management, foreign exchange, securities lending, mutual fund administration, institutional trust services and investment advisory services.

- Investors Financial Services

Investors Financial Services is a bank holding company that provides asset administration services for the financial services industry. The Company provides global custody, multi-currency accounting, institutional transfer agency, performance measurement, cash management, foreign exchange, securities lending, mutual fund administration, institutional trust services and investment advisory services. The Company provides these services to financial asset managers, such as mutual fund complexes, investment advisors, banks and insurance companies.

Eaton Vance

Eaton Vance creates and manages a variety of mutual funds that cover the major sectors of the markets. The company also provides financial services such as management and counseling service to individual and institutional accounts along with administrative services to individuals and institutional accounts, as well as funds.

- Waddell & Reed

Waddell & Reed, Inc., Waddell & Reed Investment Management Company, and Waddell & Reed Services Company. Waddell & Reed, Inc. is a broker-dealer and investment advisor. Their investment advisory provides investment management and advisory services to the Company's mutual funds and to institutions and private clients. Waddell & Reed Services Company provides transfer agency and accounting services to the funds and their shareholders.

Private Equity Discount ("haircut") of 40%

All trading multiple analyses have received a 40% discount in the valuation calculation to account for the risk and valuation impact of holding private, illiquid securities.

B. Valuation Considerations

Previous Financing Round and Valuation August 4, 1998.

Proceeds of $25.3mm.

$16.3mm series C preferred.

$lO.Omm convertible preferred debt - Phoenix ($1.0)mm back to one of the original angel investors Pre-Money $19.7mm.

Post-Money $45mm.

- Projections in Placement Memo suggested 2000 assets under management of $7 Abn, net income of $11.6mm and equity of $53.4mm.

LEHMAN BROTHERS

III-6

Confidential and Proprietary

IBEX CAPITAL MARKETS, INC.-VALVA TION

C. Valuation Analysis

$ in millions IBEX Phoenix IBEX Vista One

Total

Assets Under Assets Under
Management Management
12/31/00 317101
$ 746 $ 768
1,100 904
$ 1,846 $ 1,672
2.29% 2.01% (1)
40% 40% (2)
$ 25.36 $ 20.15 Market Multiple - Market Value of Equity/Assets Under Management Liquidity Discount

Equity Value After Liquidity Discount

(1) Weighted average multiple based on comparable companies

(2) To account for valuation impact ofholding private, illiquid securities,

It is recommended that IBEX be valued based on a multiple of assets under management because a net income approach does not assign adequate value to the infrastructure IBEX has in place.

D. Valuation Recommendation

We believe that IBEX should be given a valuation based on assets under management yet reflective also of the poor financial performance to date. In addition, it is Lehman's intention to invest at a valuation less than the previous valuation of $45mm when the company last raised capital (August 1998). Furthermore, Lehman intends to mitigate its cash exposure by structuring the investment with cash and non-cash contributions.

It is proposed that Lehman would invest a total of $7mm with approximately $4mm in cash with the remaining noncash component being valued at $3mm in exchange for approximately 26% of the equity capital of the Company in the form of "preferred stock". This equates to a pre-money value of $20mm and a post-money value of $27mm. The noncash component would consist of:

- Lehman personnel assigned to the venture.

- Human Resource advice

- Credit management guidance.

Treasury management guidance. - Board supervision/advice.

It is expected that Lehman will need $1.5mm in cash to supply the $3mm in non-cash consideration to IBEX. In effect, Lehman will be receiving $7mm in value for $5.5mm in cash. It is proposed that the cash investment be used for improvements to infrastructure and technology and working capital needs.

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LEHMAN BROTHERS

IIl-7

Confidential and Proprietary

The following table presents the proforma capitalization table following the proposed investment by Lehman Brothers.

Debt

6.79% Convertible Debt (Phoenix Home Life)

Preferred and Common Stock

$10,000,000

Phoenix Private Investors Angel Investors Management Angel Investors

No. of
Shares Ownership % (b)

737,838 (a) 26.7%
70,000 2.5%
586,800 21.2%
438,998 15.9%
771,765 27.9%
232,438 8.4%
2,030,001 73.3%
2,767,839 100.0%
1,300,000 Series A Convertible Preferred (Lehman)

Common Stock reserved for option pool

Common

Old Series D Old Series C Old Series B Old Series A Old Common

Total common

Total

(a) Assumes conversion ofpreferred to common (b) Ignoring options

LEHMAN BROTHERS

Confidential and Proprietary

III-8

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