March 31, 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Attention: Filing Desk
Re: Willowbridge Strategic Trust
Post-Effective Amendment No. 3 to Registration
Statement on Form S-1
Commission File No. 33-80443
Dear Sir or Madam:
On behalf of Willowbridge Strategic Trust (the "Company"), attached for
electronic filing pursuant to Regulation S-T under the Securities Act of 1933,
as amended, is Post-Effective Amendment No. 3 (the "Amendment") to the
Company's Registration Statement on Form S-1. This document is being filed to
include audited financial information on the Trust and its Managing
Owner; other updated information of a financial or statistical nature also is
included. The Prospectus Summary and Risk Disclosures have been written in
"plain English." This Prospectus will be reprinted in its entirety following
effectiveness.
If you have any questions regarding the attached filing, please call me at
(212) 940-8720. If you need to fax me anything, my fax number is (212) 940-7079.
My client is very anxious to use this document and would appreciate being
declared effective not later than April 25, 1997, if possible. We will submit
an acceleration request, if needed, once you advise us that any comments you
may have are satisfied.
Sincerely,
/s/ Fred M. Santo
Attachment
cc: Mark S. Britton, Esq. (w/attachments)
As filed with the Securities and Exchange Commission on April 1, 1997
Registration No. 33-80443
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST EFFECTIVE AMENDMENT NO. 3 TO
F O R M S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WILLOWBRIDGE STRATEGIC TRUST
(Exact name of Registrant as specified in its charter)
Delaware 6799 13-7075398
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation) Industrial Classification) Identification No.)
One New York Plaza, 13th Floor
New York, New York 10292
(212) 778-7860
(Address and Telephone number of Registrant's principal executive offices)
_______________________________
James M. Kelso Copy to:
c/o Prudential Securities Incorporated Fred M. Santo
One New York Plaza, 13th Floor Rosenman & Colin LLP
New York, New York 10292 575 Madison Avenue
(212) 778-7860 New York, New York 10022
_______________________________
If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933 (the "Securities Act") check the following box.
If this Form is filed to register additional securities for
an offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering.
If this Form is a post-effective amendment filed pursuant
to Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If delivery of the Prospectus is expected to be made
pursuant to Rule 434, please check the following box.
_______________________________
WILLOWBRIDGE STRATEGIC TRUST
Minimum Initial Purchase: $5,000; IRAs $2,000
Minimum Additional Contribution: $100 increments
Maximum Trust Term: 20 years
Suitability: See "Investment Requirements/Who May Invest"
Willowbridge Strategic Trust (the "Trust") engages
primarily in the speculative trading of a
diversified portfolio of futures, forward and options
contracts. Willowbridge Associates Inc. (the "Trading
Manager") makes the Trust's trading decisions using a
combination of technical and fundamental
economic analyses. Prudential Securities Incorporated
("Prudential Securities") is the Trust's clearing
broker. Prudential Securities Futures Management Inc.
(the "Managing Owner"), a wholly owned
subsidiary of Prudential Securities, manages the Trust's
business and affairs. Wilmington Trust
Company, a Delaware Banking Company, is the Trust's sole
trustee but has only nominal duties and
liabilities. The Trading Manager is independent of the
Trust, Prudential Securities, the Managing Owner
and Wilmington Trust Company.
The Trust began trading on May 1, 1996, with an initial
capitalization of $12,686,200. As of December 31,
1996, the Trust's capitalization was 26,980,168, and the
Net Asset Value of a limited liability beneficial
interest in the Trust that initially sold for $100 was $103.47.
The Net Asset Value of an Interest equals
the Net Assets of the trust divided by the number
of Interests outstanding.*
This is a best-efforts, continuous offering of Interests.
Interests are sold in fractions calculated
to three decimal places, and as of the date of this prospectus
there are approximately $60,235,800 of
Interests registered for public offering and available for sale.
Prudential Securities or its affiliates pay
all expenses of the offering of Interests. Accordingly, 100% of
the subscription proceeds are available
to the Trust. The holders of Interests are referred to as "Limited
Owners." The Managing Owner has
general liability for all obligations of the Trust in excess
of the Trust's assets and owns general liability
interests ("General Interests") in the Trust. As a Limited
Owner, your liability generally will be limited
to your investment plus profits.
THESE ARE SPECULATIVE SECURITIES, AND AN INVESTMENT IN
THE TRUST INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD BE AWARE THAT:
// futures, forward and options trading is speculative, volatile
and highly leveraged;
// the Trust relies on the Trading Manager for success;
// past performance is not necessarily indicative of future results;
// you could lose a substantial portion, or even all, of your investment;
// your tax liability is likely to exceed cash distributions to you;
// substantial charges are imposed on the Trust; we estimate that
the Trust will have to achieve net trading profits (after
taking interest income into account) of approximately 6.55% per
annum in order to offset expenses, and of approximately 9.55%
to also offset the 3% redemption charge imposed on any
Interests that you may redeem as of the end of the 12th
month following their purchase;
// you will have limited voting rights and no control over the
Trust's business;
// you will have a limited ability to liquidate your Interests
because transfer is restricted, redemption
is limited, and no trading market for the Interests exists;
// actual and potential conflicts of interest exist;
// Prudential Securities and its affiliates have been involved
in several lawsuits, investigations, and enforcement actions
by regulatory authorities, including various matters surrounding
allegations relating to the sale of interests in over 700
non-commodities limited partnerships.
// unless the Trust is successful -and we cannot assure
you that it will be -it cannot serve as a beneficial
diversification for your portfolio.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF
PARTICIPATING IN THE TRUST NOR HAS SUCH COMMISSION PASSED ON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS.
Price to Public (1) Selling Proceeds to the
Commissions (1) Trust (1)
Continuous
Offering Period Net Asset Value* None Net Asset Value*
Total maximum $100,000,000 None $100,000,000
(Notes 1 and 2 are on pages 2 and 3)
* Net Asset Value is defined on page A-4 of the Trust Agreement (Exhibit
A hereto).
The date of this Prospectus is April 1, 1997
(Not for use after January 31, 1998)
NOTES
(1) (a) The Trust commenced trading on May 1, 1996 following the
initial closing for the Initial Offering Period. Interests currently are being
sold on a monthly basis at their month-end Net Asset Value. As of March
1, 1997, $60,235,800 of Interests remain to be sold during the continuous
offering.
(b) The Interests are being offered through Prudential Securities at
a minimum initial purchase of $5,000 per subscriber, except that a
minimum initial purchase of $2,000 generally is required for any
investment made on behalf of an Individual Retirement Account ("IRA").
The Interests are sold monthly at their month-end Net Asset Value per
Interest for a period that will expire no later than January 31, 1998, and
additional Interests may be purchased in increments of $100. Prudential
Securities receives no selling commissions or concessions on the sale of
Interests. Prudential Securities has no present intention, but reserves the
right, to retain certain selected brokers or dealers that are members of the
National Association of Securities Dealers, Inc. ("Additional U.S. Sellers")
and/or certain foreign securities firms ("Additional Foreign Sellers" and,
together with Additional U.S. Sellers, "Additional Sellers"). At no
additional cost to the Trust, Prudential Securities will, at the time of sale,
grant a per-Interest sales credit to the Prudential Securities branch office
that sells an Interest to a Limited Owner (other than an Individual
Retirement Account of an employee of Prudential Securities). From this
sales credit, not more than 2.5% of the Net Asset Value per Interest
normally will be paid to the employees of Prudential Securities who have
sold Interests and who have all the appropriate federal and state securities
registrations. Any Additional Sellers retained by the Trust during the Initial
Offering Period will be paid by Prudential Securities, at no additional cost
to the Trust, at rates which will not generally exceed 2.5% of the Net Asset
Value per Interest.
Beginning 12 months after the month in which the sale of each
Interest is effective, Prudential Securities will compensate its employees
who render certain on-going, additional services to Limited Owners (other
than an Individual Retirement Account of employee of Prudential
Securities). Employees eligible for this compensation are those who have
sold Interests and who are registered under the Commodity Exchange Act,
as amended (the "CE Act"), and who satisfy all applicable proficiency
requirements (i.e., have passed the Series 3 or Series 31 examinations or
are exempt therefrom) in addition to having all applicable federal and state
securities registrations. This compensation will be paid periodically, on
an Interest-by-Interest basis, and will not generally exceed 2% of the
Trust's Net Asset Value per annum. Prudential Securities will not
compensate any individual whom it no longer employs but may
compensate employees who, although not responsible for the initial sale
of an Interest, continue to provide on-going services in place of an
individual who was responsible for the initial sale. Any employee
compensated in this manner must have the appropriate registrations and
proficiency requirements. Any Additional Sellers retained by the Trust
also will receive continuing compensation. Employees of Additional U.S.
Sellers receiving continuing compensation are required to be registered
and qualified in the same manner as Prudential Securities employees. See
"Investment Requirements/Who May Invest" and "Plan of Distribution."
See also "Fees, Compensation and Expenses" and "Summary of
Brokerage Agreement."
The Trust has agreed to indemnify Prudential Securities, the
Managing Owner and their respective officers, directors, and affiliates
against certain liabilities. However, no indemnification will be made for
liabilities, if any, under federal or state securities laws unless (i) there
has been a successful adjudication on the merits of each count involving
alleged securities law violations as to the particular indemnitee and the
court approves the indemnification, or (ii) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction
as to the particular indemnitee, and the court approves the
indemnification, or (iii) a court of competent jurisdiction approves a
settlement of the claims against a particular indemnitee, and finds that
indemnification of the settlement and related costs should be made to the
indemnitee. See "Summary of Trust Agreement - Indemnification" and
Section 4.6 of the Trust Agreement attached hereto as Exhibit A.
2
You should rely only on the information contained in this Prospectus
or incorporated by reference. We have not authorized anyone to provide
you with information that is different.
--------------------------------
The delivery of this Prospectus at any time does not imply that
information herein is correct as of any time subsequent to the date hereof.
--------------------------------
We have not authorized any dealer, salesperson or any other person
to give any information or to make any representation not contained in this
prospectus, and, if given or made, you must not rely upon that information
or representation as having been authorized by the Trust, Prudential
Securities, or any selling agent or any other person.
You will be required to make certain representations and warranties
in the Subscription Agreement and power of attorney.
--------------------------------
This prospectus is not an offer to sell, nor is it seeking an offer to
buy these securities in any jurisdiction where the offer or sale is not
permitted.
--------------------------------
Prudential Securities sends all interestholders annual and monthly
reports complying with CFTC and National Futures Association ("NFA")
requirements. The annual reports contain certified and audited, and the
monthly reports contain unaudited, financial information.
This prospectus must be accompanied by a recent monthly report of
the Trust.
Prudential Securities and any Additional Sellers must deliver any
supplemented or amended prospectus issued by the Trust.
The Division of Investment Management of the SEC requires that the
following statement be set forth prominently herein: "Willowbridge
Strategic Trust is not a mutual fund or any other type of investment
company within the meaning of the Investment Company Act of 1940, as
amended, and is not subject to regulation thereunder."
--------------------------------
You should not invest more than 10% of your "liquid" net worth
(exclusive of home, furnishings and automobiles in the case of individuals;
readily marketable securities in the case of entities) in the Trust.
3
PAGE
COMMODITY FUTURES TRADING COMMISSION ("CFTC")
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL
CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN
SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS
TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS.
SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE
OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN
THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT
YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL
CHARGES FOR MANAGEMENT AND ADVISORY AND BROKERAGE FEES.
IT MAY BE NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO
THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID
DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE
DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO
BE CHARGED THIS POOL AT PAGES 49-52 AND A STATEMENT OF THE
PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO
RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT AT PAGE 17.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND
OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN
THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO
PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY
STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF
THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT AT PAGE 18.
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY
TRADE FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS
ON MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING
MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE
SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED
PROTECTION TO THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED
STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE
ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR
MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE
TRANSACTIONS FOR THE POOL MAY BE EFFECTED.
4
PAGE
TABLE OF CONTENTS
Commodity Futures Trading
Commission "CFTC" Risk
Disclosure Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Summary of the Prospectus. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
Trading Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Risks Relating to the
Trading Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Risks Relating to the Trust
and the Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Tax and ERISA Risks . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Regulatory Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Business of the Trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
Trust's Trading Limitations and
Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Performance of the Trust . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Description of the
Trading Manager. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
The Trading Manager and
its Principals. . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Trading Approach
Used by the Trading
Manager for the Trust . . . . . . . . . . . . . . . . . . . . . . . . .30
Investment Requirements/Who May
Invest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Minimum Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Net Worth and Income
Requirements . . . . . . . . . . . . . . . . . . . . . . . . .34
Receipt of Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . .35
Fundamental Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . .35
Ineligible Investors. . . . . . . . . . . . . . . . . . . . . . . . . . .35
Employee Benefit Plan
Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Publicly Offered Security . . . . . . . . . . . . . . . . . . . . . . . .36
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Subscription Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
How to Subscribe. . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Ways to Subscribe . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
When Does Subscription
Become Final. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Continuous Offering . . . . . . . . . . . . . . . . . . . . . . . . . . .39
The Trust, Trustee, Managing
Owner and Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . .39
Organization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
The Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39
Prudential Securities
Group Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
Prudential Securities
Incorporated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
The Managing Owner. . . . . . . . . . . . . . . . . . . . . . . . . . . .44
Directors and Officers of
the Managing Owner. . . . . . . . . . . . . . . . . . . . . . . . . . .44
Duties of the Managing Owner . . . . . . . . . . . . . . . . . . . . . . . . .45
Fiduciary Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . .46
Managing Owner's Minimum Purchase
and Net Worth Obligations . . . . . . . . . . . . . . . . . . . . . . . .48
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Fees, Compensation and
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49
Actual and Potential Conflicts of
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Commodity Trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Summary of Advisory Agreement. . . . . . . . . . . . . . . . . . . . . . . . .59
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59
Term and Termination. . . . . . . . . . . . . . . . . . . . . . . . . . .59
Other Business of the
Trading Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
Liability and
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
Name of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
Summary of Brokerage
Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
Commodity Brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . .62
Foreign Currency
Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62
Custodial Functions . . . . . . . . . . . . . . . . . . . . . . . . . . .62
Administrative Functions. . . . . . . . . . . . . . . . . . . . . . . . .62
Flat Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
Summary of Trust Agreement . . . . . . . . . . . . . . . . . . . . . . . . . .63
Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64
Management Responsibilities
of the Managing Owner . . . . . . . . . . . . . . . . . . . . . . . . .64
Transfer of Interests . . . . . . . . . . . . . . . . . . . . . . . . . .64
Redemption of Interests . . . . . . . . . . . . . . . . . . . . . . . . .65
Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66
Reports and Accounting. . . . . . . . . . . . . . . . . . . . . . . . . .68
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69
Sharing of Profits
and Losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70
Election or Removal of
Managing Owner. . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
Exercise of Rights by
Limited Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . .72
Amendments and Meetings . . . . . . . . . . . . . . . . . . . . . . . . .73
Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
Income Tax Consequences. . . . . . . . . . . . . . . . . . . . . . . . . . . .73
Opinion of Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . .74
Treatment as a
Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74
Other Tax Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . .76
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . .85
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86
Glossary of Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86
Index to Certain Financial and
Other Past Performance
Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90
Financial Statements
The Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .92
The Managing Owner. . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Other Past Performance Information
Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Capsule of Other Pools
Sponsored by
the Managing Owner and its
Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
Trading Manager Capsules. . . . . . . . . . . . . . . . . . . . . . . . 113
Exhibit A - Form of Trust Agreement. . . . . . . . . . . . . . . . . . . . . A-1
Exhibit B - Form of Request for
Redemption. . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
Exhibit C - Form of Subscription
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . C-1
- State Suitability
Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . C-7
5
PAGE
SUMMARY OF THE PROSPECTUS
This summary of certain provisions of this Prospectus is proposed to
be used beginning April 1, 1997 and is intended for quick reference only and
does not purport to be complete. The remainder of this Prospectus contains
more detailed information; this summary is, therefore, qualified in its entirety
by the information appearing elsewhere in this Prospectus and in the exhibits
to the Prospectus.
Formation of Trust Willowbridge Strategic Trust (the "Trust") was
formed as a Delaware business trust on
October 16, 1995.
The principal offices of the Trust and the
Managing Owner are located at One New York
Plaza, 13th floor, New York, New York 10292-
2013 and their telephone number is (212) 778-
7866. The Trust maintains its registered office
in the State of Delaware c/o Wilmington Trust
Company (the "Trustee"), Rodney Square
North, 110 North Market Street, Wilmington,
Delaware 1989.
Performance of the Trust The Trust began trading May 1, 1996, with an
initial capitalization of $12,686,200. Through
February 28, 1997, the Trust's performance has
been profitable, while exhibiting a high degree
of volatility volatility that can be expected to
continue.
Month-end
Monthly Net Asset Month-end
Rate of Value Net Asset
1996 Return Per Interest* Value *
May -9.86% $ 90.14 $11,277,934
June -0.58% $ 89.62 $15,268,082
July 9.17% $ 81.40 $16,371,166
Aug. 2.75% $ 83.64 $18,057,814
Sept. 10.01% $ 92.01 $21,177,254
Oct. 8.13% $ 99.49 $24,259,704
Nov. 6.91% $ 106.36 $26,265,939
Dec. -2.72% $ 103.47 $26,980,168
Total 3.47%
1996 Compound Rate of Return (8 months) 14.47%
1997
Jan. 2.45% $ 106.01 $32,147,746
Feb. 7.98% $ 114.47 $39,518,232
Cumulative Compound Rate of Return from
May 1, 1996 - February 28, 1997 (10
months) 14.47%
* The Month-end Net Asset Value per
Interest and month-end Net Asset Value
figures above reflect a reduction for all fees
and expenses including accrued Incentive
Fees.
6
Risk Factors THESE ARE SPECULATIVE SECURITIES AND
AN INVESTMENT IN THE TRUST INVOLVES A
HIGH DEGREE OF RISK. YOU SHOULD BE
AWARE THAT:
// futures, forward and options trading is
speculative, volatile and highly leveraged;
// the Trust relies on the Trading Manager for
success;
// past performance is not necessarily
indicative of future results;
// You could lose a substantial portion, or even
all, of your investment;
// Your tax liability is likely to exceed cash
distributions to you;
// substantial charges are imposed on the
Trust; we estimate that the Trust will have to
achieve net trading profits (after taking
interest income into account) of
approximately 6.55% per annum in order to
offset expenses, and of approximately 9.55%
to also offset the 3% redemption charge
imposed on any Interests that you may
redeem as of the end of the 12th month
following their sale;
// You will have limited voting rights and no
control over the Trust's business;
// You will have limited ability to liquidate your
Interests, because transfer is restricted,
redemption is limited, and no trading market
for the Interests exists;
// actual and potential conflicts of interest
exist;
// Unless the Trust is successful -- and we
cannot assure you that it will be -- it cannot
serve as a beneficial diversification for your
portfolio.
Liabilities Under the Trust Agreement, the Managing
Owner has unlimited liability for the obligations
of the Trust in excess of the Trust's assets;
because your capital contribution is part of the
Trust's assets, it is subject to the risks of the
Trust's business. Under the Delaware
Business Trust Statute, you, as a Limited
Owner, are entitled to the same limitation of
personal liability that is extended to
shareholders of private, for-profit Delaware
corporations. And while you generally cannot
lose more than your investment and your share
of the Trust's profits, under Delaware law a
Limited Owner's potential liability is not limited
strictly to that. See "Summary of Trust
7
Agreement--Liabilities" for a more complete
explanation.
Trading Activities The Trust's investment objective is to increase
the value of your Interests over the long term
(asset appreciation), while controlling risk and
volatility. We will engage primarily in the
speculative trading of a diversified portfolio of
commodity futures, forward and options
contracts. Cash and spot transactions also
may be effected from time to time.
Willowbridge Associates Inc. ("Willowbridge" or
the "Trading Manager"), a professional
commodity trading manager, makes the Trust's
commodities trading decisions and has been
allocated 100% of the Trust's Net Asset Value
for trading purposes. THERE IS NO
ASSURANCE THAT WE WILL MEET OUR
INVESTMENT OBJECTIVE, AND YOU COULD
LOSE ALL OR A SUBSTANTIAL PORTION OF
YOUR INVESTMENT. See "Business of the
Trust," "Plan of Distribution," "Subscription
Procedure and Escrow of Funds," "Trust's
Trading Limitations and Policies" and
"Description of the Trading Manager."
Segregated Accounts/
Interest Income The net proceeds of this offering have been
and continue to be deposited in cash in
segregated trading accounts at Prudential
Securities. Prudential Securities credits the
Trust with 80% of the interest it earns on these
deposits and retains the balance; currently, the
interest rate is approximately equal to the
Federal Funds rate, but may change from time
to time. We intend to continue this
arrangement for as long as our brokerage
agreement with Prudential Securities remains
in effect.
Except for that portion of the Trust's assets
used as margin to maintain the Trust's forward
currency contract positions (which does not
currently exceed 0%), the Trust's assets will be
maintained with Prudential Securities in
accordance with CFTC segregation
requirements, as set forth in the Commodity
Exchange Act and CFTC regulations, and used
only to margin positions on recognized
domestic and foreign exchanges. We will not
invest in or loan funds to any other person or
entity. See "Use of Proceeds," "Trust's Trading
Limitations and Policies" and "Summary of
Brokerage Agreement."
The Trading Manager Willowbridge is an independent professional
commodity trading manager retained by the
Managing Owner on the Trust's behalf (the
"Trading Manager"). The Trading Manager
instructs the Trust on its trading decisions.
The Trading Manager was allocated 100% of
the Trust's initial assets and as of March 1,
1997, was directing the trading of
approximately $43,747,000 for the Trust. In its
trading on behalf of the Trust, the Trading
Manager currently allocates the
8
Trust's assets
to the following five trading strategies: XLIM,
Argo, Titan, Vulcan and Siren. See
"Description of the Trading Manager--
Description of the Trading Manager's Trading
Approach." The Managing Owner, subject to
the consent of the Trading Manager,
determines the percentage of Trust assets to
be allocated at any point to these trading
strategies. This decision is based on the
Managing Owner's assessment of market
conditions, of the Trading Manager's risk
management capacity, of the risk/reward
balance, and of performance and other factors.
Allocation of Assets to
Trading Strategies: The Managing Owner initially allocated the
Trust's assets as follows and additional
allocations have been made in these same
proportions:
Start of Trading:
XLIM ARGO TITAN VULCAN SIREN
Program Program Program Program Program
50% 20% 10% 10% 10%
As of March 1, 1997, as a result of trading
profits and losses, the Trust's assets were
traded in the following proportions:
48.75% 20.34% 10.72% 11.01% 9.18%
These proportions will continue to change as
the Trust earns trading profits and incurs trading
losses. Between 15% and 40% of the Trust's
assets normally are committed as margin for
commodities trading, but from time to time these
percentages are substantially more or less. See
"Description of the Trading Manager" and
"Trust's Trading Limitations and Policies."
The Advisory Agreement The Advisory Agreement among the Trust, the
Managing Owner and the Trading Manager (the
"Advisory Agreement"), which has been in effect
since trading commenced on May 1, 1996, is due
to expire on April 30, 1997, but will be renewed
for at least an additional one-year term. See
"Summary of Advisory Agreement." The
Managing Owner may retain additional or sub-
stitute commodity trading managers, at its
discretion, but has no current intention to do so.
The Managing Owner Prudential Securities Futures Management Inc.
(the "Managing Owner"), a Delaware corporation,
administers the business and affairs of the Trust
(excluding commodity trading decisions, except
in certain limited, and essentially emergency,
situations). The Managing Owner is a wholly
owned subsidiary of Prudential Securities
Incorporated
9
("Prudential Securities"). See
"Actual and Potential Conflicts of Interest." The
Managing Owner makes contributions to the
Trust necessary to maintain at least a 1%
interest in the Trust's profits and losses at all
times. See "Managing Owner's Minimum
Purchase and Net Worth Obligations." The
Managing Owner currently has contributed
$439,000 to the Trust.
The Trustee Wilmington Trust Company, a Delaware banking
corporation, is the Trust's sole trustee. The
Trustee delegated to the Managing Owner all of
the power and authority to manage the business
and affairs of the Trust and has only nominal
duties to and liabilities under the Trust.
Prudential Securities
Incorporated Prudential Securities, the parent of the Managing
Owner, acts as the clearing broker, executes and
clears the Trust's futures and options trans-
actions, and performs certain administrative
services for the Trust. These administrative
services include, without limitation, preparing
and sending to the Limited Owners account
statements and periodic reports, calculating
equity balances and margin requirements, and
communicating with Limited Owners. See
"Summary of Brokerage Agreement." Prudential
Securities is a wholly owned subsidiary of
Prudential Securities Group Inc. ("PSGI"). PSGI
is an indirect wholly owned subsidiary of The
Prudential Insurance Company of America.
Because of these affiliations, the fee the Trust
pays to Prudential Securities was not negotiated
at arm's length. See "Actual and Potential
Conflicts of Interest." The Trust also engages in
foreign currency forward transactions with
Prudential Securities, which in turn engages, as
a principal, in back-to-back transactions with
Prudential-Bache Forex (USA) Inc. and its
subsidiaries ("PBFI"), also affiliates of Prudential
Securities. PBFI attempts to earn a profit on the
spread in such transactions; and even though
PBFI is an affiliate, PBFI is required to charge a
competitive spread. All compensation paid to
Prudential Securities is within the overall limits
set forth in the guidelines for the Registration of
Commodity Pool Programs imposed by the
North American Securities Administrators
Association, Inc. ("NASAA Guidelines").
Investment Requirements/
Who May Invest You must represent and warrant to the Trust in
the Subscription Agreement that, among other
things, your net worth and annual income
satisfy certain minimum requirements.
Generally, you are required to have a net worth
(exclusive of home, home furnishings and
automobiles) of at least $150,000 or a net worth,
similarly calculated, of at least $45,000 and an
annual gross income of at least
10
$45,000, although many states impose greater net worth
and/or income requirements. See "State
Suitability Requirements" in the Subscription
Agreement, Exhibit C to this Prospectus. IRAs,
Keogh and other employee benefit plans are
subject to special suitability requirements. You
should not subscribe unless you understand,
among other things, (i) the fundamental risks
and possible financial hazards of the
investment, (ii) that the Interests lack liquidity,
(iii) that the Managing Owner will manage and
control the Trust's business and operations,
(iv) the tax consequences of the investment, (v)
the potential limitations on your limited liability
and (vi) the Trust's structure (including fees) and
proposed trading activities. Moreover, you may
not invest more than 10% of your liquid net
worth (exclusive of home, home furnishings and
automobiles) in the Trust. An investment by
IRA, Keogh and other ERISA subscribers should
comprise no more than 10% of the IRA, Keogh
or ERISA Plan's assets at the time of
subscription. See "Risk Factors," "Description
of the Trading Manager," "Investment
Requirements/Who May Invest," "Fees,
Compensation and Expenses," "Actual and
Potential Conflicts of Interest," "Income Tax
Consequences" and the Subscription Agreement
(Exhibit C hereto).
Plan of Distribution We are offering a maximum of $100,000,000 of
Limited Interests (the "Interests"), $60,235,800 of
which is available for issuance as of March 1,
1997. Any subscription may be rejected in
whole or in part by the Managing Owner for any
reason.
The Interests are being offered through
Prudential Securities. Additional Sellers also
may be utilized. You are required to have a
securities account at Prudential Securities (or an
Additional Seller) and to have funds in that
account at the time of your subscription in an
amount at least equal to the amount subscribed
for. Prudential Securities or an Additional Seller
will debit your account for the full amount of the
subscription. We will accept subscriptions in
cash only. If you decide to sell securities in
your Prudential Securities account in order to
subscribe for Interests in the Trust, you will
have income tax consequences from that sale.
You may revoke your subscription only within
five (5) business days of your receipt of this
Prospectus, and may not revoke it after that
time.
Minimum Purchases The price per Interest is its current month-end
Net Asset Value. No front-end sales charges or
selling commissions are charged, and the Net
Asset Value has not been diluted by the Trust's
organization and offering expenses. Your
minimum purchase is $5,000, except that the
minimum purchase for an IRA generally is
$2,000. Existing Limited Owners may
11
purchase additional Interests in increments of $100.
See "Investment Requirements/Who May Invest" and
"Plan of Distribution."
Organization and Offering
Expenses The Trust is not responsible for the payment of
any of the expenses associated with the
organization of the Trust and the offering of
Interests. These expenses are the obligation of
Prudential Securities or an affiliate and will not
be reimbursed by the Trust to Prudential
Securities. As a result, 100% of the Trust's
offering proceeds are available for trading
activities. See "Business of the Trust," "Use of
Proceeds" and "Fees, Compensation and
Expenses."
Offering of Interests The Trust offers Interests as of the end of each
month, and will continue to offer Interests until
an aggregate of $100,000,000 of Interests are
sold, but in no event later than January 31, 1998
("Continuous Offering"). You will be admitted to
the Trust as a Limited Owner as of the first day
of the month following the month in which your
subscription is received and accepted. The
Managing Owner may terminate the Continuous
Offering at any time prior to the sale of
$100,000,000.
Redemption of Interests You may redeem your Interests as of the end of
a month, and your redemption will be effective
immediately after the close of business on that
date (a "Redemption Date"). Redemptions are
made at the then-current Net Asset Value per
Interest (which, among other things, will be
reduced by any accrued incentive fees to the
Trading Manager). If you redeem your Interests
on or before the end of the first six-month
period after your purchase, you will be charged
a redemption fee of 4% of the Net Asset Value at
which your Interests are redeemed; if you
redeem your Interests on or before the end of
the second successive six-month period after
your purchase, you will be charged a 3%
redemption fee. For the purpose of determining
whether redemption fees apply, an Interest is
considered purchased on the day -- the first day
of the month -- you are admitted as Limited
Owner and the subscription Proceeds are
invested in the Trust. Redemption fees will be
paid to the Managing Owner.
You must deliver your request for redemption in
writing to the Managing Owner at least ten (10)
days before the applicable Redemption Date
(counting the last day as one day). If, as of the
close of business of any business day, the Net
Asset Value per Interest, after adjusting for
distributions, is less than 50% of the Net Asset
Value per Interest as of the end of the
immediately preceding month, trading will cease
while you are given the opportunity to redeem
your Interests. In
12
addition, the Managing Owner
may, in certain circumstances, mandatorily
redeem any or all Interests held by you. You
should note that Prudential Securities Financial
Advisors have a financial incentive to advise
you not to redeem your Interests. See "Actual
and Potential Conflicts of Interest--Advising on
Redemptions."
Distributions The Managing owner will make distributions to
you at its discretion. Because the Managing
Owner does not presently intend to make
ongoing distributions, your income tax liability
for any Trust profits will, in all likelihood, exceed
any distributions you receive from the Trust.
See "Income Tax Consequences."
Transfer of Interests The Trust Agreement ("Trust Agreement" or the
"Agreement") restricts the transferability and
assignability of the Interests. There is not now,
nor will there be, a primary or secondary trading
market for the Interests.
Income Tax Consequences
Under current federal income tax law, the Trust
is classified as a partnership and not as an
association taxable as a corporation, and does
not pay federal income tax. Instead, you must
report on your own income tax return and pay
all applicable federal income taxes on your
allocable share of any Trust trading profits and
other Trust taxable income (whether or not any
cash is distributed to you). Your ability to
deduct losses and expenses relating to the
Trust's trading activities may be significantly
limited. Special tax risks apply to tax-exempt
Limited Owners and to non-United States
investors. The tax laws applicable to the Trust
and to your investment in Interests are subject
to change. For a more complete discussion of
tax risks relating to this investment, see "Risk
Factors - Tax and ERISA Risks" and "Income
Tax Consequences."
Termination The term of the Trust expires on December 31,
2015. The Trust may terminate earlier in certain
circumstances, including, but not limited to,
13
(i) the insolvency or bankruptcy of the Managing
Owner without substitution of a new Managing
Owner; (ii) any event that would make the
continued existence of the Trust unlawful; (iii)
the expiration or termination of the Managing
Owner's registration with the CFTC as a
commodity pool operator; (iv) the vote of
Limited Owners holding a majority in interest of
the outstanding Interests (excluding Interests
held by the Managing Owner or an Affiliate);
(v) the insolvency or bankruptcy of the Trust;
(vi) the Managing Owner's determination that the
value of the Trust's Net Assets in relation to its
operating expenses makes it unreasonable or
imprudent to continue the Trust's business; or
(vii) a decline in the Net Asset Value of the Trust
by 50% from either the Trust's initial Net Asset
Value or the Trust's Net Asset Value on the first
day of a fiscal year, in each case after
appropriate adjustment for distributions,
redemptions and additional contributions to
capital.
Glossary of Terms See the "Glossary of Terms" for the definition of
certain key terms used in this Prospectus.
Reports and Accounting As of the end of each month and as of the end
of each Fiscal Year, we will furnish you with
(1) those reports (in such detail) as are required
by the CFTC and the National Futures
Association ("NFA"), including, but not limited
to, an annual audited financial statement
certified by independent public accountants;
(2) any other reports (in such detail) required by
any other governmental authority that has
jurisdiction over the activities of the Trust,
including, but not limited to, the Securities and
Exchange Commission; and (3) any other
reports or information that the Managing Owner,
in its discretion, determines to be necessary or
proper. You will also be provided with, on a
timely basis, appropriate information to permit
you to file federal and state income tax returns.
You also will be notified within seven (7)
business days from the date of (i) any decline in
the Net Asset Value per Interest, after
adjustment for distributions, as of the close of
business on any business day, to less than 50%
of the Net Asset Value per Interest as of the end
of the immediately preceding month, (ii) any
material changes in the Trust's Advisory
Agreement, including any modification of the
method of calculating the incentive fee, or any
termination of the Trading Manager and/or
retention of a new trading manager, (iii) any
material change affecting the compensation
arrangements between the Trust and any party
enumerated under "Fees, Compensation and
Expenses," or (iv) any change of Trustee.
Fiscal Year December 31.
14
Selected Financial Data
[unaudited]
Period from May 1, 1996
(Commencement of
Operations)
to December 31, 1996
Net Realized Gain on Commodity
Transactions $ 3,130,423
Net Unrealized Gain on Open
Commodity Positions $ 354,215
Interest Income $ 663,866
Commissions $ 1,033,462
Management Fees $ 409,964
Incentive Fees $ 414,894
Net Income $ 2,290,184
Allocation of Net Income
Limited Interests $ 2,268,174
General Interests $ 22,010
Net Income Per Weighted
Average Limited and General Interest $ 10.79
Total Assets $ 27, 823,974
Redemptions $ 2,292,016
Net Asset Value Per Interest $ 103.47
15
FEES, COMPENSATION AND EXPENSES
No selling commissions or front-end
charges are imposed by the Trust
Except as set forth below, no compensation will be
paid, directly or indirectly, by the Trust to any other
person, including the Trust's Sponsor and Managing Owner
CHARGES PAID BY THE TRUST OR LIMITED OWNERS:
CAPTION
Entity Form of Compensation Amount of Compensation
I. Prudential (a) Monthly fee for brokerage 7.75%. An annual rate of 7.75% of the
Securities services rendered, as well as for Trust's Net Asset Value (as defined in
assisting the Managing Owner in Exhibit A hereto) as of the first day of
managing non-commodities assets. each month.
Out of this fee Prudential Securities
will be responsible for the
following: The fixed brokerage fee as of
December 31, 1996 equaled
approximately $48.71 per round turn
transaction.
(i) Compensating its employees See Note (1) to the cover page.
who sell Interests and perform
continuing services; and
(ii) Execution costs, including Approximately 1% of the Trust's Net
floor brokerage expenses, give-up Asset Value
charges and NFA, exchange and
clearing fees.
(b) Interest income. 20% of all interest income earned on
Trust assets is deposited at
Prudential Securities.
II. Managing
Owner Redemption fees. 4% and 3% of the Net Asset Value of
an Interest redeemed during the 1st
and 2nd successive six-month
periods following their sale.
III. Prudential-
Bache Forex
(USA) Inc.
and its
Subsidiaries Bid-asked spread. PBFI attempts to earn a profit on the
spread on all back-to-back foreign
currency forward transactions in
which the Trust, Prudential Securities
and it are involved.
IV.Trading
Manager (a) Monthly management fee. An annual rate of 3% of the Trust's
Net Asset Value allocated to its
management as of the end of each
month.
(b) Quarterly incentive fee. 20% of the Trust's New High Net
Trading Profits as of the end of each
quarter and upon the redemption of
Interests, if other than at the end of a
quarter.
V.The Trust Any extraordinary expenses (e.g., If and as incurred. To date, no such
litigation and indemnification). expenses have been incurred.
CHARGES PAID BY PRUDENTIAL SECURITIES OR ITS AFFILIATES:
CAPTION
Entity Form of Compensation Amount of Compensation
VI.Prudential (a) Expenses of the organization of $580,000.
Securities the Trust and the offering of
or its Interests;
Affiliates
(b) Routine operational and Approximately $125,000 per annum.
administrative expenses (e.g.,
filing, accounting and computer
services); and
(c) Routine legal, auditing and Approximately $75,000 per annum.
other expenses of third party
service providers, including the
Trustee.
See "ESTIMATED TWELVE-MONTH BREAK-EVEN ANALYSIS" on the next page
of this Summary.
16
PROJECTED TWELVE-MONTH "BREAK-EVEN" ANALYSIS
THE FOLLOWING PROJECTED TWELVE-MONTH BREAK-EVEN
ANALYSIS TAKES INTO ACCOUNT ALL FEES AND EXPENSES
ENUMERATED ABOVE (OTHER THAN ADVISORY INCENTIVE FEES AND
EXTRAORDINARY EXPENSES WHICH ARE IMPOSSIBLE TO PREDICT),
AND IS EXPRESSED AS A DOLLAR AMOUNT AND AS A PERCENTAGE
OF A $5,000 INITIAL INVESTMENT:
Description $5,000.00 Percentage of a
of Charges Investment $5,000 Investment
Brokerage Fees $ 387.50 7.75%
Advisory Management Fees $ 150.00 3.0%
Advisory Incentive Fees* -- --
Total $ 537.50 10.75%
Less Estimated
Interest Income** ($ 210.00) 4.20%
Estimated 12-month
Break-Even Level
Without Redemption
Charges $ 327.50 6.55%
Redemption Charges*** $ 150.00 3.0%
Estimated 12-month
Break-Even Level
After Redemption
Charges $ 477.50 9.55%
* Advisory Incentive Fees are only paid on "New High Net Trading Profits".
New High Net Trading Profits are determined after Brokerage and
Advisory Management Fees, and without regard to interest income. The
Trust could pay Advisory Incentive Fees in years in which the Trust
breaks even, or even loses money, due to the quarterly, rather than
annual, nature of such fees.
** The Trust receives 80% of all interest income earned on its assets at the
current rate of 5.25%.
*** An early redemption fee of 4% will be assessed on an Interest redeemed
before the end of the 6th full month after its sale. An early redemption
fee of 3% will be assessed on an Interest redeemed after the end of the
6th, but on or before the end of the 12th, full month after its sale.
17
RISK FACTORS
The Trust is a new venture in a high risk business. An investment in
the Interests is very speculative, and you should make this investment only
after consulting with independent, qualified sources of investment and tax
advice. You should make a purchase of the Interests only if your financial
condition will permit you to bear the risk of a total loss of your investment
in the Trust. You should consider an investment in the Interests only as a
long-term investment. Moreover, in order properly to evaluate the risks
described below, as well as the risks described in the CFTC Risk Disclosure
Statement, you must familiarize yourself with the relevant terms and
concepts relating to commodities trading and the regulation of commodities
trading, which are discussed below in this Prospectus in the sections
captioned "Commodity Trading" and "Trust's Trading Limitations and
Policies."
Among the risks of investing in the Trust are the following:
(1) GENERAL
Past Performance is Not Necessarily Indicative of Future Performance.
The Trust selected the Trading Manager to manage its assets because the
Trading Manager performed well through the date of its selection. You must
consider, however, the uncertain significance of past performance in
determining whether or not to invest in the Trust, and you should not rely to
a substantial degree on the Trading Manager's or the Managing Owner's
record to date for predictive purposes. You should not assume that the
Trading Manager's future trading decisions will avoid substantial losses, no
less be profitable, or result in performance for the Trust comparable to the
Trading Manager's or the Managing Owner's past performance. In fact, a
significant amount of academic attention has focused on the fact that futures
funds more frequently than not underperform the past performance records
included in the funds' prospectuses.
Because you and other investors will both acquire and redeem
Interests at different times, you may experience a loss on your Interests even
though other investors, and the Trust as a whole, are profitable.
Consequently, even the past performance of the Trust itself may not be
representative of all investors' investment experience in it.
The Trust's Performance is Not Correlated to the Debt or Equity
Markets. The Trust anticipates that over time its performance will be non-
correlated with the general equity and debt markets; which means simply
that the Trust's performance may or may not be similar to the performance
of the general financial markets.
Non-correlation, however, does not mean negative correlation. The
Trust will by no means necessarily be profitable during downward cycles in
stock and bond prices. Non-correlation does not mean that there is an
inverse relationship between the Trust's performance and the performance
of general financial markets -- stock indices may rise while Interest values
rise as well as while Interest values fall. During certain periods, the Trust
may perform in a manner very similar to more traditional portfolio holdings,
providing little, if any, diversification benefits.
There Is No "Principal Protection" Feature. You are not assured of any
minimum return. You could lose your entire investment (including any
undistributed profits), in addition to losing the use of your subscription funds
during the lifetime of the Trust; moreover, under Delaware law, you could
theoretically lose even more than that. See "Summary of Trust Agreement-
Liabilities" for a more complete explanation.
The Trust Has a Limited Operating History. The Trust commenced
trading on May 1, 1996, and has a limited operating history.
18
See "Performance of the Trust."
(2) TRADING RISKS
Commodity Interest Trading is Volatile. A principal risk in futures,
forward and options trading is volatile performance. In a single advisor fund
such as the Trust, where the Trading Manager makes all the trading
decisions, that volatility may increase as compared to a fund with several
trading advisors (assuming those advisors are non-correlated with each
other) that, collectively, can diversify risk to a greater extent. See
"Description of the Trading Manager" and "Commodity Trading."
Futures Trading is Highly Leveraged. The low margin normally
required in futures, forward and options trading provides a large amount of
leverage; i.e., contracts can have a value substantially greater than their
margin and may be traded for a comparatively small amount of money.
Thus, a relatively small change in the market price of an open position can
produce a disproportionately large profit or loss. See "Commodity Trading--
Margins" and "Summary of Trust Agreement--Liabilities."
Commodity Trading May Be Illiquid. Although the Trust generally
purchases and sells actively traded contracts (see "Trust's Trading
Limitations and Policies"), we cannot assure you that orders will be executed
at or near the desired price, particularly in thinly traded markets, in markets
that lack trading liquidity, or because of applicable "daily price fluctuation
limits," "speculative position limits" or market disruptions. Market
illiquidity or disruptions could cause major losses.
Technical Trading Systems Require Trending Markets and Sustained
Price Moves to Be Profitable. The Trading Manager, like many other trading
managers, uses a technical trading system for many of its trading decisions.
See "Description of the Trading Manager--Description of the Trading
Manager's Trading Approach". For any technical trading system to be
profitable, there must be price moves or trends in some commodities that are
significant enough to the system to dictate an entry or exit decision. In
addition, technical trading systems will not be profitable if there are no
trends of the kind such systems seek to follow, and such trendless markets
have occurred in the past and are likely to recur. In addition, technical
systems may be profitable for a period of time, after which the system fails
to detect correctly any future price movements. Accordingly, technical
followers may modify and alter their systems on a periodic basis. Any factor
(such as increased governmental control of, or participation in, the markets
traded) that lessens the prospect of sustained price moves in the future may
reduce the likelihood that any commodity trading advisor's ("CTA") technical
systems will be profitable. A number of markets traded by the Trust, in
particular the currency and interest-rate markets, are likely targets for
governmental intervention.
The Large Number of Existing Technical Traders Could Adversely
Affect the Trust. The Managing Owner believes that there has been, in recent
years, a substantial increase in the use of technical trading systems.
Different technical systems will tend to generate different trading signals.
However, the significant increase in the use of technical systems as a
proportion of the overall trading volume in the Trust's markets as a whole,
as well as in the particular markets included in the Trust's portfolio, could
result in traders' attempting to initiate or liquidate substantial positions at
or about the same time as the Trust, or otherwise altering historical trading
patterns or affecting the execution of trades, all to the significant detriment
of the Trust.
Discretionary Decision-Making May Result in Missed Opportunities for
the Trust. The Trading Manager's trading strategies do involve discretionary
aspects as well as technical factors. Discretionary decision-making may
result in the Trading Manager's failing to capitalize on certain price trends or
making unprofitable trades in a situation where a trader using a systematic
approach might not have done so. See "Description of the Trading Manager-
- - -Description of the Trading Manager's Trading Approach."
19
Trading on Exchanges Outside the United States may be Riskier than
Trading on U.S. Exchanges. The Trust presently trades on non-U.S.
exchanges in certain of its programs. These exchanges, whether or not
linked to a U.S. exchange, are not regulated by the CFTC or any other United
States governmental agency or instrumentality; and, therefore, trading on
these exchanges may involve more risks than similar trading on U.S.
exchanges. See the CFTC Risk Disclosure Statement.
The Unregulated Nature of the Forward Markets Creates Counter-Party
Risks That Do Not Exist on U.S. Futures Exchanges. Forward contracting is
not regulated by the CFTC or any other U.S. government agency, and these
contracts are not guaranteed by an exchange or its clearing house. If the
Trust deals as a principal with a counterparty that fails, a default would most
likely result, depriving the Trust of any profit potential, or forcing the Trust
to cover its commitments for resale, if any, at the then current market price.
Because the Trust executes its forward trading exclusively with
Prudential Securities (and its affiliates, PBFI), as principal, liquidity
problems
might be greater in the Trust's forward trading than they would be if trades
were placed with and through a larger number of forward market participants.
If governmental authorities impose exchange and credit controls or fix
currency exchange rates, trading in certain currencies might be eliminated
or substantially reduced, and the Trust's forward trading might be limited to
less than desired levels. The amount of loss the Trust may claim for tax
purposes because of unprofitable forward trades may be limited. Also, to the
extent forward contracts are offset by futures positions or other forward
positions, the loss limitation rules applicable to "offsetting positions" might
prevent the allowance of losses for tax purposes. See "Income Tax
Consequences."
Options Trading Can Be More Volatile and Expensive Than Futures
Trading. The Trading Manager trades options on futures. Although
successful options trading requires many of the same skills as successful
futures trading, the risks involved are somewhat different. For example, the
assessment of near-term market volatility -- which is directly reflected in the
price of outstanding options -- can be of much greater significance in trading
options than it is in many long-term futures strategies. If market volatility
is
incorrectly predicted, the use of options can be extremely expensive.
The Start-up Period Entails Increased Investment Risks. The Trust
encountered a start-up period following the close of the Initial Offering
Period, and will encounter similar start-up periods following each subsequent
closing during the Continuous Offering. During each start-up period the
Trust will incur certain risks relating to the initial investment of the assets
received at such times. Specifically, the Trust cannot develop a fully
diversified portfolio instantly upon the commencement of trading. A decline
in the initial Net Asset Value could result from the level of diversification in
the Trading Manager's trading activities at the outset, which may be lower
than in a fully committed portfolio.
(3) RISKS RELATING TO THE TRADING MANAGER
Reliance on the Trading Manager for Success. The Trading Manager
will make the commodity trading decisions for the Trust. Therefore, the
Trust's success largely depends on the judgment and ability of the Trading
Manager. We cannot assure you that the Trading Manager's trading on
behalf of the Trust will prove successful under all or any market conditions.
No Assurance of Continued Services of Trading Manager or Its Trading
Strategies. We cannot assure you that (i) the Trading Manager, or the Trust,
will not exercise their rights to terminate the Advisory Agreement under
certain conditions, (ii) the Advisory Agreement with the Trading Manager will
be renewed on the same terms as the current Advisory Agreement following
its expiration, or (iii) if new trading advisors are retained they will be
20
(a) retained on terms as favorable to the Trust as those negotiated with the
Trading Manager or (b) required to recoup losses sustained previously before
being entitled to receive incentive fees. Moreover, we cannot assure you that
the level of the Trust's capitalization will permit the Trading Manager to use
all five trading strategies at all times. In addition, if the Trading Manager's
license agreement with Caxton Corporation is terminated, that termination
could have a material adverse effect on the Trust because four of the five
trading strategies used for an aggregate of approximately half of the Trust's
assets would then no longer be available to the Trading Manager to use on
behalf of the Trust.
The Trading Manager's Past Performance Record is Inconsistent. The
performance record of the Trading Manager also reflects significant
variations in profitability from period to period. Moreover, the combination
of trading strategies used by the Trading Manager has a limited performance
history, although each individual trading strategy has a more substantial past
performance record. See "Description of the Trading Manager" and "Past
Performance Information--The Trading Manager."
Pro Forma Performance Record Is Not Indicative of How the Trust Will
Perform. The performance information shown in Capsule K, which attempts
to show the relative weightings of the five trading strategies used by the
Trading Manager for the Trust on a pro forma basis from January 1991
through April 1996, should not be taken as an indication of how the Trust will
perform, or would have performed, over the same period.
Other Clients of the Trading Manager May Compete with the Trust. The
Trading Manager manages large amounts of other funds and advises other
clients at the same time as it manages Trust assets; consequently, the Trust
may experience increased competition for the same positions. See "Actual
and Potential Conflicts of Interest."
Possible Adverse Effects of Increasing the Assets Under the Trading
Manager's Discretion. The Trading Manager has not agreed to limit the
amount of additional equity that it may manage. We cannot assure you that
the Trading Manager's strategies will not be adversely affected by any
additional equity accepted by the Trading Manager, especially if the
acceptance of additional equity affects the Trading Manager's capacity (i.e.,
the amount that the Trading Manager can trade effectively without violating
its trading and risk management capabilities).
(4) RISKS RELATING TO THE TRUST AND THE OFFERING
You Will Have a Limited Ability to Liquidate Your Interests. There is
and will be no primary or secondary market for the Interests. In addition, the
Trust Agreement, included as Exhibit A, restricts transfers and assignments
of Interests. You will be permitted to redeem your Interests generally as of
the close of business on the last day of each month (each, a "Redemption
Date"). The Trust will redeem your Interests at 100% of Net Asset Value. If
you redeem your Interests on or before the end of the first six-month period
after your purchase, you will be charged a redemption fee of 4% of the Net
Asset Value at which your Interests are redeemed. If you redeem your
Interests on or before the end of the second successive six-month period
after your purchase, you will be charged a 3% redemption fee. These
redemption fees will be paid to the Managing Owner. If a substantial number
of Limited Owners redeem their Interests, the Trust could be required to
liquidate positions at potentially unfavorable prices. Under extraordinary
circumstances, such as an inability to liquidate positions, the Trust may
delay redemption payments to you beyond the period specified in the Trust
Agreement. See "Summary of Trust Agreement--Transfer of Interests; --
Redemption of Interests."
21
The Trust Will Have to Overcome Substantial Fees and Commissions
in Order to Break Even Each Year. The Trust is required to pay substantial
fees that could deplete its assets, including a 7.75% annual fee to Prudential
Securities for brokerage and other services, and a 3% annual management
fee to the Trading Manager. After taking into account (i) all fees and
expenses to be paid by the Trust, but excluding the advisory incentive fee
(which is paid only on New High Net Trading Profits) and extraordinary
expenses (which are impossible to predict) and (ii) estimated interest income
of approximately 5.25% per annum expected to be earned on Trust assets,
it is currently estimated that the Trust will have to achieve annual net trading
profits of approximately 6.55% in order to offset the next twelve months of
expenses, and of approximately 9.55% to also offset the 3% redemption
charge imposed on Interests being redeemed as of the end of the 12th
month following their sale. This break-even level will be higher, to the extent
that interest rates decrease, or lower, to the extent that interest rates
increase, in the future. See "Projected Break-Even Analysis."
The Payment of Quarterly Incentive Fees Does Not Assure the
Realization of Profits. The Trust also pays the Trading Manager a quarterly
incentive fee based upon the "New High Net Trading Profits" earned by the
Trading Manager on the Trust's Net Asset Value allocated to the Trading
Manager. These profits include unrealized appreciation on open positions.
Accordingly, it is possible that the Trust will pay an incentive fee on trading
profits that do not become realized (in whole or in part). The Trading
Manager will retain all incentive fees paid, even if the Trust incurs a
subsequent loss on those fees. Because the incentive fee is paid quarterly,
it is possible that such payment may be made during a year in which the Net
Asset Value per Interest ultimately declines from the outset because of
losses occurring after the date of an incentive fee payment or because of the
non-realization of profits on which an incentive fee was paid. See "Fees,
Compensation and Expenses."
The Trust Is Subject to Conflicts of Interest. A number of actual and
potential conflicts of interest exist in the operation of the Trust's business,
including conflicts involving (i) the affiliates of the Managing Owner,
Prudential Securities and PSGI, (ii) Prudential Securities-related activities,
(iii)
Prudential Securities' advising on redemptions, (iv) other commodity funds
sponsored by Prudential Securities, and (v) management of other accounts
by the Trading Manager. See "Actual and Potential Conflicts of Interest."
You Have Limited Rights. Pursuant to the Trust Agreement, you will
exercise no control over the Trust's business. However, certain actions,
such as termination or dissolution of the Trust, may be taken, or approved,
upon the affirmative vote of Limited Owners owning more than fifty percent
(50%) of the Outstanding Interests (excluding Interests owned by the
Managing Owner and its affiliates). See "Summary of Trust Agreement--
Exercise of Rights by Limited Owners; --Termination."
There Was No Independent Investigation of the Terms of the Offering
or the Trust's Structure. Prudential Securities is an affiliate of the Managing
Owner, and made no independent investigation of the terms of this offering
or the structure of the Trust. Except for the agreements with the Trading
Manager and the Trustee, the terms of this offering and the structure of the
Trust have not been established as the result of arm's length negotiation.
(5) TAX AND ERISA RISKS
Your Tax Liability May Exceed Distributions to You. For federal income
tax purposes, your taxable income or loss for each taxable year of the Trust
will include your allocable share of Trust ordinary income and loss, as well
as your allocable share of Trust capital gains and losses recognized during
the year. If the Trust has taxable income for a year, your allocable share of
that income will be taxable to you, whether or not any distributions have
been or will be made to you. Under certain circumstances, all or part of such
income would be taxable to you even if you are otherwise tax-exempt. Also,
the Trust might sustain losses
22
offsetting its profits after the end of a year, so
that if you did not redeem your Interests as of such year-end, you might
never receive the profits on which you have been taxed. The Managing
Owner, in its discretion, will determine whether, and in what amount, the
Trust will make distributions. There is no present intention to make
distributions. See "Summary of Trust Agreement--Sharing of Profits and
Losses; ---Distributions." Accordingly, it is likely that you will incur tax
liabilities as a result of being allocated Trust taxable income, but will not
receive distributions of cash with which to pay such taxes.
Your ability to claim current deductions for certain expenses or losses,
including your share of any Trust capital losses, will be subject to various
limitations. Thus, the income tax effects of the Trust's transactions may
differ from the economic consequences of such transactions. See "Income
Tax Consequences."
Partnership Status Is Not Assured. The Trust, although classified as
a partnership under currently effective federal income tax regulations, could
become taxable as a corporation if it were to be considered a publicly traded
partnership for federal income tax purposes. This should not apply to or
affect the Trust, based upon (and subject to the continued accuracy of) the
facts and the Managing Owner's representations set forth in this Prospectus.
See "Income Tax Consequences."
There Is the Possibility of a Tax Audit. We cannot assure you that the
Trust's tax returns will not be audited by a taxing authority or that an audit
will not result in adjustments to the Trust's returns. If an audit results in
an
adjustment, you may be required to file amended returns and to pay
additional taxes plus interest. See "Income Tax Consequences."
You are strongly urged to consult your own tax adviser and counsel
about the possible tax consequences to you of an investment in the Trust.
Tax consequences may differ for different investors, and you could be
affected by changes in the tax laws. See "Income Tax Consequences."
Employee Benefit Plan Considerations. Special considerations apply
to investments in the Trust by pension, profit sharing, stock bonus, Keogh
or other employee benefit plans or by IRAs (collectively, "Plans"). See
"Investment Requirements/Who May Invest."
(6) REGULATORY RISKS
The Clearing Broker's Regulatory and Other Legal Problems.
Prudential Securities and its affiliates have been involved in several lawsuits,
investigations, and enforcement actions by regulatory authorities, including
various matters surrounding allegations relating to the sale of interests in
over 700 non-commodities limited partnerships. See "The Trust, Trustee,
Managing Owner and Affiliates--Prudential Securities Incorporated."
Government Regulations May Change. Considerable regulatory
attention has recently been focused on publicly distributed partnerships, and,
in particular, on "commodity pools" such as the Trust. In addition, tax law
revisions could have a materially adverse effect on the Trust. Concern has
also been expressed about speculative pools of capital trading in the
23
currency markets because these pools have the potential to disrupt central
banks' attempts to influence exchange rates. In the current environment, you
must recognize the possibility that future regulatory changes may alter,
perhaps to a material extent, the nature of an investment in the Trust.
Failure of the Trust's Clearing Broker or Other Counterparties. The
Trust may be unable to recover its assets in the event of the bankruptcy of
Prudential Securities, its clearing broker, or any other counterparty with
whom it trades.
CFTC Registrations Could be Terminated. If the CE Act registrations
or NFA memberships of the Managing Owner, the Trading Manager or
Prudential Securities are no longer effective, these entities would not be able
to act for the Trust.
The foregoing risk factors are not a complete explanation of all the
risks involved in purchasing Interests in a fund that invests in the highly
speculative, highly leveraged trading of futures, forwards and options. You
should read this entire Prospectus before determining to subscribe for
Interests.
24
BUSINESS OF THE TRUST
Formation of the Trust
The Trust was formed on October 16, 1995 as a Delaware Business
Trust pursuant to the requirements of the Delaware Business Trust Statute
(the "Business Trust Statute") and commenced trading on May 1, 1996. The
Business Trust Statute provides that, except as otherwise provided in the
Trust Agreement, Interestholders in a Delaware Business Trust will have the
same limitation of liability as do shareholders of private, for-profit, Delaware
corporations. The Trust Agreement confers substantially the same limited
liability, and contains the same limited exceptions thereto, as a would a
limited partnership agreement for a Delaware limited partnership engaged in
like transactions as the Trust. In addition, pursuant to the Trust Agreement,
the Managing Owner of the Trust is liable for obligations of the Trust in
excess of Trust assets. See "Summary of Trust Agreement--Exercise of
Rights by Limited Owners; --Liabilities."
Trading Activities
The Trust engages primarily in the speculative trading of a diversified
portfolio of futures, forward and options contracts. Willowbridge Associates
Inc. (the "Trading Manager") is allocated 100% of the Trust's assets. In its
trading on behalf of the Trust, Willowbridge utilizes the following five trading
strategies: XLIM, Argo, Titan, Vulcan and Siren. The percentage of Trust
assets allocated at any point in time to these trading strategies is determined
by the Managing Owner, after consultation with the Trading Manager, based
on their assessment of market conditions, Trading Manager capacity (i.e., the
amount that the Trading Manager can trade effectively without violating its
trading and risk management capabilities), risk/reward considerations,
performance and other factors not currently known but deemed relevant at
the time. The initial allocation was XLIM - 50%, Argo - 20%, and Titan, Vulcan
and Siren - 10% each. As of March 1, 1997, the allocation was XLIM - 48.75%,
Argo - 20.34%, Titan - 10.72%, Vulcan - 11.01%, and Siren - 9.18%. This
allocation may be altered if the Managing Owner determines it is in the
Trust's best interests to do so. In the event the Trading Manager wishes to
add or delete a trading program, it must obtain the consent of the Managing
Owner. It is also expected that between 15% and 40% of the Trust's assets
normally will be committed as margin for commodities trading, but from time
to time these percentages may be substantially more or less. See
"Description of the Trading Manager" and "Trust's Trading Limitations and
Policies."
USE OF PROCEEDS
Segregated Accounts
All of the proceeds of this offering are received in the Trust's name and
deposited and maintained in cash in a segregated trading account or
accounts at Prudential Securities. Except for Trust assets that are deposited
as margin to maintain the Trust's forward currency contract positions (not
expected to exceed 8% of the Trust's total assets), all Trust assets are
maintained in accordance with requirements of the Commodity Exchange Act
and the regulations thereunder, which means that the Trust's assets are
maintained either on deposit with Prudential Securities or, for margin
purposes, with the various exchanges on which the Trust is permitted to
trade. Trust assets also may be maintained on deposit in U.S. banks,
although there is no present intention to do so. Trust assets will not be
maintained in foreign banks. Prudential Securities credits the Trust with 80%
of the interest deposits at Prudential Securities and retains the balance.
Currently, Trust Assets are earning interest at a rate of approximately 5.25%,
but that rate may change from time to time. The Managing Owner will not
commingle the property of the Trust with the property of another person.
Receipt and Maintenance of Proceeds
25
Start of Trading Maximum Offering
March 1, 1997 Size
Limited Owner Contributions $12,686,200 $39,764,200 $100,000,000
Initial Syndication Expenses* None None None
Maximum Net Proceeds to
Trust from Limited Owners $12,686,200 $39,764,200 $100,000,000
Contributions on deposit with
Prudential Securities $12,686,200 $39,764,200* *$100,000,000
Unregulated deposits to
maintain forward positions 0 0 0 to $8 million
(up to 8%)
Domestic bank accounts 0 0 0
Foreign bank accounts 0 0 0
____________________
* All of the Trust's organization and offering expenses (approximately
$580,000) were paid by Prudential Securities or an affiliate and will not
be reimbursed by the Trust. Accordingly, there was and will be no
dilution to the Trust's Net Asset Value resulting from such expenses.
** Typically, approximately 15% to 40% of deposits are maintained as
margin on domestic and foreign exchanges, with the balance retained
at Prudential Securities.
TRUST'S TRADING LIMITATIONS AND POLICIES
The following limitations and policies are applicable to the Trust as a
whole and at the outset to the Trading Manager individually; since the
Trading Manager currently manages 100% of the Trust's assets, the
application of these limitations and policies is identical for the Trust and the
Trading Manager. The Trading Manager sometimes may be prohibited from
taking positions for the Trust which it would otherwise prefer to acquire due
to the need to comply with these limitations and policies. The Managing
Owner monitors compliance with the trading limitations and policies of the
Trust set forth below, and it may impose additional restrictions (through
modification of such limitations and policies) upon the trading activities of
the Trading Manager, as it, in good faith, deems appropriate in the best
interests of the Trust, subject to the terms of the Advisory Agreement (see
"Summary of Advisory Agreement").
26
The Managing Owner will not approve a material change in the
following trading limitations and policies without obtaining the prior written
approval of Limited Owners who own more than 50% of the Interests. The
Managing Owner may, however, impose additional trading limitations on the
trading activities of the Trust without obtaining such approval if the
Managing Owner determines that additional limitations are necessary or are
in the best interests of the Trust.
Trading Limitations
The Trust does not and will not: (i) engage in pyramiding its
commodities positions (i.e., using unrealized profits on existing positions to
provide margin for the acquisition of additional positions in the same or a
related commodity), but may take into account open trading equity on
existing positions in determining generally whether to acquire additional
commodities positions; (ii) borrow or loan money (except with respect to the
initiation or maintenance of the Trust's commodities positions or obtaining
lines of credit for the trading of forward currency contracts; provided,
however, that the Trust is prohibited from incurring any indebtedness on a
non-recourse basis); (iii) permit rebates to be received by the Managing
Owner or its affiliates, or permit the Managing Owner or any affiliate to
engage in any reciprocal business arrangements which would circumvent the
foregoing prohibition; (iv) permit the Trading Advisor to share in any portion
of the commodity brokerage fees paid by the Trust; (v) commingle its assets,
except as permitted by law; or (vi) permit the churning of its commodity
accounts.
The Trust conforms and will continue to conform in all respects to the
rules, regulations and guidelines of the markets on which its trades are
executed.
Trading Policies
Subject to the foregoing limitations, the Trading Manager has agreed
to abide by the trading policies of the Trust, which currently are as follows:
(1) Trust funds generally will be invested in contracts that are
traded in sufficient volume to permit taking and liquidating positions.
(2) Stop or limit orders may, in the Trading Manager's
discretion, be given with respect to initiating or liquidating positions in
order to seek to limit losses or secure profits. If stop or limit orders
are used, however, no assurance can be given that Prudential
Securities will be able to liquidate a position at a specified stop or limit
order price, due to either the volatility of the market or the inability to
trade because of market limitations.
(3) The Trust generally will not initiate an open position in a
futures contract (other than a cash settlement contract) during any
delivery month in that contract, except when required by exchange
rules, law or exigent market circumstances. This policy does not apply
to forward and cash market transactions.
(4) The Trust may occasionally make or accept delivery of a
commodity including, without limitation, currencies. The Trust also
may engage in EFP transactions (i.e., an exchange of futures for
physicals transaction, as permitted on the relevant exchange) involving
currencies and metals and other commodities in such volume as may
be agreed upon between the Trust and the Trading Advisor.
(5) The Trust may, from time to time, employ trading techniques
such as spreads, straddles and conversions.
(6) The Trust will not initiate open positions that would result
in net long or short positions requiring as margin or premium for
outstanding positions in excess of 15% of the Trust's Net Asset Value
for any one commodity, or in excess of 66 2/3% of the Trust's Net Asset
Value for all commodities combined. Under certain market conditions,
such as where there is an inability to liquidate open commodities
positions because of
27
daily price fluctuations, the Managing Owner may
be required to commit as margin in excess of the foregoing limits; and
in such case the Managing Owner will cause the Trading Advisor to
reduce its open positions to comply to these limits before initiating new
commodities positions.
(7) To the extent the Trust engages in transactions in forward
currency contracts other than with or through Prudential Securities
and/or PBFI, the Trust will engage in such transactions only with or
through a bank which, as of the end of its last fiscal year, had an
aggregate balance in its capital, surplus and related accounts of at
least $100,000,000, as shown by its published financial statements for
such year, and through other broker-dealer firms whose aggregate
balance in its capital, surplus and related accounts is at least
$50,000,000.
PERFORMANCE OF THE TRUST
Set forth below is the performance record of the Trust from the start
of trading on May 1, 1996, through February 28, 1997.
THE TRUST'S PERFORMANCE SHOULD NOT BE EXPECTED TO BE
SIMILAR TO ANY OF THE PERFORMANCE RESULTS IN THE OTHER
CAPSULES SET FORTH UNDER "OTHER PAST PERFORMANCE
INFORMATION" IN THIS PROSPECTUS.
THE INFORMATION IN THE TRUST CAPSULE HAS NOT BEEN
AUDITED. HOWEVER, THE MANAGING OWNER REPRESENTS AND
WARRANTS THAT THE CAPSULE IS ACCURATE IN ALL MATERIAL
RESPECTS. IT SHOULD NOT BE ASSUMED THAT THE TRUST WILL
EXPERIENCE RESULTS IN THE FUTURE THAT ARE COMPARABLE TO
THE RESULTS EXPERIENCED TO DATE.
28
PAGE
DESCRIPTION OF THE TRADING MANAGER
The Managing Owner initially allocated 100% of the proceeds from the
Initial Offering of Interests to the Trading Manager for commodities trading
purposes. It is currently contemplated that the Trading Manager will
continue to be allocated 100% of additional Trust capital raised during the
Continuous Offering of Interests. The Trading Manager was selected based
upon the Managing Owner's evaluation of its past performance and its
trading portfolios and strategies. The Trading Manager is not affiliated with
the Trust, the Trustee, the Managing Owner or Prudential Securities, but does
currently act as a commodity trading advisor to other public and private
funds sponsored by Prudential Securities. See "Other Past Performance
Information--Other Pools Sponsored by the Managing Owner and its
Affiliate." Neither the Trading Manager nor any of its principals currently has
any beneficial interest in the Trust, but some or all of such persons may
acquire such an interest in the future.
Set forth below is a description of the Trading Manager and its
principals, and a general description of the trading strategies and trading
portfolios which the Trading Manager employs in its trading on behalf of the
Trust. This description was derived by the Managing Owner in part from
information contained in the Trading Manager's CFTC Disclosure Document,
which was prepared by the Trading Manager. In addition, since the Trading
Manager's trading strategies are proprietary and confidential, the description
which follows is of necessity general in nature. If the Trading Manager's
trading reaches a level where certain position limits restrict its trading, the
Trading Manager will modify its trading instructions for the Trust and its
other accounts in a good faith effort to achieve an equitable treatment of all
accounts.
The Trading Manager and Its Principals
The Trading Manager is a Delaware corporation, organized in January
1988, with its main business offices at 101 Morgan Lane, Suite 180,
Plainsboro, New Jersey 08536. The Trading Manager became a registered
commodity trading advisor and commodity pool operator with the CFTC and
a member of the United States National Futures Association (the "NFA") on
May 3, 1988.
Philip L. Yang has been sole shareholder, Director and President of the
Trading Manager since September 1, 1992, and also held those positions
from the time he formed the Trading Manager in January 1988 through
September 1989. Mr. Yang is registered as an associated person of the
Trading Manager. He is individually registered pursuant to the CE Act as a
CPO and CTA and is a member of the NFA in such capacities. He is also a
principal and an associated person of Doublewood, Inc. and Union Spring
Asset Management, Inc., each a registered CPO and CTA, and an NFA
member. Mr. Yang has full responsibility for the trading activities of the
Trading Manager, except in the case of MTech, the discretionary approach
of Michael Gan. From 1983 through August 1988 and from October 1989
through August 1992, Mr. Yang was a Senior Vice President at Caxton
Corporation, a commodity trading advisory firm, serving initially as Director
of Research, where his research concentration was in the development of
and application of computerized trading models for a broad range of financial
markets, and later as Director of Commodity Trading. Mr. Yang obtained a
bachelor's degree with honors from the University of California at Berkeley,
where he was inducted into Phi Beta Kappa. He received his master's degree
from the Wharton School of the University of Pennsylvania.
Michael Y. Gan has been the Executive Vice President of the Trading
Manager since September 1, 1992. Mr. Gan is registered as an associated
person of the Trading Manager. He is individually registered pursuant to the
CE Act as a CPO and CTA and is a member of the NFA in such capacities.
He is also a principal and an associated person of Doublewood, Inc. and
Union Spring Asset Management, Inc., each a registered CPO and CTA, and
an NFA member. Mr. Gan was the sole shareholder, Director and President
of the Trading Manager from October 1989 through August 1992. From 1983
to 1989, he worked in the foreign exchange trading group at Marine Midland
Bank in New York. In this capacity, Mr. Gan was responsible for research
into technical analysis, as well as proprietary trading for the firm in currency
futures and options. He had been promoted to Assistant Vice President prior
to his resignation. Mr. Gan graduated summa cum laude from the University
of the Philippines with a B.S. in Chemical Engineering and subsequently
graduated with honors from the Wharton School of the University of
Pennsylvania with an M.B.A. in Finance.
29
Theresa C. Morris is the Senior Vice President of the Trading Manager.
Ms. Morris has been employed by the Trading Manager since its inception in
August 1988 and is registered as an associated person of the Trading
Manager. Ms. Morris is also a principal and an associated person of
Doublewood, Inc. and Union Spring Asset Management, Inc. (see
"Description of Philip Yang" above). Ms. Morris oversees administration,
operations and compliance at the Trading Manager. Prior to her current
duties, Ms. Morris was responsible for analyzing and trading the technical
signals generated by the computerized trading models. Ms. Morris has
twenty years' experience in the futures and financial industry. She attended
Brookdale College, majoring in international business.
Richard G. Faux, Jr. has been Executive Director of the Trading
Manager since April 1995. He is registered as an associated person and a
principal of the Trading Manager. He is also an associated person of
Doublewood, Inc. and President, a principal and an associated person of
Union Spring Asset Management, Inc. Mr. Faux co-founded MC Baldwin
Financial Company ("MC Baldwin") in 1989 and served as its Co-Chief
Executive until April 1995. MC Baldwin is an international trading manager
which develops futures funds for its partner, Mitsubishi Corporation, and
other institutional clients. Prior to forming MC Baldwin, Mr. Faux was
President of Merrill Lynch Options/Futures Management Inc., a futures fund
subsidiary of Merrill Lynch. Before Mr. Faux joined Merrill Lynch in 1985, it
had raised only $13 million in futures funds. When he left, the company had
raised $930 million, including one of the first multi-advisor futures funds.
Previously, he spent four years at Thomson McKinnon Securities, Inc. where
he helped develop futures funds, including one of the first financial futures
funds. Earlier, Mr. Faux spent ten years at Kuhn Loeb & Co. (now Lehman
Brothers). He is a graduate of Brown University and the Columbia University
Graduate School of Business.
John C. Plimpton is Director of Investment Services. He joined
Willowbridge in February 1995 and is responsible for marketing the firm's
various investment strategies as well as maintaining client service.
Mr. Plimpton is registered as an associated person and principal of
Willowbridge. His prior futures industry experience was with Beacon
Management Corporation (USA), a commodity trading advisor and commodity
pool operator, where he held a marketing position specializing in the
Japanese institutional market from January 1989 to December 1990. From
January 1991 to August 1994, as a representative of Prudential Life
Insurance, and from August 1994 to present, as sole shareholder and
President of Plimpton Financial Group, a financial services company, Mr.
Plimpton concentrated on insurance and benefit services for wealthy families
and venture businesses. Since 1985, Mr. Plimpton has been involved in a
number of businesses privately held by his family, as well as serving as
director of Inolex Chemical Company, a specialty chemical company owned
by his family. He earned his B.A. degree in Economics from the University
of Chicago and his M.B.A. in Corporate Finance and Corporate Accounting
from the William E. Simon School of Management at the University of
Rochester.
30
James J. O'Donnell is Vice President of Willowbridge. He oversees
Willowbridge's computer and information needs, including trading
information systems, accounting information systems and support for
ongoing research of new computerized trading systems and effectiveness
testing of existing trading systems. Mr. O'Donnell has been employed by
Willowbridge since September 1, 1992. From June 1987 through August
1992, Mr. O'Donnell was Manager of Computer Information Systems at
Caxton Corporation. From April 1979 through May 1987, Mr. O'Donnell was
manager of Research Information Systems at Commodities Corporation.
Prior to that, he was employed by Penn Mutual from September 1973 through
March 1979 as Senior Programmer Analyst. He is a graduate of LaSalle
University with a B.A. in mathematics.
Steven R. Crane is Vice President of Willowbridge. He oversees the
accounting and financial reporting for Willowbridge. Mr. Crane has been
employed by Willowbridge since April 1993. Prior to that, he was employed
by Caxton Corporation from April 1992 to April 1993 as a Senior Accountant.
From September 1989 through April 1992, Mr. Crane worked as a Senior
Auditor for Deloitte & Touche LLP. Mr. Crane is a Certified Public
Accountant and a member of the AICPA. He graduated magna cum laude
from North Carolina State University with a B.A. in accounting.
Trading Approach Used by the Trading Manager for the Trust
Traders generally rely on either fundamental or technical analysis, or
a combination thereof, in making trading decisions and attempting to identify
price trends. Fundamental analysis involves the evaluation of factors
external to the markets which affect the price of a futures contract,
commodity, financial instrument or currency in order to predict prices.
Fundamental factors which influence the price of futures contracts, physical
commodities, financial instruments and currencies include changing money
supply and demand relationships; the trade, fiscal, monetary and exchange
control programs and policies of various governments; national and
international political and economic events; and changes in interest rates.
Technical analysis is not based on the evaluation of fundamental factors but
instead on the theory that a study of the markets themselves will provide a
means of anticipating price changes. Technical analysis generally includes
a study of actual daily, weekly and monthly price fluctuations, volume
variations and changes in open interest, utilizing charts and computers for
analysis of these items.
The Trading Manager makes trading decisions for the Trust based upon
fundamental and/or technical trading analysis, depending on the strategy
used. Fundamental analysis is used to determine long-term trends in the
various markets and to determine the instruments in which the Trust will
invest. This analysis examines, among other things, relative economic
trends, such as real growth, production and inflation, levels of currency
volatility, investment preferences, and financial trends, such as monetary and
fiscal policies, interest rates and external debt levels and political conditions.
The Trading Manager's technical analysis involves review of historical market
data, cyclical analysis, mathematical relationships, momentum models and
a review of certain technical models.
The Trading Manager relies on judgmental decisions by Mr. Yang in
determining trades for the Trust pursuant to certain of its trading strategies.
The various decisions include which instruments to trade, whether to take
a long or short position, the maturity of the contract being purchased or
written, the size of the positions to be taken, and the timing of the executions
of trades. No assurance can be given that all of the factors discussed above
or all of the pertinent information will be available to the Trading Manager in
formulating any particular trading decision. The Trading Manager's failure
to consider any of those factors may cause the Trust to miss significant
profit opportunities or to incur substantial losses.
Willowbridge initially allocated the Trust's assets to the following five
trading strategies: XLIM, Argo, Titan, Vulcan and Siren. The percentage of
Trust assets to be allocated at any point in time to these five trading
strategies is determined by the Managing Owner subject to the consent of
the Trading Manager based on its assessment of market conditions, Trading
Manager capacity (i.e., the amount that the Trading Manager
31
can trade
effectively without violating its trading and risk management capabilities),
risk/reward considerations, performance and other factors deemed relevant
at the time. The initial allocation was XLIM - 50%, Argo - 20%, and Titan,
Vulcan and Siren - 10% each. As of March 1, 1997, the allocation was XLIM -
48.75%, Argo - 20.34%, Titan - 10.72%, Vulcan - 11.01%, and Siren - 9.18%.
The allocations change automatically because of trading gains and losses
but also may be altered if the Managing Owner determines it is in the Trust's
best interest to do so using the factors enumerated above. Limited Owners
will be given prompt written notice of any material change in the trading
strategies used for the Trust.
The XLIM Trading Approach
XLIM, which was first applied in February 1988, is traded on a discretionary
basis by Mr. Yang. Trading decisions are based primarily on Mr. Yang's
analysis of technical factors, fundamentals and market action. XLIM trades
are selected from a wide variety of futures contracts, forwards, spot and
options on both the United States and international markets, including, but
not limited to, financial instruments, currencies, precious and base metals
and agricultural commodities. Mr. Yang reserves the right to change the
portfolio composition of XLIM.
Vulcan Trading System
Vulcan is a computerized technical trading system. It is not a trend-
following system, but does ride a trend when the opportunity arises. Vulcan
uses the concepts of pattern recognition, support/resistance levels, and
counter-trend liquidations in making trading decisions (see "Glossary"). In
effect, Vulcan is more akin to a systematic technical charting system (see
"Glossary"), as opposed to most computer systems which are based on pure
trend-following calculations.
The Vulcan system is based on general technical trading principles that
over time have repeatedly shown their validity as price movement
forecasters. It applies these principles to a diversified portfolio of
commodities and currencies. Given that the system is based on general
principles, the system parameters (see "Glossary") used are the same for all
items in the portfolio and are not optimized, and are not particularized by
commodity.
Vulcan determines, on a daily basis, whether to be long, short or flat on
the various commodities in its portfolio. It is intended that approximately
fifteen to forty percent (15-40%) of the assets utilizing the Vulcan system will
normally be committed as margin for Commodities trading, but from time to
time, the percentage of assets committed may be substantially more or less.
Positions are generally held from 10 to 15 trading days. For allocations of
less than $1 million in assets, the Trading Manager may not be able to trade
the full Vulcan portfolio.
Titan Trading System
Titan, which commenced trading in 1986, is a technical trend following
system coupled with a mechanism for adding to, or subtracting from, the
initial position on a counter-trend or retracement basis as described below.
Unlike Vulcan, Titan applies various technical factors in an effort to
monitor the overall market environment to attempt to recognize major trends.
If the system initially perceives a low degree of risk, a relatively greater
number of positions are initiated. Likewise, when the system initially
perceives a high level of risk, relatively fewer positions will be initiated until
a lower degree of risk is perceived. Thereafter positions may be added or
subtracted as a result of a perceived temporary discontinuance of a trend.
This ability to adjust the number of positions held is Titan's primary risk-
control tool. Through this combination, Titan attempts to maximize profits
in markets with strong secular trends (see "Glossary") running over a six-to
twelve-month period, while minimizing the risks which otherwise involve
taking a large position at the start of the perceived move.
Titan's portfolio composition generally is the same as Vulcan's,
although the number of days the system will hold a position, based on an
average of the number of days the initial base position would be held
combined with the number of days any additional positions would be held,
is generally fifteen days. It is intended that approximately fifteen to forty
percent (15-40%) of the assets under management pursuant to the Titan
system will normally be committed as margin for Commodity Interest trading,
but from time
32
to time the percentage of assets committed may be
substantially more or less. For allocations of less than $1,000,000.00 in
assets, Willowbridge may not be able to trade the full Titan portfolio.
Argo Trading System
Argo commenced trading in 1987. Argo essentially incorporates
Vulcan's concepts of pattern recognition, support/resistance levels and
counter-trend liquidations to trade a portfolio similar to Vulcan. However,
Argo has a relatively slower time horizon than Vulcan and attempts to
capture longer-term price moves in a manner similar to Titan (described
below). It is intended that Argo's positions generally will be held from 20 to
30 trading days with approximately fifteen to forty percent (15-40%) of assets
utilizing the Argo System committed as margin for Commodities trading, but
from time to time, the percentage of assets committed may be substantially
more or less. For allocations of less than $1 million in assets, the Trading
Manager may not be able to trade the full Argo portfolio.
Siren Trading System
Siren, which commenced trading January 1991, is a system based on
the principles of market profiles and other techniques that utilize real time
price information. Siren can best be characterized as a top and bottom
picking system. Siren tries to determine acquisition and distribution patterns
that often signal the end and reversal of a major trend bias. When it
identifies such a change, it will attempt to initiate a countervailing position.
Siren's time frame is generally 18 to 25 trading days.
It is intended that approximately fifteen to forty percent (15-40%) of the
assets utilizing the Siren system will normally be committed as margin for
Commodities trading, but from time to time, the percentage of assets
committed may be substantially more or less. For allocations of less than
$1 million in assets, the Trading Manager may not be able to trade the full
Siren portfolio.
Additional Trading Strategies and Licensing Agreement
The Trading Manager utilizes additional trading strategies not described
herein for other clients. It is not contemplated that the Trading Manager will
use any of these additional trading strategies for the Trust. In addition,
pursuant to a licensing agreement between Caxton Corporation, a registered
commodity trading advisor, and the Trading Manager, the Trading Manager
has been granted the sole and exclusive right to use four of the five trading
systems (excluding XLIM) described above. The licensing agreement will
continue until December 31, 2001 and shall be renewed for successive one-
year terms unless either the Trading Manager or Caxton has given 90 days'
notice to the other prior to such date of its intention not to renew. The
licensing agreement may also be terminated in the case of uncured material
breach or in other extraordinary situations. The Trading Manager pays
royalties to Caxton based on fees generated by the Trading Manager's
trading.
Commodities and Markets Traded
(1) The consolidated portfolio for the five trading strategies to be used
by the Trading Manager for the Trust currently consists of:
Grains: Corn, Wheat, Soybeans, Soybean Meal, Soybean Oil, Rough Rice
Livestock: Live Cattle, Live Hogs, Pork Bellies
Softs: Coffee, Cocoa, Sugar, Cotton, Orange Juice
Energies: Crude Oil, Heating Oil, Unleaded Gasoline, Natural Gas, Gas, Oil
Precious Metals: Gold, Silver, Platinum, Palladium
Base Metals: Copper, Aluminum, Nickel, Tin, Zinc, Lead
33
Domestic Financial Instruments: Treasury Bills, Treasury Notes, Treasury
Bonds, Euro-Dollars, Standard & Poors 500, CRB Index, Goldman Index
Foreign Financial Instruments: Italian Bonds, Euro-Lira, Euro-Marks, Euro-
Yen, Euro-Swiss, Gilts, Short-Sterling, French Notional Bonds, Paris
Interbank Offered Rate (Pibor), Financial Times Stock Index (FT-SE), Comtrat
Assiste en Contitu (CAC 40 Stock Index), Long-Term German Government
Bonds (Bunds), Medium-Term German Bonds (Bobls), German Stock Index
(DAX), Japanese Bonds (JGB), Nikkei Stock Average, Hang Seng, TOPIX
Stock Index, Australian Treasury Bonds,
Australian Treasury Bills, All Ordinaries, Canadian Bank Acceptances,
Canadian Bonds, ECU Bonds
Currencies: Japanese Yen, DMark, Swiss Franc, British Pound, Canadian
Dollar, Australian Dollar, New Zealand Dollar, French Franc, Italian Lira,
Sterling/Mark, Sterling/Yen, Mark/Yen, Mark/Paris, Mark/Krona, Mark/Swiss,
Mark/Lira
Miscellaneous: Baltic Freight Index, Lumber, Red Bean, Rubber, Silk
Subject to the terms of the Advisory Agreement (see "Summary of
Advisory Agreement"), the Trading Manager may add and delete commodities
from this list.
Set forth below for calendar year 1996 is a bar graph showing the
volume of trades effected by the Trading Manager in the foregoing
commodities using the five trading strategies to be used for the Trust on a
weighted average basis. This weighting will change as market conditions
change and there is every likelihood that these weightings will be different
during future periods.
(CHART)
(2) The domestic and non-U.S. exchanges on which the above commodities
currently are traded are:
Domestic exchanges: Chicago Board of Trade (CBOT), Chicago
Mercantile Exchange (CME), Commodity Exchange Inc. (Comex), Coffee
Sugar and Cocoa Exchange Inc. (CSC), New York Mercantile Exchange
(NYME), New York Cotton Exchange (NYCE), New York Futures Exchange
(NYFE), and International Monetary Market of the CME (IMM), Kansas City
Board of Trade and MidAmerica Commodity Exchange.
Non-U.S. exchanges: London International Financial Futures Exchange
(LIFFE), Marche a Terme International de France (MATIF), Singapore
International Monetary Exchange (SIMEX), Tokyo Stock Exchange (TSE),
Hong Kong Futures Exchange (HKFE), Tokyo International Financial
Exchange (TIFFE), and Deutsche Terminbourse (DTB), Financial International
Exchange, London Commodity Exchange, Montreal Exchange, and Sydney
Futures Exchange, Financial International Exchange (FINEX), Tokyo
Commodity Exchange and Tokyo Grain Exchange.
34
To the extent that Commodities transactions are effected for the Trust
in the forward markets, the only forward markets currently permitted to be
utilized are the interbank foreign currency markets and the London Metal
Exchange. The utilization of other forward markets requires the consent of
the Managing Owner.
Past Performance Information
The past performance history of the Trading Manager appears under the
heading "Other Past Performance Information--the Trading Manager." PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
INVESTMENT REQUIREMENTS/WHO MAY INVEST
Prudential Securities and each employee of Prudential Securities selling
Interests in the Trust is obligated to make every reasonable effort to
determine that the purchase of Interests is a suitable and appropriate
investment for each subscriber, based on information provided by the
subscriber regarding his or its financial situation and investment objective.
A PURCHASE OF THE INTERESTS SHOULD BE MADE ONLY BY
THOSE PERSONS WHOSE FINANCIAL CONDITION WILL PERMIT THEM TO
BEAR THE RISK OF A TOTAL LOSS OF THEIR INVESTMENT IN THE TRUST.
INVESTMENT IN THE INTERESTS SHOULD BE CONSIDERED ONLY AS A
LONG-TERM INVESTMENT.
Investors should not purchase Interests with the expectation of tax
benefits in the form of losses or deductions. See "Risk Factors--Limited
Owners' Tax Liability May Exceed Distributions." If losses accrue to the
Trust, a Limited Owner's distributive share of such losses will, in all
probability, be treated as a capital loss and generally will be available only
for offsetting capital gains from other sources. To the extent that a Limited
Owner has no capital gains, capital losses can be used only to a very limited
extent as a deduction from ordinary income. See "Income Tax
Consequences."
ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF INDIVIDUAL
RETIREMENT ACCOUNTS OR OTHER EMPLOYEE BENEFIT PLANS IS IN NO
RESPECT A REPRESENTATION BY THE TRUST, THE MANAGING OWNER,
THE TRADING MANAGER, PRUDENTIAL SECURITIES OR ANY OTHER
PARTY THAT THIS INVESTMENT MEETS SOME OR ALL OF THE RELEVANT
LEGAL REQUIREMENTS WITH RESPECT TO INVESTMENTS BY ANY
PARTICULAR PLAN OR THAT THIS INVESTMENT IS APPROPRIATE FOR
ANY PARTICULAR PLAN. THE PERSON WITH INVESTMENT DISCRETION
SHOULD CONSULT WITH HIS ATTORNEY AND FINANCIAL ADVISERS AS TO
THE PROPRIETY OF SUCH AN INVESTMENT IN LIGHT OF THE
CIRCUMSTANCES OF THE PARTICULAR PLAN AND CURRENT TAX LAW.
Subscriptions for the purchase of the Interests are subject to the
following conditions:
Minimum Purchases.
// Initial Purchase - $5,000; $2,000 (IRAs)
// Additional Purchases - $100 increments
Net Worth and Income Requirements. Each subscriber (other than a
subscriber which is a pension, profit sharing, stock bonus, Keogh Plan or
other employee benefit plans or an IRA (collectively, "Plans") must represent
and warrant in the Subscription Agreement (Exhibit C hereto) that the
subscriber has a net worth (exclusive of home, home furnishings and
automobiles) of at least $150,000, or a net worth (similarly calculated) of at
least $45,000 and annual gross income of at least $45,000 and that the
investment in the Trust does not exceed 10% of such subscriber's liquid net
worth.
Each subscriber that is an IRA or a Keogh Plan covering no common
law employees, and the participant covered by such IRA or Keogh Plan, must
represent and warrant in the Subscription Agreement (Exhibit C hereto) that
the participant has a net worth (exclusive of home, home furnishings and
automobiles) of at least $150,000, or a net worth (similarly calculated) of at
least $45,000 and annual gross income of at least $45,000 and that the IRA
or Keogh Plan's aggregate investment in the Trust does not exceed 10% of
the assets of such IRA or Keogh Plan.
35
Each subscriber that is a Plan (other than an IRA or a Keogh Plan
covering no common law employees) must represent and warrant in the
Subscription Agreement (Exhibit C hereto) that it has net assets of at least
$150,000 and that the Plan's aggregate investment in the Trust does not
exceed 10% of the assets of such Plan. When a Plan (other than an IRA or
Keogh Plan covering no common law employees) is considering an
investment in the Trust, the fiduciary of such Plan should consider, among
other things, whether the investment is prudent, considering the nature of
the Trust.
UNDER THE SECURITIES LAWS OF CERTAIN STATES, RESIDENTS OF
THOSE STATES WILL BE SUBJECT TO GREATER NET WORTH AND/OR
INCOME REQUIREMENTS THAN ARE NOTED ABOVE (AS SET FORTH IN
THE SUBSCRIPTION AGREEMENT ANNEXED AS EXHIBIT C HERETO UNDER
THE CAPTION "STATE SUITABILITY REQUIREMENTS"), AND THE TRUST
MAY IMPOSE GREATER NET WORTH OR INCOME REQUIREMENTS ON
SUBSCRIBERS WHO PROPOSE TO PURCHASE MORE THAN THE MINIMUM
NUMBER OF INTERESTS.
Receipt of Prospectus. Each subscriber must represent and warrant in
the Subscription Agreement that, among other things, the subscriber has
received a Prospectus. No subscription will be final and binding on any
subscriber until such subscriber has been in receipt of a final Prospectus for
at least five (5) business days. Thereafter, all subscriptions are irrevocable
by subscribers.
Fundamental Knowledge. Each subscriber should make sure that it
understands, among other things, (i) the fundamental risks and possible
financial hazards of the investment, (ii) that the Interests lack liquidity,
(iii) that the Managing Owner will manage and control the Trust's business
operations, (iv) the tax consequences of the investment, (v) the potential
limitations on an Interestholder's limited liability and (vi) the Trust's structure
(including fees) and proposed trading activities. In addition, the Managing
Owner must consent to each subscription, which consent may be withheld
in whole or in part for any reason.
Ineligible Investors. Interests may not be purchased with the assets of
a Plan if the Trustee, the Managing Owner, Prudential Securities, the Trading
Manager or any of their respective affiliates (a) is an employer maintaining
or contributing to such Plan, or (b) has investment discretion over the
investment of such plan assets. An investment in the Trust is not suitable
for Charitable Remainder Annuity Trusts or Charitable Remainder Unit
Trusts. See "Risk Factors--Employee Benefit Plan considerations."
Employee Benefit Plan Considerations. Section 404(a)(1) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and the regulations promulgated thereunder by the United States Department
of Labor (the "DOL") provide as a general rule that a fiduciary of a Plan
which is subject to Title I of ERISA (which would exclude certain Keogh
Plans and IRAs which are not employee benefit plans under section 3(2) of
ERISA) must discharge his duties with respect to such Plan in a prudent
manner and must consider several factors in determining whether to enter
into an investment or engage in an investment course of action. If a
fiduciary of any such Plan acts imprudently with regard to selecting an
investment or an investment course of action for such Plan, the fiduciary
may be held personally liable for losses incurred by the Plan as a result of
such imprudence. Among the factors that should be considered are (i) the
diversification and liquidity of the Plan's portfolio; (ii) the potential return on
the proposed investment and the effect on that return if any portion of the
Trust's income constitutes "unrelated business taxable income" (see "Income
Tax Consequences - Tax-Exempt Limited Owners and Unrelated Business
Taxable Income"); and (iii) the place the proposed investment would occupy
in the Plan's portfolio taken as a whole.
The acceptance of a subscription by the Managing Owner from a Plan
does not constitute a representation or judgment by the Managing Owner
that an investment in the Trust is an appropriate investment for that entity or
that such an investment meets the legal requirements applicable to such
entity.
Generally, under Title I of ERISA, the Plan trustees or duly authorized
investment managers (within the meaning of section 3(38) of ERISA) have
exclusive authority and discretion to manage and control assets of the Plan.
ERISA also prohibits a fiduciary from causing a Plan to enter into
transactions involving Plan assets with various parties in interest (within the
meaning of section 3(14) of ERISA) with regard to the Plan. If such a
"prohibited transaction" is entered into, certain excise taxes may be payable,
and the Plan fiduciaries may be liable to the Plan for any losses incurred.
36
If the assets of the Trust are deemed to be "plan assets" with respect
to the investing Plans, the Managing Owner will be deemed to be a fiduciary
with respect to each investing plan and the general prudence and fiduciary
responsibility provisions of ERISA will be applicable to the Managing Owner,
and certain transactions entered into by the Trust may be prohibited
transactions. Under a regulation (the "Regulation") of the DOL if (1) a Plan
acquires a "publicly-offered security" or (2) equity participation by "benefit
plan investors" is "not significant" (as such terms are used in the
Regulation), the issuer of the security is not deemed to hold plan assets.
Publicly Offered Security. In order for the Interests to be considered
publicly offered, they must be "widely held," "freely transferable" and must
satisfy certain registration requirements under federal securities laws. Under
the Regulation, a class of securities is considered "widely held" if it is owned
by 100 or more investors who are independent of the issuer and of one
another. In order to assure satisfaction of this condition, the Managing
Owner will not close the offering of Interests unless more than 150 investors
acquire Interests. Whether a security is "freely transferable" is a factual
question to be determined on the basis of all relevant facts and
circumstances. However, the Regulation sets forth a number of factors
which will not ordinarily, either alone or in combination, affect a finding that
securities are freely transferable. In particular, the Regulation provides that
a restriction or prohibition against transfers or assignments that would result
in either the termination or reclassification of an entity for federal income tax
purposes ordinarily will not cause securities issued by such entity to fail to
be freely transferable. A 1989 DOL Advisory Opinion reiterated this position
with respect to transfer restrictions imposed by a Trust to insure against
reclassification of the Trust under I.R.C. Section 7704 (which did not exist
when the Regulation was adopted) for federal income tax purposes. Based
on the terms of the Regulation and this advisory opinion, counsel to the
Trust has advised the Trust that, in its view, the assets of an investing Plan
will include its investment in the Trust, but will not, solely by reason of such
investment, include any of the underlying assets of the Trust, assuming the
100 investor rule discussed above is satisfied, and assuming that the
Interests are registered under the Securities Exchange Act of 1934 (the
"Exchange Act") within 120 days or such later time as may be allowed by the
Securities and Exchange Commission (the "SEC") after the end of the Trust's
fiscal year during which the offering of the Interests occurred and assuming
that the Managing Owner does not impose transfer restrictions which would
violate the "freely transferable" requirement. See "Summary of Trust
Agreement--Transfer of Interests." In the event that, for any reason, the
assets of the Trust are deemed to be plan assets, and if any transactions
would or might constitute prohibited transactions under ERISA or the Code
and an exemption for such transaction or transactions cannot be obtained
from the DOL (or the Managing Owner determines not to seek such
exemption), the Managing Owner reserves the right, upon notice to but
without the consent of any Limited Owner, to mandatorily redeem out any
Limited Owner which is a Plan investor. See "Summary of Trust Agreement--
Redemption of Interests."
Certain Plan investors may currently maintain relationships with
Prudential Securities and its affiliates whereby Prudential Securities or such
affiliate provides brokerage services or other services to such Plans. These
relationships may cause Prudential Securities and/or its affiliates to be
deemed to be fiduciaries of those Plans. The DOL has issued a regulation
defining the term "fiduciary" which provides that a registered broker will not
be deemed a fiduciary of an employee benefit plan solely because the broker,
in the ordinary course of its business as a broker, executes transactions for
the purchase and sale of securities on behalf of the Plan pursuant to specific
instructions within narrowly drawn parameters. However, Prudential
Securities will be deemed a party-in-interest with respect to such Plan. The
regulation further provides that a broker who either has discretionary control
over Plan assets or renders advice concerning investments on a regular
basis for a fee (which includes commissions) pursuant to an understanding
that such advice will serve as a primary basis for the Plan's investment
decisions, and that such broker will render individualized investment advice
to the Plan based on the needs of such Plan, such broker will be deemed a
fiduciary (but only with respect to that portion of the Plan's assets with
respect to which the broker has such discretionary control or renders such
advice, as the case may be).
Under ERISA, investment in the Trust by Plans with such pre-existing
relationships could possibly be interpreted to constitute a prohibited use of
plan assets because it has the effect of directly or indirectly benefiting one
or more parties-in-interest.
37
Prudential Securities has determined that it will
not recommend an investment in Interests of any Plan assets with respect
to which it believes it is a fiduciary, nor will it or any affiliate allocate any
employee benefit plan assets over which it has discretionary control to the
Trust. Prudential Securities believes that with respect to the assets of a Plan
with which it has a non-fiduciary, party-in-interest brokerage relationship, any
investment in the Trust which is undertaken on behalf of such Plan by an
independent plan fiduciary who possesses the requisite experience and
acumen to understand the operation of the Trust and who determines that
the investment is appropriate and in the best interests of the Plan and which
is made under arm's-length conditions should not be viewed as a prohibited
transaction. Plan investors should pay particular attention to the section of
this Prospectus entitled "Income Tax Consequences - Tax-Exempt Limited
Owners and Unrelated Business Taxable Income."
PLAN OF DISTRIBUTION
Interests will continue to be offered pursuant to this offering as of the
end of each month during the continuous offering until an aggregate of
$100,000,000 of Interests are sold, but in no event later than January 31, 1998
("Continuous Offering"). Subscribers will be admitted to the Trust as Limited
Owners as of the first day of the month following the month in which their
subscription is received and accepted. The Managing Owner may terminate
the Continuous Offering at any time prior to the sale of $100,000,000 in
Interests. As of the date hereof, the Trust has a maximum of $60,235,800 in
Interests which may be sold pursuant to this offering.
General
The Trust will not, directly or indirectly, pay or award any finder's fees,
commissions or other compensation to any persons engaged by a potential
Limited Owner for investment advice as an inducement to such investment
adviser to advise the potential Limited Owner to purchase Interests in the
Trust. Aggregate expenses incurred in connection with retail salaries,
expenses, reimbursement, sales seminars, bonus and sales incentives will
not exceed the limitation imposed on such expenses by the National
Association of Securities Dealers, Inc. ("NASD").
THE MANAGING OWNER MAY REJECT ANY SUBSCRIPTION IN WHOLE
OR IN PART AT ITS DISCRETION. A subscriber's subscription will not be
final and binding until five business days following the subscriber's receipt
of a final Prospectus. Subscriptions may be accepted or rejected by the
Managing Owner within four business days of its receipt of subscriptions
from Prudential Securities.
In connection with this offering, Prudential Securities is an "under-
writer" within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"). The Trading Manager is not an underwriter, promoter or
organizer of the Trust.
For a tabular summary of the pro forma capitalization of the Trust
giving effect to the sale of all of the Interests offered hereby and to the
purchase of the Managing Owner's General Interests, see "Capitalization."
SUBSCRIPTION PROCEDURE
How to Subscribe
In order to subscribe for Interests, a subscriber must
// have an account at Prudential Securities;
// complete a Subscription Application (Exhibit C);
// have cash in its Prudential Securities account to cover the
subscription;
// deliver the Subscription Agreement to a Prudential Securities
Financial Advisor in a timely manner; and
// meet established suitability standards.
38
Ways to Subscribe
// Individual or joint tenant - Individual accounts are owned by one
person. Joint accounts can have two or
more owners.
// Gifts or transfers to a - An individual can give up to $10,000
minor (UGMA or UTMA) a year per child without paying federal
gift tax. Depending on state law, you
can establish a custodial account under the
Uniform Gift to Minors Act (UGMA) or the
Uniform Transfers to Minors Act (UTMA).
// Trust - The trust must be established before an
account can be opened.
// Business or Organization - Corporations, partnerships, associations
or other groups.
// Retirement Accounts - IRA, Keogh Plan and other Employee
Benefit Plans.
When Does Subscription Become Final
Subscriptions will not be final or binding on any subscriber until five
(5) business days following a subscriber's receipt of a final Prospectus.
Thereafter, all subscriptions will be irrevocable by the subscriber. If a
subscription is rejected by the Managing Owner, in whole or in part, for any
reason, or if the subscriber determines to revoke his or its subscription
within the five business day period described above, the subscription funds,
or applicable portion thereof, will be returned promptly to the subscriber, as
well as any interest earned thereon. The principal amount of any such
subscription funds will be credited to the subscriber's Prudential Securities
account; any interest earned thereon will be returned by delivering a check
to the subscriber in an amount equal to the allocable interest earned on the
proceeds. In the case of IRA subscribers, checks will be transmitted to
Prudential Securities (or an Additional Seller) for deposit into such IRA
account. All accepted subscribers will receive written confirmation of
acceptance into the Trust.
Continuous Offering
A subscriber's subscription agreement must be received by the
Managing Owner at its principal office, and sufficient funds must be in the
subscriber's Prudential Securities account, at least five business days prior
to the end of the month in which the subscription is submitted in order for
such subscriber to be admitted as of the first day of the next month. In the
event that funds in the subscriber's account are insufficient to cover the
requested subscription amount, the Managing Owner may, in its sole
discretion, reject such subscription for that month in whole or in part. Funds
from accepted subscriptions will have been transferred from the subscriber's
Prudential Securities account (or from the subscriber's account at an
Additional Seller) and deposited in the Trust's trading account. Once the
month-end Net Asset Value per Interest is determined, a confirmation of each
accepted subscription will be sent to subscribers.
39
THE TRUST, TRUSTEE, MANAGING OWNER AND AFFILIATES
Organization
Prudential Securities
Group Inc.
100%
Prudential Securities
Incorporated Wilmington Trust
Company
100%
Managing Trustee
Prudential Securities Owner
Futures Management Inc. Trust
The Trust was formed on October 16, 1995 under the Business Trust
Statute of the State of Delaware and commenced trading on May 1, 1996.
The sole trustee of the Trust is Wilmington Trust Company, a Delaware
Banking Company (the "Trustee"). The Trustee delegated its duty and
authority for the management of the business and affairs of the Trust to
Prudential Securities Futures Management Inc. (the "Managing Owner"), a
Delaware corporation formed in May 1973, and will have no liability. The
Trustee will accept service of legal process upon the Trust in the State of
Delaware. See "Summary of Trust Agreement--The Trustee." The Managing
Owner is a wholly-owned subsidiary of Prudential Securities, the Trust's
commodity broker and selling agent, which in turn is wholly-owned by
Prudential Securities Group Inc., ("PSGI"), an indirect wholly-owned
subsidiary of The Prudential Insurance Company of America.
PSGI, Prudential Securities and the Managing Owner may each be
deemed to be, and the Trustee will not be deemed to be, a "Promoter" of the
Trust within the meaning of the Securities Act. None of the foregoing
persons is an "affiliate" (as that term is used for purposes of the Securities
Act) of the Trading Manager. PSGI and the Managing Owner may each be
deemed to be a "parent" of the Trust within the meaning of the federal
securities laws.
A brief description of the Trustee, PSGI, Prudential Securities, the
Managing Owner, and the officers and directors of the Managing Owner,
follows:
The Trustee
Wilmington Trust Company, a Delaware banking corporation (the
"Trustee"), is the sole trustee of the Trust. The Trustee's principal offices are
located at Rodney Square North, 1100 North Market Street, Wilmington,
Delaware 19890-0001. The Trustee is unaffiliated with each of PSGI,
Prudential Securities, the Managing Owner and the Trading Manager. The
Trustee's duties and liabilities with respect to the offering of the Interests and
the administration of the Trust are limited to its express obligations under
the Trust Agreement. See "Summary of the Trust Agreement--The Trustee."
Limited Owners will be notified by the Managing Owner of any change of the
Trust's Trustee.
Prudential Securities Group Inc.
PSGI is a holding company whose principal subsidiary is Prudential
Securities (the Trust's selling agent and commodity broker). PSGI is an
indirect wholly owned subsidiary of The Prudential Insurance Company of
America, a major mutual insurance company.
Prudential Securities Incorporated
Prudential Securities' main business office is located at Prudential
Securities Building, One New York Plaza, 13th Floor, New York, New York
10292, telephone (212) 214-1000. Prudential Securities, in its capacity as
selling
40
agent for the Trust, is registered as a broker-dealer with the SEC and
is a member of the NASD. Prudential Securities is a major securities firm
with a large commodity brokerage business. It has over 270 offices in 43
states, the District of Columbia, and 18 foreign countries. Prudential
Securities is a clearing member of the Chicago Board of Trade, Chicago
Mercantile Exchange, Commodity Exchange, Inc., and all other major United
States commodity exchanges.
From time to time Prudential Securities (in its respective capacities as
a commodities broker and as a securities broker-dealer) and its principals are
involved in numerous legal actions, some of which individually and all of
which in the aggregate, seek significant or indeterminate damages. However,
except for the actions described below, during the five years preceding the
date of this Prospectus, there have been no administrative, civil, or criminal
actions, including actions which are pending, on appeal or concluded,
against Prudential Securities or any of its principals which are material, in
light of all the circumstances, to an investor's decision to invest in the Trust.
On September 29, 1992, Prudential Securities entered into a settlement
with the CFTC in which, without admitting or denying the allegations of the
complaint, Prudential Securities consented to findings by the CFTC that it
failed to supervise employees in connection with the commodity trading
activities of a customer of Prudential-Bache Securities Inc. (the predecessor
of Prudential Securities) who was indicted and convicted of fraud and the
trading practices of two account executives formerly employed by Prudential-
Bache Securities Inc. Prudential Securities further admitted to findings of
recordkeeping violations and for employing an unregistered associated
person in connection with this matter. Pursuant to the settlement, Prudential
Securities agreed to pay a $240,000 civil penalty and to cease and desist
from engaging in further violations of the rules and regulations with which
they had been charged.
On July 22, 1993, Prudential Securities entered into a Settlement
Agreement with the Office of the Secretary of State of the State of South
Carolina. Without admitting or denying the allegations, Prudential Securities
agreed to pay $225,000 in settlement of all administrative inquiries,
investigations and other proceedings against Prudential Securities and its
agents in South Carolina relating to the supervisory and retail sales activities
of Prudential Securities and certain of its registered representatives.
On October 21, 1993, Prudential Securities entered into an omnibus
settlement with the SEC, state securities regulators in 51 jurisdictions
(49 states, the District of Columbia and Puerto Rico) and the NASD to resolve
allegations that had been asserted against Prudential Securities with respect
to the sale of interests in more than 700 limited partnerships generated by
Prudential Securities' Direct Investment Group and sold from January 1, 1980
through December 31, 1990. The limited partnerships principally involved
real estate, oil and gas producing properties and aircraft leasing ventures.
The allegations against Prudential Securities were set forth in a
Complaint filed by the SEC on October 21, 1993 and in an Administrative
Order issued by the SEC also on October 21, 1993. It was alleged that
federal and state securities laws had been violated through sales of the
limited partnership interests (and a limited number of certain other securities)
to persons for whom such securities were not suitable in light of their
investment objectives, financial status, or investment sophistication. It was
also alleged that the safety, potential returns and liquidity of the investments
had been misrepresented. Prudential Securities neither admitted nor denied
the allegations asserted against it. The Administrative Order included
findings that Prudential Securities' conduct violated the federal securities
laws and that an order issued by the SEC in 1986 requiring Prudential
Securities to adopt, implement and maintain certain supervisory procedures
had not been complied with. The Administrative Order (to which Prudential
Securities consented without admitting or denying the SEC's findings),
directed Prudential Securities to cease and desist from violating the federal
securities laws and imposed a $10 million civil penalty. The Administrative
Order also required Prudential Securities to adopt certain remedial measures
including the establishment of a Compliance Committee of its Board of
Directors.
41
Prudential Securities' settlement with the state securities regulators
included an agreement to pay a penalty of $500,000 per jurisdiction. In
settling the NASD disciplinary action, Prudential Securities consented to a
censure and to the payment of a $5 million fine to the NASD.
In connection with the settlement of the allegations asserted against it,
and pursuant to a Final Order and Judgment entered on October 21, 1993 in
the action commenced by the SEC, Prudential Securities has deposited $330
million as a fund to be used for the resolution of claims for compensatory
damages asserted by persons who purchased the limited partnership
interests from Prudential Securities, and has agreed to provide additional
funds, if necessary, for that purpose. The fund is to be administered by a
court-approved Claims Administrator who is a former SEC Commissioner.
Prudential Securities also consented to the establishment of a court-
supervised expedited claims resolution procedures with respect to such
claims.
On December 17, 1993, Prudential Securities agreed to the entry of a
Consent Order issued by the State of Rhode Island, Department of Business
Regulation, Division of Securities. The allegation against Prudential
Securities was that ten employees of Prudential Securities engaged in
investment advisory activities with clients in Rhode Island although these
employees were neither licensed as investment advisor representatives nor
exempt from the licensing requirements of Section 204 of the Rhode Island
Uniform Securities Act (the "RI Act"). Prudential Securities consented to the
payment of a civil penalty in the amount of $33,000 and agreed to cease and
desist from further violations of Section 203 of the RI Act. Prudential
Securities also agreed to modify relevant internal marketing and training
materials distributed to its sales force. Prior to the entry of the Consent
Order discussed above, Prudential Securities entered into a series of
Consent Agreements with the Department involving similar allegations
concerning the registration of Prudential Securities investment adviser
representatives.
On January 18, 1994, Prudential Securities agreed to the entry of a Final
Consent Order and a Parallel Consent Order by the Texas State Securities
Board. The firm also entered into a related Agreement with the Texas State
Securities Commissioner. The allegations against Prudential Securities were
that the firm had engaged in improper sales practices and other improper
conduct resulting in pecuniary losses and other harm to investors residing
in Texas with respect to purchases and sales of limited partnership interests
during the period of January 1, 1980 through December 31, 1990. Without
admitting or denying the allegations, Prudential Securities consented to a
reprimand, agreed to cease and desist from further violations, and to provide
voluntary donations to the State of Texas in the aggregate amount of
$1,500,000. The firm agreed to suspend the creation of new customer
accounts, the general solicitation of new accounts, and the offer for sale of
securities in or from Prudential Securities' North Dallas office, irrespective
of the place of residence of such new customers, during a period of twenty
consecutive business days. Prudential Securities further agreed to suspend
the creation of new customer accounts, the general solicitation of new
customer accounts, and offer for sale of securities into or from the State of
Texas to any new customers, irrespective of the place of residence of such
new customers, during a period of five consecutive business days.
Prudential Securities also agreed to comply with the terms of the
Administrative Order entered by the SEC on October 21, 1993 (as discussed
above) and to institute training programs for its securities salesmen in Texas.
On January 25, 1994, Prudential Securities agreed to the entry of a
Consent Order issued by the Banking Commissioner (the "Commissioner")
of the State of Connecticut, Department of Banking. The allegations against
Prudential Securities were that from January 1992 through at least July 1993,
Prudential Securities employed investment adviser agents who solicited
investment advisory business in Connecticut without being registered to do
so. This conduct was found by the Commissioner to be in violation of the
Connecticut Uniform Securities Act (the "Act") and in violation of the terms
and conditions of a Stipulation and Agreement entered into between the
Commissioner and Prudential Securities on February 20, 1992. It was further
alleged with respect to Prudential Securities' investment advisory business,
that certain Prudential
42
Securities agents held themselves out to the public in
Connecticut under a business name other than Prudential Securities.
Without admitting or denying the allegations, Prudential Securities agreed to
be censured by the Department of Banking, to cease and desist from
violation of the provisions of the Act, and agreed to pay a civil penalty to the
Department of Banking in the amount of $150,000. Further, Prudential
Securities agreed to be subject to a period of administrative probation which
will conclude upon Prudential Securities' completion of certain remedial
actions, including but not limited to, the following: (a) Prudential Securities
shall review, implement and maintain supervisory procedures designed to
ensure its compliance with the provision of the Act; and (b) commencing on
April 1, 1994 and continuing until April 1, 1996, Prudential Securities shall file
quarterly reports with the Securities and Business Investments Division of
the Department of Banking (the "Division") relating to its investment advisory
business. In addition, Prudential Securities has agreed to pay the
Department of Banking the cost of two or more examinations of any of its
offices by the Division, such amount not to exceed $10,000.
On March 10, 1994, Prudential Securities agreed to the entry of a
Consent Order issued by the State of Missouri, Commissioner of Securities.
The allegations against Prudential Securities were that the firm failed to
supervise a former registered representative, in violation of Missouri
securities laws. Without admitting or denying the allegations, Prudential
Securities agreed to the following: (a) to maintain and make available to the
Missouri Division of Securities all customer and regulatory complaints
concerning any Prudential Securities employee working in a branch located
in Missouri or any security sold by such employees; (b) beginning 30 days
from the date of the Consent Order and continuing for a period of three
years, to include at least one public service information piece selected by the
Commissioner of Securities in all of Prudential Securities' new account
packages mailed to Missouri residents; (c) for a period of three years from
the date of the Consent Order, to annually provide a notice to Prudential
Securities' Missouri customers which details the procedures for filing a
complaint with Prudential Securities and the applicable regulatory authorities.
In addition, Prudential Securities agreed to pay a fine in the amount of
$175,000.
On June 8, 1994, the Business Conduct Committee of the New York
Mercantile Exchange ("NYMEX" or "Exchange") accepted an Offer of
Settlement submitted by Prudential Securities concerning allegations that
Prudential Securities violated NYMEX rules regarding pre-arranged trades
and wash trades. Without admitting or denying the allegations, Prudential
Securities consented to a finding by the Exchange that it had violated
NYMEX Rule 8.55(A)(18) relating to conduct substantially detrimental to the
interest of the welfare of the Exchange; agreed to cease and desist from
future violations of Rule 8.55; and agreed to pay a fine in the amount of
$20,000.
On September 19, 1994, Prudential Securities consented to the entry of
an Agreement and Order issued by the State of Idaho, Department of
Finance, Securities Bureau (the "Department"). The allegations against
Prudential Securities were that the firm failed to supervise certain employees
in connection with the securities and options trading activities entered into
on behalf of Idaho clients, in violation of the Idaho Securities Act (the "Act").
It was further alleged that Prudential Securities failed to amend the Forms U-
4 for certain employees. Prudential Securities agreed to a number of
sanctions and remedial measures including, but not limited to, the following:
(a) to install a new branch manager in the Prudential Securities Boise branch
office, who is to function in a supervisory capacity only; (b) to designate a
regional quality review officer to review all securities options accounts and
securities options trading activities of Idaho customers in three Prudential
Securities offices; (c) to implement procedures reasonably designed to
ensure compliance with regulations concerning the timely delivery of
prospectuses; and (d) to cooperate in the Department's ongoing investigation
and to comply with all provisions of the Act. In addition, Prudential
Securities agreed to pay a fine to the State of Idaho in the amount of
$300,000. In addition, Prudential Securities has voluntarily reimbursed
certain customers for losses suffered in their accounts in the amount of
$797,518.49.
43
On October 27, 1994, Prudential Securities and Prudential Securities
Group entered into an agreement with the Office of the United States
Attorney for the Southern District of New York (the "U.S. Attorney") deferring
prosecution of charges contained in a criminal complaint. The complaint
alleged that Prudential Securities committed fraud in connection with the sale
of certain oil and gas limited partnership interests between 1983 and 1990 in
violation of federal securities laws. The agreement requires that Prudential
Securities deposit an additional $330,000,000 into an account established by
the Securities and Exchange Commission to pay restitution to the investors
who purchased the oil and gas partnership interests. Prudential Securities
further agreed to appoint a mutually acceptable outsider to sit on the Board
of Directors of Prudential Securities Group and the Compliance Committee
of Prudential Securities. The outside director will serve as an "ombudsman"
whom Prudential Securities' employees can contact anonymously with
complaints about ethics or compliance. Prudential Securities will report any
allegations or instances of criminal conduct and material improprieties to the
new director. The new director will submit compliance reports of his findings
every three months for a three year period. If, upon completion of a three-
year period, Prudential Securities has complied with the terms of the
agreement then the government will not pursue the charges in the complaint.
If Prudential Securities does not comply with the agreement then the
government may elect to pursue the charges.
On June 19, 1995, Prudential Securities entered into a settlement with
the CFTC in which, without admitting or denying the allegations of the
complaint, Prudential Securities consented to findings by the CFTC of certain
recordkeeping violations and failure to supervise in connection with the
commodity trading activities, in 1990 and early 1991, of a former broker of
Prudential Securities. Pursuant to the settlement, Prudential Securities
agreed to (i) pay a civil penalty of $725,000, (ii) the entry of a cease and
desist order with respect to the violations charged and (iii) an undertaking
directing the Prudential Securities Compliance Committee to review certain
of the firm's commodity compliance and supervisory policies and procedures
and a report be submitted to the CFTC, as well as a report to the CFTC on
the actions taken as a result of the review.
On February 29, 1996, the State of New Mexico Securities Division
issued a final order, subject to a settlement, whereby Prudential Securities
neither admitted nor denied any allegations that Prudential Securities failed
to supervise two former employees and a Branch Office Manager of its
Phoenix, Arizona branch and that such persons engaged in
misrepresentation, fraud, unsuitable trading, failure to properly register and
failure to report a suspected forgery. Prudential Securities consented to the
imposition of a censure and paid a fine in the amount of $15,000 and
investigative fees in the amount of $2,000
The Managing Owner
Prudential Securities Futures Management Inc., a Delaware corporation
formed in May 1973, is the managing owner of the Trust. The Managing
Owner has been registered with the CFTC as a commodity pool operator
since June 1989 and as a commodity trading advisor since November 1990,
and is a member of NFA in such capacities. The Managing Owner's main
business office is located at One New York Plaza, 13th floor, New York, New
York 10292, telephone (212) 778-7866.
The Managing Owner is currently the general partner/managing owner
and commodity pool operator ("CPO") of three publicly owned commodity
pool limited partnerships (Prudential-Bache Capital Return Futures Fund 2,
L.P., Prudential Securities Aggressive Growth Fund, L.P. and Diversified
Futures Trust I) and three non-public commodity funds (Prudential Securities
Foreign Financials Fund, L.P., Signet Partners II, L.P. and Diversified Futures
Trust II. Seaport Futures Management Inc. ("Seaport"), an affiliate of the
Managing Owner, acts as the general partner and CPO of five publicly owned
commodity funds, as well as a public commodity fund which terminated on
January 31, 1995. The Managing Owner is also the CPO of five additional
commodity funds which were formed after February 7, 1996 (the effective
date of the original prospectus) (the "Original Prospectus"), were organized
under the laws of Ireland, and are being offered pursuant to CFTC Rule 4.7
exclusively to non-U.S. investors. See "Past Performance Information--Other
Pools Sponsored by the Managing Owner and its Affiliate."
Since 1980 Prudential Securities has sponsored twenty-three public and
private commodity pools other than the Trust. The first five pools (started
between 1980 and 1982) terminated after an average term of five and one-half
years; the sixth
44
pool (started in March 1988) terminated after approximately
six and three-quarters years on January 31, 1995; the seventh pool (started
in 1993) terminated after approximately three years on December 17, 1995;
the remaining sixteen pools (started between 1988 and 1997) are still in
existence.
Directors and Officers of the Managing Owner
The current officers and directors of the Managing Owner are as
follows:
James M. Kelso, born 1954, has been the President and a Director of
the Managing Owner since May 1995. Mr. Kelso has also been the President
and a Director of Seaport since May 1995. Mr. Kelso is a Senior Vice
President of Futures Administration for Prudential Securities and serves in
various capacities for other affiliated companies. Mr. Kelso joined Prudential
Securities in July 1981 and has held positions of increasing responsibility
since that time.
Barbara J. Brooks, born 1948, became the Treasurer and Chief Financial
Officer of the Managing Owner in May 1990 when she also became the
Treasurer and Chief Financial Officer of Seaport. She is a Senior Vice
President of Prudential Securities and is Vice President-Finance, Chief
Financial Officer and Director of various entities affiliated with Prudential
Securities. She has been employed by Prudential Securities since 1983. Ms.
Brooks is a Certified Public Accountant.
David Buchalter, born 1958, has been Secretary of both the Managing
Owner and Seaport since October 1996. Mr. Buchalter is a Senior Vice
President and Associate General Counsel in the Law Department of
Prudential Securities. Prior to joining Prudential Securities in January 1992,
Mr. Buchalter was associated with the law firm of Rosenman & Colin LLP
from April 1988 to January 1992. Prior to that, from May 1983 though March
1988, Mr. Buchalter served as in-house counsel for Shearson Lehman Hutton,
Inc. and its predecessor firm, E.F. Hutton, Inc.
Pamela Morgan, born 1959, has been a Vice President of the Managing
Owner since October 1994. Ms. Morgan is a First Vice President of Finance
and Administration in the Futures Division of Prudential Securities, with
responsibility for Risk Management, Credit, Finance, Compliance and Audit.
She has managed a variety of departments with increasing levels of
responsibility within Prudential Securities, most recently as Director of
Marketing Communications and Design. Ms. Morgan also has been a Vice
President of Seaport since October 1994. Prior to joining Prudential
Securities in 1986, Ms. Morgan, a certified public accountant, was employed
by Arthur Andersen & Company for five years.
A. Laurence Norton, Jr., born 1939, has been a Director of the Managing
Owner since October 1994. Mr. Norton has also been a Director of Seaport
since March 1994. Mr. Norton is an Executive Vice President of Prudential
Securities and is the President of its Futures Division. Prior to joining
Prudential Securities in November 1991, Mr. Norton was the branch manager
of the Shearson Lehman Brothers' Greenwich, Connecticut branch. Mr.
Norton joined Shearson Lehman Brothers as a branch manager in 1975.
Guy S. Scarpaci, born 1947, has been a Director of the Managing Owner
since July 1987 and was Assistant Treasurer from May 1988 until December
1989. In addition, Mr. Scarpaci has been a Director of Seaport since May
1989. Mr. Scarpaci was first affiliated with the Managing Owner in July 1987.
Mr. Scarpaci has been employed by Prudential Securities in positions of
increasing responsibility since August 1974 and is currently a Vice President
of the Futures Division.
Eleanor L. Thomas, born 1954, has been a Vice President of the
Managing Owner since April 1993 and also has held such positions with
Seaport since such date. Ms. Thomas is a First Vice President of Prudential
Securities and also serves in various capacities for other affiliated
companies. Prior to joining Prudential Securities in March 1993, she was
with MC Baldwin Financial Company
45
from June 1990 through February 1993
and Arthur Andersen & Co. from 1986 through May 1990. Ms. Thomas is a
certified public accountant.
Steven Carlino, born 1964, has been a Vice President and the Chief
Accounting Officer of the Managing Owner since June 1995 and also has
held such positions with Seaport since such date. Mr. Carlino is a Vice
President of Prudential Securities and also serves in various capacities for
other affiliated companies. Prior to joining Prudential Securities in October
1992, he was with Ernst & Young for six years. Mr. Carlino is a certified
public accountant.
Thomas T. Bales, born 1959, is a First Vice President of Futures
Administration in the Futures Division for Prudential Securities and serves
in various capacities for other affiliated companies. Prior to joining the
Futures Division, Mr. Bales served as in-house counsel in the Law
Department for Prudential Securities from October 1987 through May 1996.
Mr. Bales joined Prudential Securities in November 1981 as an Analyst in the
Credit Analysis Department and later served as a Section Manager.
The most recent statement of financial condition of the Managing
Owner and report of the independent certified public accountants thereon is
set forth under "Report of Independent Public Accountants and Statement of
Financial Condition of Prudential Securities Futures Management Inc."
DUTIES OF THE MANAGING OWNER
Management of the Trust
The Managing Owner manages the Trust's business and affairs, but
does not (except in certain limited, and essentially emergency, situations)
direct the Trust's trading activities. The Managing Owner is responsible for
the renewal of the agreement with the Trading Manager, as well as for the
selection of additional and/or substitute trading managers, provided,
however, that in no event shall the Managing Owner retain a commodity
trading advisor affiliated with Prudential Securities. See "Summary of
Advisory Agreement." In addition, the Managing Owner selected the Trustee,
and is responsible for determining whether to retain or replace the Trustee.
The Managing Owner is directly responsible for preparing monthly and
annual reports to the Limited Owners, filing reports required by the CFTC,
the SEC and any other federal or state agencies or self-regulatory
organizations, and calculating Net Asset Value of the Trust and all fees and
expenses to be paid by the Trust. The Managing Owner provides suitable
facilities and procedures for handling redemptions, transfers, distributions,
and the orderly liquidation of the Trust, and effecting each of the foregoing.
Prudential Securities currently acts, and is expected to continue to act, as
the Trust's executing and clearing broker. In the event Prudential Securities
is unable or unwilling to continue in that capacity, however, the Managing
Owner is responsible for selecting another futures commission merchant.
Retention of Affiliates
The Managing Owner may retain affiliates to provide certain
administrative services necessary to the prudent operation of the Trust so
long as the Managing Owner has made a good faith determination that: (i) the
affiliate which it proposes to engage to perform such services is qualified to
do so (considering the prior experience of the affiliate or the individuals
employed thereby); (ii) the terms and conditions of the agreement pursuant
to which such affiliate is to perform services for the Trust are no less
favorable to the Trust than could be obtained from equally-qualified
unaffiliated third parties; and (iii) the maximum period covered by any
agreement pursuant to which such affiliate is to perform services for the
Trust shall not exceed one year, and such agreement shall be terminable
without penalty upon 30 days' prior written notice by the Trust. The fees of
any such affiliates will be paid by Prudential Securities or an affiliate.
46
Notification of Decline in Net Asset Value
The Managing Owner will notify the Limited Owners of any decline, as
of the end of any business day, in the estimated Net Asset Value per Interest
to less than 50% of the Net Asset Value per Interest as of the end of the
immediately preceding month within seven (7) business days of any such
occurrence. Included in such notification shall be a description of the
Limited Owners' voting and redemption rights.
Maximum Contract Term
The Trust is prohibited from entering into any contract with the
Managing Owner or its affiliates which has a term of more than one year and
which is not terminable by the Trust without penalty upon sixty (60) days'
prior written notice.
The Managing Owner participates in the income and losses of the Trust
in the proportion which its ownership of General Interests bears to the total
number of Interests on the same basis as the Limited Owners, but the
Managing Owner receives no fees or other remuneration from the Trust.
FIDUCIARY RESPONSIBILITY
Accountability
Pursuant to the Business Trust Statute, the Trustee delegated to the
Managing Owner responsibility for the management of the business and
affairs of the Trust, and has no duty or liability to supervise or monitor the
performance of the Managing Owner; nor does the Trustee have any liability
for the acts or omissions of the Managing Owner. The Managing Owner is
accountable to each Limited Owner as a fiduciary and must exercise good
faith and fairness in all dealings affecting the Trust. The Trustee retains a
statutory fiduciary duty to the Trust only for the performance of its express
obligations which it retains under the Trust Agreement, which are limited to
the making of certain filings under the Business Trust Statute and accepting
service of process on the Trust in the State of Delaware, and the Trustee
owes no other duties to the Trust. Pursuant to the Business Trust Statute,
to the extent that, in law or equity, the Trustee or the Managing Owner has
duties (including fiduciary duties) and liabilities relating thereto to the Trust
or to the Limited Owners, (i) the Trustee and the Managing Owner shall not
be liable for their good faith reliance on the provisions of the Trust
Agreement, and (ii) the Trustee's and the Managing Owner's duties and
liabilities may be expanded or restricted by the express provisions of the
Trust Agreement. The Managing Owner may not contract away its fiduciary
obligations.
Legal Proceedings
If a Limited Owner believes that the Managing Owner has violated its
fiduciary duty to the Limited Owners, a Limited Owner may seek legal relief
for himself (or itself) or, subject to the satisfaction of certain conditions, on
behalf of the Trust to recover damages from, or require an accounting by, the
Managing Owner. A Limited Owner may have the right to institute legal
action on behalf of himself and all other similarly situated Limited Owners (a
class action) to recover damages from the Managing Owner for violations of
fiduciary duties. See "Summary of Trust Agreement--Indemnification."
Potential defenses, among others, to any claim by a Limited Owner of breach
of fiduciary duty include that discretion was reasonably exercised or that the
action at issue was contractually authorized. In addition, (i) Limited Owners
may have the right, subject to procedural and jurisdictional requirements, to
bring Trust class actions in federal court to enforce their rights under the
federal securities and commodities laws; and (ii) Limited Owners who have
suffered losses in connection with the purchase or sale of their Trust
Interests may be able to recover such losses from the Managing Owner
where the losses result from a violation by the Managing Owner of the
antifraud provisions of the federal securities and commodities laws.
47
Reparations and Arbitration Proceedings
Limited Owners also have the right to institute a reparations proceeding
before a CFTC administrative law judge against the Managing Owner (a
registered commodity pool operator), Prudential Securities (a registered
futures commission merchant) or the Trading Manager (a registered
commodity trading advisor) under the CE Act, and the rules promulgated
thereunder, as well as the right to initiate arbitration proceedings in lieu
thereof.
Basis for Liability
Potential investors should be aware, however, that because of certain
provisions in the Advisory Agreement, the Brokerage Agreement and the
Trust Agreement, it generally will be more difficult to establish a basis for
liability against such entities than it would be absent such provisions,
including, (a) the provisions in the Advisory Agreement giving broad
discretion to the Trading Manager, and (b) the exculpatory and indemnity
provisions contained in the Advisory Agreement, the Brokerage Agreement
and the Trust Agreement. See "Summary of Advisory Agreement,"
"Summary of Brokerage Agreement" and "Summary of Trust Agreement--
Indemnification." Payment of any indemnity to any such person by the Trust
pursuant to such provisions would reduce the assets of the Trust. The
Managing Owner does not carry insurance covering such potential losses,
and the Trust carries no liability insurance covering its potential
indemnification exposure.
Because the foregoing summary involves rapidly developing and
changing areas of the law, Limited Owners who believe that the Trustee, the
Managing Owner, Prudential Securities or the Trading Manager may have
violated applicable law should consult with their own counsel as to their
evaluation of the status of the law at such time.
MANAGING OWNER'S MINIMUM PURCHASE AND NET WORTH OBLIGATIONS
Minimum Purchase Obligation
The Managing Owner has contributed $439,000 to the capital of the
Trust. In return, the Managing Owner received General Interests and has a
1% interest in the capital, profits and losses of the Trust. The Managing
Owner is required to maintain at least a 1% interest in the Trust's capital,
profits and losses so long as it is acting as the Managing Owner of the Trust,
and it will make such purchases as are necessary to effect this requirement.
All General Interests purchased by the Managing Owner are held for
investment purposes only and not for resale. No principal of the Managing
Owner owns any beneficial interest in the Trust.
Net Worth Obligation
General. The Managing Owner has represented that its net worth will
equal an amount at least equal to 5% of the total contributions to the Trust,
excluding its interests in and receivables from the Trust, and that such net
worth will be in addition to any minimum net worth being maintained by the
Managing Owner with respect to all other entities in which it is a managing
owner or a general partner, which minimum net worth, calculated with
respect to each such other entity in the same manner as for the Trust, shall
not be less than 5% of the total capital contributions made to such entity.
The Managing Owner and PSGI have each agreed that so long as the
Managing Owner remains the Managing Owner of the Trust, they will not take
or voluntarily permit to be taken any affirmative action to reduce the
Managing Owner's net worth below the foregoing amount. PSGI made
available to the Managing Owner additional capital (in the form of a demand
promissory note) in an amount sufficient to permit the Managing Owner to
meet its net worth obligation. PSGI secured the Note by depositing United
States Treasury securities in an amount equal to the value of the Note in a
collateral account for the benefit of the Managing Owner. PSGI incurred its
obligations in connection with the Note and the collateral pledged thereunder
(the "Collateral") in good faith, without an intent to hinder, delay or defraud
any of its present
48
or future creditors, and PSGI received reasonable and fair
consideration therefor. Consequently, the Managing Owner believes (i) the
Note constitutes a legal, valid and binding obligation of PSGI, (ii) it has a
duly perfected security interest in the Collateral, and (iii) such security
interest would be valid in any proceeding commenced by or against PSGI
under the U.S. Bankruptcy Code.
The Managing Owner's net worth obligation may be modified if the
Managing Owner is advised by tax counsel that the proposed modification
will not adversely affect the classification of the Trust as a partnership for
federal income tax purposes. See Section 4.3(i) of the Trust Agreement.
CAPITALIZATION
The table below shows the capitalization of the Trust (i) on the date
hereof, (ii) as adjusted for the sale of the maximum $100,000,000 of Interests
offered hereby (after the minimum required contribution of the Managing
Owner):
As Adjusted
Title of Class Outstanding Maximum
General Interests . . . . . . $ 477,696 (a) (b)
Limited Interests . . . . . . $ 43,269,236 (a) (b)
Total Contributions . . . . . $ 43,746,932 $101,010,000
(a) As of March 1, 1997.
(b) The Trust may not sell more than $100,000,000 of Limited Interests.
The maximum number of Limited Interests which may be sold to reach
this $100,000,000 amount cannot currently be determined because
Limited Interests are sold at their Net Asset Value, which amount
fluctuates daily. General Interests also are sold at Net Asset Value.
FEES, COMPENSATION AND EXPENSES
Charges to be paid by the Trust
(1) Brokerage Fee to Prudential Securities
For commodity brokerage and other administrative services, the Trust
pays Prudential Securities a fixed fee payable monthly as of the first day of
each month, equal on an annual basis to 7.75% of the Trust's Net Asset
Value. See "Actual and Potential Conflicts of Interest--Affiliation of the
Managing Owner, Prudential Securities and PSGI." Payments are made on
the first business day of each month. No material change related to such
brokerage fee will be made except upon twenty business days' prior notice
to Limited Owners, and no increase in such fees shall take effect except at
the beginning of a quarter. In no event will the brokerage fee paid by the
Trust exceed any limitations imposed by the NASAA Guidelines, or be
increased without the approval of at least a majority in interest of the Limited
Owners.
Based on the Trust's trading activities through December 31, 1996, the
fixed brokerage fee paid to Prudential Securities is equivalent to
approximately $48.71 per round turn transaction (i.e., the total for executing
and closing out the transaction).
From its fixed brokerage fee, Prudential Securities is responsible for
the payment of the following:
(a) Compensation to Prudential Securities Employees. See Note
(1) to the cover page of this Prospectus.
(b) Execution Costs. All of the Trust's floor brokerage expenses
and give-up charges, as well as the NFA, exchange and clearing fees
incurred in connection with the Trust's futures trading activities. These
costs are approximately 1% per annum of the Trust's Net Asset Value.
In addition, Prudential Securities credits the Trust with 80% of the interest
income it earns on the Trust's deposits with it and retains the balance for
itself.
49
(2) Forward Transactions through Prudential-Bache Forex (USA) Inc.
Many of the Trust's currency trades are executed in the forward
markets, in which no brokerage commissions are charged. Instead,
participants trade with a spread between the prices at which they are
prepared to buy and sell a particular currency. The "bid-ask" spreads
charged by the forward counterparties with which the Trust trades cannot be
quantified, but could be substantial.
PBFI attempts to earn a profit on the bid-ask spreads (which must be
competitive) on any back-to-back foreign currency forward transactions
entered into between the Trust and Prudential Securities, on the one hand,
and Prudential Securities and PBFI on the other. In connection with its
trading of foreign currencies in the interbank market, Prudential Securities
may arrange bank lines of credit at major international banks. To the extent
such lines of credit are arranged, Prudential Securities will not charge the
Trust for maintaining such lines of credit, but will require margin deposits
with respect to forward contract transactions. See "Risk Factors--Forward
Contracts." Except as discussed above, Prudential Securities receives no
other compensation for the services it provides the Trust.
(3) Management and Incentive Fees to the Trading Manager
Under the terms of the Advisory Agreement among the Trust, the
Managing Owner and the Trading Manager, the Trading Manager receives a
quarterly incentive fee (if it achieves New High Net Trading Profits) and a
monthly management fee, in each instance based on the Trust's Net Asset
Value. See "Summary of Advisory Agreement." In no event will the
management and incentive fees to the Trading Manager exceed any
limitations imposed by the NASAA Guidelines.
(a) Management Fee. The Trust pays the Trading Manager a
monthly management fee of 1/4 of 1% of the portion of the Trust's Net
Asset Value allocated to its management (the "Allocated Assets") as
of the last day of each calendar month (an annualized rate of 3%). The
management fee is not reduced on account of any (i) redemptions,
(ii) distributions, (iii) accrued Management Fees being calculated,
(iv) accrued Incentive Fees being calculated, (v) accrued but unpaid
extraordinary expenses, or (vi) reallocations of assets to any other
trading manager that may be retained to provide advisory services to
the Trust (an "Other Advisor"), made as of the end of the month for
which the calculation is being made.
(b) Incentive Fee. The Trust pays the Trading Manager an
incentive fee of 20% of any New High Net Trading Profits generated by
it as of the last day of each calendar quarter on the Allocated Assets.
New High Net Trading Profits are computed under the Advisory
Agreement as the excess (if any) of (A) the Allocated Assets, including
realized and unrealized gains and losses thereon, as of the last day of
a calendar quarter, after deduction of Management Fees paid or
payable in respect of the such Allocated Assets as of the last day of
such quarter, but before deduction of incentive fees payable for such
quarter, minus (B) the Allocated Assets, including realized and
unrealized gains and losses thereon, as of the last day of the most
recent preceding calendar quarter for which an incentive fee in respect
of such Allocated Assets was earned, after deduction of management
fees and incentive fees paid or payable in respect of such Allocated
Assets for such prior quarter. In determining whether an incentive fee
is due from quarter to quarter, it is not required that unrealized gains
or losses in one period be matched with subsequently realized gains
or losses in another period. In computing New High Net Trading
Profits, the difference between (A) and (B) in the preceding sentence
shall be (i) decreased by all interest earned on the Allocated Assets
between the dates referred to in (A) and (B) as well as all additions to
the Allocated Assets and positive reallocations of Allocated Assets
from Other Advisors between the dates referred to in (A) and (B), and
(ii) increased by the Trading Manager's allocable portion (initially 100%)
of any distributions or redemptions paid or payable by the Trust as of,
or subsequent to, the date in (B) through the date in (A), as well as
losses (including losses incurred from the date of the last incentive fee
50
paid or payable), if any, associated with the Trading Manager's
allocable portion of redemptions and any losses associated with
negative reallocations of Allocated Assets, and any negative
reallocations of Allocated Assets between the dates referred to in (A)
and (B), and extraordinary expenses not related to the Trading Manager
from the date in (B) to the last day of the calendar quarter as of which
the current incentive fee calculation is made. The term "extraordinary
expenses" as used above, and below under the heading "the Managing
Owner" shall have the meaning ascribed to it under Section 4.7(a) of
the Trust Agreement. All incentive fees paid to the Trading Manager
will be retained by the Trading Manager despite any subsequent losses
which may be incurred. To the extent that a redemption of an Interest
occurs at any time other than the end of a quarter, an incentive fee will
be paid to the Trading Manager as if such redemption occurred as of
the end of a quarter.
As a result of the foregoing, the incentive fee to be paid to the Trading
Manager under the Advisory Agreement is not paid after a calendar quarter
in which the Trading Manager incurs losses until sufficient New High Net
Trading Profits are generated in subsequent periods to recoup any losses
incurred and New High Net Trading Profits are achieved.
Example of Incentive Fee
A simple numerical example with respect to the Interests illustrates
how the quarterly incentive fee is calculated, as follows:
A. Assumptions
(1) The Trust commenced trading activities at the beginning of a
quarter with $100,000,000 in Interests and the Trading Manager
is allocated 100% of that amount.
B. Quarterly Data
(1) (2) (3) (4) (5) (6) (7)
Beginning Gross Fees for Advisory Net Interest Ending
Net Asset Realized & Brokerage Management Trading Income Net Asset
Value Unrealized Services Fee Profit Value***
Trading and Related (Loss)**
Profit Out-of-pocket
(Loss)* Costs
$100,000,000 $12,000,000 $1,937,500 $1,000,000 $9,062,500 $100,000 $109,162,500
* $6,000,000 realized and $6,000,000 unrealized.
** Column (2) minus the sum of Columns (3) and (4)
*** Column (1) plus Column (5) plus Column (6), and before computation of the
advisory incentive fee.
C. Incentive Fee Calculation
(1) Quarterly incentive fee is calculated as follows:
$9,062,500 [Column (5)] 20% = $1,812,500
(2) If in the next quarter, the Trading Manager experienced Net
Trading (Losses) computed on both a realized and unrealized
basis, it would not receive another incentive fee until it recouped
its losses and achieved New High Net Trading Profits (both
realized and unrealized). If, however, the fees and expenses in
the next quarter totaled $3,000,000, and the only Net Trading
Profit consisted of realization of only $4,000,000 of the $6,000,000
unrealized gain
51
from the prior quarter, the Trading Manager would
be eligible for an incentive fee on the $1,000,000 New High Net
Trading Profit.
(4) Extraordinary Expenses
To the extent that any extraordinary expenses are incurred including,
without limitation, legal claims and liabilities and litigation costs and
any indemnification related thereto, the Trust will be responsible for
such expenses. See Section 4.7(b) of the Trust Agreement.
Charges of the Trust to be paid by Prudential Securities or its Affiliates.
Prudential Securities or an affiliate is responsible for the payment of
the following charges and is not reimbursed by the Trust therefor:
(1) Routine Operational, Administrative and Other Expenses. All
of the Trust's routine operational and administrative expenses
including, but not limited to, accounting and computer services, filing
fees, printing, mailing and duplication costs are paid by Prudential
Securities or one of its affiliates. These operational and administrative
expenses currently are approximately $125,000 per annum. Prudential
Securities or an affiliate also is responsible for all routine legal,
auditing and other expenses of third party service providers, including
the Trustee. Currently, such fees and expenses are approximately
$75,000 per annum.
(2) Organization and Offering Expenses. Expenses incurred in
connection with the organization of the Trust and the offering of
Interests during the Initial and Continuous Offering Periods total
approximately $580,000 to date.
Charges Paid by Limited Owners
Redemption Fees. Limited Owners who redeem their Interests during
the first twelve months following their purchase will be subject to the
following redemption fees: Interests redeemed on or prior to the end of the
first and second successive six-month periods after their purchase are
charged a redemption fee of 4% and 3%, respectively, of the Net Asset Value
at which they are redeemed. These redemption fees are paid to the
Managing Owner. In the event that an investor acquires Interests at more
than one closing date, such Interests will be treated on a "first-in, first-out"
basis for redemption purposes (including determining the amount of any
applicable redemption charge). Redemption fees do not reduce Net Asset
Value or New High Net Trading Profit for any purpose, only the amount which
Interestholders receive upon redemption.
Projected Twelve-Month Break-Even Analysis
A projected twelve-month break-even analysis, taking into account all
fees and expenses enumerated above (other than advisory incentive fees and
extraordinary expenses, which are impossible to predict), plus interest
income, is set forth at page 17 above under the heading "Projected Break-
Even Analysis," and is expressed as a dollar amount and as a percentage of
a minimum $5,000 initial investment.
ACTUAL AND POTENTIAL CONFLICTS OF INTEREST
(1) Affiliation of the Managing Owner, Prudential Securities and PSGI.
The Managing Owner is a wholly-owned subsidiary of Prudential Securities,
which acts as the Trust's selling agent and clearing broker and performs
other services for the Trust. Prudential Securities is a wholly-owned
subsidiary of PSGI. See "The Trust, Trustee, Managing Owner and Affiliates"
and "Summary of Brokerage Agreement." PBFI, affiliates of Prudential
Securities, also attempts to earn a spread on any foreign currency forward
transactions between the Trust and Prudential Securities, on the one hand,
and Prudential Securities and PBFI on the other. Because the Managing
Owner is an affiliate of Prudential Securities, the
52
fixed brokerage fee it
receives is not the result of arm's-length negotiations. Other customers of
Prudential Securities may pay commissions which are effectively lower than
the fixed brokerage fee payable by the Trust when Prudential Securities
determines, in its sole discretion, that the size of any such other account, the
anticipated volume and frequency of its trading and the costs associated
with the servicing of such account, or any other reasons, justify a lower rate.
To the extent that other brokers would charge commission rates effectively
below those charged by Prudential Securities, the Trust will pay effectively
higher commissions for similar trades. However, Limited Owners obtain
several benefits from investing in the Trust which might otherwise not be
available to them for an investment as low as the minimum investment in the
Trust (e.g., limited liability, investment diversification, and administrative
convenience).
In addition, because the Managing Owner and Prudential Securities are
each affiliates of PSGI, and PBFI is an affiliate of Prudential Securities, the
Managing Owner may have an incentive to retain Prudential Securities as the
Trust's clearing broker and to engage in foreign currency forward
transactions with PBFI as the counterparty. However, the Managing Owner
has a fiduciary obligation to the Trust notwithstanding its relationship with
Prudential Securities and PBFI, and it will be mindful of this obligation in all
dealings affecting the Trust. Accordingly, the Managing Owner will not
continue to retain such affiliated entities if it determines that it would not
be in the best interest of the Trust to do so.
As a result of the flat brokerage fee being charged the Trust, the
Managing Owner may have a conflict of interest in two additional respects.
First, the Managing Owner is responsible for determining whether
distributions are to be made to Limited Owners by the Trust. However,
because any distributions will reduce the Trust's assets which serve as the
basis on which Prudential Securities's fixed brokerage fee is calculated, the
Managing Owner will have an incentive to reduce or eliminate distributions
in order to maximize such brokerage fee. Second, the Managing Owner was
responsible for selecting the Trading Manager and is responsible for
selecting any new commodity trading managers for the Trust and may have
an incentive to select trading managers which do not trade frequently since
Prudential Securities will receive the same fee regardless of how many
transactions are effected for the Trust. The Trust Agreement requires the
Managing Owner to determine whether the Trust is receiving the best price
and services available under the circumstances and whether the rates are
competitive, and, if necessary, to renegotiate the brokerage fee structure to
obtain such rates and services for the Trust. In making the foregoing
determinations, the Managing Owner may not rely solely on the brokerage
fees paid by other major commodity pools.
The officers, directors and employees of the Managing Owner and of
Prudential Securities, and agents and correspondents of Prudential
Securities, from time to time may trade in commodities for their own
accounts and for the account of Prudential Securities itself. In addition,
Prudential Securities is
a futures commission merchant, handling customer
business in commodities. Thus, Prudential Securities may effect
transactions in which the other parties to the transactions are Prudential
Securities, officers, directors or employees of Prudential Securities or the
Managing Owner, or customers, agents or correspondents of Prudential
Securities, or employees of such agents or correspondents. Such persons
or entities might also compete with the Trust in bidding or offering on
purchases or sales of contracts without knowing that the Trust also is so
bidding or offering. Transactions for Prudential Securities, for the officers,
directors or employees of Prudential Securities or the Managing Owner, or
for customers, agents or correspondents of Prudential Securities or
employees of such agents or correspondents, might be effected when similar
Trust trades are not executed or are executed at less favorable prices.
Although Limited Owners will not be permitted to inspect such persons'
trading records in light of their confidential nature, the Managing Owner will
have access to these records.
Certain of the officers and directors of the Managing Owner (who are
also employees of and are compensated by Prudential Securities) may
individually
53
receive from Prudential Securities compensation and bonuses
based on various factors including brokerage fees generated by the Trust.
(2) Prudential Securities-related Activities. As part of its commodity
brokerage services, Prudential Securities maintains managed accounts
serviced by outside commodity trading managers, as well as discretionary
and guided commodity accounts through which Prudential Securities
services commodity accounts for customers meeting certain investment
requirements. The selection of commodity trades for such accounts is made
through the judgment of the particular person servicing the account.
Prudential Securities also maintains a commodity research department which
makes fundamental and technical information available daily to its Financial
Advisors and certain customers. In addition, from time to time it makes
recommendations as to market positions. In servicing managed accounts,
discretionary accounts and/or guided accounts, Prudential Securities
Financial Advisors may take or advocate a position similar or opposite to
that taken by Prudential Securities and/or the Trust, and there is no
assurance that the Trust's positions will prove more profitable than those of
such other accounts. However, since Prudential Securities does not have
discretion over the positions taken on behalf of the Trust, it will not be able
to affect, either positively or negatively, the Trust's positions.
(3) Prudential Securities Advising on Redemptions. Prudential
Securities Financial Advisors who are appropriately registered and qualified
will receive continuing compensation for services rendered to the Trust on
an ongoing basis, including rendering advice to Limited Owners on
redemptions. See "Summary of Brokerage Agreement." This compensation
is paid by Prudential Securities out of the fixed monthly brokerage fee it
receives from the Trust in proportion to the number of then outstanding
Interests for which each Financial Advisor provides ongoing services. This
compensation ceases to be paid to Financial Advisors with respect to
redeemed Interests. Accordingly, Prudential Securities Financial Advisors
have a financial incentive to advise Limited Owners not to redeem Interests
in the Trust. However, Prudential Securities Financial Advisors are expected
to act in the best interests of their clients, notwithstanding any personal
interests to the contrary.
(4) Other Commodity Funds Sponsored by Prudential
Securities. Prudential Securities is the sponsor of other publicly and
privately offered commodity funds, which may or may not be similar to the
Trust. These funds and other commodity funds established from time to time
by Prudential Securities may compete with the Trust for the execution of
trades and there is no assurance that the Trust will obtain the most favorable
prices on such trades. Since Prudential Securities has no discretion over the
selection of the positions taken by these funds or the timing of the initiation
thereof, it will not be able to influence the favorability of the price of the
Trust's transactions. See "Past Performance Information--Other Pools
Sponsored by the Managing Owner and its Affiliate."
(5) Management of Other Accounts by the Trading Manager. The
Trading Manager is permitted to manage and trade accounts for other
investors (including other commodity pools) and to trade commodities for its
own account and the accounts of its principals and will continue to be free
to do so, so long as the Trading Manager's ability to carry out its obligations
and duties to the Trust under the Advisory Agreement is not materially
impaired thereby. See "Summary of Advisory Agreement." The Trading
Manager and its principals have specifically indicated their intention to
continue to trade for their own account(s). The Trading Manager might
therefore compete with the Trust in bidding or offering on purchases or sales
of contracts through the same or a different trading program than that to be
used by the Trust. There can be no assurance that any such trades will be
consistent with those of the Trust, or that the Trading Manager or its
principals will not be the other party to a trade entered into by the Trust. In
addition, certain affiliates of the Trading Manager operate commodity pools
which may be competitive with the Trust. Pursuant to the Advisory
Agreement, the Trading Manager must treat the Trust equitably and has
agreed to provide the Managing Owner with access to information so that the
Managing Owner can be assured of such equitable treatment. Limited
Owners, however, have no inspection rights. See "Summary of Advisory
Agreement." In addition, because the financial incentives of the Trading
Manager in certain other accounts managed
54
by it may exceed any incentives
payable by the Trust, the Trading Manager might have an incentive to favor
those accounts as against the Trust in trading. The Trading Manager's
management of other clients' accounts may increase the level of competition
among such clients and the Trust for the execution of the same or similar
transactions and affect the priority of order entry. All open positions held in
the accounts owned or controlled by the Trading Manager and its principals
and affiliates will be aggregated for purposes of applying speculative
position limits in the United States. Thus, the Trust might be unable to enter
into or hold certain positions if such positions, when added to contracts held
for other accounts of the Trading Manager or for the Trading Manager itself,
would exceed the applicable speculative position limits. See "Risk Factors--
Commodity trading may be Illiquid."
COMMODITY TRADING
Futures Contracts
Futures contracts are contracts made on or through a commodity
exchange and provide for future delivery of agricultural and industrial
commodities, precious metals, foreign currencies or financial instruments,
and in the case of certain contracts, such as stock index futures contracts
and Eurodollar futures contracts, provide for cash settlement. Such
contracts are uniform for each commodity on each exchange and vary only
with respect to price and delivery time. A contract to buy or sell may be
satisfied either by making or taking delivery of the commodity and payment
or acceptance of the entire purchase price therefor or by offsetting the
obligation with a contract containing a matching contractual obligation on
the same (or a linked) exchange prior to delivery. United States commodity
exchanges individually or, in certain limited situations, in conjunction with
certain foreign exchanges, provide a clearing mechanism to facilitate the
matching of offsetting trades. Once trades made between members of an
exchange have been confirmed, the clearinghouse becomes substituted for
the clearing member acting on behalf of each buyer and each seller of
contracts traded on the exchange and in effect becomes the other party to
the trade. Thereafter, each clearing member firm party to the trade looks
only to the clearinghouse for performance. Clearinghouses do not deal with
customers, but only with member firms, and the "guarantee" of performance
under open positions provided by the clearinghouse does not run to
customers. If a customer's commodity broker becomes bankrupt or
insolvent, or otherwise defaults on such broker's obligations to such
customer, the customer in question may not receive all amounts owning to
such customer in respect of his trading, despite the clearinghouse fully
discharging all of its obligations.
Hedgers and Speculators
The two broad classifications of person who trade in commodity
futures are "hedgers" and "speculators." Commercial interests that market
or process commodities use the futures market to a significant extent for
hedging. Hedging is a protective procedure designed to minimize losses that
may occur because of price fluctuations, for example, between the time a
merchandiser or processor makes a contract to sell a raw or processed
commodity and the time he must perform the contract. The commodity
markets enable the hedger to shift the risk of price fluctuations to the
speculator. The speculator, unlike the hedger, generally expects neither to
deliver nor receive the physical commodity; rather, the speculator risks his
capital with the hope of making profits from price fluctuations in commodity
futures contracts. Speculators rarely take delivery of physical commodities
but rather close out their futures positions by entering into offsetting
purchases or sales of futures contracts.
Forward Trading
Futures contracts are but one category of organized commodity
trading. Two other categories of transactions are "spot" contracts and
"forward" contracts. Both of these are varieties of cash commodity
transactions, as opposed to futures transactions, in that they relate to the
purchase and sale of specific physical commodities and may differ from each
other with respect to quantity, payment,
55
grade, mode of shipment, penalties,
risk of loss and the like. In recent years, the terms of certain forward
contracts have become more standardized and may, in lieu of requiring
actual delivery and acceptance, provide a right of offset or cash settlement.
For example, foreign currencies may also be purchased or sold for future
delivery in the international foreign exchange market among banks, money
market dealers and brokers. The bank or other institution generally acts as
a principal in such forward contract transactions and includes its anticipated
profit and cost in the price it quotes for such contract. Such forward
contracts bear substantial similarities to exchange traded futures, but are not
generally regulated by the CFTC. Although United States banks, which are
major participants in the forward market, are regulated in various ways by
the Federal Reserve Board, the Comptroller of the Currency and other federal
and state banking officials, banking authorities do not regulate forward
trading in foreign currencies. Likewise, forward trading in foreign currencies
is not regulated by any foreign governmental agency although exchange
control restrictions on the movement of foreign currencies are in effect in
many nations.
Cash Transactions
Cash commodity transactions may arise in conjunction with futures
transactions. For example, if the holder of a long contract satisfies it by
taking delivery of the commodity, such holder is said to have a cash
commodity position. This cash position, if it is not to be used or processed
by the holder, may be sold through spot or forward contracts or delivered in
satisfaction of a futures contract.
Margins
Margins are good faith deposits which must be made with a commodity
broker in order to initiate or maintain an open position in a futures contract.
When futures contracts are traded in the United States and on most
exchanges abroad, both buyer and seller are required to post margins with
the broker handling their trades as security for the performance of their
buying and selling undertakings, and to offset losses on their trades due to
daily fluctuations in the markets. Minimum margins usually are set by the
exchanges.
A customer's margin deposit is treated as "equity" in his account. A
change in the market price of the futures contract will increase or decrease
the equity. If this equity decreases below the "maintenance margin" amount
(generally 75% of the initial margin requirement), the broker will issue a
"variation" margin call requiring the customer to increase the account's
equity to the initial margin. Failure to honor such a margin call generally will
result in the closing out of the open position. If, at the time such open
position is closed the account equity is negative, then the equity in the
customer's remaining open positions, if any, in excess of their required
margins, as well as the customer's cash reserves will be used to offset such
debit balance, and if such equities and reserves are not sufficient the
customer will be liable for the remaining unpaid balance.
United States Regulations
(a) Commodity Exchange Act. The United States Congress
enacted the CE Act to regulate trading in commodities, the exchanges
on which they are traded, the individual brokers who are members of
such exchanges, and commodity professionals and commodity
brokerage houses that trade in these commodities in the United States.
(b) Commodity Futures Trading Commission. The CFTC is an
independent governmental agency which administers the CE Act and
is authorized to promulgate rules thereunder. A function of the CFTC
is to implement the objectives of the CE Act in preventing price
manipulation and excessive speculation and promoting orderly and
efficient commodity futures markets. The CFTC has adopted
regulations covering, among other things, (a) the designation of
contract markets; (b) the monitoring of United States commodity
exchange rules; (c) the establishment of speculative position limits;
(d) the registration of commodity brokers and brokerage houses,
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floor brokers, introducing brokers, leverage transaction merchants,
commodity trading advisors, commodity pool operators and their
principal employees engaged in non-clerical commodities activities
("associated persons"), and (e) the segregation of customers' funds
and recordkeeping by, and minimum financial requirements and
periodic audits of, such registered commodity brokerage houses and
professionals. Under the CE Act, the CFTC is empowered, among
other things, to (i) hear and adjudicate complaints of any person (e.g.,
a Limited Owner) against all individuals and firms registered or subject
to registration under the CE Act (reparations), (ii) seek injunctions and
restraining orders, (iii) issue orders to cease and desist, (iv) initiate
disciplinary proceedings, (v) revoke, suspend or not renew
registrations and (vi) levy substantial fines. The CE Act also provides
for certain other private rights of action and the possibility of
imprisonment for violations.
The CFTC has adopted extensive regulations affecting commodity
pool operators (such as the Managing Owner) and commodity trading
advisors (such as the Trading Manager) and their associated persons
which, among other things, require the giving of disclosure documents
to new customers and the retention of current trading and other
records, prohibit pool operators from commingling pool assets with
those of the operators or their other customers and require pool
operators to provide their customers with periodic account statements
and an annual report. Upon request by the CFTC, the Managing Owner
also will furnish the CFTC with the names and addresses of the Limited
Owners, along with copies of all transactions with, and reports and
other communications to, the Limited Owners. The CFTC has recently
amended its regulations relating to the disclosure, recordkeeping and
reporting obligations affecting commodity pool operators. These
regulations, as adopted, among other things, streamline the disclosure
documents and increase from six to nine months the time period after
which such documents must be updated.
(c) United States Commodity Exchanges. United States
commodity exchanges are given certain latitude in promulgating rules
and regulations to control and regulate their members and clearing
houses, as well as the trading conducted on their floors. Examples of
current regulations by an exchange include establishment of initial and
maintenance margin levels, size of trading units, daily price fluctuation
limits and other contract specifications. Except for those rules relating
to margins, all exchange rules and regulations relating to terms and
conditions of contracts of sale or to other trading requirements
currently must be reviewed and approved by the CFTC.
(d) Daily Price Fluctuation Limits. Generally, exchanges in the
United States (but generally not foreign exchanges, or banks or
broker-dealer firms in the case of forward contracts) limit the amount
of fluctuation in commodity futures contract prices during a single
trading day by regulations. These regulations specify what are referred
to as "daily price fluctuation limits," which establish the maximum
amount the price of a futures contract may vary from the previous
day's settlement price at the end of the trading session. Generally,
once the daily limit has been reached in a particular commodity, no
trades may be made at a price beyond the limit. Positions in the
commodity could then be taken or liquidated only if traders are willing
to effect trades at or within the limit during the period for trading on
such day. Because the daily limit rule only governs price movement
for a particular trading day, it does not limit, and in fact may increase,
losses because it may prevent the prompt liquidation of unfavorable
positions. At the same time, when situations develop that exert
genuine pressure on price limits, exchanges may put special formulas
into effect that expand the limits so as to keep pace with the world's
cash and forward markets in the affected commodity.
(e) Speculative Position Limits. In order to prevent excessive
speculation (and hence undue influence on prices) and attempted
market corners, the various exchanges in the United States (subject to
CFTC approval) and in certain cases, the CFTC, have imposed
speculative
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position limits on futures transactions in all commodities.
Speculative position limits establish the maximum net long or net short
positions that any person (other than a hedger) may hold or control in
affected commodity futures contracts. Certain exchanges or their
clearinghouses also set limits on the total net positions that may be
held by a clearing broker, such as Prudential Securities. See "Risk
Factors--Commodity trading may be Illiquid." The CFTC's rules allow
an exemption from aggregation for the purpose of speculative position
limits for positions which have a common owner but are independently
controlled. Foreign exchanges do not generally impose position limits,
with such limits being set by many of the member firms of such
exchanges based on credit considerations.
(f) National Futures Association. Substantially all commodity
pool operators, commodity trading advisors, futures commission
merchants, introducing brokers and their associated persons are
members or associated members of the NFA. The NFA's principal
regulatory operations include (i) auditing the financial condition of
futures commission merchants, introducing brokers, commodity pool
operators and commodity trading advisors; (ii) arbitrating commodity
futures disputes between customers and NFA members;
(iii) conducting disciplinary proceedings; and (iv) registering futures
commission merchants, commodity pool operators, commodity trading
advisors, introducing brokers and their respective associated persons,
and floor brokers.
(g) Non-U.S. Transactions. Although the CFTC is prohibited by
statute from regulating trading on foreign commodity markets, the
CFTC has adopted rules with respect to the regulation of persons
outside the U.S. engaging in foreign futures transactions (i.e.,
transactions in futures on non-U.S. exchanges) with persons in the
United States and has also published a statement concerning its
jurisdiction in the foreign currency forward market.
* * *
The regulation of commodities transactions in the United States is a
rapidly changing area of law and the various regulatory procedures
described herein are subject to modification by United States Congressional
action, changes in CFTC rules and amendments to exchange regulations and
NFA regulations.
Regulation Outside of the United States
The CFTC does not regulate futures trading on exchanges outside of
the United States (see "Commodity Futures Trading Commission Risk
Disclosure Statement"), forward contracts with banks or transactions in
physical commodities generally. No regulatory scheme currently exists in
relation to the foreign currency forward market, except for regulation of
general banking activities and exchange controls in the various jurisdictions
where trading occurs or in which the currency originates. Moreover, neither
foreign commodity exchanges nor foreign banks currently are subject to
regulation by the CFTC or any other United States Governmental agency, and
may not be subject to any regulation.
Some foreign exchanges also have no position limits, with each dealer
establishing the size of the positions it will permit traders to hold. To the
extent that the Trust will engage in transactions on foreign exchanges, it will
be subject to the risk of fluctuations in the exchange rate between the native
currencies of any foreign exchange on which it trades and the United States
dollar (which risks may be hedged) and the possibility that exchange
controls could be imposed in the future. There is no limitation on daily price
moves on forward contracts in foreign currencies traded through banks,
brokers or dealers. While margin calls are not required by foreign
exchanges, Prudential Securities may be subject to daily margin calls in
foreign markets.
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SUMMARY OF ADVISORY AGREEMENT
General
Pursuant to the Advisory Agreement among the Trust, the Managing
Owner and the Trading Manager, the Managing Owner delegated to the
Trading Manager sole discretion and responsibility to engage in commodity
transactions for the Trust pursuant to its agreed-upon trading approach (the
"Trading Approach") (as described under the heading "Description of the
Trading Manager") subject to the Trust's trading limitations and policies
(described under the heading "Trust's Trading Limitations and Policies").
The Trading Manager has been allocated 100% of the proceeds from the
Initial Offering and the Continuous Offering of Interests (the "Allocated
Assets"). At any time after an allocation of Trust assets to the Trading
Manager, the Managing Owner may reallocate the Allocated Assets at its
discretion to one or more trading advisors who are unaffiliated with
Prudential Securities. There is no current intention to utilize other trading
advisors, but any such advisors which may be selected will be chosen based
on factors similar to those used to select the Trading Manager (see
"Business of the Trust"), and will not be paid compensation in excess of that
permitted by the NASAA Guidelines.
The Managing Owner may override the trading instructions of the
Trading Manager in the event it determines in good faith following
appropriate consultation with the Trading Manager that any trading
instruction issued by the Trading Manager violates the Trust's trading
policies or limitations. In addition, the Managing Owner may impose
limitations on trading activities if the Managing Owner determines that such
limitations are necessary or in the best interests of the Trust.
In the event the Trading Manager wishes to use, or the Managing
Owner requests the Trading Manager to use, a trading method or strategy
other than or in addition to the Trading Approach in connection with trading
for the Trust (including, without limitation, the deletion of an agreed upon
trading method or strategy or the addition of a trading method or strategy to
the agreed upon Trading Approach), either in whole or in part, the Trading
Manager may not do so and/or shall not be required to do so, as appropriate,
unless both the Managing Owner and the Trading Manager consent thereto.
The Trading Manager will give the Trust prior written notice of any proposed
material change in its Trading Approach, and agrees not to make any
material change in such Trading Approach (as applied to the Trust) over the
objection of the Managing Owner. However, the Trading Manager is free to
institute non-material changes in its Trading Approach (as applied to the
Trust) without prior notification to the Trust, including the deletion of traded
commodities, or the addition of traded commodities on organized domestic
exchanges or foreign exchanges which the CFTC believes provide equivalent
customer protections or in the interbank foreign currency market. The
addition of any other commodities or the utilization of other forward markets
would be deemed a material change and would require the Managing
Owner's consent.
Term and Termination
The Advisory Agreement has been in effect since trading commenced
on May 1, 1996. It is due to expire on April 30, 1997, but will be renewed for
at least an additional successive one-year terms unless the Advisory
Agreement otherwise is terminated prior to the termination date of the term
of the Advisory Agreement then in effect.
The Advisory Agreement will terminate automatically (i) in the event
that the Trust is terminated; or (ii) if the Net Asset Value of the Allocated
Assets declines by 33 % from the Net Asset Value of the Allocated Assets
(a) as of the first day of the Advisory Agreement or (b) as of the first day of
any calendar year, in each case after appropriate adjustment for
distributions, redemptions, reallocations and additional allocations.
The Advisory Agreement also may be terminated at the discretion of
the Managing Owner at any time upon 30 days' prior written notice to the
Trading Manager, or for cause on less than 30 days' prior written notice, in
the event
59
that: (i) the Managing Owner determines in good faith following
appropriate consultation with the Trading Manager that the Trading Manager
is unable to use its agreed upon Trading Approach to any material extent, as
such Trading Approach may be refined or modified in the future in
accordance with the Advisory Agreement for the benefit of the Trust; (ii) the
Trading Manager's registration as a commodity trading advisor under the CE
Act or membership as a commodity trading advisor with the NFA is revoked,
suspended, terminated or not renewed; (iii) the Managing Owner determines
in good faith following appropriate consultation with the Trading Manager
that the Trading Manager has failed to conform, and after receipt of written
notice, continues to fail to conform in any material respect, to (A) the Trust's
Trading Policies and Limitations, or (B) the Trading Manager's Trading
Approach; (iv) there is an unauthorized assignment of the Advisory
Agreement by the Trading Manager; (v) the Trading Manager dissolves,
merges or consolidates with another entity or sells a substantial portion of
its assets, any portion of its Trading Approach utilized by the Trust or its
business goodwill, in each instance without the consent of the Managing
Owner; (vi) Philip Yang is not in control of the Trading Manager's trading
activities for the Trust; (vii) the Trading Manager becomes bankrupt or
insolvent; or (viii) for any other reason if the Managing Owner determines in
good faith that the termination is essential for the protection of the Trust,
including, without limitation, a good faith determination by the Managing
Owner that such Trading Manager has breached a material obligation to the
Trust under the Advisory Agreement relating to the trading of the Allocated
Assets.
The Trading Manager also has the right to terminate the Advisory
Agreement in its discretion at any time for cause on appropriate notice in the
event (i) of the receipt by the Trading Manager of an opinion of independent
counsel satisfactory to the Trading Manager and the Trust that by reason of
the Trading Manager's activities with respect to the Trust, the Trading
Manager is required to register as an investment adviser under the 1940 Act
and it is not so registered; (ii) the registration of the Managing Owner as a
commodity pool operator under the CE Act or membership as a commodity
pool operator with the NFA is revoked, suspended, terminated or not
renewed; (iii) the Managing Owner imposes additional trading limitation(s)
which the Trading Manager does not agree to follow in its management of the
Allocated Assets; or the Managing Owner overrides a trading instruction;
(iv) if the Trust assets allocated to the Trading Manager decreases, for any
reason, to less than $5 million; (v) the Managing Owner elects to have the
Trading Manager use a different Trading Approach and the Trading Manager
objects; (vi) there is an unauthorized assignment of the Advisory Agreement
by the Trust or the Managing Owner; or (vii) other good cause is shown and
the written consent of the Managing Owner is obtained (which shall not
unreasonably be withheld).
Other Business of the Trading Manager
The Trading Manager's business is managing commodity trading
accounts. See "Past Performance Information--The Trading Manager." The
Trading Manager is permitted to manage and trade accounts for other
investors (including other public and private commodity pools) during the
same period as it is managing the trading of the Trust's assets and to use
the same or other information and Trading Approach utilized on behalf of the
Trust for any such other account so long as the Trading Manager's ability to
carry out its obligations and duties to the Trust pursuant to the Advisory
Agreement is not materially impaired thereby.
The Trading Manager will not accept additional capital for commodities
management if doing so would have a reasonable likelihood of resulting in
the Trading Manager having to modify materially its agreed upon Trading
Approach being used for the Trust in a manner which might reasonably be
expected to have a material adverse effect on the Trust, provided that the
foregoing will not prohibit the acceptance of additional funds which
acceptance requires only routine adjustments to trading patterns in order to
comply with speculative position limits or daily trading limits.
The Trading Manager and its shareholders, directors, officers,
employees and agents also are permitted to trade for their own accounts so
long as such trading does not materially impair the Trading Manager's ability
to carry out its
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obligations and duties to the Trust. Limited Owners are not
permitted to inspect records of the Trading Manager or the individuals
associated with the Trading Manager due to the confidential nature of such
records. The Trading Manager will, upon reasonable request, permit the
Managing Owner to review at the Trading Manager's offices such trading
records as the Managing Owner may reasonably request for the purpose of
confirming that the Trust has been treated equitably with respect to advice
rendered by the Trading Manager for other accounts managed by the Trading
Manager.
Liability and Indemnification
Neither the Trading Manager, nor any employee, director, officer or
shareholder of the Trading Manager, or any person who controls the Trading
Manager, will be liable to the Managing Owner, its officers, directors,
shareholders or employees, or any person who controls the Managing Owner
or the Trust or its owners, or any of their respective successors or assigns
under the Advisory Agreement, except by reason of acts or omissions in
material breach thereof or due to their misconduct or negligence or by
reason of not having acted in good faith in the reasonable belief that such
actions or omissions were in the best interests of the Trust; it being
understood that all purchases and sales of Commodities are for the account
and risk of the Trust, that the Trading Manager makes no guarantee of profit
and provides no protection against loss, and that the Trading Manager shall
incur no liability for trading profits or losses resulting therefrom except as
set forth above. The Trading Manager, and each officer, director, shareholder
and employee of the Trading Manager, and each person who controls the
Trading Manager, will be indemnified by the Trust and the Managing Owner
against any losses, judgments, liabilities, expenses (including, without
limitation, reasonable attorneys' fees) and amounts paid in settlement of any
claims (collectively, "Losses"), sustained by the Trading Manager in
connection with any acts or omissions of the Trading Manager relating to its
management of the Trust's assets or as a result of any material breach of the
Advisory Agreement by the Trust or the Managing Owner, provided, that
(i) such Losses were not the result of negligence, misconduct or a material
breach of the Advisory Agreement on the part of the Trading Manager; (ii) the
Trading Manager, and its officers, directors, shareholders and employees,
and each person controlling the Trading Manager, acted or omitted to act in
good faith and in a manner reasonably believed by it and them to be in, or
not opposed to, the best interests of the Trust; and (iii) any such
indemnification will only be recoverable from the assets of the Trust and the
Managing Owner and provided further, however, that no indemnification shall
be permitted for amounts paid in settlement if either (A) the Trading Manager
fails to notify the Trust of the terms of any proposed settlement at least 15
days before any amounts are paid and (B) the Trust does not approve the
amount of the settlement within 15 days. Any indemnification by the Trust,
unless ordered by a court, shall only be made as authorized in the specific
case and only upon a determination by independent legal counsel in a
written opinion that indemnification is proper in the circumstances because
the indemnitee has met the applicable standard of conduct. Expenses
incurred in defending a threatened or pending civil, administrative or criminal
action, suit or proceeding against the foregoing indemnitees shall be paid by
the Trust in advance of the final disposition of such action, suit or
proceeding if (i) the legal action, suit or proceeding, if sustained, would
entitle the indemnitee to indemnification under the terms of the Advisory
Agreement, and (ii) the Trading Manager undertakes to repay the advanced
funds to the Trust in cases in which the foregoing indemnities are not
entitled to indemnification under the terms of the Advisory Agreement and
(iii) in the case of advancement of expenses by the Trust, the indemnitee
receives a written opinion of independent legal counsel that advancing such
expenses is proper in the circumstances. Notwithstanding the foregoing, the
Trust shall, at all times, have the right to offer to settle any matter with the
approval of the Trading Manager (which approval shall not be unreasonably
withheld).
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Name of Trust
In the event that the Trading Manager is replaced as a trading manager
to the Trust, or an additional trading manager is added in addition to the
Trading Manager, the Trust will be obligated upon request of the Trading
Manager to change its name to remove "Willowbridge" from the title.
SUMMARY OF BROKERAGE AGREEMENT
Prudential Securities and the Trust entered into a brokerage agreement
(the "Brokerage Agreement") pursuant to which Prudential Securities (i) acts
as the Trust's clearing broker, (ii) acts as custodian of the Trust's assets,
(iii) assists the Managing Owner in the performance of its administrative
functions for the Trust, and (iv) performs such other services for the Trust
as the Managing Owner may from time to time request.
Commodity Brokerage
As executing and clearing broker for the Trust, Prudential Securities
receives the Trading Manager's orders for trades. Confirmations of all
executed trades are given to the Trust by Prudential Securities. The
Brokerage Agreement incorporates Prudential Securities' standard Customer
Agreement and related documents, which include provisions which are
standard in the industry; namely, that (i) all funds, commodities and open or
cash positions carried for the Trust will be held as security for the Trust's
obligations to Prudential Securities; (ii) the margins required to initiate or
maintain open positions will be as from time to time established by
Prudential Securities and may exceed exchange minimum levels; and
(iii) Prudential Securities may close out positions, purchase commodities or
cancel orders at any time it deems necessary for its protection, without the
consent of the Trust.
Foreign Currency Transactions
PBFI, affiliates of Prudential Securities, also attempt to earn a spread
on foreign currency forward transactions between the Trust and Prudential
Securities, on the one hand, and Prudential Securities and PBFI on the other.
The Managing Owner does not receive any portion of such spreads.
Generally, when the Trading Manager gives an instruction either to sell or
buy a particular foreign currency forward contract, the Trust engages in
back-to-back principal trades with Prudential Securities and its affiliates,
PBFI, in order to carry out the Trading Manager's instructions. In
back-to-back currency transactions, Prudential Securities, as principal,
arranges bank lines of credit and contracts with PBFI to make or to take
future delivery of specified amounts of the currency at the negotiated price.
Prudential Securities, again as principal, in turn contracts with the Trust to
make or take future delivery of the same specified amounts of currencies at
the same price. In these transactions, Prudential Securities acts in the best
interests of the Trust. See "Fees, Compensation and Expenses."
Custodial Functions
As custodian of the Trust's assets, Prudential Securities is responsible,
among other things, for providing periodic accountings of all dealings and
actions taken by it during the reporting period, together with an accounting
of all securities, cash or other indebtedness or obligations held by it or its
nominees for or on behalf of the Trust.
Administrative Functions
Administrative functions provided by Prudential Securities for the Trust
include, but are not limited to, preparing and transmitting daily confirmations
of transactions and monthly statements of account, calculating equity
balances and margin requirements, assisting the Managing Owner in
providing continuing information services to the Limited Owners holding
Interests, keeping Limited Owners apprised of developments affecting the
Trust, communicating valuations of
62
Interests, providing information with
respect to procedures for redemptions, transfers and distributions, if any,
interpreting monthly and annual reports, providing tax information to Limited
Owners, explaining developments in the commodity markets in the United
States and abroad and furnishing all of the information from time to time in
its possession which the Managing Owner is required to furnish to Limited
Owners. Many of these services are performed on behalf of Prudential
Securities by the Financial Advisors who are registered under the CE Act,
and satisfy all applicable proficiency requirements (i.e., have passed the
Series 3 or Series 31 examinations or are exempt therefrom), in addition to
having all of the appropriate federal and state securities registrations. See
Note (1) to the cover page for a description of the continuing compensation
to be paid to such Financial Advisors for such services.
Flat Fee
As long as the Brokerage Agreement is in effect, Prudential Securities
will not charge the Trust a fee for any of the services it has agreed to
perform, except for the agreed upon brokerage fee. Prudential Securities
receives a flat brokerage fee, payable as of the first day of each month,
equal, on an annualized basis, to 7.75% of the Trust's Net Asset Value. From
this fee, Prudential Securities pays, among other things, all execution costs
related to the Trust's commodity interest trading (including, without
limitation, floor brokerage and give-up charges, as well as NFA, exchange
and clearing fees). Prudential Securities will not, however, charge the Trust
a lower monthly fee even though certain other customers may pay less in
brokerage charges than the Trust pays for Prudential Securities's services.
However, the Managing Owner is obligated to renegotiate the brokerage fee
if it determines that the Trust is not receiving a competitive rate for the
brokerage services provided. See "Actual and Potential Conflicts of
Interest." In reviewing the competitiveness of the flat fee, the Managing
Owner will give separate consideration to the portions of the flat fee related
to brokerage and related services and the balance of the fee, and will not rely
solely on the brokerage fees paid by other major commodity pools. The
Managing Owner believes that the flat monthly fee to be paid to Prudential
Securities is reasonable and fair. Moreover, this fee may not be increased
without the approval of at least a majority in interest of the Limited Owners
(excluding the Managing Owner).
Term
The Brokerage Agreement is not exclusive, and runs for successive
one-year terms to be renewed automatically each year unless terminated.
The Brokerage Agreement is terminable by the Trust (including by a vote of
a majority-in-interest of the Interestholders) or Prudential Securities without
penalty upon 60 days' prior written notice.
Liability
Prudential Securities and its stockholder, directors, officers and
employees will not be liable to the Trust or to the Limited Owners for errors
in judgment or other acts or omissions except by reason of acts of, or
omissions due to bad faith, misconduct or negligence or for not having acted
in good faith in the reasonable belief that its actions were in, or not opposed
to, the best interests of the Trust, or by reason of any material breach of the
Brokerage Agreement.
SUMMARY OF TRUST AGREEMENT
The rights and duties of the Trustee, the Managing Owner and the
Limited Owners are governed by provisions of the Delaware Business Trust
Act and by the Trust Agreement (the "Agreement" or the "Trust Agreement")
which is attached hereto as Exhibit A. The key features of the Agreement
which are not discussed elsewhere in the Prospectus are outlined below, but
reference is made to the Agreement for complete details of all of its terms
and conditions.
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Trustee
Wilmington Trust Company is the Trustee of the Trust and serves as
the Trust's sole trustee in the State of Delaware. The Trustee will accept
service of legal process on the Trust in the State of Delaware and makes
certain filings under the Business Trust Statute. The Trustee owes no other
duties to the Trust, the Managing Owner or the Limited Owners. The Trustee
is permitted to resign upon sixty days' notice to the Trust, provided, that any
such resignation will not be effective until a successor Trustee is appointed
by the Managing Owner. The Trust Agreement provides that the Trustee will
be compensated by the Managing Owner or its affiliates, and will be
indemnified by the Managing Owner against any expenses (as defined in the
Trust Agreement) it incurs relating to or arising out of the formation,
operation or termination of the Trust or the performance of its duties
pursuant to the Trust Agreement, except to the extent that such expenses
result from the gross negligence or willful misconduct of the Trustee. The
Managing Owner has the discretion to retain the Trustee or replace the
Trustee with a new trustee.
Only the Managing Owner has signed the Registration Statement of
which this Prospectus is a part, and only the assets of the Trust and the
Managing Owner are subject to issuer liability under the federal securities
laws for the information contained in this Prospectus and under federal and
state law with respect to the issuance and sale of the Interests. Under such
laws, neither the Trustee, either in its capacity as Trustee or in its
individual capacity, nor any director, officer or controlling person
of the Trustee is, or has any liability as, the issuer
or a director, officer or controlling person of
the issuer of the Interests. The Trustee's liability in connection with the
issuance and sale of the Interests, and with respect to the Trust's obligations
under the Interests, is limited solely to the express obligations of the Trustee
set forth in the Trust Agreement.
Management Responsibilities of the Managing Owner
Under the Agreement, the Trustee of the Trust has delegated to the
Managing Owner the exclusive management and control of all aspects of the
business of the Trust. The Trustee has no duty or liability to supervise or
monitor the performance of the Managing Owner, nor shall the Trustee have
any liability for the acts or omissions of the Managing Owner. In addition,
the Managing Owner has been designated as the "tax matters partner" for
purposes of the Code. The Limited Owners will have no voice in the
operations of the Trust, other than certain limited voting rights which are set
forth in the Agreement. See "Termination," "Election or Removal of
Managing Owner," "Exercise of Rights by Limited Owners" and
"Amendments and Meetings" under this heading. In the course of its
management, the Managing Owner may, in its sole and absolute discretion,
appoint an Affiliate or Affiliates of the Managing Owner as additional
managing owners (except where the Managing Owner has been notified by
the Limited Owners
that it is to be replaced as the managing owner) and
retain such persons, including Affiliates of the Managing Owner, as it deems
necessary for the efficient operation of the Trust.
Transfer of Interests
Subject to compliance with suitability standards imposed by the Trust
and applicable federal securities and state "Blue Sky" laws (see "Investment
Requirements/Who May Invest"), and the rules of other governmental
authorities, the Interests may be assigned at the election of a Limited Owner,
upon notice to the Managing Owner on a form acceptable to the Managing
Owner. The Managing Owner shall only refuse to recognize an assignment
(i) if necessary, in its judgment, to maintain the classification of the Trust
as a partnership for federal income tax purposes or to preserve the
characterization or treatment of Trust income or loss and upon receipt of an
opinion of counsel supporting its conclusion; (ii) if, as a result of such
assignment, the Trust would be unable to satisfy at least one of the safe
harbors for avoiding treatment as a "publicly traded partnership" provided
in Treas. Reg. S 1.7704-1(e) (or under other safe harbors established by the
IRS that protect against treatment as a publicly traded partnership); or (iii)
if such assignment is effectuated through an
64
established securities market
or a secondary market (or the substantial equivalent thereof). See "Income
Tax Consequences--Classification as a Partnership." The Managing Owner
will exercise such right by taking any actions as it deems necessary or
appropriate in its reasonable discretion so that such transfers or
assignments of rights are not in fact recognized and the assignor or
transferor continues to be recognized by the Trust as a beneficial owner for
all purposes, including the payment of any cash distribution.
Notwithstanding the foregoing and except for certain situations set forth in
the Agreement, no assignment may be made if such assignment would result
in (a) Limited Owners and their permitted assignees owning 5% or more of
the stock of the Managing Owner or any related person, (b) a contravention
of the NASAA Guidelines as adopted in any state where the proposed
assignor and assignee reside, including the current restriction which
generally prohibits transfers or assignments of Interests valued at less than
$5,000 (or $2,000 in the case of IRAs) except if such proposed transfer
relates to a Limited Owner's entire interest in the Trust, or (c) the aggregate
total of Interests transferred in a twelve-month period equaling forty-nine
percent (49%) or more of the outstanding Interests (taking into account
applicable attribution rules and excluding transfers by gift, bequest, or
inheritance). The Agreement provides that the Managing Owner will incur no
liability to any investor or prospective investor for any action or inaction by
it in connection with the foregoing, provided it acted in good faith.
Assignments to (i) the ancestors or descendants of a Limited Owner,
(ii) the personal representative or heir of a deceased Limited Owner, (iii) the
trustee of a trust whose beneficiary is the Limited Owner or another person
to whom a transfer could otherwise be made, or (iv) the shareholders,
partners or beneficiaries of a corporation, partnership or trust upon its
termination or liquidation, shall be effective as of the first day of the
calendar month following the month in which the Managing Owner receives
the written instrument of assignment. Assignments or transfers of
Interests to any other person also shall be effective on the
first day of the next succeeding calendar month, provided
the Managing Owner shall have been in receipt of
the written instrument of assignment for at least thirty (30) days.
An assignee may become a substituted Limited Owner only with the
written consent of the Managing Owner, which consent may be withheld in
the Managing Owner's sole and absolute discretion in order to maintain the
Trust's tax classification as a partnership, to avoid having the Trust
classified as a publicly traded partnership or to avoid
adverse legal consequences to the Trust, upon receipt
by the Managing Owner of (i) a duly executed and
acknowledged, written instrument of assignment, (ii) upon the Managing
Owner's request, an opinion of the Trust's independent counsel that such
assignment will not jeopardize the Trust's tax classification as a partnership
or cause the Trust to be deemed a publicly traded partnership and that the
assignment will not violate the Trust Agreement or the Business Trust
Statute and (iii) such other documents as the Managing Owner deems
necessary or desirable to effect such substitution.
A permitted assignee who
does not become a substituted Limited Owner shall be entitled to receive the
share of the profits or the return of capital to which his assignor would
otherwise be entitled, but shall not be entitled to vote, to receive any
information on or account of the Trust's transactions or to inspect the books
of the Trust. Under the Agreement an assigning Limited Owner is not
released from his liability to the Trust for any amounts for which he may be
liable under the Agreement (see "Redemption of Interests" and "Liabilities"
under this heading), whether or not the assignee to whom he has assigned
Interests becomes a substituted Limited Owner. All Limited Owners are
responsible for all costs relating to the assignment or transfer or their own
Interests.
Redemption of Interests
Redemption of any Interest or portion thereof held by the Limited
Owners (or any assignee thereof) will be made at 100% of the Net Asset
Value per Interest on the applicable Redemption Date. A Redemption Date
shall be immediately after the close of business on the last day of any month
in which the Managing Owner shall have been in receipt of the required
written notice of redemption for at least ten (10) days. Accordingly, Limited
Owners bear the risk of any decline in Net Asset Value from the date notice
of intent to redeem is
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given until the Redemption Date. Interests redeemed
on or prior to the end of the first and second successive six-month periods
after their purchase will be subject to a redemption fee of 4% and 3%,
respectively, of the Net Asset Value at which they are redeemed. These
redemption fees will be paid to the Managing Owner.
In the event that the estimated Net Asset Value per Interest, after
adjustment for distributions, as of the close of business of any business day
is less than 50% of the Net Asset Value per Interest as of the last day of the
immediately preceding month, Limited Owners will be given notice of such
event (see "Reports and Accounting") and an opportunity to redeem their
Interests as of a Special Redemption Date, which shall be the twentieth (20th)
business day following the notification by the Managing Owner to the Limited
Owners of such decline in Net Asset Value. The Managing Owner will notify
the Limited Owners of such estimated decline in Net Asset Value within
seven (7) business days of such occurrence. In order for redemptions as of
the Special Redemption Date to be effective, the Managing Owner must be
in receipt of written notice of intent to redeem for at least five (5) business
days. During this special redemption period, all commodities trading
activities will cease.
The Net Asset Value per Interest upon redemption on any date also will
reflect all accrued expenses for which the Trust is responsible, including
incentive fees, if any (including incentive fees which may be due and owing
other than at the end of a quarter), and will be reduced by such Interest's pro
rata portion of any expenses or losses incurred by the Trust resulting from
such redeeming Limited Owner (and his assignee, if any) unrelated to the
Trust's business, as well as the Limited Owner's liabilities for certain Trust
taxes, if any, or for liabilities resulting from violations of the transfer
provisions in the Trust Agreement. Limited Owners shall be notified in
writing within ten (10) days following the Redemption Date whether or not
their Interests shall be redeemed, unless payment for the redeemed Interests
is made within that ten day period, in which case notice shall not be
required. Except as otherwise provided in the Agreement, in the case of
extraordinary circumstances, payment generally shall be made within ten
business days following the Redemption Date. A Limited Owner may revoke
his intention to redeem before the Redemption Date by written instruction to
the Managing Owner.
All timely requests for redemption in proper form will be honored and
the Trust's commodity positions will be liquidated to the extent necessary to
effect such redemptions. The right to obtain redemption is contingent upon
the Trust's having property sufficient to discharge its liabilities on the date
of redemption. It is also contingent upon timely receipt by the Managing
Owner of a request for redemption in the form annexed hereto as Exhibit B
(or any other form approved by the Managing Owner). Redemption requests
may be mailed or otherwise delivered to the Managing Owner. See
"Additional Limited Owners" below.
The Agreement provides that the Managing Owner also has the right
mandatorily to redeem, upon ten days' prior notice, Interests of any Limited
Owner if (a) the Managing Owner determines that the continued participation
of such Limited Owner in the Trust might cause the Trust or any
Interestholder to be deemed to be managing Plan assets under ERISA;
(b) there is an unauthorized assignment or transfer pursuant to the
Agreement; or (c) in the event that any transaction would or might violate
any law or constitute a prohibited transaction under ERISA or the Code and
a statutory, class or individual exemption from the prohibited transaction
provisions of ERISA for such transaction or transactions does not apply or
cannot be obtained from the DOL (or the Managing Owner determines not to
seek such an exemption).
Termination
Unless earlier dissolved, the term of the Trust shall expire on
December 31, 2015. The Trust shall also be dissolved upon the occurrence
of any of the following events:
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(a) The filing of a certificate of dissolution or the revocation of
the charter (and the expiration of 90 days after the date of notice to the
Managing Owner of revocation without a reinstatement of its charter)
of the Managing Owner, or the withdrawal, removal, adjudication of
bankruptcy or insolvency of the Managing Owner (each of the
foregoing, an "Event of Withdrawal"), unless (i) at the time there is at
least one remaining Managing Owner and that remaining Managing
Owner carries on the business of the Trust or (ii) within 90 days of an
Event of Withdrawal all the remaining Interestholders agree in writing
to continue the business of the Trust and to select, as of the date of
such Event of Withdrawal, one or more successor Managing Owners.
Within 120 days of any Event of Withdrawal, if action is not taken
pursuant to (i) or (ii) and the Trust is dissolved, Limited Owners
holding a majority interest (over 50%) of the outstanding Interests
(without regard for Interests held by the Managing Owner or its
Affiliates) may elect to continue the business of the Trust by forming
a new business trust (the "Reconstituted Trust") on the same terms
and provisions set forth in this Agreement. Any such election must
also provide for the election of a Managing Owner to the Reconstituted
Trust. If such election is made, all Limited Owners will be bound
thereby and continue as Limited Owners of the Reconstituted Trust;
(b) The occurrence of any event which makes the continued
existence of the Trust unlawful;
(c) The suspension, revocation or termination of the Managing
Owner's registration as a commodity pool operator under the CE Act,
as amended, or membership as a commodity pool operator with the
NFA, unless at the time there is at least one remaining Managing
Owner whose registration or membership has not been suspended,
revoked or terminated;
(d) The insolvency or bankruptcy of the Trust;
(e) The vote of Limited Owners holding more than 50% of the
outstanding Interests (excluding Interests held by the Managing Owner
or an Affiliate) to dissolve the Trust with 90 days' prior written notice
to the Managing Owner; or
(f) The decline of the Net Asset Value of the Trust by 50% from
the Net Asset Value of the Trust (i) as of the commencement of the
Trust's trading activities; or (ii) on the first day of a fiscal year,
in each
case after appropriate adjustment for distributions, redemptions,
reallocations and additional contributions to capital.
The Trust also may dissolve, in the discretion of the Managing Owner,
upon the determination of the Managing Owner that the Trust's aggregate Net
Asset Value in relation to the operating expenses of the Trust makes it
unreasonable or imprudent to continue the business of the Trust. The
Managing Owner is not required to, and should not be expected to, obtain an
opinion of legal counsel or any other third party prior to determining to
dissolve the Trust.
Upon dissolution of the Trust, its affairs shall be wound up, its
liabilities discharged and its remaining assets distributed pro rata to the
Interestholders. To the extent the Trust has open positions at such time, it
will use its best efforts to close such positions, although no assurance can
be given that market conditions might not delay such liquidation and that
amounts received thereon will not be less than if market conditions permitted
an immediate liquidation.
The Agreement provides that the death, legal disability, bankruptcy or
withdrawal of a Limited Owner will not terminate or dissolve the Trust
(unless such Limited Owner is the sole Limited Owner of the Trust) and that
the legal representatives of such Limited Owner have no right to withdraw
or value his, her or its Interest except by redemption of Interests pursuant to
the Agreement.
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Reports and Accounting
The Trust maintains its books on the accrual basis. The financial
statements of the Trust are audited at least annually in accordance with
Generally Accepted Accounting Principles by independent certified public
accountants designated by the Managing Owner, in its sole discretion. Each
Limited Owner is furnished with unaudited monthly and certified annual
reports containing such information as the CFTC and NFA require. Current
monthly and annual reports accompany this Prospectus to all new
subscribers. The CFTC requires that an annual report be provided not later
than one hundred and twenty (120) days after the end of each fiscal year or
the permanent cessation of trading as defined in the CE Act, whichever is
earlier and set forth, among other matters:
(1) the Net Asset Value of the Trust and the Net Asset Value per
Interest or the total value of a Limited Owner's interest in the Trust, in
either case, as of the end of the year in question and the preceding
year;
(2) a Statement of Financial Condition as of the close of the fiscal
year and, if applicable, the preceding fiscal year;
(3) Statements of Income (Loss) and Changes in Limited Owners'
Capital during the fiscal year and, to the extent applicable, the previous
two fiscal years; and
(4) appropriate footnote disclosure and such further material
information as may be necessary to make the required statements not
misleading.
The CFTC also requires that an unaudited monthly report be distributed
to each Limited Owner within thirty (30) days of the end of each month
containing information presented in the form of a Statement of Income (Loss)
and a Statement of Changes in Net Asset Value.
The Statement of Income (Loss) must set forth, among other matters:
(1) the total amount of realized net gain or loss on commodity
interest positions liquidated during the month;
(2) the change in unrealized net gain or loss on commodity
interest positions during the month;
(3) the total amount of net gain or loss from all other
transactions in which the Trust is engaged; and
(4) the total amounts of management fees, advisory fees,
brokerage fees and other fees for commodity and other investment
transactions, and all other expenses incurred or accrued by the Trust
during the month.
The Statement of Changes in Net Asset Value must itemize the
following:
(1) the Net Asset Value of the Trust as of the beginning and end
of the month;
(2) the total amount representing redemptions of Interests during
the month;
(3) the total net income or loss of the Trust during the month;
and
(4) the Net Asset Value per Interest or the total value of a Limited
Owner's interest in the Trust as of the end of the month.
The monthly report also is required to describe any other material
business dealings between the Trust, the Managing Owner, the Trading
Manager, Prudential Securities or any affiliate of any of the foregoing.
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Limited Owners also will be furnished with such additional information
as the Managing Owner, in its discretion, deems appropriate, as well as any
other information required to be provided by any governmental authority
having jurisdiction over the Trust.
Net Asset Value is calculated on each business day. Upon request, the
Managing Owner will make available to any Limited Owner the Net Asset
Value per Interest. Each Limited Owner will be notified of any decline in the
Net Asset Value per Interest or to less than fifty percent (50%) of the Net
Asset Value per Interest as of the last day of the preceding quarter. Such
notice must be given within seven (7) business days of the occurrence of
such decline. Included in such notification will be a description of the
Limited Owners' voting and redemption rights. See "Summary of Trust
Agreement--Redemption of Interests."
In addition, the Managing Owner will furnish each Limited Owner with
tax information in a form which may be utilized in the preparation of Federal
income tax returns as soon as possible after the end of each year, but
generally no later than March 15.
The books and records maintained by the Trust will be kept for eight
years at its principal office. The Limited Owners have the right to obtain
information about all matters affecting the Trust, provided that such is for a
purpose reasonably related to the Limited Owner's interest in the Trust, and
to have access at all times during normal business hours to the Trust's
books and records in person or by their authorized attorney or agent and to
examine such books and records in compliance with CFTC rules and
regulations. The Managing Owner maintains (at the Managing Owner's
principal office) a current list, in alphabetical order, of the names and last
known addresses and, if available, business telephone numbers of, and
number of Interests owned by, all Interestholders, a copy of the Trust
Certificate and all certificates of amendment thereto, together with executed
copies of any powers of attorney pursuant to which any certificate has been
executed, copies of the Trust's federal, state and local income tax returns
and reports, if any, for the eight most recent years and copies of any
effective written trust agreements, subscription agreements and any financial
statements of the Trust for the six most recent years. Such information will
be made available at reasonable times for inspection and copying by any
Limited Owner or his representative for any purpose reasonably related to
the Limited Owner's interest as a beneficial owner of the Trust during
ordinary business hours. Such list is printed on white paper in clearly
legible print and is updated quarterly. The Managing Owner will furnish a
copy of the list of Limited Owners to a Limited Owner or his representative
within ten days of a request therefor for any purpose reasonably related to
the Limited Owner's interest as a Limited Owner in the Trust (including,
without limitation, matters relating to a Limited Owner's voting rights under
the Agreement or the exercise of a Limited Owner's rights under federal
proxy laws) upon request and upon payment of the reasonable cost of
reproduction and mailing; provided, however, that the Limited Owner
requesting such list must give written assurances that it will not be used for
commercial purposes. Subject to applicable law, a Limited Owner must give
the Managing Owner at least ten (10) business days' prior written notice for
such inspection or copying by a Limited Owner or his authorized attorney or
agent. Each Limited Owner will be notified of any material change in the
Advisory Agreement or in the compensation of any party within seven
business days thereof and will be provided with a description of any material
effect on the Interests such changes may have.
Distributions
Other than as limited by the Agreement, the Managing Owner has sole
discretion in determining the amount and frequency of distributions.
However, a Limited Owner has the right to redeem a portion or all of his
Interests in accordance with the redemption procedures contained in the
Agreement. See "Summary of Trust Agreement--Redemption of Interests."
In the event any type of distribution is declared, each Interestholder will
receive an amount of such distribution in proportion to the interest in the
Trust held by him, as of the record date of distribution. Any distribution
shall become a liability of the Trust for purposes of calculating Net Asset
Value as of the date of its
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declaration until it is paid. See "Income Tax
Consequences--Other Tax Factors: Treatment of cash distributions;
redemptions; sales," for the income tax effect of such distributions.
Sharing of Profits and Losses
Each Interest has a tax capital account and a book capital account.
The initial balance of each will be the amount paid for the Interest. At the
end of each calendar month, the amount of any increase or decrease in the
Net Asset Value per Interest from the preceding month is credited or charged
against the book capital account of each Interest.
At the end of each fiscal year of the Trust, all items of ordinary income
and deduction will be allocated pro rata among the Interests outstanding on
the last day of each calendar month. After such allocation is made, the
Trust's net capital gain, if any (including capital gain required to be
recognized under certain mark-to-market rules provided in the Internal
Revenue Code) realized during each calendar month shall be allocated to
each Interest whose book capital account balance exceeds its tax capital
account, until such excess is eliminated. Any remaining net capital gain
realized during a month will be allocated among all Interestholders who were
Interestholders during such month in proportion to their respective book
capital account balances for such month. The Trust's net capital loss, if any
(including capital loss required to be recognized under certain mark-to-
market rules provided in the Code), realized during each calendar month will
be allocated to each Interest whose tax capital account balance exceeds the
book capital account balance of such Interests until such excess has been
eliminated. Any remaining net capital loss realized during a month will be
allocated among all Interestholders who were Interestholders during such
month in proportion to their respective book capital account balances for
such month. Notwithstanding the foregoing, loss will not be allocated to an
Interest (and instead will be allocated to the Managing Owner) to the extent
that allocating such loss to such Interest would cause the book capital
account balance of such Interest to be reduced below zero.
Liabilities
A Limited Owner's capital contribution is subject to the risks of the
Trust's business. The Delaware Business Trust Statute provides that, except
to the extent otherwise provided in the Trust Agreement, a Limited Owner
shall be entitled to the same limitation of personal liability extended to
shareholders of private Delaware corporations for profit. No similar statutory
or other authority limiting business trust beneficial owner liability exists in
many other states. As a result, to the extent that the Trust or a Limited
Owner is subject to the jurisdiction of courts in those states, the courts may
not apply Delaware law, and may thereby subject Limited Owners to liability.
To guard against this risk, the Trust Agreement (i) requires that every written
obligation of the Trust contain a statement that such obligation may only be
enforced against the assets of the Trust, provided that the omission of such
disclaimer is not intended to create personal liability for any Interestholder;
and (ii) provides for indemnification to the extent of the Trust's assets of any
Limited Owner against claims of liability asserted against such Limited
Owner solely because he or it
is a beneficial owner of the Trust. Thus,
subject to the exceptions set forth in the Trust Agreement and described
below, the risk of a Limited Owner incurring financial loss beyond his
investment because of liability as a beneficial owner is limited to
circumstances in which (i) a court refuses to apply Delaware law; (ii) no
contractual limitation on liability was in effect; and (iii) the Trust
itself would be unable to meet its obligations. Moreover,
and perhaps more importantly, the Managing Owner has
agreed in the Trust Agreement for the benefit of the
Limited Owners and any third parties that it will be liable for all obligations
of the Trust in excess of the Trust's assets as if it were the general partner
of a limited partnership.
In addition, while, as stated above, a Limited Owner in the Trust
generally cannot lose more than his or its investment and his or its share of
the Trust's profits, the Trust Agreement provides that Limited Owners may
incur liability (i) in the event the Trust is required to make payments to any
Federal, state or
70
local or any foreign taxing authority in respect of any
Interestholder's allocable share of Trust income, in which case such
Interestholder shall be liable for the repayment of such amounts; (ii) to
indemnify the Trust if the Trust incurs losses (including expenses) as a result
of any claim or legal action to which the Trust is subject which arises out of
such Limited Owner's obligations or liabilities unrelated to the Trust's
business, (iii) to indemnify the Trust and each Interestholder against any
losses or damages (including tax liabilities or loss of tax benefits) arising as
a result of any transfer or purported transfer of a Limited Owner's Interest in
violation of the Trust Agreement, and (iv) if the Limited Owner's Subscription
Agreement delivered in connection with his or its purchase of Interests
contains misstatements.
Moreover, the Trust Agreement provides that, subject to the exceptions
referred to above, the Trust will not make a claim against a Limited Owner
with respect to amounts distributed to such Limited Owner or amounts
received by such Limited Owner upon redemption (see "Additional Limited
Owners" below) of Interests unless under Delaware law the Limited Owner
is liable to repay such amounts. Except as set forth above, assessments of
any kind shall not be made of the Limited Owners. Except as provided under
Delaware law and by the Agreement, each Interest, when issued, will be fully
paid and non-assessable. Except as indicated above, losses in excess of the
Trust's assets will be the obligation of the Managing Owner.
Election or Removal of Managing Owner
The Managing Owner may be removed on reasonable prior written
notice by Limited Owners holding at least a majority in interest (over 50%)
of the outstanding Interests. The Agreement provides that the Managing
Owner may voluntarily withdraw as managing owner of the Trust provided
that it gives the Limited Owners one hundred twenty (120) days' prior written
notice and its withdrawal as Managing Owner is approved by Limited Owners
holding at least a majority in interest (over 50%) of the outstanding Interests
(not including Interests held by the Managing Owner). The Agreement
provides that if the Managing Owner elects to withdraw as Managing Owner
to the Trust and it is the sole Managing Owner, Limited Owners holding at
least a majority interest (over 50%) of the outstanding Interests (not including
Interests held by the Managing Owner) may vote to elect, prior to such
withdrawal, a successor Managing Owner to carry on the business of the
Trust. If the Managing Owner withdraws as Managing Owner and the Limited
Owners or remaining Managing Owners elect to continue the Trust, the
withdrawing Managing Owner shall pay all expenses incurred as a result of
its withdrawal. The Agreement further provides that in the event of the
withdrawal of the Managing Owner, the Managing Owner shall be entitled to
redeem its General Interests in the Trust at their Net Asset Value as of the
next permissible Redemption Date. See "Summary of Trust Agreement--
Management Responsibilities of the Managing Owner."
Alternatively, the Agreement provides that if the Trust is dissolved as
a result of an Event of Withdrawal (as defined in Article XIII of the
Agreement) of a Managing Owner, then within one hundred and twenty (120)
days of such Event of Withdrawal, Limited Owners holding a majority interest
(over 50%) in the outstanding Interests may elect to form a new business
trust on the same terms
as set forth in the Agreement and continue the
business of the Trust and elect a new Managing Owner.
Exercise of Rights by Limited Owners
Limited Owners holding in excess of fifty percent (50%) of the
outstanding Interests (excluding Interests held by the Managing Owner and
its Affiliates) must approve any material change in the Trust's trading policies
which change will not be effective without such approval. See "Trust's
Trading Limitations and Policies." In addition, Limited Owners holding in
excess of fifty percent (50%) of the outstanding Interests (excluding Interests
held by the Managing Owner and its Affiliates) may vote to adopt
amendments to the Agreement proposed by the Managing Owner or by
Limited Owners holding at least ten percent (10%) of the outstanding
Interests. See "Summary of Trust Agreement--Amendments and Meetings"
below. Additionally, Limited Owners holding at least a majority in
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interest (over 50%) of the outstanding Interests (excluding
Interests held by the Managing Owner and its Affiliates)
may vote to (i) terminate and dissolve the Trust upon
ninety (90) days' prior notice to the Managing Owner, (ii) remove
the Managing Owner on reasonable prior written notice to the Managing
Owner, (iii) elect one or more additional Managing Owners, (iv) approve the
voluntary withdrawal of the Managing Owner and elect a successor Managing
Owner in the event the Managing Owner is the sole Managing Owner of the
Trust, and (v) approve the termination of any agreement between the Trust
and the Managing Owner or its Affiliates for any reason, without penalty, in
the case of (iii) and (v) on sixty (60) days' prior written notice.
Indemnification
The Agreement provides that with respect to any action in which the
Managing Owner or any of its affiliates (including Prudential Securities only
when performing services on behalf of the Managing Owner and acting within
the scope of the Managing Owner's authority) is a party because of its
relationship to the Trust, the Trust shall indemnify and hold harmless to the
full extent permitted by law such person against any losses, judgments,
liabilities, expenses and amounts paid in settlement of any claims sustained
by such person in connection with the Trust, provided that (1) the Managing
Owner was acting on behalf of or performing services for the Trust and has
determined, in good faith, that such course of conduct was in the best
interests of the Trust and such liability or loss was not the result of
negligence, misconduct or a breach of the Agreement on the part of the
Managing Owner or its affiliates and (2) any such indemnification will only
be recoverable from the assets of the Trust. All rights to indemnification
permitted by the Agreement and payment of associated expenses will not be
affected by the dissolution or other cessation to exist of the Managing
Owner, or the withdrawal, adjudication of bankruptcy or insolvency of the
Managing Owner. The Agreement further provides that any such
indemnification, unless ordered by a court, shall be made by the Trust only
as authorized in the specific case and only upon a determination by
independent legal counsel in a written opinion that indemnification of the
Managing Owner is proper in the circumstances because it has met the
applicable standard of conduct set forth in the Agreement. Expenses
incurred in defending a threatened or pending action or proceeding against
the Managing Owner may be paid by the Trust in advance of the final
disposition of such action if (i) the legal action relates to the performance of
duties or services by the Managing Owner or an Affiliate on behalf of the
Trust; (ii) the legal action is initiated by a third party who is not a Limited
Owner or the legal action is initiated by a Limited Owner and a court of
competent jurisdiction specifically approves such advancement; and (iii) the
Managing Owner undertakes to repay the advanced funds to the Trust with
interest in the event indemnification is subsequently held not to be permitted.
No indemnification of the Managing Owner or its Affiliates is permitted for
liabilities arising under federal or state securities laws unless (i) there has
been a successful adjudication on the merits of each count involving alleged
securities law violations as to the particular indemnitee and the court
approves the indemnification; (ii) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction as to the
particular indemnitee and the court approves the indemnification; or (iii) a
court of competent jurisdiction approves a settlement of claims against a
particular
indemnitee and finds that indemnification of the settlement and
related costs should be made. Insofar as indemnification for liabilities
arising under the Securities Act of 1933, as amended (the "Securities Act")
may be permitted to the Managing Owner or its Affiliates, the Managing
Owner has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable.
In any claim for indemnification in actions involving alleged federal or
state securities laws violations, the party seeking indemnification must place
before the court the position of the SEC, the position of the Pennsylvania
Securities Commission, the Massachusetts Securities Division and the
Tennessee Securities Division and any other applicable state securities
division which requires disclosure with respect to the issue of
indemnification for securities law violations. The Agreement also provides
that with respect to any action
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taken by the Managing Owner as "tax matters
partner," including consenting to an audit, the Trust shall indemnify and hold
harmless the Managing Owner.
Amendments and Meetings
The Agreement may be amended in certain respects by a vote of the
holders of at least a majority of the outstanding Interests (which excludes the
Interests of the Managing Owner), either pursuant to a written vote or at a
duly called meeting of the Limited Owners. An amendment may be proposed
by the Managing Owner or by Limited Owners holding at least ten percent
(10%) of the outstanding Interests. Interestholders will be supplied with a
verbatim copy of any proposed amendment which potentially could affect
them and statements concerning the legality thereof. It is not anticipated
that the Managing Owner will call any annual meetings of the Limited
Owners.
The Managing Owner may, without the consent of the Limited Owners,
make amendments to the Agreement which are necessary to (i) add to the
representations, duties or obligations of the Managing Owner or to surrender
any right or power of the Managing Owner, for the benefit of the Limited
Owners, (ii) cure any ambiguity, (iii) correct or supplement any provision of
the Agreement which may be inconsistent with any other provision of the
Agreement or this Prospectus, or (iv) make any other provisions with respect
to matters or questions arising under the Agreement or this Prospectus that
are not inconsistent with other provisions of the Agreement or this
Prospectus. The Managing Owner also may make such amendments as it
deems advisable, provided, however, that no such amendment shall be
adopted unless the amendment is not adverse to the interests of the Limited
Owners, does not affect the allocation of profits and losses to them or
among them, and does not adversely affect the limited liability status of the
Limited Owners or the status of the Trust as a partnership for Federal income
tax purposes). The Managing Owner further may, without the consent of the
Limited Owners, amend the provisions of the Agreement relating to the
allocations among Limited Owners of profits, losses and distributions if it is
advised by its accountants or counsel that any such allocations are unlikely
to be upheld for federal income tax purposes.
Meetings of the Trust may be called by the Managing Owner. In
addition, meetings will be called upon receipt by the Managing Owner of a
written request signed by Limited Owners owning at least ten percent (10%)
of the outstanding Interests. Thereafter, the Managing Owner shall give
written notice to all Limited Owners, in person or by certified mail within
fifteen (15) days after such receipt, of such meeting and its purpose. Such
meeting must be held at least thirty (30) but not more than sixty (60) days
after the receipt of such notice. Any action permitted to be taken at a
meeting may be taken without a meeting on written approval of the holders
of the percentage of outstanding Interests required to approve any such
action if a meeting were held.
Fiscal Year
The Trust shall begin on January 1 on each year and end on December
31 of each year, except that (i) the first fiscal year of the Trust commenced
on October 16, 1995 the date the Certificate of Trust was filed, and (ii) the
fiscal
year in which the Trust terminates shall end on the date of termination
of the Trust.
INCOME TAX CONSEQUENCES
The following sets forth the material United States income tax
consequences which may be relevant to a prospective Limited Owner. It is
impractical to set forth in this Prospectus all aspects of federal, state and
local tax law which may bear upon a Limited Owner's investment in the
Trust. The tax considerations discussed below are necessarily general and
may vary depending upon a Limited Owner's particular circumstances.
Therefore, each prospective Limited Owner should consult his own tax
advisor to satisfy himself as to the tax consequences to him of this
investment. The discussion of federal income tax consequences below is
based on the Internal Revenue Code of 1986, as amended (the "Code"),
73
including existing law, judicial decisions and administrative regulations,
rulings and practice, all of which are subject to change. (See paragraph (16)
under the subheading "Other Tax Factors," below.) Any such change could
be retroactive so as to apply to the Trust and/or an investment in Interests.
The Trust has not applied, and does not intend to apply, for a ruling from the
Internal Revenue Service (the "IRS") with respect to any of the tax matters
discussed herein. This investment is not intended to generate tax losses or
credits, and will not be registered as a "tax shelter" under the applicable
provisions of the Code or the regulations promulgated thereunder.
Opinion of Counsel
In the opinion of Rosenman & Colin LLP ("Tax Counsel"), the
discussion of federal income tax consequences set forth in this Prospectus
under the heading "Income Tax Consequences" is accurate in all material
respects as of the date of this Prospectus insofar as it involves matters of
federal income tax law.
The opinion of Tax Counsel is based on the facts described in this
Prospectus and on the facts as they have been represented by the Managing
Owner to Tax Counsel or determined by Tax Counsel as of the date of the
opinion. Any alteration of the facts may adversely affect the opinion
rendered. The opinion of Tax Counsel also is based on existing law and
applicable current and proposed Treasury Regulations, current published
administrative positions of the IRS contained in Revenue Rulings and
Revenue Procedures, and judicial decisions, all of which are subject to
change either prospectively or retroactively.
The opinion described herein represents only Tax Counsel's best legal
judgment and has no binding effect or official status of any kind before the
IRS or the courts. In the absence of an IRS ruling, the IRS is not precluded
from challenging the conclusions reached by Tax Counsel and set forth
below under this heading.
Treatment as a Partnership
The Trust, being a domestic entity eligible for such classification and
in existence prior to 1997, is classified as a partnership and not as an
association taxable as a corporation under income tax regulations (i.e., S
301.7701-2 and -3) that are effective for periods beginning on or after January
1, 1997. (For certain entities, such as the Trust, in existence before
1997, the
regulations also provide that the entity will be classified as a partnership for
periods before 1997 if the entity claimed partnership classification on its tax
returns for such periods and had a reasonable basis therefor.) Under Code
section 7704, however, certain publicly traded partnerships are treated as
corporations for federal income tax purposes even if they are otherwise
classified as partnerships. Publicly traded partnerships (as defined in
section 7704(b) of the Code) are partnerships (or entities classified as
partnerships for tax purposes) the interests in which are traded on an
established securities market or are readily tradeable on a secondary market
(or the substantial equivalent thereof). The existence of a secondary market
(or its equivalent) may be indicated where, by reason of a regular plan of
redemptions or otherwise, a partner has a "readily available, regular and
ongoing opportunity" to sell or exchange his partnership interest in a manner
comparable to trading on an established securities market.
Under the Trust Agreement, Interests will not be traded on an
established securities market. Interests can be redeemed as of the last day
of any calendar month, provided that the Limited Owner submits a written
request at least 10 business days prior to the applicable monthly Redemption
Date. (Redemptions also will be permitted in certain limited circumstances
involving a cessation of commodities trading activity.)
Treasury Regulation S 1.7704-1(e)(viii) provides that transfers of limited
partnership interests pursuant to a closed-end redemption plan will be
disregarded for purposes of determining whether interests in the partnership
are publicly traded. A redemption plan qualifies as closed-end for these
purposes if (i) the partnership does not issue any partnership interests after
the initial offering, and (ii) neither a partner nor any person related to any
partner
74
(within the meaning of section 267(b) or section 707(b)(1) of the
Code) provides contemporaneous opportunities to acquire interests in similar
or related partnerships which represent substantially identical investments.
The Managing Owner has represented to Tax Counsel that requirement
(ii) above will at all times be satisfied. With respect to requirement (i), the
Trust Agreement provides that no Interests may be issued or reissued
following the expiration of the Continuous Offering, and redeemed Interests
are extinguished. Accordingly, Tax Counsel is of the opinion that the Trust
should not be treated as a publicly traded partnership following the
conclusion of the Continuous Offering.
With regard to any redemptions of Interests that might occur during the
Continuous Offering, it may be that such redemptions do not provide Limited
Owners with a readily available, regular and ongoing opportunity to dispose
of their Interests in a manner that is substantially equivalent to a secondary
market, because the Continuous Offering (if made) will be made pursuant to
Rule 415 of the Securities Act of 1933 for only a limited period, as provided
in the Trust Agreement. (See Ltr. Ruls. 9342042 (July 26, 1993), 9109036
(Nov. 30, 1990), and 9111023 (December 14, 1990), wherein the IRS ruled that
certain proposed plans for redeeming partnership interests during a limited
continuous offering period pursuant to Rule 415 would not cause the
partnerships described therein to be treated as publicly traded partnerships.
(Letter rulings issued to others may not be used or cited as precedent, but
generally reflect the IRS's position on the issues presented.) However, due
to various factual differences between the letter rulings and the instant facts,
it is unclear whether the IRS would so conclude with respect to redemptions
during the Continuous Offering.
Treasury Regulation S 1.7704-1(e) also provides that assignments of
partnership interests that are made in certain limited circumstances, such as
the death of a partner, transfers between family members, and distributions
from qualified retirement plans or IRAs, will not cause a partnership to
become publicly traded, but that assignments of partnership interests under
other circumstances, if not restricted, might cause a partnership to become
publicly traded. Accordingly, the Trust Agreement provides that the
Managing Owner shall refuse to recognize assignments of Interests (or rights
therein) under circumstances other than as specifically permitted under safe
harbors that protect against treatment as a publicly traded partnership. See
"Summary of the Trust Agreement--Transfer of Interests." Under these safe
harbors, interests in a partnership generally will not be considered to be
publicly traded in any year in which the aggregate percentage interests in
partnership capital or profits that are sold or otherwise disposed of,
disregarding any transfers that meet certain other safe harbors (for example,
the safe harbor relating to redemptions by closed-end partnerships), do not
exceed 2%.
Even if a partnership is considered to be publicly traded, section
7704(c) of the Code provides that such partnership will not be treated as a
corporation for federal income tax purposes if, as to each taxable year of its
existence, (i) with certain exceptions to be prescribed by forthcoming
Treasury Regulations, the partnership is not required to register under the
1940 Act, and (ii) at least 90% of its gross income is "qualifying income."
Qualifying income includes interest income, and, in the case of a partnership
that has as a principal activity the buying and selling of commodities
(including foreign currencies) and commodity instruments (i.e., options,
futures and forward contracts on commodities), also includes income and
gains from such commodities transactions.
Based on the facts set forth in this Prospectus and the Managing
Owner's representation that at least 90% of the Trust's annual gross income
has consisted and will continue to consist of income and gains from futures,
forwards or options with respect to commodities and interest income earned
on assets allocated to commodities trading, the Trust should not be taxed as
a corporation under the provisions of section 7704 of the Code even if it were
to be viewed as publicly traded. In this regard, the Managing Owner has
been advised by Tax Counsel, based on its review of the trading portfolios
to be utilized for the Trust (see "Description of the Trading Manager's
Trading Approach" and "Summary of Advisory Agreement"), that
substantially all the income and gain from
75
transactions in the commodity
instruments proposed to be traded by the Trading Manager should constitute
"qualifying income" as defined above. See Rev. Rul. 73-158, 1973-1 C.B. 337,
and Ltr. Ruls. 8540033 (July 3, 1985), 8850041 (Sept. 19, 1988) and 8807004
(Nov. 10, 1987), concerning whether various instruments are "commodities"
for purposes of section 864(b)(2) of the Code.
Should the aforementioned facts, assumptions and representations not
continue to be accurate for any reason, the IRS may take the position that
the Trust should be taxed as a corporation. The continued treatment of the
Trust as a partnership also is dependent upon existing provisions of the
Code, the regulations promulgated thereunder and administrative
interpretations thereof, all of which are subject to change. Therefore, no
assurances can be given that the Trust's federal income tax status may not
be changed during the term of its existence.
If the Trust were to be treated for federal income tax purposes as a
corporation, income, deductions, gains and losses of the Trust would be
reflected only on its tax return rather than being passed through to the
Limited Owners. In such event, the Trust itself would be required to pay
income tax at corporate tax rates on its net ordinary income and capital
gains, thereby substantially reducing the amount of cash available to be
distributed to the Limited Owners. Furthermore, all or a portion of any such
distributions made to Limited Owners, other than in redemption of Interests,
could be treated as ordinary dividend income regardless of the source from
which they were generated. Limited Owners, however, generally would not
be subject to tax on any undistributed income of the Trust. See "Other Tax
Factors," paragraph (1) below.
THE DISCUSSION BELOW ASSUMES THAT THE TRUST WILL BE TREATED
AS A PARTNERSHIP FOR FEDERAL INCOME TAX PURPOSES.
Other Tax Factors
(1) Owners, not Trust, Subject to Tax. The Trust reports its operations
for tax purposes on the accrual method for each year and files a partnership
information income tax return, but does not itself pay federal income tax.
Each Limited Owner is responsible for reporting on his personal income tax
return each year his distributive share of the Trust income, gain, loss,
deduction and items of tax preference.
Each Limited Owner is required to report and determine his tax liability
with respect to his share of the Trust's taxable income, if any, whether or not
he has received or will receive any cash distributions from the Trust. A
Limited Owner's ability to deduct his share of Trust losses and expenses is
subject to various limitations. See paragraphs (5) and (7) below. Further, the
Trust's primary investment objective is capital appreciation rather than the
current distribution of profits, and the Trust does not intend to make
distributions. Consequently, a Limited Owner's tax liability with respect to
his share of the taxable income of the Trust will likely exceed the amount of
cash, if any, distributed to such Limited Owner in a given year.
(2) Tax Audits. The income tax returns of the Trust may be audited,
and such audit may result in an audit of the returns of the Limited Owners.
Such audits could result in tax deficiencies with respect to matters unrelated
to the
Trust. Audit changes made to the Trust's returns would result in
corresponding changes to the Limited Owners' returns. Such changes,
under the tax rules providing for administrative and judicial tax proceedings
at the partnership level, would be binding on the Limited Owners under most
circumstances. Further, interest paid on tax deficiencies generally is
nondeductible.
(3) Calculation of "Adjusted Basis"; "At Risk" Limitation. A Limited
Owner may deduct his share of any losses of the Trust (whether ordinary or
capital) only up to the amount of his adjusted basis in his Interests. Losses
in excess of a Limited Owner's adjusted basis in his Interests in any year
may be carried forward and deducted in succeeding years subject to this
limitation.
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Each Limited Owner's adjusted basis in his Interests will be equal
to his purchase price, increased by the amount of his share of items of
taxable income and gain of the Trust and reduced, but not below zero, by
(a) the amount of his share of losses of the Trust, (b) expenditures which are
neither properly deductible nor properly chargeable to his capital account
and (c) the amount of any distributions received by such Limited Owner. If
a Limited Owner invests additional funds subsequent to his initial investment
in the Trust (including by reinvesting proceeds otherwise distributable to
him), such additional investment will be added to his tax basis for all of his
Interests. Such aggregate basis also will determine his tax consequences
on a sale or redemption of his Interests or on a cash distribution. See
paragraph (4) below.
A Limited Owner (other than a Limited Owner that is a subchapter C
corporation, unless more than 50% of the corporation's shares are owned
directly or indirectly by not more than five individuals) may not deduct Trust
losses for any year in excess of such Limited Owner's amount "at risk" in the
Trust's activities as of the end of such year. Losses in excess of a Limited
Owner's amount "at risk" in the Trust may be carried forward and deducted
in succeeding years subject to this limitation. Recapture of previously
allowed losses is required if a Limited Owner's amount "at risk" at the end
of the year is reduced below zero (e.g., by cash distributions from the Trust).
A Limited Owner's amount "at risk" will be increased by his share of Trust
income and gains, and reduced by his share of Trust losses, deductions and
distributions, but will not include any Trust borrowings for which he is not
personally liable. See section 465(b)(4) of the Code.
(4) Treatment of Cash Distributions; Redemptions; Sales. Cash
distributions (including distributions on partial redemptions) made to a
Limited Owner will generally represent a return of capital up to the amount
of such Limited Owner's aggregate adjusted basis in his Interests. A return
of capital does not result in any recognition of gain or loss for federal
income tax purposes but will reduce a Limited Owner's adjusted basis in his
Interests. Distributions in excess of a Limited Owner's adjusted basis in his
Interests immediately prior thereto will result in the recognition of gain.
Upon a liquidation or termination of the Trust, gain will be recognized by a
Limited Owner to the extent that cash is distributed in excess of such
Limited Owner's adjusted basis in his Interests immediately before the
distribution.
A Limited Owner who redeems a portion of his Interests at an economic
profit will recognize gain for tax purposes only if the redemption price
exceeds his total adjusted basis in all of his Interests, including Interests he
continues to hold. A Limited Owner who sustains an economic loss on the
redemption of a portion (but not all) of his Interests will be required to add
his unrecovered tax basis in the redeemed Interests to his tax basis in the
Interests he continues to own and, therefore, will not recognize a loss for tax
purposes unless and until he disposes of his remaining Interests for less
than his adjusted basis in such Interests. Upon the sale or redemption of a
portion of his Interests, a Limited Owner would be required to allocate his
aggregate adjusted basis pro rata between his Interests sold or redeemed
and his Interests retained. Thus, a Limited Owner owning Interests that were
purchased at different prices cannot control the timing of his recognition of
the inherent gain or loss in particular Interests by selecting such
Interests for
sale or redemption, and the tax consequences to a Limited Owner of a partial
redemption
therefore may be more or less favorable to him than the
economic consequences to him of such redemption.
Provided the Limited Owner is not deemed to be a "dealer" in Interests,
gain or loss recognized by a Limited Owner upon a sale or other disposition
of his Interests and gain recognized in connection with a complete
redemption or liquidation of his Interests generally will be treated as capital
gain or loss, except for (i) the portion of any gain which is attributable to
such Limited Owner's distributive share of income of the Trust, which
income will be taxed as otherwise described below, and (ii) certain items of
accrued interest and market discount income. Such gain or loss will be
treated as long-term capital gain or
77
loss if the Interests so disposed of have
been held for more than one year, or as short-term capital gain or loss if the
Interests so disposed of have been held for one year or less. See paragraph
(5) below.
(5) Gains and Losses From Commodity Trades.
(a) In general. The Trust's transactions in commodity futures, forward
and option contracts are anticipated to result primarily in capital gains or
losses (both short-term and long-term).
The top tax rate currently applicable to net capital gain (i.e., the excess
of net long-term capital gain over net short-term capital loss) of
non-corporate taxpayers is 28% whereas the top tax rate on ordinary income
and net short-term capital gain of such taxpayers is 39.6%. The excess of
Trust capital losses over capital gains is deductible by a non-corporate
Limited Owner only against his capital gain income each year (and up to
$3,000 per year against his ordinary income). Thus, a Limited Owner's
capital losses, if any, from the Trust generally would not reduce his tax
liability with respect to his allocable share of the Trust's interest income and
other ordinary income. Unused capital losses may be carried forward
indefinitely, but except as described below, may not be carried back. AS A
RESULT OF THESE LIMITATIONS, AMONG OTHER LIMITATIONS DESCRIBED
HEREIN, AN INDIVIDUAL LIMITED OWNER SHOULD ANTICIPATE THAT HIS
SHARE OF THE TRUST'S CAPITAL LOSSES, IF ANY, WILL NOT MATERIALLY
REDUCE HIS FEDERAL INCOME TAX ARISING FROM HIS ORDINARY
INCOME FROM THIS AND OTHER SOURCES.
In the case of a corporate Limited Owner, all capital gains are fully
includable in income. Capital losses of corporations may be offset only
against capital gains, but unused capital losses may be carried back three
years or forward five years. The amount that can be carried back is limited
to an amount which does cause or increase a net operating loss in a
carryback year.
(b) Section 1256 contracts. In the case of "section 1256
contracts," the Code requires a "mark to market" system of taxing unrealized
gains and losses on such contracts and otherwise provides for special rules
of taxation.
A section 1256 contract includes (1) a futures contract which is traded
on or subject to the rules of a domestic board of trade designated as a
contract market by the CFTC or of any board of trade or exchange
designated by the Secretary of the Treasury, and which is "marked to
market" to determine the amount of margin which must be deposited or may
be withdrawn, (2) a foreign currency forward contract traded in the interbank
market ("interbank forward contract") if such contract requires delivery of,
or the settlement of which depends on the value of, a foreign currency which
is also traded in the interbank market and is entered into at arm's length at
a price determined by reference to the price in that market, and (3) certain
commodity options.
Under these rules, all section 1256 contracts held by the Trust at the
end of each taxable year will be treated for federal income tax purposes as
if they were sold by the Trust for their fair market value on the last business
day of such taxable year. The net gain or loss, if any, resulting from such
deemed sales (known as "marking to market") must be taken into account
by the Trust in computing its taxable income for such year, a pro rata portion
of which income will be taxable to each Limited Owner under the general
principles of partnership taxation (see paragraph (1) above) whether or not
such income is distributed. If a section 1256 contract held by the Trust at
the end of a taxable year is sold in the following year, the amount of any gain
or loss realized on such sale will be adjusted to reflect the gain or loss
previously taken into account in the prior year under the "mark to market"
rules.
78
The Code also provides special rules concerning the tax treatment of
gains and losses from section 1256 contracts. Under these rules, and
subject to the mixed straddle rules described in subparagraph (e) below,
each Limited Owner's distributive share of the Trust's gain or loss with
respect to each section 1256 contract (including gain or loss resulting from
actual sales and under the "mark to market" rules described above), other
than interbank forward contracts (which are subject to special rules
discussed in subparagraph (c) below), will be treated (without regard to the
period held) as short-term gain or loss to the extent of 40% thereof and as
long-term gain or loss to the extent of 60% thereof. Such gains and losses
will be taxed under the general rules described above.
Non-corporate Limited Owners ordinarily cannot carry back the unused
portion of their net capital losses, but, as a result of certain special rules,
individuals (but not estates or trusts) may elect to carry back the unused
portion of their net capital losses from section 1256 contracts (limited,
however, to the amount of their total net capital loss for the year after taking
into account their capital gains and losses from all sources) to each of the
three years preceding the loss year. If the election is made, the losses
carried back under this special provision may be used only to offset gains
from section 1256 contracts in the carryback years.
In addition to positions that qualify as section 1256 contracts, the Trust
anticipates taking positions in futures contracts on foreign exchanges, and
possibly, forward contracts on foreign currencies not traded in the interbank
market and options on such foreign currencies. Such positions will not
qualify as section 1256 contracts, and generally will give rise to short-term
capital gain (or loss) or ordinary income (or loss) under the rules described
in subparagraph (c) below.
(c) Certain foreign currency transactions. The Trust engages in
transactions involving interbank forward contracts, as well as foreign
currency options and futures contracts that are traded on foreign exchanges.
In order to obtain capital gain treatment for its gains (if any) from contracts
on foreign currencies, the Trust has made an election under which its eligible
foreign currency contracts are marked to market under the rules applicable
to section 1256 contracts and give rise to capital gain or loss. Such gain or
loss is characterized under the 60/40 rules discussed in subparagraph (a)
above, in the case of interbank forward contracts, or entirely as short-term
capital gain or loss, in the case of all other foreign currency contracts that
are not section 1256 contracts. Certain instruments in which the Trust may
trade from time to time, although denominated in a foreign currency, are not
eligible for this election and, as such, may give rise to ordinary income or
loss rather than capital gain or loss.
To be eligible to maintain the foregoing election, the Trust must be a
"qualified fund." As defined in section 988(c)(1)(E) of the Code, this term
includes most commodity pools. As such, the Trust anticipates that it will
be a "qualified fund" except possibly in a year, if any, in which an event of
trading termination occurs. (The Trust also would cease to be a qualified
fund if more than a de minimis amount of its gross income in any year were
to be derived from buying and selling commodities, as opposed to futures
and forward contracts on commodities; the Trust does not anticipate that this
will occur.) If the Trust ceases to be a qualified fund after having made the
election, its net gains, if any, from any non-section 1256 contracts on foreign
currency generally would be treated as ordinary income (commencing with
the year of disqualification), but its net losses, if any, from such contracts
would be treated as capital losses.
(d) Cash commodity transactions. Any gains or losses realized by the
Trust from its transactions, if any, in physicals generally should not be
recognized until the physical commodity is sold, and should be treated as
long-term capital gains and losses if held for more than one year, or as
short-term capital gains and losses if held for one year or less.
79
(e) Mixed straddle rules. The Trust engages from time to time in
straddle transactions involving a section 1256 contract and an offsetting
position that does not qualify as a section 1256 contract (a "mixed straddle").
Two alternative mixed straddle elections are available to the Trust. The Trust
has elected to establish mixed straddle accounts for different classes of
commodity activities, in which groups of mixed straddles are pooled to
determine net gain or net loss on a daily basis. Such election generally
results in the Trust's mixed straddle account being taxed either under the
rules applicable to section 1256 contracts or non-section 1256 contracts
depending upon whether the net gain or loss is attributable to section 1256
contracts or non-section 1256 contracts, except that no more than 50% of the
total annual account net gain, if capital, may be treated as long-term, and no
more than 40% of the total annual account net loss, if capital, may be treated
as short-term.
(6) Interest Income. Interest income earned by the Trust will be taxable
as ordinary income to the Limited Owners. Such income generally cannot
be offset by capital losses. See paragraph (5) above.
If the Trust acquires taxable obligations issued at a discount and such
obligations have maturities of more than one year, the Trust, subject to
certain exceptions, will be required to treat a portion of the original issue
discount attributable to such obligations as ordinary interest income during
each year it holds the obligations. In addition, the Trust may be required in
certain instances to accrue interest income on discount obligations which
have a maturity of not more than one year. Further, any gain recognized by
the Trust on the disposition of an obligation acquired for less than its
adjusted issue price will be treated as ordinary interest income up to the
amount of the accrued market discount, unless an election is made to
include the market discount in income for the year to which it is attributable.
Also, interest incurred to purchase or carry market discount obligations
cannot be deducted to the extent that the amount thereof exceeds the
interest which is currently includable in the purchaser's income; interest
which is so disallowed will be deductible in the year of the obligation's
disposition.
(7) Deductibility of Investment Expenses. If the Trust is considered to
be engaged in merely an investment activity, and not in the trade or business
of commodities trading, then an individual Limited Owner will be unable to
deduct his allocable share of certain Trust expenses (including investment
advisory fees, but excluding interest expense) for regular income tax
purposes except to the extent that the Limited Owner's investment and
miscellaneous itemized expenses for the particular year exceed 2% of his
adjusted gross income. The deductible portion of such expenses is further
reduced by an amount equal to the lesser of (i) 3% of an individual's adjusted
gross income in excess of $100,000 (indexed for inflation) and (ii) 80% of the
individual's miscellaneous itemized deductions otherwise allowable for such
taxable year. Such expenses are not deductible at all for alternative
minimum tax purposes; see paragraph (11) below. If, on the other hand, the
Trust is considered to be in a trade or business, then the Trust's expenses
should not be subject to these limitations.
The Trust currently takes the position that it is engaged in a trade or
business. A Supreme Court decision, Commissioner v. Groetzinger, 480 U.S.
23 (1987), indicates, in dicta, that active securities or commodities trading
could constitute a trade or business (as opposed to an investment activity).
(See also King v. Commissioner, 89 T.C. 445, acq., 1988-1 C.B. 1.) The
application of the aforementioned case to the Trust and its contemplated
activities, however, is not free from doubt at the present time, and the Trust
might be required, as a result of subsequent developments in this area of the
tax law, to take a different position on future tax returns. Also, whether the
Trust's activities constitute a trade or business for these purposes is largely
a factual issue as to which Tax Counsel cannot opine. The resolution of this
issue therefore will depend on the extent and nature of the Trust's trading
activities in the particular year, and may vary (as a result of changes in the
Trust's activities) from year to year.
80
(8) Passive Activity Loss Limitation. Under section 469 of the Code,
non-corporate taxpayers and personal service corporations deriving net
losses from "passive activities" are permitted to deduct such losses only to
the extent of their income from passive and rental activities (which does not
include salaries and other compensation, or "portfolio income," such as
interest income, dividends and net capital gains not incurred in the ordinary
conduct of a trade or business), and closely-held corporations may not offset
passive losses against portfolio income. Passive activities are defined
generally as any trade or business activity in which the taxpayer does not
materially participate (for example, a trade or business activity conducted by
a partnership in which the taxpayer is a limited partner). Any losses that are
not currently deductible under this provision may be carried forward and
deducted in subsequent years to the extent of the taxpayer's passive activity
income in such years.
The Trust is anticipated to generate taxable income, rather than tax
losses. The Treasury Department has been given broad regulatory authority
to reclassify income from a purported passive activity as non-passive income
(which could not be offset by passive losses) rather than as passive income.
Temporary Treasury Regulation S1.469-IT(e)(6) provides that, whether or not
such activity is a trade or business for other purposes, trading in
commodities, stocks, securities, options and other similar instruments (other
than as a market-maker or dealer) is not to be treated as a passive activity
for purposes of the passive activity loss limitation.
Under temporary Treasury Regulation S1.469-IT(e)(6), any taxable
income of the Trust that is allocated to the Limited Owners will not be treated
as passive activity income for purposes of the passive activity loss
limitation.
Accordingly, for Limited Owners who are subject to the passive activity loss
limitation, the temporary Treasury Regulations would not permit taxable
income generated by the Trust's transactions to be offset by losses from
passive activities, but also would not subject any tax losses generated by the
Trust's transactions to the passive activity loss limitations.
(9) Allocations. The Code and Treasury Regulations permit allocations
of income and loss to be made among partners in accordance with the
partnership agreement, provided that such allocations have "substantial
economic effect;" that is, the allocations can affect the partner's right
ultimately to receive cash or property (independent of tax consequences).
Treasury Regulations promulgated under Code section 704(b) set forth
requirements for the maintenance of capital accounts and rules for
determining whether an allocation satisfies the substantial economic effect
test or is otherwise in accordance with the partners' economic interests in
the partnership. Under these Regulations, all contributions, distributions and
allocations of tax items are to be reflected by an appropriate adjustment in
a partner's capital account.
Under the Trust Agreement, realized and unrealized profits and losses
of the Trust are allocated among the Owners both for tax purposes and for
purposes of determining the price payable on redemption of a Limited
Owner's Interests. Since gain or loss for tax purposes generally is not
recognized until there is an actual sale or disposition of the underlying asset
(unless marked to market under the rules discussed in paragraph (5) above),
discrepancies may result between a Limited Owner's economic gain or loss
and his share of the gain or loss reported by the Trust for tax purposes. The
tax allocation provisions of the Trust Agreement attempt to allocate the net
capital gain or the net capital loss of the Trust for each year so as to
eliminate, to the extent possible, any disparity between a Limited's Owner's
book account (reflecting the economic results of the Trust's operations) and
his tax account (reflecting the tax consequences of the Trust's operations).
If the Trust's use of calendar monthly segments for allocation purposes or
the overall method of allocating Trust income and losses is not respected for
tax purposes, a Limited Owner's share of taxable income and loss of the
Trust might be other than as provided in the Trust Agreement. See
"Summary of Trust Agreement--Sharing of Profits and Losses."
81
(10) Tax Elections. The Code provides for optional adjustments to the
basis of partnership property upon distributions of partnership property to
a partner (section 734) and transfers of a partnership interest, including by
reason of death (section 743), provided that a partnership election has been
made pursuant to section 754. The general effect of such an election is that
transferees of partnership interests are treated, for purposes of computing
gain, as though they had acquired a direct interest in the partnership assets
and the partnership is treated for such purposes, upon certain distributions
to the partners, as though it had newly acquired an interest in the
partnership assets and therefore acquired a new cost basis for such assets.
Any such election, once made, is irrevocable without the consent of the IRS.
As a result of the complexities and added expense of the tax accounting
required to implement such an election, the Managing Owner does not
presently intend to make such an election. It is possible that the allocation
provisions of the Trust Agreement, by attempting to allocate taxable gain
only to Partners who have realized economic gains, may produce similar
effects under certain circumstances in the absence of such an election.
(11) Alternative Minimum Tax. The Code provides for an alternative
minimum tax (at rates of, currently, 26% and 28% for non-corporate taxpayers
and 20% for corporations) applicable to taxpayers only if and to the extent
it exceeds a taxpayer's regular federal income tax liability. The alternative
minimum tax will not be imposed on the Trust as such, but each Limited
Owner must include, in the computation of his or its own alternative
minimum tax liability, if any, his or its allocable share of certain
Trust items.
Limited Owners should note that their ability to deduct their share of certain
Trust expenses for purposes of determining their alternative minimum tax
liability, if any, may be limited (see paragraph (7) above). The effect of the
alternative minimum tax provisions upon an investor in the Trust will depend
upon the investor's overall individual tax situation. Each investor should
consult his own professional tax advisers concerning the applicability of the
alternative minimum tax.
(12) Limitation on Interest Deduction. Section 163(d) of the Code limits
the deductibility of interest on indebtedness that is properly allocable to
property held for investment by taxpayers other than corporations. Non-
corporate Limited Owners will be subject to this limitation with respect to
their investment in the Trust. The amount of investment interest which may
be deducted by a non-corporate Limited Owner may not exceed the amount
of the Limited Owner's "net investment income," which is the amount by
which the sum of his taxable interest, dividends, royalties, short-term capital
gains and rents from investment property exceeds the expenses incurred in
earning such income; long-term capital gain is includable in net investment
income only to the extent that the Limited Owner elects to pay tax on the
included portion at the same marginal federal income tax rates as his other
income.
This limitation, as applied to a non-corporate Limited Owner, may
preclude his deduction of all or part of the interest paid on money borrowed
to finance his investment in the Trust. A Limited Owner generally would be
entitled to carry such non-deductible interest forward to future taxable years
where the same limitations would apply. The application of the investment
interest limitation to a particular Limited Owner will depend on his overall
investment situation.
(13) Tax-exempt Limited Owners and Unrelated Business Taxable
income. Tax-exempt investors, such as Plans and IRAs, are generally
exempt from taxation except to the extent that their "unrelated business
taxable income" ("UBTI"), determined in accordance with sections 511-514
of the Code, exceeds $1,000 during any fiscal year. The tax is imposed at
such income tax rates as would be applicable to the organization if it were
not otherwise exempt from taxation. If an exempt organization is a Limited
Owner, the organization is required to include in its computation of its UBTI,
its pro rata share of the portion, if any, of the Trust's taxable income that
would be taxable to the organization as UBTI if earned directly by the
organization. Any UBTI generated by an investment in the Trust may result
in a tax-exempt Limited Owner's having to file income tax returns and pay
taxes.
82
UBTI, as defined in section 512 of the Code, generally means the
taxable income (with certain modifications) derived by a tax-exempt
organization from a trade or business, or from "debt-financed property" that
is not substantially related to such organization's performance of its exempt
function. Dividends, interest and gains resulting from the sale, exchange or
other disposition of non-dealer property currently are in no event taxable to
an exempt organization as UBTI except to the extent that such income is
derived from or attributable to "debt-financed property," as defined in section
514(b) of the Code, and except under the circumstances described below.
Capital gains realized by the Trust with respect to its commodity
trading activities would be taxed as UBTI to the extent that the commodity
positions acquired by the Trust are considered to be "debt-financed
property". In this connection, the United States Tax Court, in Elliot Knitwear
Profit Sharing Plan v. Commissioner, 71 T.C. 765 (1979), aff'd, 614 F.2d 347
(3rd Cir. 1980), held that securities purchased on margin by a qualified profit
sharing plan for the exclusive benefit of plan participants and their
beneficiaries are "debt-financed property" within the meaning of section
514(b) of the Code. (The IRS previously had taken a similar position in Rev.
Rul. 74-197, 1974-1 C.B. 163.) However, in several private letter rulings
issued subsequent to the Elliot Knitwear decision, the IRS stated that margin
deposits made by a tax-exempt entity in connection with purchases and
sales of commodity futures contracts (as distinguished from purchases of
equity securities on margin) were in the nature of "security deposits" to
assure the performance of such contracts and did not represent
"indebtedness" for purposes of section 514 of the Code. The IRS ruled that
the commodity futures contracts acquired by the tax-exempt entity using
margin deposits were not "debt-financed property". See Ltr. Ruls. 8338138,
8110163 and 8107115. Although private letter rulings cannot be relied upon
by taxpayers other than those to whom the rulings were directed, based in
large part on the rationale expressed in the foregoing letter rulings, the
Trust's commodity
investments are not expected to be treated as
"debt-financed property" (except if the Trust acquires physicals using
borrowed funds) under current law.
In any case, all or any portion of a tax-exempt Limited Owner's share
of taxable income of the Trust, as well as any gain realized by the Limited
Owner on the redemption of its Interests, would be taxable to such Limited
Owner as UBTI if the Limited Owner incurs indebtedness in connection with,
or relating to, its purchase of Interests. Each prospective tax-exempt Limited
Owner is urged to consult with its own professional tax advisers to
determine whether, under the circumstances of its own particular situation,
its interest in the Trust would constitute "debt-financed property" to such
Limited Owner and, if so, how such Limited Owner would be affected by the
application of the UBTI rules.
A tax-exempt Limited Owner may deduct only that portion of its share
of expenses and losses of the Trust that corresponds with the portion, if any,
of its share of income of the Trust that is includable in the computation of
such Limited Owner's UBTI for the taxable year. Except to the extent that the
Trust's investments give rise to UBTI, tax-exempt Limited Owners will not be
entitled to claim a deduction or other federal income tax benefit with respect
to their share of expenses and losses of the Trust, even though such items
will reduce the Net Asset Value of their Interests and the cash available for
distribution by the Trust.
(14) Offering Expenses. Prudential Securities (or an affiliate) has
agreed to compensate the Financial Advisors who sell Interests and to pay
the expenses of offering Trust Interests. The Trust will not report any
income or claim any deductions on account of such expenses, which are
non-deductible as to the Trust. There is a risk that the Trust may be required
for tax purposes to recharacterize a portion of the brokerage fees paid to
Prudential Securities as non-deductible offering expenses, or to include in
income all or a portion of Prudential Securities' payment of such expenses.
(15) United States Tax on Foreign Investors. The Code and the
Treasury Regulations generally provide an exemption from federal income
taxation for
83
non-resident alien individuals, foreign trusts, foreign
partnerships and foreign corporations not otherwise engaged in a trade or
business in the United States on gains derived from trading in certain types
of commodities for their own account if such foreign persons, or their
investment vehicles, are not dealers in commodities. In addition, the
Treasury Regulations provide that foreign persons that invest in such
commodities through a domestic partnership, the principal business of which
is trading in commodities (but not securities) for its own account, are entitled
to this exemption provided the partnership only trades in commodities of a
kind customarily dealt in on an organized commodity exchange in
transactions of a kind customarily consummated on an exchange. It is
currently anticipated that most, if not all, of the Trust's commodity trading
activities will qualify under the foregoing exemption. Accordingly, foreign
persons (who or which are not dealers in commodities) investing in the Trust
generally should not be required to pay any federal income tax on Trust
income derived from commodity trading. If future Trust transactions do not
come within the foregoing exemption, a foreign Limited Owner's entire
allocable share of Trust income could become reportable for U.S. income tax
purposes and subject to U.S. income tax and, if the Limited Owner is a
corporation, an additional 30% U.S. branch profits tax. Also, in that event,
the Trust could be required to withhold income taxes from income or gain
allocable to a foreign Limited Owner (see Code section 1446).
With respect to commodity trading gains and any gains realized on the
sale, transfer or other disposition of Interests, current tax law provides that,
notwithstanding the foregoing exemption, a non-resident alien individual will
be subject to federal income tax (at a 30% rate) on such gains if he is present
within the United States for an aggregate of 183 days or more during the
taxable year when such gains are realized. Also, foreign investors who are
individuals may be subject to U.S. estate tax on Interests held by them at
death.
Interest earned by the Trust as original issue discount on obligations
with maturities of 183 days or less and interest earned on bank deposits will
not be taxable to foreign investors. A foreign investor generally will not be
subject to federal or withholding income tax with respect to other interest
income earned by the Trust where there is either (1) an exemption under an
appropriate tax treaty and the Trust has received a properly completed IRS
Form 1001, or (2) the interest is paid with respect to "portfolio interest"
obligations issued after July 18, 1984 and the Trust has received a properly
signed and completed IRS Form W-8 in respect of such foreign investor.
Interest income earned by the Trust on its trading accounts generally should
qualify as portfolio interest for these purposes. If neither (1) nor (2) apply,
foreign investors will be subject to a 30% withholding tax on their allocable
share of such interest.
Foreign investors are advised to consult with their own tax advisors as
to the United States federal, state and local income tax consequences to
them of this investment.
(16) Future Legislation. Legislation may be enacted in the future, and
Treasury Regulations may be issued, that could be retroactive with respect
to transactions entered into prior to the effective date thereof or that could
affect the Trust or an investment in Interests generally. Proposals have been
made to change the federal income tax treatment of long-term capital gains
and losses. Moreover, Congress may again consider legislative proposals
to change the tax treatment of large partnerships. Accordingly, there can be
no assurance that legislation or Treasury Regulations will not be
implemented in the future that could affect, perhaps adversely, the tax
treatment of the gains, losses and expenses arising from an investment in
the Trust.
(17) State and Local Taxes; Foreign Taxes. In addition to the federal
income tax consequences described above, the Trust and the Limited
Owners may be subject to various state and local taxes. For example, the
State of Delaware, under whose laws the Trust was formed, does not impose
an income tax on the Trust with respect to its income (so long as it is treated
as a partnership for federal income tax purposes), but does impose an
income tax upon (i) each Limited Owner
84
who is a resident of Delaware and
(ii) each Limited Owner who is not a resident of Delaware based upon such
Limited Owner's share of any income derived from the Trust's activities
having sources within Delaware. Any state and local taxes payable by the
Trust would reduce the Net Asset Value of the Trust.
The Trust should not be subject to entity-level tax in New York so long
as the Trust is treated as a partnership for federal income tax purposes (see
"Treatment as a Partnership" above). It is possible that corporate Limited
Owners not otherwise subject to tax in New York may become so by reason
of their investment in the Trust. Under applicable tax regulations, a
corporation that is not otherwise doing business in New York may be
considered to be so doing, in limited circumstances, solely by virtue of its
ownership of a limited partnership interest in a partnership that transacts
business in New York.
State and local tax laws may not reflect changes made to the federal
income tax laws or may be inconsistent in other respects with the federal
income tax treatment of income, gains, losses and expenses arising from the
Trust's transactions. Accordingly, prospective Limited Owners should
consult with their own tax advisors concerning the applicability of state and
local taxes to an investment in the Trust.
The Trust's transactions on foreign exchanges may cause the Trust and
the Limited Owners to become subject to foreign taxes. Such taxes, if any,
may be creditable against a Limited Owner's U.S. income tax liability, if any.
* * *
The foregoing analysis is not intended as a substitute for careful tax
planning. In addition, the foregoing does not discuss estate tax, gift tax or
other estate planning aspects of this investment. Accordingly, prospective
Limited Owners are urged to consult their own tax advisors with respect to
the effects of this investment on their own tax situation.
LEGAL MATTERS
Legal matters in connection with this offering have been passed upon
for the Trust, the Managing Owner and Prudential Securities by Messrs.
Rosenman & Colin LLP, 575 Madison Avenue, New York, New York 10022.
Certain legal matters relating to Delaware law have been passed upon for the
Trust and the Managing Owner by Richards, Layton & Finger, Wilmington,
Delaware. Rosenman & Colin LLP acts as counsel generally for the
Managing Owner and advises the Managing Owner with respect to its
responsibilities as Managing Owner of, and with respect to matters relating
to, the Trust. Such counsel also represents Prudential Securities and certain
of its affiliates from time to time in various matters, and it is expected they
will continue to represent such entities in the future.
ADDITIONAL INFORMATION
The Trust has filed with the Securities and Exchange Commission in
Washington, D.C. a registration statement on Form S-1, as amended (the
"Registration Statement"), with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in such
Registration Statement, certain portions of which have been omitted pursuant
to the rules and regulations of the Securities and Exchange Commission,
including, without limitation, certain exhibits thereto (e.g., the Selling
Agreement, the Escrow Agreement, and the Brokerage Agreement). A copy
of the Registration Statement has also been provided to the Commodity
Futures Trading Commission in Washington, D.C. The descriptions
contained herein of agreements included as exhibits in the Registration
Statement are necessarily summaries. Reference is made to the Registration
Statement, including the exhibits thereto, for further information with respect
to the Trust and such securities. Such information may be examined without
charge at the public reference facilities of the Securities and Exchange
85
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies may be obtained therefrom upon payment of the fees prescribed
by the Securities and Exchange Commission. The Trust's filings are also
available on the SEC Internet Site (http://www.sec.gov.)
EXPERTS
The statements of financial condition and related statement of
operations and of changes in trust capital of Willowbridge Strategic Trust
included in this Prospectus have been audited by various independent
accountants. The periods covered by these audits are indicated in the
individual accountants' reports. Such financial statements have been so
included in reliance on the reports of the various independent accountants
given on the authority of such firms as experts in auditing and accounting.
The statement of financial condition of Prudential Securities Futures
Management Inc. included in this Prospectus has been so included in
reliance on the report of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The statement of financial condition of Diversified Futures Trust I
included in this Prospectus has been so included in reliance on the report
of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The statements referred to under "Income Tax Consequences" have
been reviewed by Messrs. Rosenman & Colin LLP and are included in
reliance upon their authority as experts in tax law in the United States.
GLOSSARY OF TERMS
The following glossary may assist prospective investors in
understanding the terms used in this Prospectus:
Affiliate of the Managing Owner. Means: (i) any Person directly or
indirectly owning, controlling or holding with power to vote 10% or more of
the outstanding voting securities of the Managing Owner; (ii) any Person 10%
or more of whose outstanding voting securities are directly or indirectly
owned, controlled or held with power to vote, by the Managing Owner;
(iii) any Person, directly or indirectly, controlling, controlled by, or under
common control of the Managing Owner; (iv) any officer, director or partner
of the Managing Owner; or (v) if such Person is an officer, director or partner
of the Managing Owner, any Person for which such Person acts in any such
capacity.
Clearing Broker. Any person who engages in the business of effecting
transactions in commodities contracts for the account of the Trust.
Prudential Securities acts in this capacity for the Trust.
Commodity. Goods, wares, merchandise, produce and in general
everything that is bought and sold in commerce. Out of this large class,
certain commodities, because of their wide distribution, universal acceptance
and marketability in commercial channels, have become the subject of
trading on various national and international exchanges located in principal
marketing and commercial areas. Traded commodities are sold in
predetermined lots and quantities.
Commodity Futures Trading Commission. An independent regulatory
commission of the United States Government empowered to regulate
commodity futures transactions and other commodity transactions under the
CE Act, as amended.
Continuous Offering. The period following the conclusion of the Initial
Offering Period on May 1, 1996 and ending on the date when the number of
86
Interests permitted to be sold pursuant to Section 3.2(f) of the Trust
Agreement are sold, but in no event later than January 31, 1998.
Contract Month. The month in which a futures contract may be
satisfied by making or accepting delivery of the underlying commodity.
Contract round-turn. The initial purchase of a long or short contract
and the subsequent purchase of an offsetting contract.
Counter-trend liquidations. Closing out a position after significant price
move on the assumption that the market is due for a correction.
Daily price fluctuation limit. The maximum permitted fluctuation
imposed by commodity exchanges in the price of a commodity futures
contract for a given commodity that can occur on a commodity exchange on
a given day in relation to the previous day's settlement price, which
maximum permitted fluctuation is subject to change from time to time by the
exchange. In the United States these limits, including changes thereto, are
subject to CFTC approval. These limits generally are not imposed on option
contracts or outside the United States.
Delivery. The process of satisfying a commodity futures contract, an
option on a physical commodity, or forward contract by transferring
ownership of a specified quantity and grade of a cash commodity to the
purchaser thereof.
Forward contract. A cash market transaction in which the buyer and
seller agree to the purchase and sale of a specific quantity of a commodity
for delivery at some future time under such terms and conditions as the two
may agree upon.
Futures contract. A contract providing for the delivery or receipt at a
future date of a specified amount and grade of a traded commodity at a
specified price and delivery point, or for cash settlement. Such contracts are
uniform for each commodity on each exchange and vary only with respect
to price and delivery time. A commodity futures contract should be
distinguished from the actual physical commodity, which is termed a "cash
commodity." It is important to note that trading in commodity futures
contracts involves trading in contracts for future delivery of commodities and
not the buying and selling of particular lots of commodities. A contract to
buy or sell may be satisfied either by making or taking delivery of the
commodity and payment or acceptance of the entire purchase price therefor,
or by offsetting the contractual obligation with a countervailing contract on
the same on a linked exchange prior to delivery.
Initial Offering Period. The period that commenced February 7, 1996
and terminated on May 1, 1996.
Interests. Means the beneficial interest of each Interestholder in the
profits, losses, distributions, capital and assets of the Trust. The Managing
Owner's Capital Contributions shall be represented by "General" Interests
and a Limited Owner's Capital Contributions shall be represented by
"Limited" Interests. Interests will not be represented by certificates.
Limited Owner. A Limited Owner is any person or entity acting in his,
her or its capacity as a Limited Owner of the Trust, and may include the
Managing Owner with respect to Interests purchased by it.
Limit order. A trading order which sets a limit on either price or time
of execution or both. Limit orders (as contrasted with stop orders) do not
become market orders.
Long contract. A contract to accept delivery of (buy) a specified
amount of a commodity at a future date at a specified price.
Market order. A trading order to execute a trade at the most favorable
price as soon as possible.
87
Margin. A good faith deposit with a broker to assure fulfillment of a
purchase or sale of a commodity futures, or, in certain cases, forward or
option contract. Commodity margins do not usually involve the payment of
interest.
Managing Owner. Prudential Securities Futures Management Inc. or
any substitute therefor as provided in the Trust Agreement.
Margin call. A demand for additional funds after the initial good faith
deposit required to maintain a customer's account in compliance with the
requirements of a particular commodity exchange or of a commodity broker.
Net Asset Value. See Section 1.1 of the Trust Agreement attached as
Exhibit A on page A-3.
New High Net Trading Profits. See "Fees, Compensation and Expenses
- - - Charges to be paid by the Trust - Management and Incentive Fees to the
Trading Manager."
Net Worth. See Section 4.3(i) on page A-19 of the Trust Agreement for
the definition of "Net Worth." Insofar as Net Worth relates to investor
suitability, see the heading entitled "State Suitability Requirements" in the
Subscription Agreement (Exhibit C).
Open Position. A contractual commitment arising under a long
contract or a short contract that has not been extinguished by an offsetting
trade or by delivery.
Organization and offering expenses. Those expenses incurred in
connection with the formation, qualification and initial registration of the
Trust and the Interests and in initially offering, distributing and processing
the Interests under applicable federal and state law, and any other expenses
actually incurred and directly or indirectly related to the organization of the
Trust or the initial offering of the Interests. See Section 4.7(a) of the Trust
Agreement attached as Exhibit A for a more particular enumeration of such
expenses, all of which will be paid by Prudential Securities or an affiliate.
Parameters. A value which can be freely assigned in a trading system
in order to vary the timing of signals.
Pattern recognition. The ability to identify patterns that appeared to act
as precursors of price advances or declines in the past.
Position Limit. The maximum number of speculative futures or option
contracts in any one commodity (on one contract market), imposed by the
CFTC or a United States commodity exchange, that can be held or controlled
at one time by one person or a group of persons acting together. These
limits generally are not imposed for trading on markets or exchanges outside
the United States.
Redemption Date. Means the date upon which Interests held by the
Interestholders may be redeemed in accordance with the provisions of the
Trust Agreement.
Secular trend. Intermediate upswings and downswings in price that
over a long period of time constitutes a big move.
Short contract. A contract to make delivery of (sell) a specified amount
of a commodity at a future date at a specified price.
Spot contract. A cash market transaction in which buyer and seller
agree to the purchase and sale of a specific commodity for immediate
delivery.
Spreads or straddles. A transaction involving the simultaneous holding
of futures and/or option contracts dealing with the same commodity but
involving different delivery dates or different markets, and in which the trader
expects
88
to earn profits from a widening or narrowing movement of the prices
of the different contracts.
Stop-loss order. An order to buy or sell at the market when a definite
price is reached, either above or below the price of the instrument that
prevailed when the order was given.
Stop order. An order given to a broker to execute a trade when the
market price for the contract reaches the specified stop order price. Stop
orders are utilized to protect gains or limit losses on open positions. Stop
orders become market orders when the stop order price is reached.
Support/resistance levels.
Support: A previous low. A price level under the market where buying
interest is sufficiently strong to overcome selling pressure.
Resistance: A previous high. A price level over the market where
selling pressure overcomes buying pressure and a price advance is turned
back.
Systematic technical charting systems. A system which is technical in
nature and based on chart patterns as opposed to pure mathematical
calculations.
Trading Approach. See "Description of the Trading Manager---
Description of the Trading Manager's Trading Approach."
Trading Manager. Any entity or entities acting in its capacity as a
commodity trading advisor to the Trust and any substitute(s) therefor as
provided herein. Willowbridge Associates Inc. currently acts in this capacity.
Trustee. Wilmington Trust Company or any substitute therefor as
provided in the Trust Agreement.
Unrealized profit or loss. The profit or loss which would be realized on
an open position in a futures, forward or option contract if it were closed at
the current market value price for such contract.
Valuation Date. The date as of which the Net Asset Value of the Trust
is determined.
89
INDEX TO CERTAIN FINANCIAL AND OTHER
PAST PERFORMANCE INFORMATION
Page
WILLOWBRIDGE STRATEGIC TRUST
Report of Independent Accountants. . . . . . . . . . . . . . . . . 91
Statements of Financial Condition as of December 31, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . 92
Statements of Operations for the period from May 1, 1996
(commencement of trading operations) to December 31, 1996. . . . . 93
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . 94
Management's Discussion and Analysis of the Trust's Financial
Condition as of December 31, 1996. . . . . . . . . . . . . . . . . 99
PRUDENTIAL SECURITIES FUTURES MANAGEMENT INC.
Report of Independent Accountants. . . . . . . . . . . . . . . . .101
Statement of Financial Condition as of December 31, 1996 . . . . .102
Notes to Statement of Financial Condition. . . . . . . . . . . . .103
DIVERSIFIED FUTURES TRUST I
Report of Independent Accountants. . . . . . . . . . . . . . . . 106
Statement of Financial Condition as of December 31, 1996 . . . . 107
Notes to Statement of Financial Condition. . . . . . . . . . . . 108
PRUDENTIAL SECURITIES AND THE TRADING MANAGER
Performance Information as of February 28, 1997 For Prior
Prudential Securities -- Sponsored Commodity Pools, Including
Those in Which the Trading Manager Currently is Making the
Trading Decisions. . . . . . . . . . . . . . . . . . . . . . . . . 112
Performance Information as of February 28, 1997 For the Five
Trading Strategies used by the Trading Manager in Managing the
Trust's Assets, Plus Other Trading Strategies Offered by the
Trading Manager Which are Not Used by the Trust. . . . . . . . . . 118
PAST PERFORMANCE INFORMATION FOR THE TRUST IS SET FORTH ELSEWHERE IN THIS
PROSPECTUS UNDER THE HEADING "PERFORMANCE OF THE TRUST" AT PAGE 27
90
1177 Avenue of the Americas Telephone 212 596 7000
New York, NY 10036 Facsimile 212 596 8910
Price Waterhouse LLP (LOGO)
Report of Independent Accountants
January 29, 1997
To the Managing Owner and
Limited Owners of
Willowbridge Strategic Trust
In our opinion, the accompanying statement of financial condition and the
related statements of operations and of changes in trust capital present
fairly, in all material respects, the financial position of
Willowbridge Strategic Trust (the ``Trust'') at December 31, 1996, the
results of its operations for the period from May 1, 1996 to
December 31, 1996 and the changes in its trust capital for the year
ended December 31, 1996, in conformity with generally accepted accounting
principles. The financial statements are the responsibility of
the managing owner; our responsibility is to express an opinion
on these financial statements based on our audit. We conducted
our audit of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by the
managing owner, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
91
Deloitte &
Touche LLP
--------------------------------------------------------
Two World Financial Center Telephone: (212) 436-2000
New York, New York 10281-1414 Facsimile: (212) 436-5000
INDEPENDENT AUDITORS' REPORT
To the Interestholders of
Willowbridge Strategic Trust:
We have audited the accompanying statement of financial condition of
Willowbridge Strategic Trust as of December 31, 1995. This financial statement
is the responsibility of the Trust's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of financial condition is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of financial condition. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement of financial
condition presentation. We believe that our audit of the statement of financial
condition provides a reasonable basis for our opinion.
In our opinion, such statement of financial condition presents fairly, in all
material respects, the financial position of Willowbridge Strategic Trust as of
December 31, 1995 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
October 14, 1996
- - -----------------
Deloitte Touche
Tohmatsu
International
- - -----------------
91A
WILLOWBRIDGE STRATEGIC TRUST
(a Delaware Business Trust)
STATEMENTS OF FINANCIAL CONDITION
December 31,
------------------------------
1996 1995
- - ----------------------------------------------------------------------------------------------------
ASSETS
Equity in commodity trading accounts:
Cash $27,465,535 $ 1,000
Net unrealized gain on open commodity positions 354,215 --
------------- ------------
Net equity 27,819,750 1,000
Other receivable 4,224 --
------------- ------------
Total assets $27,823,974 $ 1,000
------------- ------------
------------- ------------
LIABILITIES AND TRUST CAPITAL
Liabilities
Redemptions payable $ 359,352 $ --
Management fee payable 69,560 --
Incentive fee payable 414,894 --
------------- ------------
Total liabilities 843,806 --
------------- ------------
Commitments
Trust capital
Limited interests (258,057 and 0 interests outstanding) 26,700,158 --
General interests (2,706.31 and 10 interests outstanding) 280,010 1,000
------------- ------------
Total trust capital 26,980,168 1,000
------------- ------------
Total liabilities and trust capital $27,823,974 $ 1,000
------------- ------------
------------- ------------
Net asset value per limited and general interests (``Interests'') $ 103.47 $ 100.00
------------- ------------
------------- ------------
- - ----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
92
WILLOWBRIDGE STRATEGIC TRUST
(a Delaware Business Trust)
STATEMENT OF OPERATIONS
Period from
May 1, 1996
(commencement of
operations) to
December 31,
1996
- - ---------------------------------------------------------------------------------------------------
REVENUES
Net realized gain on commodity transactions $ 3,130,423
Net unrealized gain on open commodity positions 354,215
Interest income 663,866
--------------------------
4,148,504
--------------------------
EXPENSES
Commissions 1,033,462
Incentive fees 414,894
Management fees 409,964
--------------------------
1,858,320
--------------------------
Net income $ 2,290,184
--------------------------
--------------------------
ALLOCATION OF NET INCOME
Limited interests $ 2,268,174
--------------------------
--------------------------
General interests $ 22,010
--------------------------
--------------------------
NET INCOME PER WEIGHTED AVERAGE LIMITED AND GENERAL INTEREST
Net income per weighted average limited and general interest $ 10.79
--------------------------
--------------------------
Weighted average number of limited and general interests outstanding 212,276.447
--------------------------
--------------------------
- - ---------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN TRUST CAPITAL
LIMITED GENERAL
INTERESTS INTERESTS INTERESTS TOTAL
- - -----------------------------------------------------------------------------------------------------
Initial trust capital--December 31, 1995 10.00 $ -- $ 1,000 $ 1,000
Contributions 283,101.20 26,724,000 257,000 26,981,000
Net income -- 2,268,174 22,010 2,290,184
Redemptions (22,347.89) (2,292,016) -- (2,292,016)
----------- ----------- --------- -----------
Trust capital--December 31, 1996 260,763.31 $26,700,158 $280,010 $26,980,168
----------- ----------- --------- -----------
----------- ----------- --------- -----------
- - -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements
93
WILLOWBRIDGE STRATEGIC TRUST
(a Delaware Business Trust)
NOTES TO FINANCIAL STATEMENTS
A. General
Willowbridge Strategic Trust (the ``Trust'') was organized under the Delaware
Business Trust Statute on October 16, 1995 and commenced trading operations on
May 1, 1996. The Trust will terminate on December 31, 2015 unless terminated
sooner as provided in the Second Amended and Restated Declaration of Trust and
Trust Agreement (the ``Trust Agreement''). The Trust was formed to engage in the
speculative trading of commodity futures, options and forward contracts. The
Trustee of the Trust is Wilmington Trust Company. The managing owner is
Prudential Securities Futures Management Inc. (the ``Managing Owner''), a
wholly-owned subsidiary of Prudential Securities Incorporated (``PSI''), which,
in turn, is a wholly-owned subsidiary of Prudential Securities Group Inc. PSI is
the principal underwriter and selling agent for the Trust's interests (the
``Interests'') as well as the commodity broker (``Commodity Broker'') of the
Trust.
The Trust is offering a maximum of $100,000,000 of limited interests. On May
1, 1996, the Trust completed its initial offering with gross proceeds of
$12,686,200 from the sale of 125,352 limited interests and 1,510 general
interests. Additional Interests are being offered monthly at the then current
net asset value per Interest until no later than January 31, 1998 but in no
event after $100,000,000 in limited interests are sold (the ``Continuous
Offering Period''). A minimum initial contribution of $5,000 ($2,000 for an IRA
account) is required for each new limited owner unless the Managing Owner, in
its sole discretion, approves a contribution of a lesser amount. Existing
limited owners are permitted to make additional contributions in increments of
not less than $100 during the Continuous Offering Period.
The Managing Owner is required to maintain at least a 1% interest in the
Trust so long as it is acting as the Managing Owner. Therefore, it must
contribute to the Trust between $101,000 and $1,010,000 depending upon the total
number of limited interests sold during the Initial & Continuous Offering
Periods. In return, it is entitled to a proportionate number of general
interests with at least a 1% interest in the profits and losses of the Trust.
The Managing Owner, on behalf of the Trust, entered into an agreement (the
``Advisory Agreement'') with Willowbridge Associates Inc., an independent
commodity trading manager (the ``Trading Manager'') to make the Trust's
commodities trading decisions. The Managing Owner has made 100% of the Trust's
assets available for trading by the Trading Manager; however, the Managing Owner
retains the authority to override trading instructions that violate the Trust's
trading policies. The Advisory Agreement is for an initial term of approximately
one year and may be renewed thereafter for additional successive one-year terms.
The Managing Owner retains the right to retain additional or substitute
commodity trading managers at its discretion.
B. Summary of Significant Accounting Principles
Basis of Accounting
The books and records of the Trust are maintained on the accrual basis of
accounting in accordance with generally accepted accounting principles.
Commodity futures and forward transactions are reflected in the accompanying
statements of financial condition on trade date. The difference between the
original contract amount and market value is reflected as net unrealized gain or
loss. Options transactions are reflected in the statements of financial
condition at market value, which is inclusive of the net unrealized gain or
loss. The market value of each contract is based upon the closing quotation on
the exchange, clearing firm or bank on, or through, which the contract is
traded.
The weighted average number of limited and general interests outstanding was
computed for purposes of disclosing net income per weighted average limited and
general interest. The weighted average limited and general interests are equal
to the number of Interests outstanding at period end, adjusted proportionately
for Interests subscribed and redeemed based on their respective time outstanding
during such period.
94
The Partnership has elected not to provide a Statement of Cash Flows as
permitted by Statement of Financial Accounting Standards No. 102, ``Statement of
Cash Flows--Exemption of Certain Enterprises and Classification of Cash Flows
from Certain Securities Acquired for Resale.''
Income taxes
The Trust is treated as a partnership for Federal income tax purposes. As
such, the Trust is not required to provide for, or pay, any Federal or state
income taxes. Income tax attributes that arise from its operations are passed
directly to the individual Interest holders. The Trust may be subject to other
state and local taxes in jurisdictions in which it operates.
Profit and loss allocation, subscriptions, distributions and redemptions
Net realized profits or losses for tax purposes are allocated first to
Interest holders who redeem Interests to the extent the amounts received on
redemption are greater than or are less than the amounts paid for the redeemed
Interests by the Interest holders. Net realized profits or losses remaining
after these allocations are allocated to each Interest holder in proportion to
such Interest holder's capital account at year-end. Net income or loss for
financial reporting purposes is allocated monthly for all Interest holders on a
pro rata basis based on each Interest holder's number of Interests outstanding
during the month.
Distributions (other than on redemptions of Interests) are made at the sole
discretion of the Managing Owner on a pro rata basis in accordance with the
respective capital accounts of the Interest holders. No distributions have been
made since inception.
Additional Interests are being offered monthly at their month-end NAV per
Interest until the Continuous Offering Period is terminated as discussed in Note
A.
Redemptions are permitted as of the last business day of each month, on at
least 10 days' prior written notice. Redemptions are at the then current net
asset value per Interest; however, Interests redeemed on or prior to the end of
the first and second successive six-month periods after their purchase are
subject to redemption charges of 4% and 3%, respectively, of the net asset value
at which they are redeemed. These redemption charges are paid to the Managing
Owner. Partial redemptions are permitted.
C. Fees
Organizational, offering, and general and administrative costs
PSI or its affiliates pay the costs of organizing the Trust and offering its
Interests as well as administrative costs incurred by the Managing Owner or its
affiliates for services it performs for the Trust. These costs include, but are
not limited to, those discussed in Note D below. Routine legal, audit, postage
and other third party costs are also paid by PSI or its affiliates.
Management and incentive fees
The Trust pays the Trading Manager a monthly management fee of 1/4 of 1% (3%
per annum) of the Trust's net asset value as of the last day of each month and a
quarterly incentive fee of 20% of ``New High Net Trading Profits'' (as defined
in the Advisory Agreement).
Commissions
The Managing Owner, on behalf of the Trust, entered into an agreement (the
``Brokerage Agreement'') with PSI to act as Commodity Broker whereby the Trust
pays a fixed monthly fee for brokerage and other services rendered. The monthly
fee is equal to .64583 of 1% (7.75% per annum) of the Trust's net asset value as
of the first day of each month. From this fee, PSI pays all of the Trust's
execution (i.e., floor brokerage expenses, give-up charges and NFA, clearing and
exchange fees) and account maintenance costs, as well as compensation to
employees who sell Interests in the Trust.
D. Related Parties
The Managing Owner or its affiliates perform services for the Trust which
include but are not limited to: brokerage services, accounting and financial
management, registrar, transfer and assignment functions, investor
communications, printing and other administrative services.
One hundred percent of the proceeds of this offering are received in the
Trust's name and deposited in cash in segregated trading accounts at PSI and
will remain there for as long as the Trust's Brokerage
95
Agreement with PSI remains in effect. PSI credits the Trust monthly with 80% of
the interest it earns on the equity in these accounts and retains the remaining
20%.
The costs charged to the Trust for brokerage services for the period from May
1, 1996 (commencement of operations) to December 31, 1996 were $1,033,462.
In connection with the Trust's interbank transactions, PSI engages in foreign
currency forward transactions with the Trust and an affiliate of PSI who, as
principal, attempts to earn a profit on the bid-ask spreads (which must be
competitive) on any foreign currency forward transactions entered into between
the Trust and PSI, on the one hand, and PSI and such affiliate on the other. In
connection with its trading of foreign currencies in the interbank market, PSI
may arrange bank lines of credit at major international banks. To the extent
such lines of credit are arranged, PSI does not charge the Trust for maintaining
such lines of credit, but requires margin deposits with respect to forward
contract transactions.
E. Income Taxes
There are no differences between the tax basis and book basis of Interest
holders' capital for the period from May 1, 1996 (commencement of operations) to
December 31, 1996.
F. Credit and Market Risk
Since the Trust's business is to trade futures, forward and options
contracts, its capital is at risk due to changes in the value of these contracts
(market risk) or the inability of counterparties to perform under the terms of
the contracts (credit risk).
Futures, forward and options contracts involve varying degrees of off-balance
sheet risk; and changes in the level of volatility of interest rates, foreign
currency exchange rates or the market values of the contracts (or commodities
underlying the contracts) frequently result in changes in the Trust's unrealized
gain (loss) on open commodity positions reflected in the statements of financial
condition. The Trust's exposure to market risk is influenced by a number of
factors including the relationships among the contracts held by the Trust as
well as the liquidity of the markets in which the contracts are traded.
Futures and options contracts are traded on organized exchanges and are thus
distinguished from forward contracts which are entered into privately by the
parties. The credit risks associated with futures and options contracts are
typically perceived to be less than those associated with forward contracts
because exchanges typically provide clearinghouse arrangements in which the
collective credit (subject to certain limitations) of the members of the
exchanges is pledged to support the financial integrity of the exchange. On the
other hand, the Trust must rely solely on the credit of its broker (PSI) with
respect to forward transactions.
The Managing Owner attempts to minimize both credit and market risks by
requiring the Trust's Trading Manager to abide by various trading limitations
and policies. The Managing Owner monitors compliance with these trading
limitations and policies which include, but are not limited to, executing and
clearing all trades with creditworthy counterparties (currently, PSI is the sole
counterparty or broker); limiting the amount of margin or premium required for
any one commodity or all commodities combined; and generally limiting
transactions to contracts which are traded in sufficient volume to permit the
taking and liquidating of positions. The Managing Owner may impose additional
restrictions (through modifications of such trading limitations and policies)
upon the trading activities of the Trading Manager as it, in good faith, deems
to be in the best interests of the Trust.
PSI, when acting as the Trust's futures commission merchant in accepting
orders for the purchase or sale of domestic futures and options contracts, is
required by Commodity Futures Trading Commission (``CFTC'') regulations to
separately account for and segregate as belonging to the Trust all assets of the
Trust relating to domestic futures and options trading and not to commingle such
assets with other assets of PSI. At December 31, 1996, such segregated assets
totalled $23,463,181. Part 30.7 of the CFTC regulations also requires PSI to
secure assets of the Trust related to foreign futures and options trading which
totalled $4,356,569 at December 31, 1996. There are no segregation requirements
for assets related to forward trading.
96
As of December 31, 1996, all open futures contracts mature within nine
months.
As of December 31, 1996, gross contract amounts of open futures contracts
are:
Financial Futures Contracts:
Commitments to purchase $ 61,090,445
Commitments to sell $ 22,255,035
Currency Futures Contracts:
Commitments to purchase $ 2,891,650
Commitments to sell $ 12,957,888
Other Futures Contracts:
Commitments to purchase $ 11,829,016
Commitments to sell $ 3,189,296
The gross contract amounts represent the Trust's potential involvement in a
particular class of financial instrument (if it were to take or make delivery on
an underlying futures or options contract). The gross contract amounts
significantly exceed the future cash requirements as the Trust intends to close
out open positions prior to settlement and thus is generally subject only to the
risk of loss arising from the change in the value of the contracts. As such, the
Trust considers the ``fair value'' of its futures, forward and options contracts
to be the net unrealized gain or loss on the contracts (plus premiums on
options). Thus, the amount at risk associated with counterparty nonperformance
of all contracts is the net unrealized gain included in the statements of
financial condition. The market risk associated with the Trust's commitments to
purchase commodities is limited to the gross contract amounts involved, while
the market risk associated with its commitments to sell is unlimited since the
Trust's potential involvement is to make delivery of an underlying commodity at
the contract price; therefore, it must repurchase the contract at prevailing
market prices.
The following table presents the average fair value of futures and options
contracts during the year ended December 31, 1996 and the related fair value of
such contracts as of December 31, 1996.
Average Fair Value Fair Value
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
Futures Contracts:
Domestic exchanges
Financial $ 120,518 $ 41,843 $ 27,000 $ 96,094
Currencies 426,724 98,904 151,650 56,533
Other 373,360 423,556 204,414 160,312
Foreign exchanges
Financial 997,596 33,195 73,065 84,446
Other 81,644 23,941 307,291 11,820
Options Contracts:
Domestic exchanges
Financial 15,606 -- -- --
Currencies 60,060 -- -- --
Other 17,520 -- -- --
Foreign exchanges
Financial 5,650 -- -- --
------------ ------------ ------------ ------------
$2,098,678 $ 621,439 $ 763,420 $ 409,205
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
97
The following table presents the net realized gains (losses) and the net
unrealized gains (losses) of futures and options contracts for the period from
May 1, 1996 (commencement of operations) through December 31, 1996.
Net Realized
Gains Net Unrealized
(Losses) Gains (Losses) Total
------------ --------------- -----------
Futures Contracts:
Domestic exchanges
Financial $ 522,445 $ (69,094) $ 453,351
Currencies 638,502 95,117 733,619
Other (1,875,153) 44,102 (1,831,051)
Foreign exchanges
Financial 4,491,095 (11,381) 4,479,714
Other (39,746) 295,471 255,725
Options Contracts:
Domestic exchanges
Financial (146,094) -- (146,094)
Currencies (195,150) -- (195,150)
Other (181,779) -- (181,779)
Foreign exchanges
Financial (83,697) -- (83,697)
------------ --------------- -----------
$ 3,130,423 $ 354,215 $ 3,484,638
------------ --------------- -----------
------------ --------------- -----------
98
WILLOWBRIDGE STRATEGIC TRUST
(a Delaware Business Trust)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Trust commenced operations on May 1, 1996 with gross proceeds of
$12,686,200 allocated to commodities trading. Additional Interests are offered
monthly at the then current net asset value per Interest until no later than
January 31, 1998 but in no event after $100,000,000 in limited interests are
sold.
At December 31, 1996, 100% of the Trust's net assets were allocated to
commodities trading. A significant portion of the net assets are held in cash
which is used as margin for the Trust's trading in commodities. Inasmuch as the
sole business of the Trust is to trade in commodities, the Trust continues to
own such liquid assets to be used as margin. PSI credits the Trust monthly with
80% of the interest it earns on the equity in these accounts and retains the
remaining 20%.
The commodities contracts are subject to periods of illiquidity because of
market conditions, regulatory considerations and other reasons. For example,
commodity exchanges limit fluctuations in commodity futures contract prices
during a single day by regulations referred to as ``daily limits.'' During a
single day, no trades may be executed at prices beyond the daily limit. Once the
price of a futures contract for a particular commodity has increased or
decreased by an amount equal to the daily limit, positions in the commodity can
neither be taken nor liquidated unless traders are willing to effect trades at
or within the limit. Commodity futures prices have occasionally moved the daily
limit for several consecutive days with little or no trading. Such market
conditions could prevent the Trust from promptly liquidating its commodity
futures positions.
Since the Trust's business is to trade futures, forward and options
contracts, its capital is at risk due to changes in the value of these contracts
(market risk) or the inability of counterparties to perform under the terms of
the contracts (credit risk). The Managing Owner attempts to minimize these risks
by requiring the Trust's Trading Manager to abide by various trading limitations
and policies. See Note F to the financial statements for a further discussion of
the credit and market risks associated with the Trust's futures, forward and
options contracts.
Redemptions of limited interests for the period from May 1, 1996
(commencement of operations) through December 31, 1996 were $2,292,016.
Additional contributions raised through the continuous offering resulted in
additional gross proceeds to the Trust of $14,295,800 for the period from May 1,
1996 (commencement of operations) to December 31, 1996 and $13,221,200 for
January 1, 1997 through March 1, 1997. Future redemptions and contributions will
impact the amount of funds available for investment in commodity contracts in
subsequent periods.
The Trust does not have, nor does it expect to have, any capital assets.
Results of Operations
The Trust commenced trading on May 1, 1996 posting a gain of 3.47% for the
period ended December 31, 1996. The MAR (Managed Account Reports) Fund/Pool
Index, which tracked the performance of 420 futures funds, returned 9.45% for
the comparable period in 1996, outperforming the Trust. The net asset value per
Interest as of December 31, 1996 was $103.47. Past performance is not
necessarily indicative of future results.
The international interest rate, stock index and currency sectors were the
solid performers in 1996, especially during the fourth quarter. In the financial
sector, German, French and Japanese bond positions were profitable. With
sluggish economic growth in Europe and Japan and only moderate U.S. growth, the
Trust profited from rising bond prices in the major international countries as
the financial markets adjusted to slower rates of growth in the second half of
1996. In the stock index sector, long U.S. stock index positions posted gains as
U.S. stock prices rose on expectations that moderate U.S. economic growth would
be accompanied by continuing low rates of inflation.
In the energy sector, tight supplies of natural gas drove prices higher also
impacting crude and heating oil. Long positions in these commodities were
profitable. The grain sector was profitable early in the year due to rising
international demand and historically low reserves; however, especially
favorable weather
99
conditions in the second half of the year increased crop expectations, causing
grain prices to decline. Thus, the Trust's long positions experienced losses. In
the soft sector, coffee and cotton positions were unprofitable as changing
expectations in their growing conditions caused widely volatile price moves.
Interest income is earned on the equity balances held at PSI and, therefore,
varies monthly according to interest rates, trading performance, contributions
and redemptions. Interest income was $663,866 for the period from May 1, 1996
(commencement of operations) through December 31, 1996.
Commissions are calculated on the Trust's net asset value at the beginning of
each month and, therefore, vary according to trading performance, contributions
and redemptions. Commissions for the period from May 1, 1996 through December
31, 1996 were $1,033,462.
All trading decisions for the Trust are made by Willowbridge Associates Inc.,
the Trading Manager. Management fees are calculated on the Trust's net asset
value at the end of each month and, therefore, are affected by trading
performance, contributions and redemptions. Management fees for the period from
May 1, 1996 through December 31, 1996 were $409,964.
Incentive fees are based on the New High Net Trading Profits generated by the
Trading Manager, as defined in the Advisory Agreement between the Trust, the
Managing Owner and the Trading Manager. Incentive fees earned during the period
from May 1, 1996 through December 31, 1996 were $414,894.
Inflation
Inflation has had no material impact on operations or on the financial
condition of the Trust from inception through December 31, 1996.
100
1177 Avenue of the Americas Telephone 212 596 7000
New York, NY 10036 Facsimile 212 596 8910
Price Waterhouse LLP [ LOGO ]
Report of Independent Accountants
January 29, 1997
To the Board of Directors of
Prudential Securities Futures Management Inc.
In our opinion, the accompanying statement of financial condition presents
fairly, in all material respects, the financial position of Prudential
Securities Futures Management Inc. (the "Company") at December 31, 1996, in
conformity with generally accepted accounting principles. This financial
statement is the responsibility of the Company's management; our
responsibility is to express an opinion on this financial statement based on
our audit. We conducted our audit of this statement in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the statement of
financial condition is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the statement of financial condition, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
statement of financial condition presentation. We believe that our audit of
the statement of financial condition provides a reasonable basis for the
opinion expressed above.
/s/ Price Waterhouse LLP
101
Prudential Securities Futures Management Inc.
(A wholly owned subsidiary of
Prudential Securities Incorporated)
Statement of Financial Condition
- - --------------------------------------------------------------------------
December 31, 1996
Assets
Cash $ 1,583
Investments in partnerships 1,446,501
Receivable from partnerships 126,860
Other receivables 77,000
----------
Total assets $1,651,944
----------
Liabilities and Stockholder's Equity
Liabilities
Due to Parent and affiliates, net $1,544,668
Accrued expenses 13,880
----------
Total liabilities 1,558,548
Commitments and contingencies
Stockholder's equity
Common stock (no par value, 2,000 shares authorized,
100 shares issued and outstanding) 100
Additional paid-in capital 9,600,000
Retained earnings 93,296
----------
9,693,396
Less -- Noninterest- bearing demand notes due from
Prudential Securities Group Inc. (9,600,000)
----------
Total stockholder's equity 93,396
----------
Total liabilities and stockholder's equity $1,651,944
----------
----------
The accompanying notes are an integral part of this financial statement.
102
Prudential Securities Futures Management Inc.
(A wholly owned subsidiary of
Prudential Securities Incorporated)
Notes to Statement of Financial Condition
December 31, 1996
- - ----------------------------------------------------------------------------
A. General
Prudential Securities Futures Management Inc. (the "Company") is a wholly
owned subsidiary of Prudential Securities Incorporated ("PSI" or the "Parent"),
which is a wholly owned subsidiary of Prudential Securities Group Inc.
("PSGI"). The Company is a general partner or managing owner of limited
partnerships and Delaware business trusts (collectively, "the Partnerships"),
as well as an investment manager of open-ended investment companies, all of
which were formed to engage in the speculative trading of commodity futures,
forward and option contracts pursuant to trading systems developed by
independent commodity trading advisors. The Company is registered with the
Commodity Futures Trading Commission ("CFTC") as a commodity pool operator.
The Company is also registered with the CFTC as a Commodity Trading Advisor
and provides commodity trading management services to clients of PSI.
B. Summary of Significant Accounting Policies
Basis of Accounting
The books and records of the Company are maintained on the accrual basis of
accounting in accordance with generally accepted accounting principles which
require management to make estimates and assumptions that affect the
reported amounts in the financial statement.
Income taxes
The Company is a member of a group of affiliated companies which join in
filing a consolidated federal income tax return and certain combined and
unitary state and local returns. Pursuant to the tax allocation
arrangements, total federal and state and local tax expense is determined
on a separate company basis. Members with losses record tax benefits to the
extent such losses are recognized in the consolidated federal and state and
local tax provisions.
The Company utilizes the asset and liability method for calculating income
taxes. At December 31, 1996, the Company's federal and state income tax
receivables (due from affiliate) were $49,128 and $15,686, respectively.
103
Prudential Securities Futures Management Inc. 2
(A wholly owned subsidiary of
Prudential Securities Incorporated)
Notes to Statement of Financial Condition
December 31, 1996
- - ----------------------------------------------------------------------------
C. Investments in Partnerships
The Company's investments in partnerships are carried at its share of the
underlying equity in the Partnerships' net assets. The Company's
investments in partnerships and its percentage ownership in those
partnerships are as follows:
Diversified Futures Trust I $ 715,012 1.0%
Prudential-Bache Capital Return Futures
Fund 2, L.P. 310,207 1.0%
Willowbridge Strategic Trust 278,600 1.0%
Prudential Securities Aggressive Growth Fund L.P. 89,886 1.0%
Prudential Securities Foreign Financials Fund, L.P. 35,246 1.1%
Signet Partners II, L.P. 14,231 1.1%
Others 3,319 100%
----------
$1,446,501
----------
----------
The following represents combined condensed financial information for the
Partnerships in which the Company has an investment:
Assets $156,911,097
------------
------------
Liabilities $ 13,807,338
Partners' Capital 143,103,759
------------
Total $156,911,097
------------
D. Related Parties
The Company has an interest-bearing loan payable to PSGI in the amount
of $1,353,202 at December 31, 1996 which bears interest at PSGI's effective
borrowing rate and is payable on demand. The loan was used to fund the
purchase of investments in the Partnerships.
The Company occupies space provided by PSI and is charged for this space.
PSI also provides all administrative, legal, financial and other services
to the Company and the Partnerships. The Company is billed for such
services performed for both itself and the
104
Prudential Securities Futures Management Inc. 3
(A wholly owned subsidiary of
Prudential Securities Incorporated)
Notes to Statement of Financial Condition
December 31, 1996
- - ----------------------------------------------------------------------------
Partnerships (the balance of which is $246,818 and is included in Due to
Parent and affiliates). The amount due from the Partnerships related to
these services ($31,267) is included in Receivable from partnerships.
The Company's officers and directors are also officers of PSI.
E. Stockholder's Equity
The Company maintains a net worth in accordance with the limited partnership
and trust agreements of the Partnerships.
The Company has noninterest-bearing demand notes receivable from PSGI in the
amount of $9,600,000 at December 31, 1996. These notes receivable are
classified as a reduction of Stockholder's Equity as they represent capital
subscribed but not funded. The demand notes are partially collateralized by
U.S. Government security reverse repurchase agreements which contract
amounts plus accrued interest approximate $7,500,000 at December 31, 1996.
F. Commitments and Contingencies
As a general partner or managing owner, the Company may be contingently
liable for costs and liabilities incurred by the Partnerships.
105
Report of Independent Accountants
January 29, 1997
To the Managing Owner and
Interest Holders of
Diversified Futures Trust I
In our opinion, the accompanying statement of financial condition presents
fairly, in all material respects, the financial position of Diversified Futures
Trust I (the ``Trust'') at December 31, 1996, in conformity with generally
accepted accounting principles. This financial statement is the responsibility
of the managing owner; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit of this financial
statement in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statement is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by the managing owner, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
106
DIVERSIFIED FUTURES TRUST I
(a Delaware Business Trust)
STATEMENT OF FINANCIAL CONDITION
December 31, 1996
- - --------------------------------------------------------------------------------------------------
ASSETS
Equity in commodity trading accounts:
Cash $79,506,881
Net unrealized gain on open commodity positions 1,513,343
-------------
Net equity 81,020,224
Other receivable 20,607
-------------
Total assets $81,040,831
-------------
-------------
LIABILITIES AND TRUST CAPITAL
Liabilities
Redemptions payable $ 7,223,685
Management fee payable 270,136
Incentive fee payable 2,055,497
-------------
Total liabilities 9,549,318
-------------
Commitments
Trust capital
Limited interests (401,784.703 interests outstanding) 70,776,499
General interests (4,059 interests outstanding) 715,014
-------------
Total trust capital 71,491,513
-------------
Total liabilities and trust capital $81,040,831
-------------
-------------
Net asset value per limited and general interests (``Interests'') $ 176.16
-------------
-------------
- - --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement
107
DIVERSIFIED FUTURES TRUST I
(a Delaware Business Trust)
NOTES TO STATEMENT OF FINANCIAL CONDITION
A. General
Diversified Futures Trust I (the ``Trust'') was organized under the Delaware
Business Trust Act on May 18, 1994 and will continue until December 31, 2014
unless terminated sooner under the provisions of the Amended and Restated
Declaration of Trust and Trust Agreement (the ``Trust Agreement''). On January
5, 1995, the Trust completed its initial offering having raised $25,262,800 from
the sale of 249,628 limited interests (``Limited Interests'') and 3,000 general
interests (``General Interests'') (collectively, the ``Interests'') and
commenced operations. The Trust was formed to engage in the speculative trading
of commodity futures and forward contracts. The Trust's trustee is Wilmington
Trust Company. The managing owner of the Trust is Prudential Securities Futures
Management Inc. (the ``Managing Owner''), a wholly-owned subsidiary of
Prudential Securities Incorporated (``PSI''), which, in turn, is a wholly-owned
subsidiary of Prudential Securities Group Inc. (``PSGI''). PSI was the principal
underwriter of the Interests and is the commodity broker of the Trust. The
Managing Owner is required to maintain at least a 1% interest in the Trust so
long as it is acting as the Managing Owner.
The Trust was permitted to sell a maximum of $50,000,000 of Limited
Interests, plus $50,000,000 of additional Limited Interests when PSI and the
Managing Owner exercised the over-subscription option granted to them by the
Trust Agreement. Following the close of the initial offering period, additional
Interests were offered and sold monthly at their month-end net asset value
(``NAV'') per Interest during a continuous offering period which expired on
August 31, 1996. Additional contributions raised during the Continuous Offering
Period resulted in additional proceeds to the Trust of $41,129,100 from the sale
of 299,640 Limited Interests and 1,628 General Interests.
All trading decisions are made for the Trust by John W. Henry & Co., Inc.
(the ``Trading Manager''). The Trading Manager was initially allocated the
Trust's assets to be traded pursuant to five of its trading programs as follows:
50% to the Financial and Metals Portfolio; 20% to the Global Financial
Portfolio; 20% to the Original Investment Program; 5% to the G-7 Currency
Portfolio; and 5% to the Yen Financial Portfolio. The Trading Manager may alter
the relative percentages only if the Managing Owner does not object to any such
alteration. No alterations have been made to date; however, the relative
percentages change from time to time as a result of the performance of the
various trading programs. The Managing Owner retains the authority to override
trading instructions that violate the Trust's trading policies.
B. Summary of Significant Accounting Principles
Basis of accounting
The books and records of the Trust are maintained on the accrual basis of
accounting in accordance with generally accepted accounting principles.
Commodity futures and forward transactions are reflected in the accompanying
statements of financial condition on trade date. The difference between the
original contract amount and market value is reflected as net unrealized gain or
loss. The market value of each contract is based upon the closing quotation on
the exchange, clearing firm or bank on, or through, which the contract is
traded.
Income taxes
The Trust is treated as a partnership for Federal income tax purposes. As
such, the Trust is not required to provide for, or pay, any Federal or state
income taxes. Income tax attributes that arise from its operations are passed
directly to the individual Interest holders. The Trust may be subject to other
state and local taxes in jurisdictions in which it operates.
Profit and loss allocation, subscriptions, distributions and redemptions
Net realized profits or losses for tax purposes are allocated first to
Interest holders who redeem Interests to the extent the amounts received on
redemption are greater than or are less than the amounts paid for the redeemed
Interests by the Interest holders. Net realized profits or losses remaining
after these allocations are allocated to each Interest holder in proportion to
such Interest holder's capital account at year-end. Net
108
income or loss for financial reporting purposes is allocated monthly for all
Interest holders on a pro rata basis based on each Interest holder's number of
Interests outstanding during the month.
Distributions (other than on redemptions of Interests) are made at the sole
discretion of the Managing Owner on a pro rata basis in accordance with the
respective capital accounts of the Interest holders. No distributions have been
made since inception.
Additional Interests were offered monthly at their month-end NAV per Interest
until the continuous offering period expired on August 31, 1996 as further
discussed in Note A.
The Trust Agreement provides that an Interest holder may redeem its Interests
as of the last business day of any full calendar quarter (beginning with the end
of the first full calendar quarter of the Trust's operations, which was June 30,
1995) at the then current NAV per Interest.
C. Fees
Organizational and general and administrative costs
PSI or its affiliates paid the costs of organizing the Trust and offering its
Interests and pay the routine operational, administrative, legal and auditing
expenses.
Management and incentive fees
The Trust pays the Trading Manager a monthly management fee equal to 1/3 of
1% (a 4% annual rate) of the Trust's NAV as of the end of each month.
In addition, the Trust pays the Trading Manager a quarterly incentive fee
equal to 15% of the New High Net Trading Profits (as defined in the Advisory
Agreement between the Trust, the Managing Owner and the Trading Manager).
Commissions
The Managing Owner, on behalf of the Trust, entered into an agreement with
PSI as commodity broker whereby the Trust pays a fixed monthly fee for brokerage
services rendered. The monthly fee equals .64583 of 1% (7.75% per annum) of the
Trust's NAV as of the first day of each month. From this fee, PSI pays all of
the Trust's execution (i.e., floor brokerage expenses and NFA, clearing and
exchange fees) and account maintenance costs.
D. Related Parties
The Managing Owner and its affiliates perform services for the Trust which
include, but are not limited to: brokerage services, accounting and financial
management, registrar, transfer and assignment functions, investor
communications, printing and other administrative services. Except for costs
related to brokerage services, PSI or its affiliates pay the costs of these
services in addition to costs of organizing the Trust and offering its Interests
as well as the routine operational, administrative, legal and auditing fees.
The Trust maintains its trading and cash accounts at PSI, the Trust's
commodity broker. A significant portion of the Trust's cash is utilized for
margin purposes for the Trust's commodity trading activities. PSI credits the
Trust monthly with 100% of the interest it earns on the equity in these
accounts.
In connection with the Trust's interbank transactions, PSI engages in foreign
currency forward transactions with the Trust and an affiliate of PSI who, as
principal, attempts to earn a profit on the bid-ask spreads (which must be
competitive) on any foreign currency forward transactions entered into between
the Trust and PSI, on the one hand and, PSI and such affiliate on the other. In
connection with its trading of foreign currencies in the interbank market, PSI
may arrange bank lines of credit at major international banks. To the extent
such lines of credit are arranged, PSI does not charge the Partnership for
maintaining such lines of credit, but requires margin deposits with respect to
forward contract transactions.
As of December 31, 1996, a non-U.S. affiliate of the Managing Owner owns
5,170.071 Limited Interests of the Trust.
109
E. Credit and Market Risk
Since the Trust's business is to trade futures, forward and options
contracts, its capital is at risk due to changes in the value of these contracts
(market risk) or the inability of counterparties to perform under the terms of
the contracts (credit risk).
Futures, forward and options contracts involve varying degrees of off-balance
sheet risk; and changes in the level of volatility of interest rates, foreign
currency exchange rates or the market values of the contracts (or commodities
underlying the contracts) frequently result in changes in the Trust's unrealized
gain (loss) on open commodity positions reflected in the statements of financial
condition. The Trust's exposure to market risk is influenced by a number of
factors including the relationships among the contracts held by the Trust as
well as the liquidity of the markets in which the contracts are traded.
Futures and options contracts are traded on organized exchanges and are thus
distinguished from forward contracts which are entered into privately by the
parties. The credit risks associated with futures and options contracts are
typically perceived to be less than those associated with forward contracts,
because exchanges typically provide clearinghouse arrangements in which the
collective credit (subject to certain limitations) of the members of the
exchanges is pledged to support the financial integrity of the exchange. On the
other hand, the Trust must rely solely on the credit of its broker (PSI) with
respect to forward transactions. The Trust presents unrealized gains and losses
on open forward positions at a net amount in the statements of financial
condition because it has a master netting agreement with PSI.
The Managing Owner attempts to minimize both credit and market risks by
requiring the Trust's Trading Manager to abide by various trading limitations
and policies. The Managing Owner monitors compliance with these trading
limitations and policies which include, but are not limited to, executing and
clearing all trades with creditworthy counterparties (currently PSI is the sole
counterparty or broker); limiting the amount of margin or premium required for
any one commodity or all commodities combined; and generally limiting
transactions to contracts which are traded in sufficient volume to permit the
taking and liquidating of positions. The Managing Owner may impose additional
restrictions (through modifications of such trading limitations and policies)
upon the trading activities of the Trading Manager as it, in good faith, deems
to be in the best interests of the Trust.
PSI, when acting as the Trust's futures commission merchant in accepting
orders for the purchase or sale of domestic futures and options contracts, is
required by Commodity Futures Trading Commission (``CFTC'') regulations to
separately account for and segregate as belonging to the Trust all assets of the
Trust relating to domestic futures and options trading and is not to commingle
such assets with other assets of PSI. At December 31, 1996, such segregated
assets totalled $53,711,518. Part 30.7 of the CFTC regulations also requires PSI
to secure assets of the Trust related to foreign futures and options trading
which totalled $26,551,088 at December 31, 1996. There are no segregation
requirements for assets related to forward trading.
As of December 31, 1996, the Trust's open forward and futures contracts
mature within one year.
At December 31, 1996, gross contract amounts of open futures and forward
contracts are:
Financial Futures Contracts:
Commitments to purchase $246,536,386
Commitments to sell $ 85,149,239
Currency Forward Contracts:
Commitments to purchase $ 55,393,671
Commitments to sell $ 61,497,457
Other Futures Contracts:
Commitments to purchase $ 6,735,960
Commitments to sell $ 25,980,949
The gross contract amounts represent the Trust's potential involvement in a
particular class of financial instrument (if it were to take or make delivery on
an underlying futures or forward contract). The gross contract amounts
significantly exceed the future cash requirements as the Trust intends to close
out open positions prior to settlement and thus is generally subject only to the
risk of loss arising from the change in
110
the value of the contracts. As such, the Trust considers the ``fair value'' of
its futures and forward contracts to be the net unrealized gain or loss on the
contracts. Thus, the amount at risk associated with counterparty nonperformance
of all contracts is the net unrealized gain included in the statements of
financial condition. The market risk associated with the Trust's commitments to
purchase commodities is limited to the gross contract amounts involved, while
the market risk associated with its commitments to sell is unlimited since the
Trust's potential involvement is to make delivery of an underlying commodity at
the contract price; therefore, it must repurchase the contract at prevailing
market prices.
The following table presents the average fair value of futures and forward
contracts during the year ended December 31, 1996 and the related fair value at
December 31, 1996.
Average Fair Value Fair Value
-------------------------------------- --------------------------------------
Assets Liabilities Assets Liabilities
----------------- ----------------- ----------------- -----------------
Futures Contracts:
Domestic exchanges
Financial $ 687,217 $ 142,565 $ 66,450 $ 175,344
Currencies -- -- -- --
Other 1,170,685 209,225 1,219,801 58,011
Foreign exchanges
Financial 2,812,953 208,886 542,415 847,344
Other 15,044 3,121 7,758 --
Forward Contracts:
Currencies 2,543,797 761,951 1,592,852 835,234
----------------- ----------------- ----------------- -----------------
$ 7,229,696 $ 1,325,748 $ 3,429,276 $ 1,915,933
----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- -----------------
111
PAGE
OTHER PAST PERFORMANCE INFORMATION
Description
The information set forth herein is in capsule form as required by the
Commodity Futures Trading Commission ("CFTC") under its Rule 4.25. The
information presented in the following capsules has been calculated on the
accrual basis of accounting in accordance with generally accepted
accounting standards. Additional information in tabular form is available and
will be provided upon written request to the Managing Owner at no additional
cost.
In reviewing the capsule summaries which follow, subscribers should
bear in mind that the performance shown varies from period to period, and
that there are deviations, some of which are material, in the periodic rates of
return achieved.
The Trust's experience also has not been, and is not likely to be, similar
to that of the other commodity pools sponsored by the Managing Owner or
its affiliate, Seaport, as the trading in certain of those commodity pools was
directed primarily by different trading managers (utilizing their own
proprietary systems) than those being utilized by the Trust (see Section B.
below for a description of the commodity pools which the Trading Manager
currently is managing). In addition, the specific attributes of each of the
other commodity pools sponsored by the Managing Owner or its affiliate
further distinguishes it from the Trust. For instance, in contrast to the
Trust,
some of those commodity pools are advised by several advisors, are
privately offered, or are principal-protected. Moreover, the fee structure of
each commodity pool is distinguishable from the fee structure for the Trust.
The trading strategies utilized by the Trading Manager have evolved
over the years based on accumulated experience and further testing of data.
The Trust has not experienced, and will not necessarily experience, the same
results as those set forth in the capsule summaries due to differences in
such variables as the selection of the trading programs used and the
allocation of assets among them, the proportion of funds utilized as margin
in the markets, time of market entry, starting date of the account, brokerage
commissions (which may be higher or lower than other accounts under the
Trading Manager's management), management and incentive compensation,
leverage employed, and changes in the Trading Manager's trading strategies
or approach, including the size and the degree of diversification in terms of
the number of and differences in commodities traded at a particular time. In
addition, performance is affected by the timing and execution of orders to
open and close positions and the amount of interest earned, which fluctuates
based upon interest rates available and the portion of an account utilizing
interest-bearing instruments.
THE TRUST'S PERFORMANCE SHOULD NOT BE EXPECTED TO BE
SIMILAR TO ANY OF THE PERFORMANCE RESULTS IN THE FOLLOWING
CAPSULES.
SEE THE NOTES TO EACH CAPSULE FOR A MORE DETAILED
EXPLANATION OF THE INFORMATION PRESENTED. THESE NOTES ARE AN
INTEGRAL PART OF EACH CAPSULE.
A. Other Pools Sponsored by the Managing Owner and its Affiliate
Set forth below (in Capsule A) is the performance record of trading
from January 1992 through February 28, 1997, for the three publicly formed
commodity funds (Prudential-Bache Capital Return Futures Fund 2, L.P.,
Prudential Securities Aggressive Growth Fund, L.P. and Diversified Futures
Trust I), and two non-public commodity funds (Prudential Securities Foreign
Financials Fund, L.P. and Signet Partners II, L.P.), for which the General
Partner acts as the general partner and commodity pool operator and five
offshore investment funds (Prudential-Bache International Futures Fund A
PLC, Prudential-Bache International Futures Fund B PLC, Prudential-Bache
International Futures Fund C
112
PLC, Prudential-Bache International Futures
Fund D PLC and Prudential-Bache International Futures Fund E PLC)
organized as investment companies incorporated in Ireland and offered only
to non-U.S. residents, for which the General Partner acts as investment
manager and for which a CFTC Rule 4.7 eligibility notice was filed, and each
of the four public commodity funds for which its affiliate, Seaport Futures
Management Inc. ("Seaport") acts as general partner and commodity pool
operator. Performance information also is shown for one public and one
non-public commodity fund for which Seaport and the Managing Owner,
respectively, acted as general partners and commodity pool operators until
January 31, 1995 and December 17, 1995, respectively.
The Trading Manager currently acts as the trading advisor to five of
these pools, as indicated on the following capsule. In three instances, the
Trading Manager replaced another trading advisor in July 1995. The Trading
Manager uses the same five trading strategies for two of these pools as it
uses in trading the Trust's assets (Prudential-Bache International Futures
Fund A and D (Willowbridge part)). The Trading Manager uses at least one
of the trading strategies that it uses for the Trust in managing the assets of
the other three pools (XLIM is used in two pools, Argo is used in one pool,
and the CFM Program, which allows the Trading Manager to select from
among seven trading strategies, including the five strategies to be used for
the Trust, is used in one pool). In addition, the advisory management and
incentive fees which the Trading Manager receives from these five pools is
the same as it receives from the Trust in three pools, and is higher in two
other pools (Prudential-Bache International Futures Fund A and D
(Willowbridge part)).
THE INFORMATION IN CAPSULE A HAS NOT BEEN AUDITED.
HOWEVER, THE MANAGING OWNER REPRESENTS AND WARRANTS THAT
THE CAPSULE IS COMPLETE AND ACCURATE IN ALL MATERIAL
RESPECTS.
B. Trading Manager
The Managing Owner initially allocated the Trust's assets to the
following five Willowbridge trading strategies: XLIM, Argo, Titan, Vulcan and
Siren. The initial allocations were as follows: XLIM - 50%, Argo - 20%, and
Titan, Vulcan and Siren - 10% each, and additional allocations from sales
during the continuous offering have been made in the same proportions. As
of March 1, 1997, the Trust's assets were being traded in the following
proportions: XLIM - 48.75%, Argo - 20.34%, Titan - 10.72%, Vulcan - 11.01%,
and Siren - 9.18%. These proportions will continue to change as the Trust
earns trading profits and incurs trading losses. The allocations may be
altered, subject to Willowbridge's consent, if the Managing Owner determines
it is in the Trust's best interests to do so. The performance of these trading
strategies through February 28, 1997 is reflected in capsule summaries B
through G.
Capsules H and I represent the customer accounts traded by the
Trading Manager pursuant to different trading strategies from those to be
utilized by the Trust.
The proprietary performance of the XLIM trading strategy is separately
set forth in Capsule J.
The foregoing capsule summaries were supplied by the Trading
Manager. The Managing Owner is relying on the Trading Manager for the
accuracy of the information supplied in these capsules.
THE INFORMATION IN CAPSULES B THROUGH J HAS NOT BEEN
AUDITED. HOWEVER, THE TRADING MANAGER REPRESENTS AND
WARRANTS THAT THESE CAPSULES ARE COMPLETE AND ACCURATE IN
ALL MATERIAL RESPECTS.
Also set forth in Capsule K is hypothetical combined pro forma
information which was prepared by the Managing Owner and which attempts
to show the relative
113
weighting of the five trading strategies used by the
Trading Manager for the Trust on a pro forma basis from January, 1991, the
earliest date when all five trading strategies were being used at the same
time through April 30, 1996 (the period immediately prior to the
commencement of trading activities by the Trust on May 1, 1996). Although
this capsule was derived from the Trading Manager's actual trading results
depicted in Capsules B through G, as well as Capsule J, this capsule reflects
the performance of a hypothetical portfolio whose assets are allocated in the
same proportions as the Trust's initial assets were allocated. Thereafter, no
attempt was made to maintain the initial allocations among the five strategies
in the same relative percentages by adjusting for subsequent profits, losses,
additions or withdrawals. While the Managing Owner believes that such
theoretical results as presented in this capsule may be of some relevance to
prospective investors in determining whether or not to subscribe for
Interests in the Trust, the performance information presented in this capsule
should by no means be taken as an indication of how the Trust as a whole
or how Limited Owners' individual investments will perform or would have
performed, over the same time period. Prospective investors are referred to
the Trust's actual performance from May 1, 1996 to February 28, 1997 at page
27 of this Prospectus. Prospective investors should be aware in reviewing
capsule K that the CFTC and NFA regulations require the following
cautionary legend to accompany all hypothetical performance information:
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT
LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO
REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS
LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN
FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN
HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS
SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS
IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF
HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE
FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN
COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL
TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO
ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING
LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT
ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS
RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION
OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY
ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL
PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT
ACTUAL TRADING RESULTS.
114
CAPSULE A
CAPSULE PERFORMANCE OF OTHER POOLS OPERATED BY PRUDENTIAL SECURITIES FUTURES MANAGEMENT INC. AND AFFILIATE [a]
(SEE ACCOMPANYING NOTES)
WORST WORST
MONTHLY PEAK TO
AGGREGATE CURRENT PERCENT VALLEY
TYPE INCEPTION SUBSCRIPTIONS TOTAL NAV DRAW- DRAW-
NAME OF POOL OF POOL OF TRADING ($ x 1,000) ($ x 1,000) DOWN[b] DOWN[c]
PRUDENTIAL-BACHE FUTURES GROWTH FUND,
L.P. [d] (PBFG) 3, 5, 6, 8, 10 3/88 24,961 --- -14.38% -24.48%
10/89 12/88-1/93
PRUDENTIAL-BACHE DIVERSIFIED
FUTURES FUND L.P. (PBDFF) 3, 5, 6, 8, 10 10/88 29,747 19,895 -18.37% -36.63%
1/92 1/92-5/92
PRUDENTIAL-BACHE CAPITAL RETURN
FUTURES FUND L.P. (PBCRFF) 1a, 3, 5, 7, 8, 10 5/89 137,705 18,315 -5.26% 24.43%
11/94 9/93-1/95
PRUDENTIAL-BACHE CAPITAL RETURN
FUTURES FUND 2 L.P. (PBCRFF2) 1a, 3, 5, 7, 8, 9 10/89 100,000 31,673 -11.36% -24.24%
1/92 1/92-5/92
PRUDENTIAL-BACHE CAPITAL RETURN
FUTURES FUND 3 L.P. (PBCRFF3) 1a, 3, 5, 7, 8, 10, 13 5/90 64,863 20,851 -10.94% -17.84%
1/91 9/90-6/91
PRUDENTIAL-BACHE OPTIMAX
FUND L.P. - OPTIMAX (PBOFF) 3, 5, 7, 8, 10, 11, 13 4/96 69,603 15,625 -6.36% -11.32%
7/96 5/96-8/96
PRUDENTIAL-BACHE OPTIMAX
FUND L.P. - A (PBOFF) 1, 3, 5, 7, 10, 13 2/91 63,356 --- -6.00% -10.72%
1/92 8/93-2/95
PRUDENTIAL-BACHE OPTIMAX
FUND L.P. - B (PBOFF) 3, 5, 7, 8, 10, 13 2/91 6,247 --- -9.90% -20.26%
1/92 8/93-2/95
PRUDENTIAL SECURITIES OPTIMAX
FUND 2 L.P. - A (PBOFF2) 1, 3, 5, 7, 9, 13 1/92 15,197 8,405 -5.82% -13.53%
9/93 9/93-1/95
PRUDENTIAL SECURITIES OPTIMAX
FUND 2 L.P. - B (PBOFF2) 3, 5, 7, 8, 9, 13 1/92 2,219 748 -9.49% -20.94%
9/93 6/95-7/96
PRUDENTIAL SECURITIES FINANCIAL
FUTURES FUND L.P. [e] (PSFNF) 2, 4, 6, 8, 9 1/93 3,557 --- -8.39% -40.23%
11/94 8/93-1/95
PRUDENTIAL SECURITIES FOREIGN
FINANCIALS FUND L.P. (PSFFF) 2, 4, 6, 8, 9 1/93 4,098 2,771 -17.69% -25.96%
9/93 9/93-1/94
PRUDENTIAL SECURITIES AGGRESSIVE
GROWTH FUND L.P. (PSAGF) 3, 5a, 7, 8, 9 8/93 20,335 8,714 -9.70% -32.67%
9/93 8/93-1/95
DIVERSIFIED FUTURES TRUST I (DFT) 3, 5a, 6, 8, 9 1/95 65,908 73,023 -5.89% -6.49%
2/96 2/96-6/96
SIGNET PARTNERS II, LP (SPLP2) 2, 4, 7, 8, 9 2/96 1,519 1,400 -1.31% -1.31%
2/96 2/96
PRUDENTIAL-BACHE INTERNATIONAL
FUTURES FUND A PLC (PBIFA) 2, 4, 6, 9, 12, 13 6/96 16,825 14,457 -9.45% -10.90%
6/96 6/96-7/96
PRUDENTIAL-BACHE INTERNATIONAL
FUTURES FUND C PLC (PBIFC) 2, 4, 6, 9, 12 6/96 13,356 11,144 -6.34% -11.83%
12/96 12/96-2/97
PRUDENTIAL-BACHE INTERNATIONAL
FUTURES FUND B PLC (PBIFB) 2, 4, 6, 9, 12 7/96 40,146 40,378 -2.80% -2.80%
12/96 12/96
PRUDENTIAL-BACHE INTERNATIONAL
FUTURES FUND D PLC (PBIFD) 2, 4, 7, 9, 12, 13 10/96 11,483 10,718 -3.13% -3.13%
12/96 12/96
PRUDENTIAL-BACHE INTERNATIONAL
FUTURES FUND E PLC (PBIFE) 2, 4, 6, 9, 12 1/97 3,528 3,671 --- ---
ANNUAL RATE OF RETURN
(COMPUTED ON A COMPOUNDED MONTHLY BASIS)
YEAR
TO-DATE
NAME OF POOL 1992 1993 1994 1995 1996 1997
PRUDENTIAL-BACHE FUTURES GROWTH
FUND, L.P. [d] (PBFG) -6.37% 19.73% 1.57% -9.54% --- ---
PRUDENTIAL-BACHE DIVERSIFIED
FUTURES FUND L.P. (PBDFF) -9.80% 31.49% -10.05% 33.95% 24.81% 1.78%
PRUDENTIAL-BACHE CAPITAL RETURN
FUTURES FUND L.P. (PBCRFF) -0.04% 12.33% -21.44% 23.98% 8.58% 2.34%
PRUDENTIAL-BACHE CAPITAL RETURN
FUTURES FUND 2 L.P. (PBCRFF2) 0.49% 21.32% -8.07% 27.26% 19.10% 2.15%
PRUDENTIAL-BACHE CAPITAL RETURN
FUTURES FUND 3 L.P. (PBCRFF3) 10.28% 8.85% 10.41% 16.63% 16.79% -1.92%
PRUDENTIAL-BACHE OPTIMAX
FUND L.P. - OPTIMAX (PBOFF) --- --- --- --- 11.68% 9.27%
PRUDENTIAL-BACHE OPTIMAX
FUND L.P. - A (PBOFF) 7.15% 10.88% -6.42% 7.18% -0.41% ---
PRUDENTIAL-BACHE OPTIMAX
FUND L.P. - B (PBOFF) 5.74% 15.34% -10.66% 7.59% -1.59% ---
PRUDENTIAL SECURITIES OPTIMAX
FUND 2 L.P. - A (PBOFF2) 1.04% 4.43% -5.51% 13.93% 3.88% 2.14%
PRUDENTIAL SECURITIES OPTIMAX
FUND 2 L.P. - B (PBOFF2) 2.41% 4.36% -6.57% 18.44% 5.24% 3.23%
PRUDENTIAL SECURITIES FINANCIAL
FUTURES FUND L.P. [e] (PSFNF) --- 0.81% -24.46% -2.05% --- ---
PRUDENTIAL SECURITIES FOREIGN
FINANCIALS FUND L.P. (PSFFF) --- 1.14% 16.00% 20.38% 6.65% -6.29%
PRUDENTIAL SECURITIES AGGRESSIVE
GROWTH FUND L.P. (PSAGF) --- -19.67% -13.51% 29.50% 7.89% -2.99%
DIVERSIFIED FUTURES TRUST I (DFT) --- --- --- 42.65% 23.49% 2.14%
SIGNET PARTNERS II, LP (SPLP2) --- --- --- --- 9.70% 1.52%
PRUDENTIAL-BACHE INTERNATIONAL
FUTURES FUND A PLC (PBIFA) --- --- --- --- 12.30% 10.86%
PRUDENTIAL-BACHE INTERNATIONAL
FUTURES FUND C PLC (PBIFC) --- --- --- --- 22.70% -5.87%
PRUDENTIAL-BACHE INTERNATIONAL
FUTURES FUND B PLC (PBIFB) --- --- --- --- 28.50% 1.71%
PRUDENTIAL-BACHE INTERNATIONAL
FUTURES FUND D PLC (PBIFD) --- --- --- --- -1.10% 9.10%
PRUDENTIAL-BACHE INTERNATIONAL
FUTURES FUND E PLC (PBIFE) --- --- --- --- --- 6.80%
115
Key to type of pool
1 - Principal-protected pool currently
1a - Principal-protected pool initially, but not currently
2 - Privately offered pool
3 - Publicly offered pool
4 - Open ended pool
5 - Closed ended pool
5a - Initially open ended, currently closed ended
6 - Single advisor pool
7 - More than one advisor
8 - Non principal protected pool
9 - CPO is Prudential Securities Futures Management Inc.
10 - CPO is Seaport Futures Management, Inc.
11 - Following the expiration of the principal-protected
feature of the A Units on March 31, 1996, the A & B
Units merged into OptiMax Units on April 1, 1996.
12 - Offshore pool offered to Non-U.S. persons, authorized
and supervised by the Central Bank of Ireland.
13 - Willowbridge Associates Inc. is one of the CTAs
Notes:
[a] All performance is presented as of February 28, 1997.
[b] "Worst monthly percent draw-down" means greatest percentage decline in net
asset value due to losses sustained by a pool, account or other trading
program from the beginning to the end of a calendar month.
[c] "Worst peak to valley draw-down" means greatest cumulative percentage
decline in month-end net asset value due to losses sustained by a pool,
account or other trading program during a period in which the initial
month-end net asset value is not equaled or exceeded by a subsequent
month-end net asset value.
"Draw-down" means losses experienced by the pool over a specified period.
[d] Liquidated February 1995.
[e] Liquidated December 1995.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
116
NOTES TO CAPSULE A:
(1) Brokerage Fees - PBDFF is (and PBFG was) charged a flat 9% annual
brokerage fee on such Partnership's Net Asset Value, PBCRFF is
charged a flat 8% annual brokerage fee on such Partnership's Net
Asset Value, PBCRFF2 is charged a flat 8-1/2% annual fee on such
Partnership's Net Asset Value and PBCRFF3 is charged a flat annual
fee equal to 7 1/2% of such Partnership's Net Asset Value. PBOFF and
PSOFF2 are each charged a flat 8% annual brokerage fee on the
Partnership's Traded Assets. PSAGF is charged a flat 8% annual
brokerage fee on such Partnership's Net Asset Value. Traded Assets
in the case of PBOFF and PSOFF2 was initially 60% of the initial Net
Asset Value in respect of Class A Units and 100% of the initial Net
Asset Value in respect of Class B Units. On April 1, 1996 and April 1,
1997, respectively, the Class A and B Units of PBOFF and PBOFF2,
respectively were consolidated into a single Class. DFT pays the same
annual brokerage fee as the Trust pays. SPLP is charged on a per
transaction basis at a rate equal to $10 per round-turn. Until April 1,
1994, PSFFF and PSFNF were each charged on a per transaction basis
at the rate of $35 per round-turn. Thereafter, PSFFF has been charged
a flat annual 8% brokerage fee on its Net Asset Value. PBIFA, B, C, D,
and E each pay a flat annual brokerage fee of 5.75% of Net Asset Value,
plus transaction costs.
(2) Advisory Management (MF) and Incentive (IF) Fees -
PBDFF - 4% MF 15% IF
PBCRFF - 4% MF 15-20 IF
PBCRFF2 - 2-4% MF 15% IF
PBCRFF3 - 2-3% MF 15-20% IF
PBOFF - 2.5-3% MF 17-20% IF
PSOFF2 - 2-3% MF 15-20% IF
PSAGF - 2% MF 15% IF
DFT - 4% MF 15% IF
PSFNF - 1.9%-3% MF 20% IF
PSFFF - 1.9% MF 20% IF
PBFG - 2% MF 18% IF
SPLP - 2.5% MF 20% IF
PBIFA - 3% MF 20% IF
PBIFB - 4% MF 15% IF
PBIFC - 2% MF 20% IF
PBIFD - 2-3% MF 15-17.5% IF
PBIFE - 2% MF 20% IF
(3) Rate of Return - is calculated each month by dividing net performance
by beginning equity. The monthly returns are then compounded to
arrive at the annual rate of return.
117
Capsule B
Capsule Performance of Willowbridge Associates, Inc.
Argo Trading System
(Pursuant to the Fully-Funded Subset Method)
Rate of Return
Month 1997 1996 1995 1994 1993 1992
January *7.55% 2.61% -4.49% -9.14% -9.01% -7.71%
February *8.90% -16.70% 11.13% -6.86% 18.66% -2.15%
March 7.30% 18.39% 6.58% 0.37% -4.85%
April 17.39% 8.94% -2.31% 3.99% -0.31%
May -8.52% 5.00% 16.12% 1.34% -0.40%
June -0.80% -2.47% 11.47% 5.04% 5.69%
July -14.84% -0.72% 3.23% 3.15% 20.04%
August 3.16% 1.58% -2.83% -6.83% 13.84%
September 2.93% -2.05% 2.20% -8.42% -6.24%
October 12.24% 4.36% 1.42% -3.75% -2.55%
November 20.33% 2.19% 1.74% 4.99% 6.53%
December -5.75% 8.02% -0.32% 9.77% 1.79%
Year *17.12% 12.46% 59.52% 20.28% 17.10% 22.09%
Name of CTA: Willowbridge Associates Inc.
Name of Trading Program: Argo (Fully-Funded Subset Method)
Date CTA Began Trading Client Accounts: August 1, 1988
Date CTA Began Using Argo Trading System for Client accounts: August 1, 1988
Number of Accounts Using Argo Trading System: 60
Number of Accounts Using Argo Trading System Closed with Profits past five
years and year-to-date: 46
Number of Accounts Using Argo Trading System Closed with Losses past five
years and year-to-date: 12
CTA's Total Assets Under Management Excluding Notional: $638.32 million
CTA's Total Assets Under Management Including Notional: $801.75 million
CTA's Assets Under Management Using Argo Trading System Excluding
Notional: $141.92 million
CTA's Assets Under Management Using Argo Trading System Including
Notional: $171.59 million
Drawdown means losses experienced by the Argo Trading System over a specified
period.
Worst Monthly Percentage Drawdown past five years and year-to-date:
- - -20.49% 02/96
Worst Monthly Percentage Drawdown means greatest percentage decline in net
asset value due to losses sustained by the Argo Trading System from the
beginning to the end of a calendar month.
Worst Peak-to-Valley Drawdown past five years and year-to-date:
- - -31.13% 05/96 - 07/96
Worst Peak-to-Valley Drawdown means greatest cumulative percentage decline in
month-end net asset value of the Argo Trading System due to losses sustained
during a period in which the initial month-end net asset value of the Argo
Trading System is not equaled or exceeded by a subsequent month-end net asset
value of the Argo Trading System.
Rate of Return is calculated each month by dividing net performance by
beginning equity adjusted by the value of additions and withdrawals pursuant
to the time-weighted method. The monthly returns are then compounded to
arrive at the annual rate of return.
* Estimated Rate of Return
All Capsule Information is as of February 28, 1997
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
118
Capsule C
Capsule Performance of Willowbridge Associates, Inc.
Siren Trading System
(Pursuant to the Fully-Funded Subset Method)
Rate of Return
Month 1997 1996 1995 1994 1993 1992
January *7.90% 2.41% -1.16% -3.28% 1.78% -8.55%
February *8.25% -5.78% 7.03% -1.23% 8.10% -7.52%
March 5.85% 10.63% 6.69% 2.34% 2.58%
April 5.65% 2.30% -2.72% 2.47% 3.60%
May -1.28% 0.58% 10.98% -0.04% 8.43%
June -1.46% -0.22% 10.47% 6.18% 5.74%
July -7.97% -0.33% 5.77% -1.51% 2.68%
August 5.08% 0.54% -8.27% -10.11% 12.18%
September -7.11% -0.44% 5.63% -5.37% -8.67%
October -1.55% 1.08% -0.57% -1.56% 0.30%
November 8.40% 0.16% 4.58% 6.31% -5.24%
December 0.77% 3.09% 6.43% 1.93% -4.31%
Year *16.80% 1.41% 25.12% 37.88% 9.45% -1.39%
Name of CTA: Willowbridge Associates Inc.
Name of Trading Program: Siren (Fully-Funded Subset Method)
Date CTA Began Trading Client Accounts: August 1, 1988
Date CTA Began Using Siren Trading System for Client accounts: January 1, 1991
Number of Accounts Using Siren Trading System: 11
Number of Accounts Using Siren Trading System Closed with Profits past five
years and year-to-date: 4
Number of Accounts Using Siren Trading System Closed with Losses past five
years and year-to-date: 1
CTA's Total Assets Under Management Excluding Notional: $638.32 million
CTA's Total Assets Under Management Including Notional: $801.75 million
CTA's Assets Under Management Using Siren Trading System Excluding Notional:
$13.97 million
CTA's Assets Under Management Using Siren Trading System Including Notional:
$28.48 million
Drawdown means losses experienced by the Siren Trading System over a specified
period.
Worst Monthly Percentage Drawdown past five years and year-to-date:
- - -12.39% 08/93
Worst Monthly Percentage Drawdown means greatest percentage decline in net
asset value due to losses sustained by the Siren Trading System from the
beginning to the end of a calendar month.
Worst Peak-to-Valley Drawdown past five years and year-to-date:
- - -21.99% 07/93 - 10/93
Worst Peak-to-Valley Drawdown means greatest cumulative percentage decline in
month-end net asset value of the Siren Trading System due to losses sustained
during a period in which the initial month-end net asset value of the Siren
Trading System is not equaled or exceeded by a subsequent month-end net asset
value of the Siren Trading System.
Rate of Return is calculated each month by dividing net performance by
beginning equity adjusted by the value of additions and withdrawals pursuant
to the time-weighted method. The monthly returns are then compounded to
arrive at the annual rate of return.
* Estimated Rate of Return
All Capsule Information is as of February 28, 1997
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
119
Capsule D
Capsule Performance of Willowbridge Associates, Inc.
Titan Trading System
(Pursuant to the Fully-Funded Subset Method)
Rate of Return
Month 1997 1996 1995 1994 1993 1992
January *4.65% 3.84% -5.91% -7.42% -4.60% -7.93%
February *7.40% -13.75% 16.10% -13.65% 19.05% -7.72%
March 8.30% 22.75% 10.22% -2.56% 2.27%
April 15.07% 10.77% 2.68% 4.02% -3.82%
May -7.29% 1.98% 15.64% 4.90% 1.82%
June -1.83% -1.36% 8.31% 5.48% 13.71%
July -7.47% -0.43% -2.24% 4.34% 21.04%
August 5.75% 1.85% -12.34% -9.38% 6.91%
September 6.26% -2.40% 7.73% -2.52% -5.55%
October 13.02% 4.83% 9.85% -2.08% 3.96%
November 14.33% 2.03% -1.43% -2.42% 6.21%
December -3.34% 6.28% -2.84% 9.92% 1.20%
Year *12.39% 31.91% 68.10% 10.06% 23.28% 32.16%
Name of CTA: Willowbridge Associates Inc.
Name of Trading Program: Titan (Fully-Funded Subset Method)
Date CTA Began Trading Client Accounts: August 1, 1988
Date CTA Began Using Titan Trading System for Client accounts: August 1, 1988
Number of Accounts Using Titan Trading System: 12
Number of Accounts Using Titan Trading System Closed with Profits past five
years and year-to-date: 4
Number of Accounts Using Titan Trading System Closed with Losses past five
years and year-to-date: 1
CTA's Total Assets Under Management Excluding Notional: $638.32 million
CTA's Total Assets Under Management Including Notional: $801.75 million
CTA's Assets Under Management Using Titan Trading System Excluding
Notional: $14.64 million
CTA's Assets Under Management Using Titan Trading System Including
Notional: $29.14 million
Drawdown means losses experienced by the Titan Trading System over a specified
period.
Worst Monthly Percentage Drawdown past five years and
year-to-date: -15.02% 02/94
Worst Monthly Percentage Drawdown means greatest percentage decline in net
asset value due to losses sustained by the Titan Trading System from the
beginning to the end of a calendar month.
Worst Peak-to-Valley Drawdown past five years and
year-to-date: -27.80% 08/93 - 05/94
Worst Peak-to-Valley Drawdown means greatest cumulative percentage decline in
month-end net asset value of the Titan Trading System due to losses sustained
during a period in which the initial month-end net asset value of the Titan
Trading System is not equaled or exceeded by a subsequent month-end net asset
value of the Titan Trading System.
Rate of Return is calculated each month by dividing net performance by
beginning equity adjusted by the value of additions and withdrawals pursuant
to the time-weighted method. The monthly returns are then compounded to
arrive at the annual rate of return.
* Estimated Rate of Return
All Capsule Information is as of February 28, 1997
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
120
Capsule E
Capsule Performance of Willowbridge Associates, Inc.
Vulcan Trading System
(Pursuant to the Fully-Funded Subset Method)
Rate of Return
Month 1997 1996 1995 1994 1993 1992
January *14.90% 2.87% -0.01% -6.63% -7.54% -5.85%
February *10.85% -16.30% 6.98% -4.11% 10.15% -6.37%
March 6.41% 11.67% 6.21% 3.57% -3.85%
April 13.42% 13.56% -4.99% 2.98% -5.33%
May -8.20% -0.38% 15.43% -4.77% -1.32%
June 0.56% -1.05% 10.41% 9.65% 10.96%
July -7.82% -1.66% -1.81% 7.52% 21.33%
August 3.60% 3.52% -10.18% -6.20% 6.35%
September 6.75% 3.56% 0.36% -0.30% -7.65%
October 13.28% 3.81% -1.51% 1.20% 8.75%
November 11.84% 2.16% 5.53% 7.60% 7.83%
December -8.84% 5.43% 8.26% 7.88% -2.85%
Year *27.37% 12.96% 57.62% 14.67% 33.97% 19.30%
Name of CTA: Willowbridge Associates Inc.
Name of Trading Program: Vulcan (Fully-Funded Subset Method)
Date CTA Began Trading Client Accounts: August 1, 1988
Date CTA Began Using Vulcan Trading System for Client accounts: August 1, 1988
Number of Accounts Using Vulcan Trading System: 20
Number of Accounts Using Vulcan Trading System Closed with Profits past five
years and year-to-date: 8
Number of Accounts Using Vulcan Trading System Closed with Losses past five
years and year-to-date: 2
CTA's Total Assets Under Management Excluding Notional: $638.32 million
CTA's Total Assets Under Management Including Notional: $801.75 million
CTA's Assets Under Management Using Vulcan Trading System Excluding
Notional: $23.39 million
CTA's Assets Under Management Using Vulcan Trading System Including
Notional: $40.51 million
Drawdown means losses experienced by the Vulcan Trading System over a specified
period.
Worst Monthly Percentage Drawdown past five years and
year-to-date: -19.39% 02/96
Worst Monthly Percentage Drawdown means greatest percentage decline in net
asset value due to losses sustained by the Vulcan Trading System from the
beginning to the end of a calendar month.
Worst Peak-to-Valley Drawdown past five years and
year-to-date: -19.03% 01/92-06/92
Worst Peak-to-Valley Drawdown means greatest cumulative percentage decline in
month-end net asset value of the Vulcan Trading System due to losses sustained
during a period in which the initial month-end net asset value of the Vulcan
Trading System is not equaled or exceeded by a subsequent month-end net asset
value of the Vulcan Trading System.
Rate of Return is calculated each month by dividing net performance by
beginning equity adjusted by the value of additions and withdrawals pursuant
to the time-weighted method. The monthly returns are then compounded to arrive
at the annual rate of return.
* Estimated Rate of Return
All Capsule Information is as of February 28, 1997
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
121
Capsule F
Capsule Performance of Willowbridge Associates, Inc.
XLIM Trading System
(Notional Excluded, Customer Only)
Rate of Return
Month 1997 1996 1995 1994 1993 1992
January *-3.33% 3.38% -4.89% -11.93% 1.04% --------
February *7.55% -3.22% 0.95% -12.67% 22.24% --------
March 5.54% 33.93% 0.04% -5.40% --------
April 11.41% 4.73% --------- -2.97% --------
May -3.15% 0.27% --------- -1.04% --------
June -0.26% -8.12% --------- 4.00% --------
July -8.19% -4.16% --------- 12.93% --------
August 2.56% -1.30% --------- -8.79% --------
September 17.62% 2.56% --------- -7.02% --------
October 7.64% 1.93% --------- 5.07% 2.65%
November 2.26% 2.65% 3.23% 1.55% -2.63%
December 0.16% 7.18% 1.13% 2.56% 8.41%
Year *3.97% 38.74% 34.99% -19.68% 22.30% 8.36%
Name of CTA: Willowbridge Associates Inc.
Name of Trading Program: XLIM (Notional Excluded, Customer Only)
Date CTA Began Trading Client Accounts: August 1, 1988
Date CTA Began Using XLIM Trading System for Client accounts: August 1, 1988
Number of Accounts Using XLIM Trading System: 38
Number of Accounts Using XLIM Trading System Closed with Profits past five
years and year-to-date: 3
Number of Accounts Using XLIM Trading System Closed with Losses past five
years and year-to-date: 2
CTA's Total Assets Under Management Excluding Notional: $638.35 million
CTA's Total Assets Under Management Including Notional: $801.75 million
CTA's Assets Under Management Using XLIM Trading System Excluding
Notional: $363.03 million
CTA's Assets Under Management Using XLIM Trading System Including
Notional: $409.14 million
Drawdown means losses experienced by the XLIM Trading System over a specified
period.
Worst Monthly Percentage Drawdown past five years and
year-to-date: -7.76% 06/95
Worst Monthly Percentage Drawdown means greatest percentage decline in net
asset value due to losses sustained by the XLIM Trading System from the
beginning to the end of a calendar month.
Worst Peak-to-Valley Drawdown past five years and
year-to-date: -29.10% 08/93 - 01/95
Worst Peak-to-Valley Drawdown means greatest cumulative percentage decline in
month-end net asset value of the XLIM Trading System due to losses sustained
during a period in which the initial month-end net asset value of the XLIM
Trading System is not equaled or exceeded by a subsequent month-end net asset
value of the XLIM Trading System.
Rate of Return is calculated each month by dividing net performance by
beginning equity adjusted by the value of additions and withdrawals pursuant
to the time-weighted method. The monthly returns are then compounded to arrive
at the annual rate of return.
* Estimated Rate of Return
All Capsule Information is as of February 28, 1997
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
122
Capsule G
Capsule Performance of Willowbridge Associates, Inc.
XLIM Trading System
(Notional Included, Customer Only)
Rate of Return
Month 1997 1996 1995 1994 1993 1992
January *-3.33% 2.74% -4.89% -11.93% 1.04% ---------
February *7.55% -2.67% 0.87% -12.67% 22.24% ---------
March 4.63% 31.21% 0.04% -5.40% ---------
April 9.48% 4.41% --------- -2.97% ---------
May -2.70% 0.25% --------- -1.04% ---------
June -0.22% -7.52% --------- 4.00% ---------
July -6.76% -3.91% --------- 12.93% ---------
August 2.07% -1.28% --------- -8.79% ---------
September 14.07% 2.55% --------- -7.02% ---------
October 6.38% 1.93% --------- 5.07% 2.65%
November 1.91% 2.59% 3.23% 1.55% -2.63%
December 0.13% 5.92% 1.13% 2.56% 8.41%
Year *3.97% 31.06% 31.28% -19.68% 22.30% 8.36%
Name of CTA: Willowbridge Associates Inc.
Name of Trading Program: XLIM (Notional Included, Customer Only)
Date CTA Began Trading Client Accounts: August 1, 1988
Date CTA Began Using XLIM Trading System for Client accounts: August 1, 1988
Number of Accounts Using XLIM Trading System: 38
Number of Accounts Using XLIM Trading System Closed with Profits past five
years and year-to-date: 3
Number of Accounts Using XLIM Trading System Closed with Losses past five
years and year-to-date: 2
CTA's Total Assets Under Management Excluding Notional: $638.32 million
CTA's Total Assets Under Management Including Notional: $801.75 million
CTA's Assets Under Management Using XLIM Trading System Excluding
Notional: $363.03 million
CTA's Assets Under Management Using XLIM Trading System Including
Notional: $409.14 million
Drawdown means losses experienced by the XLIM Trading System over a specified
period.
Worst Monthly Percentage Drawdown past five years and
year-to-date: -7.51% 07/96
Worst Monthly Percentage Drawdown means greatest percentage decline in net
asset value due to losses sustained by the XLIM Trading System from the
beginning to the end of a calendar month.
Worst Peak-to-Valley Drawdown past five years and
year-to-date: -29.10% 08/93 - 01/95
Worst Peak-to-Valley Drawdown means greatest cumulative percentage decline in
month-end net asset value of the XLIM Trading System due to losses sustained
during a period in which the initial month-end net asset value of the XLIM
Trading System is not equaled or exceeded by a subsequent month-end net asset
value of the XLIM Trading System.
Rate of Return is calculated each month by dividing net performance by
beginning equity adjusted by the value of additions and withdrawals pursuant
to the time-weighted method. The monthly returns are then compounded to
arrive at the annual rate of return.
* Estimated Rate of Return
All Capsule Information is as of February 28, 1997
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
123
Capsule H
Capsule Performance of Willowbridge Associates, Inc.
Other Trading Programs
(Pursuant to the Fully-Funded Subset Method)
Annual Rate of Return
Currency CFM Primary
1992 16.96% ----- -----
1993 -8.59% 29.49% 16.79%
1994 -10.26% -10.51% 22.70%
1995 28.55% 24.52% 56.76%
1996 -0.37% 31.66% 14.45%
YTD 1997 *8.59% *1.27% *18.52%
Began Trading Client Accounts May 91 Jan 93 Jan 93
Worst Monthly Percentage Drawdown
past five years and YTD -10.31% -18.08% -17.06%
Date Aug 93 Feb 94 Feb 96
Worst Peak-to-Valley Drawdown past
five years and YTD -25.32% -31.83% -22.52%
Peak Jul 93 Aug 93 May 96
Valley Aug 94 Sep 94 Jul 96
Number of Open Accounts 5 4 13
Number of Closed Profitable Accounts
past five years and YTD 6 18 2
Number of Closed Unprofitable Accounts
past five years and YTD 22 25 1
Assets under Management excluding Notional $3.17 m $24.67 m $32.93 m
Assets under Management including Notional $15.01m $24.67 m $50.22 m
Drawdown means losses experienced by the trading program over a specified
period.
Worst Monthly Percentage Drawdown means greatest percentage decline in net
asset value due to losses sustained by the trading program from the beginning
to the end of a calendar month.
Worst Peak-to-Valley Drawdown means greatest cumulative percentage decline in
month-end net asset value of the Trading program due to losses sustained during
a period in which the initial month-end net asset value of the Trading program
is not equaled or exceeded by a subsequent month-end net asset value of the
Trading program.
Annual Rate of Return is calculated by compounding the monthly rates of return
over the number of periods in a given year.
* Estimated Rate of Return
All Capsule Information is as of February 28, 1997
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
124
Capsule I
Capsule Performance of Willowbridge Associates, Inc.
Other Trading Programs
Annual Rate of Return
MTech Rex Atlas
1992 25.13% -18.54% -5.92%
1993 32.48% -10.37% 18.29%
1994 21.68% -12.49% -----
1995 53.22% -13.07% -----
1996 45.73% -27.37% -----
YTD 1997 *15.58% *5.61% -----
Began Trading Client Accounts Jan 91 Aug 88 Nov 89
Worst Monthly Percentage Drawdown
past five years and YTD -12.44% -25.19% -16.57%
Date Feb 96 Feb 96 Jan 92
Worst Peak-to-Valley Drawdown past
five years and YTD -21.37% -78.84% -46.67%
Peak Aug 93 Sep 90 Oct 90
Valley Feb 94 Mar 96 May 92
Number of Open Accounts 3 1 0
Number of Closed Profitable Accounts
past five years and YTD 1 0 0
Number of Closed Unprofitable Accounts
past five years and YTD 0 2 1
Assets under Management excluding Notional $19.14 m $1.46 m $0
Assets under Management including Notional $31.53 m $1.46 m $0
Drawdown means losses experienced by the trading program over a specified
period.
Worst Monthly Percentage Drawdown means greatest percentage decline in net
asset value due to losses sustained by the trading program from the beginning
to the end of a calendar month.
Worst Peak-to-Valley Drawdown means greatest cumulative percentage decline in
month-end net asset value of the Trading program due to losses sustained during
a period in which the initial month-end net asset value of the Trading program
is not equaled or exceeded by a subsequent month-end net asset value of the
Trading program.
Annual Rate of Return is calculated by compounding the monthly rates of return
over the number of periods in a given year.
* Estimated Rate of Return
All Capsule Information is as of February 28, 1997
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
125
Capsule J
Supplemental
Capsule Performance of Willowbridge Associates, Inc.
XLIM Trading System
(Proprietary Trading)
Rate of Return
Month 1997 1996 1995 1994 1993 1992
January *-3.33% 2.75% -5.71% -12.54% 1.48% -9.11%
February *7.55% -3.73% 1.06% -18.21% 18.53% -2.12%
March 5.23% 29.39% 10.86% -4.43% -0.52%
April 9.36% 3.68% -6.65% -3.10% -6.99%
May -2.29% -0.53% 28.49% -1.27% 33.77%
June -0.27% -6.83% 39.23% 4.35% 6.23%
July -6.71% -2.74% 2.81% 10.81% 1.86%
August 2.32% -1.27% 3.36% -7.18% 5.51%
September 13.90% 3.01% -1.38% -7.35% -5.97%
October 6.57% 2.48% 5.83% 5.48% 2.34%
November 1.95% 3.31% 4.20% 1.60% -1.73%
December 0.22% 6.26% 2.21% 2.10% 5.76%
Year *3.97% 31.32% 31.82% 56.39% 19.67% 25.73%
Name of CTA: Willowbridge Associates Inc.
Name of Trading Program: XLIM (Notional Included, Customer Only)
Date CTA Began Trading Client Accounts: August 1, 1988
Date CTA Began Using XLIM Trading System for Client accounts: August 1, 1988
Number of Accounts Using XLIM Trading System: 3
Number of Accounts Using XLIM Trading System Closed with Profits past five
years and year-to-date: 2
Number of Accounts Using XLIM Trading System Closed with Losses past five
years and year-to-date: 0
CTA's Total Assets Under Management Excluding Notional: $638.32 million
CTA's Total Assets Under Management Including Notional: $801.75 million
CTA's Assets Under Management Using XLIM Trading System Excluding
Notional: $29.08 million
CTA's Assets Under Management Using XLIM Trading System Including
Notional: $29.08 million
Drawdown means losses experienced by the XLIM Trading System over a specified
period.
Worst Monthly Percentage Drawdown past five years and
year-to-date: -18.45% 02/94
Worst Monthly Percentage Drawdown means greatest percentage decline in net
asset value due to losses sustained by the XLIM Trading System from the
beginning to the end of a calendar month.
Worst Peak-to-Valley Drawdown past five years and
year-to-date: -32.69% 08/93 - 02/94
Worst Peak-to-Valley Drawdown means greatest cumulative percentage decline in
month-end net asset value of the XLIM Trading System due to losses sustained
during a period in which the initial month-end net asset value of the XLIM
Trading System is not equaled or exceeded by a subsequent month-end net asset
value of the XLIM Trading System.
Rate of Return is calculated each month by dividing net performance by
beginning equity adjusted by the value of additions and withdrawals pursuant
to the time-weighted method. The monthly returns are then compounded to
arrive at the annual rate of return.
* Estimated Rate of Return
All Capsule Information is as of February 28, 1997
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
126
Capsule K
Supplemental
Willowbridge Strategic Trust
Composite of Hypothetical Pro Forma and Actual Performance
The following table, which was prepared by the Managing Owner, reflects the
combined historical composite track record of Willowbridge Associates Inc.'s
Argo, Siren, Titan, Vulcan and XLIM trading systems, in the proportions in
which each such trading program was used initially by the Trust, and the actual
performance of the Trust. The Trust commenced trading on May 1, 1996.
Consequently, the performance for the period January 1991 through April 1996 is
hypothetical pro forma while the performance for May 1996 through February 1997
is actual (indicated by shading). Thus the 1996 performance numbers shown are
hypothetical pro forma performance from January through April and actual Trust
performance from May through December. Only proprietary trading results have
been included in the hypothetical pro forma for the XLIM Trading Approach
because it has continuous performance throughout the period.
Year Month Return Year Month Return Year Month Return
1991 January -14.37% 1993 January -2.48% 1995 January -5.40%
February 1.77% February 15.51% February 4.80%
March 23.45% March -2.51% March 23.83%
April -4.35% April -0.69% April 5.25%
May -3.31% May -0.83% May 0.39%
June 10.45% June 4.72% June -5.02%
July -6.82% July 7.24% July -2.54%
August -8.20% August -8.35% August -0.31%
September 11.83% September -7.48% September 0.68%
October -5.74% October 1.21% October 2.74%
November 3.99% November 2.32% November 2.32%
December 15.20% December 4.98% December 6.32%
Annual Return 18.71% Annual Return 11.96% Annual Return 34.69%
1992 January -8.81% 1994 January -10.28% 1996 January 2.73%
February -3.92% February -13.12% February -8.39%
March -1.57% March 8.67% March 5.26%
April -4.34% April -4.72% April 11.57%
May 17.56% May 21.29% May -9.86%
June 7.08% June 26.17% June -0.58%
July 8.37% July 1.94% July -9.17%
August 7.23% August -1.57% August 2.75%
September -6.75% September -0.04% September 10.01%
October 1.48% October 4.22% October 8.13%
November 0.49% November 3.13% November 6.91%
December 2.63% December 1.62% December -2.72%
Annual Return 17.77% Annual Return 35.32% Annual Return 14.37%
1997 January 2.45%
February 7.98%
YTD Return 10.63%
Hypothetical performance results have many inherent limitations, some of which
are described below. No representation is being made that any account will or
is likely to achieve profits or losses similar to those shown. In fact, there
are frequently sharp differences between hypothetical performance results and
the actual results subsequently achieved by any particular trading program.
One of the limitations of hypothetical performance results is that they are
generally prepared with the benefit of hindsight. In addition, hypothetical
trading does not involve financial risk, and no hypothetical trading record
can completely account for the impact of financial risk in actual trading.
For example, the ability to withstand losses or to adhere to a particular
trading program in spite of trading losses are material points which can also
adversely affect actual trading results. There are numerous other factors
related to the markets in general or to the implementation of any specific
trading program which cannot be fully accounted for in the preparation of
hypothetical performance results and all of which can adversely affect actual
trading results.
All Capsule Information is as of February 28, 1997
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
127
PAGE
GENERAL NOTES TO ALL WILLOWBRIDGE COMPOSITE CAPSULES:
(1) Brokerage commissions charged to accounts in the capsules may vary
substantially.
(2) Interest income includes accrued interest on cash balances and
discounted debt instruments (held for margin and investment purposes)
included in the equity of the accounts. However, not all accounts in the
composite earn Interest Income.
(3) Management and Incentive Fees represent monthly or quarterly
Management Fees and quarterly or annual Incentive Fees which are charged
to the accounts in the capsules and vary substantially. For certain accounts
included in the capsules, at the time an Incentive Fee is accrued or an
accrual is reversed, a corresponding offset is generally made to additions or
withdrawals to reflect the actual equity traded on which rate of return is
based. Some of the accounts included in the capsules are not charged a
Management Fee.
(4) For the period when the Trading Manager commenced trading the
programs for Client Accounts through June 30, 1995, Rates of Return in
Capsules B through H, may be understated to the extent that certain
accounts in the capsules paid specified fees unrelated to the Trading
Manager's trading (such as selling commissions, distribution expenses,
general partner fees or manager-of-manager fees) that were treated as
expenses rather than as withdrawals of assets under the Trading Manager's
management. Beginning July 1, 1995, such expenses are reflected in the
capsules as withdrawals.
(5) Rate of Return is calculated as dividing Net Performance by Beginning
Equity adjusted by the value of Additions and Withdrawals pursuant to the
time-weighted method. Monthly Rates of Return are compounded to arrive
at Annual Rates of Return.
NOTIONAL FUNDS
"Notional" funds reflect the amount by which the "Nominal Account Size"
exceeds the amount of actual funds on deposit in, or legally committed to,
client accounts.
NOTES TO FULLY FUNDED SUBSET CAPSULES B, C, D, E, and H
In the accompanying composite Capsule B for the periods beginning January
1992, Capsule C for periods beginning April 1995, Capsule D for periods
beginning July 1995, Capsule E for periods beginning July 1994, and Capsule
H for periods beginning January 1992 (Currency Program), January 1993
(CFM Program) and August 1995 (Primary Program), the Trading Manager has
adopted the Fully Funded Subset Method of computing rate-of-return and
presenting performance disclosure, pursuant to an Advisory published by the
Commodity Futures Trading Commission. To qualify for use of the Fully
Funded Subset Method, the Advisory requires that certain computations be
made in order to arrive at the Fully Funded Subset and that the accounts for
which performance is so reported meet two tests which are designed to
provide assurance that the Fully Funded Subset and the resultant Rates of
Return (RORs) are representative of the trading program. With respect to
these capsules, "notional" funds were not used prior to the dates noted
above. The chart on the following page attempts to illustrate the impact on
partially funding an account on Rate of Return.
"The Fully Funded Subset" represents the aggregate of Fully Funded
Accounts used to compute Monthly Rate of Return pursuant to Advisory 93-
13. These accounts may be adjusted to include or exclude certain accounts.
A "Fully Funded Account" is one which at its inception contains an amount
of Actual Funds equal to its Nominal Account Size. In such instances, the
Fully Funded Subset is adjusted to exclude accounts with significant
additions or withdrawals which would materially change the Rate of Return
pursuant to the Fully Funded Subset method.
The monthly Rates of Return for accounts excluded from the Fully Funded
Subset will often be different from the Rate of Return for the Fully Funded
Subset.
128
PAGE
Accounts not included in the Fully Funded Subset for any particular
period may include: accounts open or closed during the period; accounts
which have material additions or withdrawals during the period; and the
accounts which are being phased in to the program and, consequently, do
not have a complete set of positions that the other accounts in the program
have. The Rates of Return for these excluded accounts may be significantly
higher or lower than the Rate of Return for the Fully Funded Subset.
ACTUAL
RATE OF
RETURN(1) RATES OF RETURN BASED ON VARIOUS FUNDING LEVELS(3)
20.00% 20.00% 26.67% 30.00% 40.00% 50.00% 60.00% 100.00%
15.00% 15.00% 20.00% 22.50% 30.00% 37.50% 45.00% 75.00%
10.00% 10.00% 13.33% 15.00% 20.00% 25.00% 30.00% 50.00%
5.00% 5.00% 6.67% 7.50% 10.00% 12.50% 15.00% 25.00%
0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
-5.00% -5.00% -6.67% -7.50% -10.00% -12.50% -15.00% -25.00%
-10.00% -10.00% -13.33% -15.00% -20.00% -25.00% -30.00% -50.00%
-15.00% -15.00% -20.00% -22.50% -30.00% -37.50% -45.00% -75.00%
-20.00% -20.00% -26.67% -30.00% -40.00% -50.00% -60.00% -100.00%
-25.00% -25.00% -33.33% -37.50% -50.00% -62.50% -75.00% -125.00%
-30.00% -30.00% -40.00% -45.00% -60.00% -75.00% -90.00% -150.00%
-35.00% -35.00% -46.67% -52.50% -70.00% -87.50% -105.00% -175.00%
-40.00% -40.00% -53.33% -60.00% -80.00% -100.00% -120.00% -200.00%
100.00% 75.00% 66.67% 50.00% 40.00% 33.33% 20.00%
LEVEL OF FUNDING(2)
Footnotes to Matrix:
(1) This column represents the range of actual Rates of Return for fully
funded accounts reflected in the accompanying performance table.
(2) This represents actual funds divided by the fully funded trading level
expressed as a percentage Funding levels displayed in the matrix
include the most common funding percentages utilized by the
accounts and the lowest level of the funding allowed by the Trading
Manager.
(3) These columns represent the Rate of Return experienced by an
account at various levels of funding traded by the Trading Manager.
The Rates of Return for accounts that are not fully funded are
inversely proportional to the actual Rates of Return based on the
percentage of level of funding.
129
PAGE
NOTES TO COMPOSITE CAPSULES F AND G
Commencing in February 1995 for Capsule G, certain accounts in
this capsule include sums clients have instructed the Trading Manager to
trade but that are not deposited in, or otherwise legally committed to,
those clients' accounts. These excess sums are deemed to be "notional"
funds for which performance results are reported in accordance with the
requirements of an Advisory published by the CFTC. The computations in
Capsule F reflect the actual funds deposited in or withdrawn from clients'
brokerage and other accounts rather than the amount of "notional" funds
clients instructed the Trading Manager to trade. The Trading Manager has
included these "notional" amounts in Capsule G because they more
accurately reflect the amount of capital clients have instructed the Trading
Manager to trade. Substantial differences may exist between beginning
equity for an account which includes "notional" funds (and which is
reflected in the Trading Manager's Capsule G) and an account which
contains only "actual" funds (and which is reflected in the Trading
Manager's Capsule F. Excluding "notional" funds from the calculations of
Rates of Return accentuates (i.e., increases the absolute value of) both
positive and negative Rates of Return.
NOTES TO PROPRIETARY CAPSULE J
Set forth in Capsule J is the composite pro forma performance
record through December 31, 1995 of the two proprietary trading accounts
(one of which has been closed) of Mr. Yang and his family traded
pursuant to the XLIM trading strategy. The actual trading results have
been adjusted to reflect the Trading Manager's standard fee structure by
imposing a monthly management fee charged at an annual rate of 3%, and
an annual incentive fee at a rate of 25% of new high profit accrued on a
monthly basis.
130
EXHIBIT A
SECOND AMENDED AND RESTATED
DECLARATION OF TRUST
AND
TRUST AGREEMENT
OF
WILLOWBRIDGE STRATEGIC TRUST
Dated as of January 31, 1996
By and Among
PRUDENTIAL SECURITIES FUTURES MANAGEMENT INC.,
WILMINGTON TRUST COMPANY
and
THE INTERESTHOLDERS
from time to time hereunder
PAGE
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS; THE TRUST . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.1 Definitions. . . . . . . . . . . . . . . . . . . . 1
SECTION 1.2 Name . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 1.3 Delaware Trustee; Business Offices . . . . . . . . 7
SECTION 1.4 Declaration of Trust . . . . . . . . . . . . . . . 7
SECTION 1.5 Purposes and Powers. . . . . . . . . . . . . . . . 8
SECTION 1.6 Tax Treatment. . . . . . . . . . . . . . . . . . . 8
SECTION 1.7 General Liability of the Managing Owner. . . . . . 9
SECTION 1.8 Legal Title. . . . . . . . . . . . . . . . . . . . 9
ARTICLE II
THE TRUSTEE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 2.1 Term; Resignation. . . . . . . . . . . . . . . . . 9
SECTION 2.2 Powers . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 2.3 Compensation and Expenses of the Trustee . . . . . 10
SECTION 2.4 Indemnification. . . . . . . . . . . . . . . . . . 10
SECTION 2.5 Successor Trustee. . . . . . . . . . . . . . . . . 11
SECTION 2.6 Liability of Trustee . . . . . . . . . . . . . . . 11
SECTION 2.7 Reliance; Advice of Counsel. . . . . . . . . . . . 12
SECTION 2.8 Not Part of Trust Estate . . . . . . . . . . . . . 13
ARTICLE III
INTERESTS; CAPITAL CONTRIBUTIONS . . . . . . . . . . . . . . . . . . 13
SECTION 3.1 General. . . . . . . . . . . . . . . . . . . . . . 13
SECTION 3.2 Limited Interests. . . . . . . . . . . . . . . . . 14
ARTICLE IV
THE MANAGING OWNER . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 4.1 Management of the Trust. . . . . . . . . . . . . . 17
SECTION 4.2 Authority of Managing Owner. . . . . . . . . . . . 17
SECTION 4.3 Obligations of the Managing Owner. . . . . . . . . 20
SECTION 4.4 General Prohibitions . . . . . . . . . . . . . . . 22
SECTION 4.5 Liability of Covered Persons . . . . . . . . . . . 23
SECTION 4.6 Indemnification of the Managing Owner. . . . . . . 23
SECTION 4.7 Expenses . . . . . . . . . . . . . . . . . . . . . 25
(i)
SECTION 4.8 Compensation to the Managing Owner . . . . . . . . 26
SECTION 4.9 Other Business of Interestholders. . . . . . . . . 26
SECTION 4.10 Voluntary Withdrawal of the Managing Owner. . . . 26
SECTION 4.11 Authorization of Registration Statement . . . . . 26
SECTION 4.12 Litigation. . . . . . . . . . . . . . . . . . . . 27
ARTICLE V
TRANSFERS OF INTERESTS . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 5.1 General Prohibition. . . . . . . . . . . . . . . . 27
SECTION 5.2 Transfer of Managing Owner's General Interests. . 27
SECTION 5.3 Transfer of Limited Interests. . . . . . . . . . . 28
ARTICLE VI
DISTRIBUTION AND ALLOCATIONS . . . . . . . . . . . . . . . . . . . . 32
SECTION 6.1 Capital Accounts . . . . . . . . . . . . . . . . . 32
SECTION 6.2 Monthly Allocations. . . . . . . . . . . . . . . . 32
SECTION 6.3 Allocation of Profit and Loss for United States
Federal Income Tax Purposes.. . . . . . . . . . . 32
SECTION 6.4 Allocation of Distributions. . . . . . . . . . . . 34
SECTION 6.5 Admissions of Interestholders; Transfers . . . . . 34
SECTION 6.6 Liability for State and Local and Other Taxes. . . 34
ARTICLE VII
REDEMPTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 7.1 Redemption of Interests. . . . . . . . . . . . . . 35
SECTION 7.2 Redemption By the Managing Owner . . . . . . . . . 37
ARTICLE VIII
THE LIMITED OWNERS . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 8.1 No Management or Control; Limited Liability. . . . 37
SECTION 8.2 Rights and Duties. . . . . . . . . . . . . . . . . 38
SECTION 8.3 Limitation on Liability. . . . . . . . . . . . . . 39
ARTICLE IX
BOOKS OF ACCOUNT AND REPORTS . . . . . . . . . . . . . . . . . . . . 40
SECTION 9.1 Books of Account . . . . . . . . . . . . . . . . . 40
SECTION 9.2 Annual Reports and Monthly Statements. . . . . . . 40
SECTION 9.3 Tax Information. . . . . . . . . . . . . . . . . . 40
SECTION 9.4 Calculation of Net Asset Value . . . . . . . . . . 40
SECTION 9.5 Other Reports. . . . . . . . . . . . . . . . . . . 41
(ii)
SECTION 9.6 Maintenance of Records . . . . . . . . . . . . . . 41
SECTION 9.7 Certificate of Trust . . . . . . . . . . . . . . . 41
SECTION 9.8 Registration of Interests. . . . . . . . . . . . . 41
ARTICLE X
FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 10.1 Fiscal Year . . . . . . . . . . . . . . . . . . . 42
ARTICLE XI
AMENDMENT OF TRUST AGREEMENT; MEETINGS . . . . . . . . . . . . . . . 42
SECTION 11.1 Amendments to the Trust Agreement . . . . . . . . 42
SECTION 11.2 Meetings of the Trust . . . . . . . . . . . . . . 43
SECTION 11.3 Action Without a Meeting. . . . . . . . . . . . . 44
ARTICLE XII
TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 12.1 Term. . . . . . . . . . . . . . . . . . . . . . . 44
ARTICLE XIII
TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 13.1 Events Requiring Dissolution. . . . . . . . . . . 44
SECTION 13.2 Distributions on Dissolution. . . . . . . . . . . 46
SECTION 13.3 Termination; Certificate of Cancellation. . . . . 46
ARTICLE XIV
POWER OF ATTORNEY. . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 14.1 Power of Attorney Executed Concurrently . . . . . 47
SECTION 14.2 Effect of Power of Attorney . . . . . . . . . . . 47
SECTION 14.3 Limitation on Power of Attorney . . . . . . . . . 48
SECTION 15.1 Governing Law . . . . . . . . . . . . . . . . . . 48
SECTION 15.2 Provisions In Conflict with Law or Regulations. . 49
SECTION 15.3 Construction. . . . . . . . . . . . . . . . . . . 49
SECTION 15.4 Notices . . . . . . . . . . . . . . . . . . . . . 49
SECTION 15.5 Counterparts. . . . . . . . . . . . . . . . . . . 50
SECTION 15.6 Binding Nature of Trust Agreement . . . . . . . . 50
SECTION 15.7 No Legal Title to Trust Estate. . . . . . . . . . 50
SECTION 15.8 Creditors . . . . . . . . . . . . . . . . . . . . 50
SECTION 15.9 Integration . . . . . . . . . . . . . . . . . . . 50
(iii)
EXHIBIT A
CERTIFICATE OF TRUST OF
WILLOWBRIDGE STRATEGIC TRUST . . . . . . . . . . . . . . . . . . . . 52
(iv)
WILLOWBRIDGE STRATEGIC TRUST
SECOND AMENDED AND RESTATED
DECLARATION OF TRUST AND TRUST AGREEMENT
This SECOND AMENDED AND RESTATED DECLARATION OF
TRUST AND TRUST AGREEMENT of Willowbridge Strategic Trust ("Trust
Agreement") is made and entered into as of the 31st day of January,
1996 by and among Prudential Securities Futures Management Inc., a
Delaware corporation (the "Managing Owner"), Wilmington Trust
Company, a Delaware banking company, as trustee (the "Trustee"), and
the Interestholders from time to time hereunder.
WHEREAS, the Managing Owner and the Trustee have
heretofore formed the Trust by filing a Certificate of Trust with the office
of the Secretary of State of the State of Delaware on October 16, 1995
and entered into a Declaration of Trust and Trust Agreement of the
Trust, dated as of October 16, 1995 (the "Original Agreement"), as
amended and restated on December 14, 1995; and
WHEREAS, the parties hereto desire to continue the Trust as
a business trust under the Business Trust Statute and this Trust
Agreement; and
WHEREAS, the parties hereto desire to provide for the
governance of the Trust and to set forth in detail their respective rights
and duties relating to the Trust and to amend and restate the Original
Agreement in its entirety.
NOW, THEREFORE, in consideration of the mutual promises
and agreements herein contained, the receipt and sufficiency of which
are hereby acknowledged, the parties, intending to be legally bound,
hereby agree as follows:
ARTICLE I
DEFINITIONS; THE TRUST
SECTION 1.1 Definitions. These definitions contain certain
provisions required by the NASAA Guidelines and are included verbatim
from such Guidelines, and, accordingly, may not, in all cases, be
relevant. As used in this Trust Agreement, the following terms shall
have the following meanings unless the context otherwise requires:
"Affiliate of the Managing Owner" means: (i) any officer, director,
or partner of the Managing Owner, (ii) any corporation, partnership, trust
or other entity controlling, controlled by or under common control with
the Managing Owner or any Person described in (i) above, (iii) any
officer, director, trustee, or general partner of any Person who is a
member, other than as limited partner, with any Person described in (i)
and (ii) above, in a relationship of joint venture, general partnership or
similar form of unincorporated business association. For purposes of
this definition the term "control" shall also mean the control or
ownership of ten percent (10%) or more of the beneficial interest in the
Person referred to.
"Business Day" means a day other than Saturday, Sunday or other
day when banks and/or securities exchanges in the City of New York or
the City of Wilmington are authorized or obligated by law or executive
order to close.
"Business Trust Statute" means Chapter 38 of Title 12 of the
Delaware Code, 12 Del.C. S 3801 et seq., as the same may be amended
from time to time.
"Capital Contribution" means the amount contributed and agreed
to be contributed to the Trust by any subscriber or by the Managing
Owner, as applicable, in accordance with Article III hereof.
"CE Act" means the Commodity Exchange Act, as amended.
"Certificate of Trust" means the Certificate of Trust of the Trust in
the form attached hereto as Exhibit A, filed with the Secretary of State
of the State of Delaware pursuant to Section 3810 of the Business Trust
Statute.
"CFTC" means the Commodity Futures Trading Commission.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commodities" means positions in commodity futures contracts,
commodity forward contracts, options on commodity futures contracts
and physical commodities, as well as cash commodities resulting from
any of the foregoing positions.
"Commodity Broker" means any person who engages in the
business of effecting transactions in Commodity Contracts for the
account of others or for his or her own account.
"Commodity Contract" means any contract or option thereon
providing for the delivery or receipt at a future date of a specified
amount and grade of a traded commodity at a specified price and
delivery point.
"Continuous Offering Period" means the period following the
conclusion of the Initial Offering Period and ending on the date when
the number of Interests permitted to be sold pursuant to Section 3.2(f)
are sold, but in no event later than two years from the initial effective
date of the Registration Statement.
"Corporate Trust Office" means the principal office at which at any
particular time the corporate trust business of the Trustee is
administered, which office at the date hereof is located at Rodney
Square North, 1100 North Market Street, Wilmington, Delaware 19890,
Attention: Corporate Trust Administration.
A-2
"Disposition Gain" means, for each Fiscal Year of the Trust, the
Trust's aggregate recognized gain (including the portion thereof, if any,
treated as ordinary income) resulting from each disposition of Trust
assets during such Fiscal Year with respect to which gain or loss is
recognized for federal income tax purposes, including, without
limitation, any gain or loss required to be recognized by the Trust for
federal income tax purposes pursuant to Section 988 or 1256 (or any
successor provisions) of the Code.
"Disposition Loss" means, for each Fiscal Year of the Trust, the
Trust's aggregate recognized loss (including the portion thereof, if any,
treated as ordinary loss) resulting from each disposition of Trust assets
during such Fiscal Year with respect to which gain or loss is recognized
for federal income tax purposes, including, without limitation, any gain
or loss required to be recognized by the Trust for federal income tax
purposes pursuant to Sections 988 or 1256 (or any successor
provisions) of the Code.
"DOL" means the United States Department of Labor.
"Employee Benefit Plan Investors" means Employee Benefit Plans
subject to Title I of ERISA, government plans, church plans, Individual
Retirement Accounts, Keogh Plans covering only self-employed persons
and new employees, and Employee Benefit Plans covering only the sole
owner of a business and/or his spouse.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Fiscal Quarter" shall mean each period ending on the last day of
each March, June, September and December of each Fiscal Year.
"Fiscal Year" shall have the meaning set forth in Article X hereof.
"Initial Offering Period" means the period commencing with the
initial effective date of the Prospectus and terminating no later than the
one hundred and twentieth (120th) day following such date.
"Interestholders" means the Managing Owner and all Limited
Owners, as holders of Interests, where no distinction is required by the
context in which the term is used.
"Interests" means the beneficial interest of each Interestholder in
the profits, losses, distributions, capital and assets of the Trust. The
Managing Owner's Capital Contributions shall be represented by
"General" Interests and a Limited Owner's Capital Contributions shall be
represented by "Limited" Interests. Interests need not be represented
by certificates.
"Limited Owner" means any person or entity who becomes a
holder of Limited Interests (as defined in Article III) and who is listed as
such on the books and records of the Trust, and may include the
Managing Owner with respect to the Limited Interests
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purchased by it.
"Losses" means, for each Fiscal Year of the Trust, losses of the
Trust as determined for federal income tax purposes, and each item of
income, gain, loss or deduction entering into the computation thereof,
except that any gain or loss taken into account in determining the
Disposition Gain or the Disposition Loss of the Trust for such Fiscal
Year shall not enter into such computations.
"Managing Owner" means Prudential Securities Futures
Management Inc. or any substitute therefor as provided herein.
"Margin Call" means a demand for additional funds after the initial
good faith deposit required to maintain a customer's account in
compliance with the requirements of a particular commodity exchange
or of a commodity broker.
"NASAA Guidelines" means the North American Securities
Administrators Association, Inc. Guidelines for the Registration of
Commodity Pool Programs as last amended and restated.
"Net Asset Value" means the total assets in the Trust Estate
including, but not limited to, all cash and cash equivalents (valued at
cost plus accrued interest and amortization of original issue discount)
less total liabilities of the Trust, each determined on the basis of
generally accepted accounting principles in the United States,
consistently applied under the accrual method of accounting ("GAAP"),
including, but not limited to, the extent specifically set forth below:
(a) Net Asset Value shall include any unrealized profit or
loss on open Commodities positions, and any other credit or debit
accruing to the Trust but unpaid or not received by the Trust.
(b) All open commodity futures contracts and options
traded on a United States exchange are calculated at their then
current market value, which shall be based upon the settlement
price for that particular commodity futures contract and option
traded on the applicable United States exchange on the date with
respect to which Net Asset Value is being determined; provided,
that if a commodity futures contract or option traded on a United
States exchange could not be liquidated on such day, due to the
operation of daily limits or other rules of the exchange upon which
that position is traded or otherwise, the settlement price on the
first subsequent day on which the position could be liquidated
shall be the basis for determining the market value of such
position for such day. The current market value of all open
commodity futures contracts and options traded on a non-United
States exchange shall be based upon the liquidating value for that
particular commodity futures contract and option traded on the
applicable non-United States exchange on the date with respect
to which Net Asset Value is being determined; provided, that if a
commodity futures contract or option traded on a non-United
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States exchange could not be liquidated on such day, due to the
operation of rules of the exchange upon which that position is
traded or otherwise, the liquidating value on the first subsequent
day on which the position could be liquidated shall be the basis
for determining the market value of such position for such day.
The current market value of all open forward contracts entered
into by the Trust shall be the mean between the last bid and last
asked prices quoted by the bank or financial institution which is
a party to the contract on the date with respect to which Net Asset
Value is being determined; provided, that if such quotations are
not available on such date, the mean between the last bid and
asked prices on the first subsequent day on which such
quotations are available shall be the basis for determining the
market value of such forward contract for such day. The
Managing Owner may in its discretion value any of the Trust
Estate pursuant to such other principles as it may deem fair and
equitable so long as such principles are consistent with normal
industry standards.
(c) Interest earned on the Trust's commodity brokerage
account shall be accrued at least monthly.
(d) The amount of any distribution made pursuant to Article
VI hereof shall be a liability of the Trust from the day when the
distribution is declared until it is paid.
"Net Asset Value per Interest" means the Net Asset Value divided
by the number of Interests outstanding on the date of calculation.
"Net Worth" means the excess of total assets over total liabilities
as determined by generally accepted accounting principles. Net Worth
shall be determined exclusive of home, home furnishings and
automobiles.
"NFA" means the National Futures Association.
"Organization and Offering Expenses" shall have the meaning set
forth in Section 4.7 of this Trust Agreement.
"Person" means any natural person, partnership, limited liability
company, business trust, corporation, association or other legal entity.
"Profits" means, for each Fiscal Year of the Trust, as determined
for Federal income tax purposes, with each item of income, gain, loss
or deduction entering into the computation thereof, except that any gain
or loss taken into account in determining the Disposition Gain or the
Disposition Loss of the Trust for such Fiscal Year shall not enter into
such computations.
"Prospectus" means the final prospectus and disclosure document
of the Trust, constituting a part of the Registration Statement, as filed
with the Securities and Exchange
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Commission and declared effective thereby, as the same may at any time and
from time to time be amended or supplemented after the effective date of the
Registration Statement.
"PSI" means Prudential Securities Incorporated, the Trust's
Commodity Broker, selling agent and the parent of the Managing Owner.
"Pyramiding" means the use of unrealized profits on existing
Commodities positions to provide margins for additional Commodities
positions of the same or a related commodity.
"Redemption Date" means the Valuation Date upon which Interests
held by the Interestholders may be redeemed in accordance with the
provisions of Article VII hereof.
"Registration Statement" means the registration statement on
Form S-1, as amended, filed by the Trust with the Securities and
Exchange Commission pursuant to which the Trust registered the
Limited Interests, as the same may at any time and from time to time be
further amended or supplemented.
"Sponsor" means any person directly or indirectly instrumental in
organizing the Trust or any person who will manage or participate in the
management of the Trust, including a Commodity Broker who pays any
portion of the Organizational Expenses of the Trust and any other
person who regularly performs or selects the persons who perform
services for the Trust. Sponsor does not include wholly independent
third parties such as attorneys, accountants, and underwriters whose
only compensation is for professional services rendered in connection
with the offering of the units. The term "Sponsor" shall be deemed to
include its Affiliates.
"Subscription Agreement" means the agreement included as an
exhibit to the Prospectus pursuant to which subscribers may subscribe
for the purchase of the Limited Interests.
"Trading Manager" means initially Willowbridge Associates Inc.
and any other entity or entities, acting in its capacity as a commodity
trading advisor (i.e., any person who for any consideration engages in
the business of advising others, either directly or indirectly, as to the
value, purchase, or sale of Commodity Contracts or commodity options)
to the Trust, and any substitute(s) therefor as provided herein.
"Trust" means the Willowbridge Strategic Trust heretofore formed
and continued pursuant to this Trust Agreement.
"Trust Agreement" means this Amended and Restated Declaration
of Trust and Trust Agreement as the same may at any time or from time
to time be amended.
"Trustee" means Wilmington Trust Company or any substitute
therefor as provided herein, acting not in its individual capacity but
solely as trustee of the Trust.
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"Trust Estate" means any cash, commodity futures, forward and
option contracts, all funds on deposit in the Trust's accounts, and any
other property held by the Trust, and all proceeds therefrom, including
any rights of the Trust pursuant to any Subscription Agreement and any
other agreements to which the Trust is a party.
"Valuation Date" means the date as of which the Net Asset Value
of the Trust is determined.
"Valuation Period" means a regular period of time between
Valuation Dates.
SECTION 1.2 Name.
(a) The name of the Trust is "Willowbridge Strategic Trust"
in which name the Trustee and the Managing Owner may engage in the
business of the Trust, make and execute contracts and other
instruments on behalf of the Trust and sue and be sued on behalf of the
Trust; provided, however, that in the event that Willowbridge Associates
Inc. ceases to act as the sole Trading Manager to the Trust, the
Managing Owner shall as soon as practicable thereafter change the
name of the Trust to such other name as it in its sole discretion shall
determine without being required to obtain the consent of the Limited
Owners.
SECTION 1.3 Delaware Trustee; Business Offices.
(a) The Trustee of the Trust in the State of Delaware is
Wilmington Trust Company, which is located at the Corporate Trust
Office or at such other address in the State of Delaware as the Trustee
may designate in writing to the Interestholders. The Trustee shall
receive service of process on the Trust in the State of Delaware at the
foregoing address. In the event Wilmington Trust Company resigns or
is removed as the Trustee, the Trustee of the Trust in the State of
Delaware shall be the successor Trustee.
(b) The principal office of the Trust, and such additional
offices as the Managing Owner may establish, shall be located at such
place or places inside or outside the State of Delaware as the Managing
Owner may designate from time to time in writing to the Trustee and the
Interestholders. Initially, the principal office of the Trust shall be at
One New York Plaza, 13th floor, New York, New York 10292.
SECTION 1.4 Declaration of Trust. The Trustee hereby
acknowledges that the Trust has received the sum of $1,000 in a bank
account in the Trust's name controlled by the Managing Owner from the
Managing Owner as grantor of the Trust, and hereby declares that it
shall hold such sum in trust, upon and subject to the conditions set
forth herein for the use and benefit of the Interestholders. It is the
intention of the parties hereto that the Trust shall be a business trust
under the Business Trust Statute and that this Trust Agreement shall
constitute the governing instrument of the Trust. It is not the intention
of the parties hereto to create a general partnership, limited partnership,
joint stock association, corporation, bailment or any form of legal
relationship other than a Delaware business trust except to the extent
such Trust is deemed to constitute a partnership under the Code and
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applicable state and local tax laws. Nothing in this Trust Agreement
shall be construed to make the Interestholders partners or members of
a joint stock association except to the extent such Interestholders are
deemed to be partners under the Code and applicable state and local tax
laws. Notwithstanding the foregoing, it is the intention of the parties
thereto to create a partnership among the Interestholders for purposes
of taxation under the Code and applicable state and local tax laws.
Effective as of the date hereof, the Trustee shall have all of the rights,
powers and duties set forth herein and in the Business Trust Statute
with respect to accomplishing the purposes of the Trust. The Trustee
has filed the certificate of trust required by Section 3810 of the Business
Trust Statute in connection with the formation of the Trust under the
Business Trust Statute.
SECTION 1.5 Purposes and Powers. The purposes of the Trust
shall be (a) to trade, buy, sell, spread or otherwise acquire, hold or
dispose of commodity futures, forward and option contracts; (b) to enter
into any lawful transaction and engage in any lawful activities in
furtherance of or incidental to the foregoing purposes; and (c) as
determined from time to time by the Managing Owner, to engage in any
other lawful business or activity for which a business trust may be
organized under the Business Trust Statute. The Trust shall have all of
the powers specified in Section 15.1 hereof, including, without limitation,
all of the powers which may be exercised by a Managing Owner on
behalf of the Trust under this Trust Agreement.
SECTION 1.6 Tax Treatment.
(a) Each of the parties hereto, by entering into this Trust
Agreement, (i) expresses its intention that the Interests will qualify under
applicable tax law as interests in a partnership which holds the Trust
Estate for their benefit, (ii) agrees that it will file its own federal,
state and local income, franchise and other tax returns in a manner that is
consistent with the treatment of the Trust as a partnership in which each
of the Interestholders is a partner and (iii) agrees to use reasonable
efforts to notify the Managing Owner promptly upon a receipt of any
notice from any taxing authority having jurisdiction over such holders
of Interests with respect to the treatment of the Interests as anything
other than interests in a partnership.
(b) The Tax Matters Partner (as defined in Section 6231 of
the Code and any corresponding state and local tax law) shall initially
be the Managing Owner. The Tax Matters Partner, at the expense of the
Trust, (i) shall prepare or cause to be prepared and filed the Trust's tax
returns as a partnership for federal, state and local tax purposes and (ii)
shall be authorized to perform all duties imposed by S 6221 et seq. of
the Code, including, without limitation, (A) the power to conduct all
audits and other administrative proceedings with respect to the Trust's
tax items; (B) the power to extend the statute of limitations for all
Interestholders with respect to the Trust's tax items; (C) the power to file
a petition with an appropriate federal court for review of a final Trust
administrative adjustment; and (D) the power to enter into a settlement
with the IRS on behalf of, and binding upon, those Limited Owners
having less than one percent (1%) interest in the Trust, unless a Limited
Owner shall have notified the IRS and the Managing Owner that the
Managing Owner shall not act on such Limited Owner's behalf. The
designation made in this Section 1.6(b) is
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hereby approved by each Interestholder as an express condition to becoming an
Interestholder. Each Interestholder agrees to take any further action as may
be required by regulation or otherwise to effectuate such designation.
Subject to Section 4.6, the Trust hereby indemnifies, to the full extent
permitted by law, the Managing Owner from and against any damages or losses
(including attorneys' fees) arising out of or incurred in connection with
any action taken or omitted to be taken by it in carrying out its
responsibilities as Tax Matters Partner, provided such action taken or
omitted to be taken does not constitute fraud, negligence or
misconduct.
(c) Each Interestholder shall furnish the Managing Owner
and the Trustee with information necessary to enable the Managing
Owner to comply with United States federal income tax information
reporting requirements in respect of such Interestholder's Interests.
SECTION 1.7 General Liability of the Managing Owner.
(a) The Managing Owner shall be liable for the acts,
omissions, obligations and expenses of the Trust, to the extent not paid
out of the assets of the Trust, to the same extent the Managing Owner
would be so liable if the Trust were a partnership under the Delaware
Revised Uniform Limited Partnership Act and the Managing Owner were
a general partner of such partnership. The obligations of the Managing
Owner under this Section 1.7 shall be evidenced by its ownership of the
General Interests.
(b) Subject to Sections 8.1 and 8.3 hereof, no
Interestholder, other than the Managing Owner, to the extent set forth
above, shall have any personal liability for any liability or obligation of
the Trust.
SECTION 1.8 Legal Title. Legal title to all the Trust Estate shall
be vested in the Trust as a separate legal entity; except where
applicable law in any jurisdiction requires any part of the Trust Estate
to be vested otherwise, the Managing Owner may cause legal title to the
Trust Estate or any portion thereof to be held by or in the name of the
Managing Owner or any other Person as nominee.
ARTICLE II
THE TRUSTEE
SECTION 2.1 Term; Resignation.
(a) Wilmington Trust Company has been appointed and
hereby agrees to continue to serve as the Trustee of the Trust. The
Trust shall have only one trustee unless otherwise determined by the
Managing Owner. The Trustee shall serve until such time as the
Managing Owner removes the Trustee or the Trustee resigns and a
successor Trustee is appointed by the Managing Owner in accordance
with the terms of Section 2.5
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hereof.
(b) The Trustee may resign at any time upon the giving of
at least sixty (60) days advance written notice to the Trust; provided,
that such resignation shall not become effective unless and until a
successor Trustee shall have been appointed by the Managing Owner
in accordance with Section 2.5 hereof. If the Managing Owner does not
act within such sixty (60) day period, the Trustee may apply to the Court
of Chancery of the State of Delaware for the appointment of a successor
Trustee.
SECTION 2.2 Powers. Except to the extent expressly set forth in
Section 1.3 and this Article II, the duty and authority of the Trustee to
manage the business and affairs of the Trust is hereby delegated to the
Managing Owner, which duty and authority the Managing Owner may
further delegate as provided herein, all pursuant to Section 3806(b)(7) of
the Business Trust Statute. The Trustee shall have only the rights,
obligations and liabilities specifically provided for herein and in the
Business Trust Statute and shall have no implied rights, obligations and
liabilities with respect to the business and affairs of the Trust. The
Trustee shall have the power and authority to execute, deliver,
acknowledge and file all necessary documents and to maintain all
necessary records of the Trust as required by the Business Trust
Statute. The Trustee shall provide prompt notice to the Managing
Owner of its performance of any of the foregoing. The Managing Owner
shall reasonably keep the Trustee informed of any actions taken by the
Managing Owner with respect to the Trust that affect the rights,
obligations or liabilities of the Trustee hereunder or under the Business
Trust Statute.
SECTION 2.3 Compensation and Expenses of the Trustee. The
Trustee shall be entitled to receive from the Managing Owner or an
Affiliate of the Managing Owner reasonable compensation for its
services hereunder as set forth in a separate fee agreement and shall be
entitled to be reimbursed by the Managing Owner or an Affiliate of the
Managing Owner for reasonable out-of-pocket expenses incurred by it
in the performance of its duties hereunder, including without limitation,
the reasonable compensation, out-of-pocket expenses and
disbursements of counsel and such other agents as the Trustee may
employ in connection with the exercise and performance of its rights
and duties hereunder.
SECTION 2.4 Indemnification. The Managing Owner agrees,
whether or not any of the transactions contemplated hereby shall be
consummated, to assume liability for, and does hereby indemnify,
protect, save and keep harmless the Trustee and its successors,
assigns, legal representatives, officers, directors, agents and servants
(the "Indemnified Parties") from and against any and all liabilities,
obligations, losses, damages, penalties, taxes (excluding any taxes
payable by the Trustee on or measured by any compensation received
by the Trustee for its services hereunder or any indemnity payments
received by the Trustee pursuant to this Section 2.4), claims, actions,
suits, costs, expenses or disbursements (including legal fees and
expenses) of any kind and nature whatsoever (collectively, "Expenses"),
which may be imposed on, incurred by or asserted against the
Indemnified Parties in any way relating to or arising out of the formation,
operation or termination of the Trust, the execution, delivery and
performance of any other agreements
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to which the Trust is a party or the action or inaction of the Trustee
hereunder or thereunder, except for Expenses resulting from the gross
negligence or willful misconduct of the Indemnified Parties. The indemnities
contained in this Section 2.4 shall survive the termination of this Trust
Agreement or the removal or resignation of the Trustee. In addition, the
Indemnified Parties shall be entitled to indemnification from the Trust
Estate to the extent set forth above and to secure the same, the Trustee
shall have a lien against the Trust Estate which shall be prior to the
rights of the Managing Owner and the Interestholders to receive distributions
from the Trust Estate.
SECTION 2.5 Successor Trustee. Upon the resignation or removal
of the Trustee, the Managing Owner shall appoint a successor Trustee
by delivering a written instrument to the outgoing Trustee. Any
successor Trustee must satisfy the requirements of Section 3807 of the
Business Trust Statute. Any resignation or removal of the Trustee and
appointment of a successor Trustee shall not become effective until a
written acceptance of appointment is delivered by the successor Trustee
to the outgoing Trustee and the Managing Owner and any fees and
expenses due to the outgoing Trustee are paid. Following compliance
with the preceding sentence, the successor Trustee shall become fully
vested with all of the rights, powers, duties and obligations of the
outgoing Trustee under this Trust Agreement, with like effect as if
originally named as Trustee, and the outgoing Trustee shall be
discharged of its duties and obligations under this Trust Agreement.
SECTION 2.6 Liability of Trustee. Except as otherwise provided
in this Article II, in accepting the trust created hereby, Wilmington Trust
Company acts solely as Trustee hereunder and not in its individual
capacity, and all Persons having any claim against the Trustee by
reason of the transactions contemplated by this Trust Agreement and
any other agreement to which the Trust is a party shall look only to the
Trust Estate for payment or satisfaction thereof; provided, however, that
in no event is the foregoing intended to affect or limit the liability of the
Managing Owner as set forth in Section 1.7 hereof. The Trustee shall
not be liable or accountable hereunder or under any other agreement to
which the Trust is a party, except for its own gross negligence or willful
misconduct. In particular, but not by way of limitation:
(a) The Trustee shall have no liability or responsibility for
the validity or sufficiency of this Trust Agreement or for the form,
character, genuineness, sufficiency, value or validity of the Trust Estate;
(b) The Trustee shall not be liable for any actions taken or
omitted to be taken by it in accordance with the instructions of the
Managing Owner;
(c) The Trustee shall not have any liability for the acts or
omissions of the Managing Owner;
(d) The Trustee shall not be liable for its failure to
supervise the performance of any obligations of the Managing Owner,
any commodity broker, selling agent or any Trading Manager(s);
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(e) No provision of this Trust Agreement shall require the
Trustee to expend or risk funds or otherwise incur any financial liability
in the performance of any of its rights or powers hereunder if the
Trustee shall have reasonable grounds for believing that repayment of
such funds or adequate indemnity against such risk or liability is not
reasonably assured or provided to it;
(f) Under no circumstances shall the Trustee be liable for
indebtedness evidenced by or other obligations of the Trust arising
under this Trust Agreement or any other agreements to which the Trust
is a party;
(g) The Trustee shall be under no obligation to exercise
any of the rights or powers vested in it by this Trust Agreement, or to
institute, conduct or defend any litigation under this Trust Agreement or
any other agreements to which the Trust is a party, at the request, order
or direction of the Managing Owner or any Interestholders unless the
Managing Owner or such Interestholders have offered to the Trustee
security or indemnity satisfactory to it against the costs, expenses and
liabilities that may be incurred by the Trustee (including, without
limitation, the reasonable fees and expenses of its counsel) therein or
thereby; and
(h) Notwithstanding anything contained herein to the
contrary, the Trustee shall not be required to take any action in any
jurisdiction other than in the State of Delaware if the taking of such
action will (i) require the consent or approval or authorization or order
of or the giving of notice to, or the registration with or taking of any
action in respect of, any state or other governmental authority or agency
of any jurisdiction other than the State of Delaware, (ii) result in any fee,
tax or other governmental charge under the laws of any jurisdiction or
any political subdivision thereof in existence as of the date hereof other
than the State of Delaware becoming payable by the Trustee or (iii)
subject the Trustee to personal jurisdiction, other than in the State of
Delaware, for causes of action arising from personal acts unrelated to
the consummation of the transactions by the Trustee, as the case may
be, contemplated hereby.
SECTION 2.7 Reliance; Advice of Counsel.
(a) In the absence of bad faith, the Trustee may
conclusively rely upon certificates or opinions furnished to the Trustee
and conforming to the requirements of this Trust Agreement in
determining the truth of the statements and the correctness of the
opinions contained therein, and shall incur no liability to anyone in
acting on any signature, instrument, notice, resolutions, request,
consent, order, certificate, report, opinion, bond or other document or
paper believed by it to be genuine and believed by it to be signed by the
proper party or parties and need not investigate any fact or matter
pertaining to or in any such document; provided, however, that the
Trustee shall have examined any certificates or opinions so as to
determine compliance of the same with the requirements of this Trust
Agreement. The Trustee may accept a certified copy of a resolution of
the board of directors or other governing body of any corporate party
as conclusive evidence that such resolution has been duly adopted by
such body and that the same is in full force
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and effect. As to any fact or matter the method of the determination of
which is not specifically prescribed herein, the Trustee may for all purposes
hereof rely on a certificate, signed by the president or any vice president
or by the treasurer or other authorized officers of the relevant party, as to
such fact or matter, and such certificate shall constitute full protection to
the Trustee for any action taken or omitted to be taken by it in good faith
in reliance thereon.
(b) In the exercise or administration of the trust hereunder
and in the performance of its duties and obligations under this Trust
Agreement, the Trustee, at the expense of the Trust (i) may act directly
or through its agents, attorneys, custodians or nominees pursuant to
agreements entered into with any of them, and the Trustee shall not be
liable for the conduct or misconduct of such agents, attorneys,
custodians or nominees if such agents, attorneys, custodians or
nominees shall have been selected by the Trustee with reasonable care
and (ii) may consult with counsel, accountants and other skilled
professionals to be selected with reasonable care by it. The Trustee
shall not be liable for anything done, suffered or omitted in good faith
by it in accordance with the opinion or advice of any such counsel,
accountant or other such Persons.
SECTION 2.8 Not Part of Trust Estate. Amounts paid to the
Trustee from the Trust Estate, if any, pursuant to this Article II shall not
be deemed to be part of the Trust Estate immediately after such payment.
ARTICLE III
INTERESTS; CAPITAL CONTRIBUTIONS
SECTION 3.1 General.
(a) The beneficial interests in the Trust shall consist of a
limited number of Interests as set forth in this Article III. The Interests
shall be divided into two classes: General Interests and Limited
Interests.
(b) Upon the initial contribution by the Managing Owner
to the Trust, the Managing Owner has become the holder of ten General
Interests. Upon the termination of the Initial Offering Period pursuant
to Section 3.2(b), the Managing Owner shall receive additional General
Interests (or fractions thereof) in consideration for the required
contributions made to such time by the Managing Owner pursuant to
Section 3.2(e) in an amount equal to such contributions divided by 100.
During the Continuous Offering Period, if any, the Managing Owner shall
receive, from time to time, additional General Interests (or fractions
thereof) in consideration for the required contributions made by the
Managing Owner pursuant to Section 3.2(e) in any calendar month
during the Continuous Offering Period in an amount equal to such
contributions divided by the Net Asset Value per Interest calculated as
of the close of business on the last day of the calendar month in which
such contributions were made.
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(c) No certificates or other evidence of beneficial
ownership of the Interests will be issued.
(d) Every Interestholder, by virtue of having purchased or
otherwise acquired an Interest, shall be deemed to have expressly
consented and agreed to be bound by the terms of this Trust
Agreement.
SECTION 3.2 Limited Interests.
(a) Offer of Limited Interests. During the Initial Offering
Period, the Trust shall offer pursuant to Securities and Exchange
Commission Rule 415, at an offering price of $100 per Limited Interest,
a maximum of 1,000,000 Limited Interests ($100,000,000). No fractional
Limited Interests shall be issued during the Initial Offering Period. Each
newly admitted Limited Owner shall make a Capital Contribution to the
Trust of at least $5,000, except for Individual Retirement Account ("IRA")
subscribers, who shall be required to make a Capital Contribution of not
less than $2,000. The offering shall be made pursuant to and on the
terms and conditions set forth in the Prospectus. The Managing Owner
shall make such arrangements for the sale of the Limited Interests as it
deems appropriate.
(b) Effect of the Sale of at least 100,000 Interests. In the
event that at least 100,000 Interests are sold during the Initial Offering
Period (including both Limited Interests offered pursuant to the
Prospectus and General Interests purchased by the Managing Owner up
to $500,000), the Managing Owner will admit all accepted subscribers
pursuant to the Prospectus into the Trust as Limited Owners, by
causing such Limited Owners to execute this Trust Agreement, pursuant
to the Power of Attorney set forth in the Subscription Agreement, and
by making an entry on the books and records of the Trust reflecting that
such subscribers have been admitted as Limited Owners, as soon as
practicable after the termination of the Initial Offering Period. Such
accepted subscribers will be deemed Limited Owners at such time as
such admission is reflected on the books and records of the Trust.
(c) Paid-In Capital if at least 100,000 Interests Are Sold.
In the event that at least 100,000 Interests are sold during the Initial
Offering Period, the Trust shall have paid-in capital of not less than
$10,101,000 (including the Managing Owner's contribution for the
General Interests as provided in Section 3.1(b) and in Section 3.2(e)
hereof).
(d) Effect of the Sale of Less than 100,000 Interests. In the
event that at least 100,000 Interests are not sold during the Initial
Offering Period, all proceeds of the sale of Limited Interests, together
with any interest earned thereon, will be returned to the subscribers on
a pro rata basis (taking into account the amount and time of deposit), no
later than ten (10) Business Days after the conclusion of the Initial
Offering Period (or as soon thereafter as practicable if payment cannot
be made in such time period), and the Trust shall be terminated, and the
Managing Owner shall cause the certificate of
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cancellation required by Section 3810 of the Business Trust Statute to
be filed.
(e) Managing Owner's Required Contribution. In the event
that 100,000 or more of the Limited Interests offered pursuant to the
Prospectus are sold during the Initial Offering Period, the Managing
Owner shall be required to contribute in cash to the capital of the Trust
an amount, which, when added to the total contributions to the Trust by
all Interestholders, will be not less than one percent (1%) of such total
contributions, and in no event shall such contribution be less than
$101,000 (including the Managing Owner's Capital Contribution pursuant
to Section 3.1(b)). Thereafter, the Managing Owner shall contribute in
cash to the capital of the Trust an amount not less than 1.01% of any
additional Capital Contributions received by the Trust from the Limited
Owners. The Managing Owner may, but is not obligated to, make
additional Capital Contributions at any time during the Initial or
Continuous Offering Periods. The Managing Owner will receive General
Interests as provided in Section 3.1(b). The Managing Owner shall, with
respect to any Interests owned by it, enjoy all of the rights and
privileges and be subject to all of the obligations and duties of a Limited
Owner, in addition to its rights and privileges as Managing Owner,
except as otherwise provided herein. Notwithstanding anything to the
contrary in this Trust Agreement, the interest of the Managing Owner
(without regard to any Limited Interests of the Managing Owner in the
Trust) in each material item of Trust income, gain, loss and deduction
shall be equal, in the aggregate, to at least one percent (1%) of each
such item at all times during the term of this Trust Agreement.
(f) Offer of Limited Interests After Initial Offering Period.
In the event that 100,000 or more of the Interests are sold during the
Initial Offering Period, the Trust, pursuant to Securities and Exchange
Commission Rule 415, may continue to offer Limited Interests and admit
additional Limited Owners pursuant to the Prospectus following the
Initial Offering Period for a period (the "Continuous Offering Period")
expiring not later than the earlier to occur of (i) the sale of $100,000,000
of Limited Interests, or (ii) the date ending two years from the initial
effective date of the Registration Statement. Following the conclusion
of the Continuous Offering Period, the Trust shall be prohibited from
issuing or re-issuing any Interests, and shall be permanently closed.
Each newly admitted Limited Owner shall make a Capital
Contribution to the Trust in an amount equal to at least $5,000, except
for IRA subscribers, which amount for such subscribers shall not be
less than $2,000. Notwithstanding the foregoing, existing Limited
Owners will be permitted to make an additional Capital Contribution to
the Trust in an amount equal to at least $100. Each additional Capital
Contribution during the Continuous Offering Period must be in a
denomination which is an even multiple of $100. During the Continuous
Offering Period, each newly admitted Limited Owner, and each existing
Limited Owner that makes an additional Capital Contribution, shall
receive Limited Interests in an amount equal to such Capital
Contribution or additional Capital Contribution, as the case may be,
divided by the Net Asset Value per Interest calculated as of the close of
business on the last day of the calendar month in which such
contributions were made.
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Subscribers whose subscriptions are received and accepted by
the Trust after the termination of the Initial Offering Period shall be
admitted to the Trust and deemed a Limited Owner on the first day of
the month next succeeding the month during which such subscriber's
subscription was accepted. Existing Limited Owners who contribute
additional sums are considered to have made the contribution and
received the related Limited Interests as of the first day of next
succeeding month.
(g) Subscription Agreement. Each Limited Owner who
purchases any Limited Interests offered pursuant to the Prospectus
shall contribute to the capital of the Trust such amount as he shall state
in the Subscription Agreement which he shall execute (as required
therein), acknowledge and, together with the Power of Attorney set forth
therein, deliver to the Managing Owner as a counterpart of this Trust
Agreement. All subscription amounts shall be paid in such form as may
be acceptable to the Managing Owner at the time of the execution and
delivery of such Subscription Agreement by United States subscribers,
and in accordance with local practice and procedure by non-United
States subscribers. To the extent that the Managing Owner determines
to accept a subscription check, it shall be subject to prompt collection.
All subscriptions are subject to acceptance by the Managing Owner.
(h) Escrow Agreement. All proceeds from the sale of
Limited Interests offered pursuant to the Prospectus shall be deposited
in an interest bearing escrow account at The Bank of New York, in New
York, N.Y. until the conclusion of the Initial Offering Period. In the event
subscriptions for at least 100,000 of the Interests are received and
accepted during the Initial Offering Period, all interest earned on the
proceeds of the subscriptions from subscribers for Limited Interests
during the Initial Offering Period will be distributed to the purchasers of
Limited Interests on a pro rata basis (taking into account time and
amount of deposit) not later than ten (10) Business Days after the
conclusion of the Initial Offering Period, or as soon thereafter as
practicable if payment cannot be made in such time period.
(i) Optional Purchase of Limited Interests by Managing
Owner and Trading Manager. Subject to approval by the Managing
Owner, any commodity broker (including, but not limited to, PSI), any
Trading Manager, any principals, stockholders, directors, officers,
employees and affiliates of the Managing Owner, any commodity broker,
and any Trading Manager, may purchase any number of Limited
Interests and will be treated as Limited Owners with respect to such
Interests. In addition to the Interests required to be purchased by the
Managing Owner under Section 3.2(e), the Managing Owner may also
purchase any number of Limited Interests as it determines in its
discretion.
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ARTICLE IV
THE MANAGING OWNER
SECTION 4.1 Management of the Trust. Pursuant to Section 3806
of the Business Trust Statute, the Trust shall be managed by the
Managing Owner and the conduct of the Trust's business shall be
controlled and conducted solely by the Managing Owner in accordance
with this Trust Agreement.
SECTION 4.2 Authority of Managing Owner. In addition to and not
in limitation of any rights and powers conferred by law or other
provisions of this Trust Agreement, and except as limited, restricted or
prohibited by the express provisions of this Trust Agreement or the
Business Trust Statute, the Managing Owner shall have and may
exercise on behalf of the Trust, all powers and rights necessary, proper,
convenient or advisable to effectuate and carry out the purposes,
business and objectives of the Trust, which shall include, without
limitation, the following:
(a) To enter into, execute, deliver and maintain contracts,
agreements and any or all other documents and instruments, and to do
and perform all such things, as may be in furtherance of Trust purposes
or necessary or appropriate for the offer and sale of the Interests and
the conduct of Trust activities, including, but not limited to, contracts
with third parties for:
(i) commodity brokerage services, as well as
administrative services necessary to the prudent operation
of the Trust, provided, however, that in no event shall the
fees payable by the Trust for such services exceed any
limitations imposed by the NASAA Guidelines as in effect on
the date hereof, except to the extent that such limitations
are amended to become more restrictive, in which event
such fees will not exceed such more restrictive limitations,
and provided, further, that such services may be performed
by an Affiliate or Affiliates of the Managing Owner so long
as the Managing Owner has made a good faith
determination that: (A) the Affiliate which it proposes to
engage to perform such services is qualified to do so
(considering the prior experience of the Affiliate or the
individuals employed thereby); (B) the terms and conditions
of the agreement pursuant to which such Affiliate is to
perform services for the Trust are no less favorable to the
Trust than could be obtained from equally-qualified
unaffiliated third parties; and (C) the maximum period
covered by the agreement pursuant to which such affiliate
is to perform services for the Trust shall not exceed one
year, and such agreement shall be terminable without
penalty upon sixty (60) days' prior written notice by the
Trust; and
(ii) commodity trading advisory services relating to
the purchase and sale of all Commodities positions on
behalf of the Trust, which services may not be performed by
the Managing
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Owner or an Affiliate(s) of the Managing Owner, provided, however,
that in no event shall the fees payable by the Trust for such
services exceed any limitations imposed by the NASAA Guidelines as
in effect on the date hereof, except to the extent that such
limitations are amended to become more restrictive, in which event
such fees will not exceed such more restrictive limitations.
All advisory services shall be performed by persons with at
least three years experience and who are also appropriately
registered under federal and/or state law (i.e., all
commodities advice with respect to commodities
transactions shall be given by persons who are registered
with the CFTC as a commodity trading advisor and are
members of the NFA as a commodity trading advisor), but
shall not be performed by any person affiliated with the
Trust's Commodities broker.
(b) To establish, maintain, deposit into, sign checks and/or
otherwise draw upon accounts on behalf of the Trust with appropriate
banking and savings institutions, and execute and/or accept any
instrument or agreement incidental to the Trust's business and in
furtherance of its purposes, any such instrument or agreement so
executed or accepted by the Managing Owner in the Managing Owner's
name shall be deemed executed and accepted on behalf of the Trust by
the Managing Owner;
(c) To deposit, withdraw, pay, retain and distribute the Trust
Estate or any portion thereof in any manner consistent with the
provisions of this Trust Agreement;
(d) To supervise the preparation and filing of the
Registration Statement and supplements and amendments thereto, and
the Prospectus;
(e) To pay or authorize the payment of distributions to the
Interestholders and expenses of the Trust;
(f) To invest or direct the investment of funds of the Trust
not then delegated to a Trading Manager(s) and prohibit any
transactions contemplated hereunder which may constitute prohibited
transactions under ERISA or the Code;
(g) To make any elections on behalf of the Trust under the
Code, or any other applicable federal or state tax law as the Managing
Owner shall determine to be in the best interests of the Trust;
(h) To redeem mandatorily any Limited Interests upon at
least ten (10) days' prior written notice, if (i) the Managing Owner
determines that the continued participation of such Limited Owner in the
Trust might cause the Trust or any Interestholder to be deemed to be
managing Plan Assets under ERISA, (ii) there is an unauthorized
assignment pursuant to the provisions of Article V, or (iii) in the event
that any transaction would or might violate any law or constitute a
prohibited transaction under ERISA or the Code and a statutory, class
or individual exemption from the prohibited transaction provisions of
ERISA for such transaction or transactions does not apply or cannot be
obtained from the
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DOL (or the Managing Owner determines not to seek such an exemption). In
the case of mandatory redemptions, the Redemption Date shall be the close of
business on the date written notice of intent to redeem is sent by the
Managing Owner to a Limited Owner. A notice may be revoked prior to the
payment date by written notice from the Managing Owner to a Limited Owner;
(i) In the sole discretion of the Managing Owner, to admit an
Affiliate or Affiliates of the Managing Owner as additional Managing
Owners. Notwithstanding the foregoing, the Managing Owner may not
admit Affiliate(s) of the Managing Owner as an additional Managing
Owner if it has received notice of its removal as a Managing Owner,
pursuant to Section 8.2(d) hereof, or if the concurrence of at least a
majority in interest (over 50%) of the outstanding Interest (not including
Interests owned by the Managing Owner) is not obtained;
(j) Override any trading instructions: (i) that the Managing
Owner, in its sole discretion, determines in good faith to be in violation
of any trading policy or limitation of the Trust, including as set forth in
Section 4.2(k) below; (ii) as and to the extent necessary, upon the failure
of any Trading Manager to comply with a request to make the necessary
amount of funds available to the Trust within five (5) days of such
request, to fund distributions, redemptions (including special
redemptions), or reapportionments among Trading Managers or to pay
the expenses of the Trust; and provided further, that the Managing
Owner may make Commodities trading decisions at any time at which
any Trading Manager shall become incapacitated or some other
emergency shall arise as a result of which such Trading Manager shall
be unable or unwilling to act and a successor Trading Manager has not
yet been retained;
(k) Monitor the trading activities of the Trading Manager so
that:
(i) The Trust does not establish new Commodities
positions for any one contract month or option if such
additional Commodities positions would result in a net long
or short position for that Commodities position requiring as
margin or premium more than fifteen percent (15%) of the
Trust Estate.
(ii) The Trust does not acquire additional
Commodities positions in any commodities interest contract
or option if such additional Commodities positions would
result in the aggregate net long or short Commodities
positions requiring as margin or premium for all outstanding
Commodities positions more than sixty-six and two-thirds
percent (66 2/3%) of the Trust Estate. Under certain market
conditions, such as an abrupt increase in margins required
by a commodity exchange or its clearinghouse or an
inability to liquidate open Commodities positions because
of daily price fluctuation limits or both, the Trust may be
required to commit as margin in excess of the foregoing
limit. In such event the Managing Owner will cause each
Trading Manager to reduce its open positions to comply
with the
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foregoing limit before initiating new Commodities positions.
SECTION 4.3 Obligations of the Managing Owner. In addition to
the obligations expressly provided by the Business Trust Statute or this
Trust Agreement, the Managing Owner shall:
(a) Devote such of its time to the business and affairs of the
Trust as it shall, in its discretion exercised in good faith, determine to
be necessary to conduct the business and affairs of the Trust for the
benefit of the Trust and the Limited Owners;
(b) Execute, file, record and/or publish all certificates,
statements and other documents and do any and all other things as may
be appropriate for the formation, qualification and operation of the Trust
and for the conduct of its business in all appropriate jurisdictions;
(c) Retain independent public accountants to audit the
accounts of the Trust;
(d) Employ attorneys to represent the Trust;
(e) Use its best efforts to maintain the status of the Trust as
a "business trust" for state law purposes, and as a "partnership" for
federal income tax purposes;
(f) Monitor the trading policies and limitations of the Trust,
as set forth in the Prospectus, and the activities of the Trust's Trading
Manager(s) in carrying out those policies in compliance with the
Prospectus;
(g) Monitor the brokerage fees charged to the Trust, and the
services rendered by futures commission merchants to the Trust, to
determine whether the fees paid by, and the services rendered to, the
Trust for futures brokerage are at competitive rates and are the best
price and services available under the circumstances, and if necessary,
renegotiate the brokerage fee structure to obtain such rates and
services for the Trust. In making this determination the Managing
Owner shall not rely solely on the brokerage rates paid by other major
commodity pools. No material change related to brokerage fees shall
be made except upon twenty (20) Business Days' prior notice to the
Limited Owners, which notice shall include a description of the Limited
Owners' voting rights as set forth in Section 8.2 hereof and redemption
rights as set forth in Section 7.1 hereof, and no increase in such fees
shall take effect except at the beginning of a Fiscal Quarter following the
consent of at least a majority in interest of the Limited Owners
(excluding the Managing Owner);
(h) Have fiduciary responsibility for the safekeeping and use
of the Trust Estate, whether or not in the Managing Owner's immediate
possession or control, and the Managing Owner will not employ or
permit others to employ such funds or assets of the Trust (including any
interest earned thereon) in any manner except as and to the extent
permitted by the NASAA Guidelines for the benefit of the Trust,
including, among other
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things, the utilization of any portion of the Trust
Estate as compensating balances for the exclusive benefit of the
Managing Owner. The Managing Owner shall at all times act with
integrity and good faith and exercise due diligence in all activities
relating to the conduct of the business of the Trust and in resolving
conflicts of interest. The Trust shall not permit any Limited Owner to
contract away the fiduciary duty owed to the Limited Owners by the
Managing Owner under this Agreement or the Delaware Business Trust
Act. To the extent that, at law or in equity, the Managing Owner or any
officer, director, employee or agent thereof or any Affiliate of the
Managing Owner (collectively, the "Covered Persons"), has duties
(including fiduciary duties) and liabilities relating thereto to the Trust,
any other Interestholder or Covered Person or the Trustee, such
Covered Person acting under the Trust Agreement shall not be liable to
the Trust, any other Interestholder or Covered Person or the Trustee for
such Covered Person's good faith reliance on the provisions of the
Trust Agreement; and the duties and liabilities of such Covered Person
may be expanded or restricted by the provisions of this Trust
Agreement.
(i) Agree that, at all times from and after the sale of at least
100,000 Interests, for so long as it remains a Managing Owner of the
Trust, it shall have a minimum "net worth" (as defined below) and not
take any affirmative action to reduce its "net worth" below an amount
equal to five percent (5%) of the total contributions to the Trust. For
this purpose, "net worth" shall be calculated in accordance with GAAP,
provided that the Managing Owner's interests in and receivables due
from the Trust will be excluded and any minimum net worth being
maintained with respect to all other entities in which the Managing
Owner is a managing owner or a general partner (which minimum net
worth, calculated with respect to each such other entity in the same
manner as for the Trust, shall not be less than 5% of the total
contributions made to such entity) will be subtracted, but any notes
receivable from an Affiliate of the Managing Owner may be included.
The requirements of this Section 4.3(i) may be modified if the Managing
Owner is advised by tax counsel to the Trust that the proposed
modification will not adversely affect the classification of the Trust as
a partnership for federal income tax purposes; provided, however, that
in no event will the Managing Owner's net worth be less than the net
worth requirements imposed by the NASAA Guidelines as in effect on
the date hereof, except to the extent that such requirements are
amended to mandate a higher net worth, in which event the Managing
Owner's net worth will in no event be less than such higher net worth;
(j) Admit substituted Limited Owners in accordance with this
Trust Agreement;
(k) Refuse to recognize any attempted transfer or
assignment of an Interest that is not made in accordance with the
provisions of Article V; and
(l) Maintain a current list in alphabetical order, of the names
and last known addresses and, if available, business telephone numbers
of, and number of Interests owned by, each Interestholder (as provided
in Section 3.2 hereof) and the other Trust documents described in
Section 9.6 at the Trust's principal place of business, which documents
shall be made available thereat at reasonable times during ordinary
business hours for inspection
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by any Limited Owner or his representative for any purpose reasonably
related to the Limited Owner's interest as a beneficial owner of the Trust.
Such list shall be printed on white paper in clearly legible print and shall
be updated quarterly. Upon request, for any purpose reasonably related to
the Limited Owner's interest as a beneficial owner of the Trust, including
without limitation, matters relating to an Interestholder's voting rights
hereunder or the exercise of a Limited Owner's rights under federal
proxy law, either in person or by mail, the Managing Owner will furnish
a copy of such list to a Limited Owner or his representative within ten
(10) days of a request therefor, upon payment of the cost of
reproduction and mailing; provided, however, that the Limited Owner
requesting such list shall give written assurance that the list will not, in
any event, be used for commercial purposes. Subject to applicable law,
a Limited Owner shall give the Managing Owner at least ten (10)
Business Days' prior written notice for any inspection and copying
permitted pursuant to this Section 4.3(l) by the Limited Owner or his
authorized attorney or agent.
SECTION 4.4 General Prohibitions. The Trust shall not:
(a) Borrow money from or loan money to any Interestholder
or other Person, except that the foregoing is not intended to prohibit (i)
the deposit on margin with respect to the initiation and maintenance of
the Trust's Commodities positions or (ii) obtaining lines of credit for the
trading of forward contracts; provided, however, that the Trust is
prohibited from incurring any indebtedness on a non-recourse basis;
(b) Create, incur, assume or suffer to exist any lien,
mortgage, pledge conditional sales or other title retention agreement,
charge, security interest or encumbrance, except (i) the right and/or
obligation of a commodity broker to close out sufficient Commodities
positions of the Trust so as to restore the Trust's account to proper
margin status in the event that the Trust fails to meet a Margin Call, (ii)
liens for taxes not delinquent or being contested in good faith and by
appropriate proceedings and for which appropriate reserves have been
established, (iii) deposits or pledges to secure obligations under
workmen's compensation, social security or similar laws or under
unemployment insurance, (iv) deposits or pledges to secure contracts
(other than contracts for the payment of money), leases, statutory
obligations, surety and appeal bonds and other obligations of like nature
arising in the ordinary course of business, or (v) mechanic's,
warehousemen's, carrier's, workmen's, materialmen's or other like liens
arising in the ordinary course of business with respect to obligations
which are not due or which are being contested in good faith, and for
which appropriate reserves have been established if required by
generally accepted accounting principles, and liens arising under
ERISA;
(c) Commingle its assets with those of any other Person,
except to the extent permitted under the CE Act, and the regulations
promulgated thereunder;
(d) Directly or indirectly pay or award any finder's fees,
commissions or other compensation to any Persons engaged by a
potential Limited Owner for investment advice as an inducement to such
advisor to advise the potential Limited Owner to purchase Limited
Interests in the Trust;
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(e) Engage in Pyramiding of its Commodities positions;
provided, however, that a Trading Manager(s) may take into account the
Trust's open trade equity on existing positions in determining generally
whether to acquire additional Commodities positions on behalf of the
Trust;
(f) Permit rebates to be received by the Managing Owner or
any Affiliate of the Managing Owner, or permit the Managing Owner or
any Affiliate of the Managing Owner to engage in any reciprocal
business arrangements which would circumvent the foregoing
prohibition;
(g) Permit the Trading Manager(s) to share in any portion of
brokerage fees related to commodity brokerage services paid by the
Trust with respect to its commodity trading activities;
(h) Enter into any contract with the Managing Owner or an
Affiliate of the Managing Owner (except for selling agreements for the
sale of Interests) (i) which has a term of more than one year and which
does not provide that it may be canceled by the Trust without penalty
on sixty (60) days prior written notice or (ii) for the provision of goods
and services, except at rates and terms at least as favorable as those
which may be obtained from third parties in arms-length negotiations;
(i) permit churning of its Commodity trading account(s) for
the purpose of generating excess brokerage commissions; and
(j) Enter into any exclusive brokerage contract.
SECTION 4.5 Liability of Covered Persons. A Covered Person
shall have no liability to the Trust or to any Interestholder or other
Covered Person for any loss suffered by the Trust which arises out of
any action or inaction of such Covered Person if such Covered Person,
in good faith, determined that such course of conduct was in the best
interest of the Trust and such course of conduct did not constitute
negligence or misconduct of such Covered Person. Subject to the
foregoing, neither the Managing Owner nor any other Covered Person
shall be personally liable for the return or repayment of all or any
portion of the capital or profits of any Limited Owner or assignee
thereof, it being expressly agreed that any such return of capital or
profits made pursuant to this Trust Agreement shall be made solely
from the assets of the Trust without any rights of contribution from the
Managing Owner or any other Covered Person.
SECTION 4.6 Indemnification of the Managing Owner.
(a) The Managing Owner shall be indemnified by the Trust
against any losses, judgments, liabilities, expenses and amounts paid
in settlement of any claims sustained by it in connection with the Trust,
provided that (i) the Managing Owner was acting on behalf of or
performing services for the Trust and has determined, in good faith, that
such course of conduct was in the best interests of the Trust and such
liability or loss
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was not the result of negligence, misconduct, or a breach of this Trust
Agreement on the part of the Managing Owner and (ii) any such indemnification
will only be recoverable from the Trust Estate. All rights to indemnification
permitted herein and payment of associated expenses shall not be affected by
the dissolution or other cessation to exist of the Managing Owner, or the
withdrawal, adjudication of bankruptcy or insolvency of the Managing Owner.
Any indemnification under this Section 4.6(a), unless ordered by a court,
shall be made by the Trust only as authorized in the specific case and
only upon a determination by independent legal counsel in a written
opinion that indemnification of the Managing Owner is proper in the
circumstances because it has met the applicable standard of conduct
set forth hereunder.
(b) Notwithstanding the provisions of Section 4.6(a) above,
the Managing Owner and any Person acting as broker-dealer for the
Trust shall not be indemnified for any losses, liabilities or expenses
arising from or out of an alleged violation of federal or state securities
laws unless (i) there has been a successful adjudication on the merits
of each count involving alleged securities law violations as to the
particular indemnitee and the court approves the indemnification of
such expenses (including, without limitation, litigation costs), (ii) such
claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee and the court
approves the indemnification of such expenses (including, without
limitation, litigation costs) or (iii) a court of competent jurisdiction
approves a settlement of the claims against a particular indemnitee and
finds that indemnification of the settlement and related costs should be
made.
(c) In any claim for indemnification for federal or state
securities law violations, the party seeking indemnification shall place
before the court the position of the Securities and Exchange
Commission, the position of the Massachusetts Securities Division, the
Pennsylvania Securities Commission, the Tennessee Securities Division
and the position of any other applicable state securities division which
requires disclosure with respect to the issue of indemnification for
securities law violations.
(d) The Trust shall not incur the cost of that portion of any
insurance which insures any party against any liability the
indemnification of which is herein prohibited.
(e) Expenses incurred in defending a threatened or
pending civil, administrative or criminal action suit or proceeding
against the Managing Owner shall be paid by the Trust in advance of the
final disposition of such action, suit or proceeding, if (i) the legal action
relates to the performance of duties or services by the Managing Owner
on behalf of the Trust; (ii) the legal action is initiated by a third party
who is not a Limited Owner or the legal action is initiated by a Limited
Owner and a court of competent jurisdiction specifically approves such
advancement; and (iii) the Managing Owner undertakes to repay the
advanced funds with interest to the Trust in cases in which it is not
entitled to indemnification under this Section 4.6.
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(f) The term "Managing Owner" as used only in this
Section 4.6 shall include, in addition to the Managing Owner, any other
Covered Person performing services on behalf of the Trust and acting
within the scope of the Managing Owner's authority as set forth in this
Trust Agreement.
(g) In the event the Trust is made a party to any claim,
dispute, demand or litigation or otherwise incurs any loss, liability,
damage, cost or expense as a result of or in connection with any
Limited Owner's (or assignee's) obligations or liabilities unrelated to the
Trust business, such Limited Owner (or assignees cumulatively) shall
indemnify, defend, hold harmless, and reimburse the Trust for all such
loss, liability, damage, cost and expense incurred, including attorneys'
and accountants' fees.
SECTION 4.7 Expenses.
(a) The Managing Owner or an Affiliate of the Managing
Owner shall be responsible for the payment of all Organization and
Offering Expenses incurred in the creation of the Trust and sale of
Interests. Organization and Offering Expenses shall mean those
expenses incurred in connection with the formation, qualification and
registration of the Trust and the Interests and in offering, distributing
and processing the Interests under applicable federal and state law, and
any other expenses actually incurred and, directly or indirectly, related
to the organization of the Trust or the initial and continuous offering of
the Interests, including, but not limited to, expenses such as: (i) initial
and ongoing registration fees, filing fees, escrow fees and taxes, (ii)
costs of preparing, printing (including typesetting), amending,
supplementing, mailing and distributing the Registration Statement, the
Exhibits thereto and the Prospectus during the Initial and Continuous
Offering Periods, (iii) the costs of qualifying, printing, (including
typesetting), amending, supplementing, mailing and distributing sales
materials used in connection with the offering and issuance of the
Interests during the Initial and Continuous Offering Periods, (iv) travel,
telegraph, telephone and other expenses in connection with the offering
and issuance of the Interests during the Initial and Continuous Offering
Periods, (v) accounting, auditing and legal fees (including
disbursements related thereto) incurred in connection therewith, and (vi)
any extraordinary expenses (including, but not limited to, legal claims
and liabilities and litigation costs and any permitted indemnification
associated therewith) related thereto.
(b) All ongoing charges, costs and expenses of the Trust's
operation, including, but not limited to, the routine expenses associated
with (i) preparation of monthly, annual and other reports required by
applicable federal and state regulatory authorities, (ii) Trust meetings
and preparing, printing and mailing of proxy statements and reports to
Interestholders, (iii) the payment of any distributions related to
redemption of Interests, (iv) services of accountants employed by
Affiliates of the Managing Owner, (v) postage, insurance and filing fees,
(vi) client relations and services, (vii) computer equipment and system
development, (viii) the fees to be paid to the Trust's Commodities
broker, (ix) required payments to the Trust's Trading Manager and other
unaffiliated third party service providers, such as the Trustee,
independent legal counsel and independent certified public accounts,
and (x) extraordinary expenses (including, but not limited to, legal
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claims and liabilities and litigation costs and any indemnification related
thereto), shall be billed to and paid by the Managing Owner or an
affiliate of the Managing Owner.
(c) The Managing Owner or any Affiliate of the Managing
Owner may only be reimbursed for the actual cost to the Managing
Owner or such Affiliate of any expenses which it advances on behalf of
the Trust for which payment the Trust is responsible. In addition,
payment to the Managing Owner or such Affiliate for indirect expenses
incurred in performing services for the Trust, such as salaries and fringe
benefits of officers and directors, rent or depreciation, utilities and other
administrative items generally falling within the category of the
Managing Owner's "overhead," is prohibited.
SECTION 4.8 Compensation to the Managing Owner. Except as
provided in Section 7.1(c) with respect to the payment of redemption
charges, the Managing Owner shall not, in its capacity as Managing
Owner, receive any salary, fees, profits or distributions. The Managing
Owner shall, in its capacity as an Interestholder, be entitled to receive
allocations and distributions pursuant to the provisions of this Trust
Agreement.
SECTION 4.9 Other Business of Interestholders. Except as
otherwise specifically provided herein, any of the Interestholders and
any shareholder, officer, director, employee or other person holding a
legal or beneficial interest in an entity which is an Interestholder, may
engage in or possess an interest in other business ventures of every
nature and description, independently or with others, and the pursuit of
such ventures, even if competitive with the business of the Trust, shall
not be deemed wrongful or improper. The Managing Owner and
Affiliates of the Managing Owner shall not engage in a venture
competitive with the Trust except where such venture will not have an
adverse economic effect on the business of the Trust.
SECTION 4.10 Voluntary Withdrawal of the Managing Owner. The
Managing Owner may withdraw voluntarily as the Managing Owner of
the Trust only upon one hundred and twenty (120) days' prior written
notice to all Limited Owners and the Trustee and the prior approval of
Limited Owners holding at least a majority in interest (over 50%) of the
outstanding Interests (excluding Interests of the Managing Owner). If
the withdrawing Managing Owner is the last remaining Managing Owner,
Limited Owners holding at least a majority in interest (over 50%) of the
outstanding Interests (not including Interests held by the Managing
Owner) may vote to elect and appoint, effective as of a date on or prior
to the withdrawal, a successor Managing Owner who shall carry on the
business of the Trust. If the Managing Owner withdraws as Managing
Owner and the Limited Owners or remaining Managing Owner elect to
continue the Trust, the withdrawing Managing Owner shall pay all
expenses incurred as a result of its withdrawal. In the event of its
removal or withdrawal, the Managing Owner shall be entitled to a
redemption of its Interest at the Net Asset Value thereof on the next
Redemption Date following the date of removal or withdrawal.
SECTION 4.11 Authorization of Registration Statement. Each
Limited Owner (or any permitted assignee thereof) hereby agrees that
the Managing Owner is authorized to
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execute, deliver and perform the agreements, acts, transactions and matters
contemplated hereby or described in or contemplated by the Registration
Statement on behalf of the Trust without any further act, approval or vote of
the Limited Owners of the Trust, notwithstanding any other provision of this
Trust Agreement, the Business Trust Statute or any applicable law, rule or
regulation.
SECTION 4.12 Litigation. The Managing Owner is hereby
authorized to prosecute, defend, settle or compromise actions or claims
at law or in equity at the Trust's expense as may be necessary or proper
to enforce or protect the Trust's interests. The Managing Owner shall
satisfy any judgment, decree or decision of any court, board or authority
having jurisdiction or any settlement of any suit or claim prior to
judgment or final decision thereon, first, out of any insurance proceeds
available therefor, next, out of the Trust's assets, and thereafter out of
the assets of the Managing Owner.
ARTICLE V
TRANSFERS OF INTERESTS
SECTION 5.1 General Prohibition. A Limited Owner may not sell,
assign, transfer or otherwise dispose of, or pledge, hypothecate or in
any manner encumber any or all of his Interests or any part of his right,
title and interest in the capital or profits of the Trust except as permitted
in this Article V and any act in violation of this Article V shall not be
binding upon or recognized by the Trust (regardless of whether the
Managing Owner shall have knowledge thereof), unless approved in
writing by the Managing Owner.
SECTION 5.2 Transfer of Managing Owner's General Interests.
(a) Upon an Event of Withdrawal (as defined in Section
13.1), the Managing Owner's General Interests shall be purchased by the
Trust for a purchase price in cash equal to the Net Asset Value thereof.
The Managing Owner will not cease to be a Managing Owner of the
Trust merely upon the occurrence of its making an assignment for the
benefit of creditors, filing a voluntary petition in bankruptcy, filing a
petition or answer seeking for itself any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under
any statue, law or regulation, filing an answer or other pleading
admitting or failing to contest material allegations of a petition filed
against it in any proceeding of this nature or seeking, consenting to or
acquiescing in the appointment of a trustee, receiver of liquidator for
itself or of all or any substantial part of its properties.
(b) To the full extent permitted by law, nothing in this
Trust Agreement shall be deemed to prevent the merger of the Managing
Owner with another corporation, the reorganization of the Managing
Owner into or with any other corporation, the transfer of all the capital
stock of the Managing Owner or the assumption of the Interests, rights,
duties and liabilities of the Managing Owner by, in the case of a merger,
reorganization or consolidation, the surviving corporation by operation
of law.
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(c) Upon assignment of all of its Interests, the Managing
Owner shall not cease to be a Managing Owner of the Trust, or to have
the power to exercise any rights or powers as a Managing Owner, or to
have liability for the obligations of the Trust under Section 1.7 hereof,
until an additional Managing Owner, who shall carry on the business of
the Trust, has been admitted to the Trust.
SECTION 5.3 Transfer of Limited Interests.
(a) Permitted assignees of the Limited Owners shall be
admitted as substitute Limited Owners, pursuant to this Article V, only
upon the consent of the Managing Owner, which may be withheld in the
Managing Owner's sole and absolute discretion. The parties hereto
hereby agree that such restrictions are necessary and desirable in order
to maintain the Trust's tax classification as a partnership, to avoid
having the Trust classified as a publicly traded partnership or to avoid
adverse legal consequences to the Trust.
(i) A substituted Limited Owner is a permitted
assignee that has been admitted to the Trust as a Limited
Owner with all the rights and powers of a Limited Owner
hereunder. If all of the conditions provided in Section 5.3(b)
below are satisfied, the Managing Owner shall admit
permitted assignees into the Trust as Limited Owners by
making an entry on the books and records of the Trust
reflecting that such permitted assignees have been admitted
as Limited Owners, and such permitted assignees will be
deemed Limited Owners at such time as such admission is
reflected on the books and records of the Trust.
(ii) A permitted assignee is a Person to whom a
Limited Owner has assigned his Limited Interests with the
consent of the Managing Owner, as provided below in
Section 5.3(d), but who has not become a substituted
Limited Owner. A permitted assignee shall have no right to
vote, to obtain any information on or account of the Trust's
transactions or to inspect the Trust's books, but shall only
be entitled to receive the share of the profits, or the return
of the Capital Contribution, to which his assignor would
otherwise be entitled as set forth in Section 5.3(d) below to
the extent of the Limited Interests assigned. Each Limited
Owner agrees that any permitted assignee may become a
substituted Limited Owner without the further act or consent
of any Limited Owner, regardless of whether his permitted
assignee becomes a substituted Limited Owner.
(iii) A Limited Owner shall bear all costs (including
attorneys' and accountants' fees) related to any transfer,
assignment, pledge or encumbrance of his Limited Interests.
(b) No permitted assignee of the whole or any portion of
a Limited Owner's Limited Interests shall have the right to become a
substituted Limited Owner in
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place of his assignor unless all of the following conditions are satisfied:
(i) The written consent of the Managing Owner to
such substitution shall be obtained, the granting or denial of
which shall be within the sole and absolute discretion of the
Managing Owner.
(ii) A duly executed and acknowledged written
instrument of assignment has been filed with the Trust
setting forth the intention of the assignor that the permitted
assignee become a substituted Limited Owner in his place;
(iii) The assignor and permitted assignee execute
and acknowledge and/or deliver such other instruments as
the Managing Owner may deem necessary or desirable to
effect such admission, including his execution,
acknowledgement and delivery to the Managing Owner, as
a counterpart to this Trust Agreement, of a Power of
Attorney in the form set forth in the Subscription
Agreement; and
(iv) Upon the request of the Managing Owner, an
opinion of the Trust's independent legal counsel is obtained
to the effect that (i) the assignment will not jeopardize the
Trust's tax classification as a partnership or cause the Trust
to be deemed a publicly traded partnership, and (ii) the
assignment does not violate this Trust Agreement or the
Business Trust Statute.
(c) Any Person admitted to the Trust as an Interestholder
shall be subject to all of the provisions of this Trust Agreement as if an
original signatory hereto.
(d)(i) Subject to the provisions of Section 5.3(e) below,
compliance with the suitability standards imposed by the Trust for the
purchase of new Interests, applicable federal securities and state "Blue
Sky" laws and the rules of any other applicable governmental authority,
a Limited Owner shall have the right to assign all or any of his Limited
Interests to any assignee by a written assignment (on a form acceptable
to the Managing Owner) the terms of which are not in contravention of
any of the provisions of this Trust Agreement, which assignment has
been executed by the assignor and received by the Trust and recorded
on the books thereof. An assignee of a Limited Interest (or any interest
therein) will not be recognized as a permitted assignee without the
consent of the Managing Owner, which consent the Managing Owner
shall withhold only under the following circumstances: (A) if necessary,
in the judgment of the Managing Owner (and upon receipt of an opinion
of counsel to this effect), to preserve the classification of the Trust as
a partnership for federal income tax purposes or to preserve the
characterization or treatment of Trust income or loss; or (B) if, as a
result of such assignment, the Trust would be unable to satisfy at least
one of the safe harbors for avoiding treatment as a publicly traded
partnership provided in Treas. Reg. S 1.7704-1(e) (or under other safe
harbors established by the IRS that protect against treatment as a
publicly traded
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partnership); or (C) if such assignment is effectuated
through an established securities market or a secondary market (or the
substantial equivalent thereof). The Managing Owner shall withhold its
consent to assignments made under the foregoing circumstances, and
shall exercise such right by taking any actions as it seems necessary or
appropriate in its reasonable discretion so that such transfers or
assignments of rights are not in fact recognized, and the assignor or
transferor continues to be recognized by the Trust as an Interestholder
for all purposes hereunder, including the payment of any cash
distribution. The Managing Owner shall incur no liability to any investor
or prospective investor for any action or inaction by it in connection
with the foregoing, provided it acted in good faith.
(ii) Except as specifically provided in this Trust
Agreement, a permitted assignee of an Interest shall be
entitled to receive distributions from the Trust attributable to
the Interest acquired by reason of such assignment from
and after the effective date of the assignment of such
Interest to him. The "effective date" of an assignment of a
Limited Interest as used in this clause shall be the first day
of the next succeeding calendar month, provided the
Managing Owner shall have been in receipt of the written
instrument of assignment for at least thirty (30) days prior
thereto. If the assignee is (A) an ancestor or descendant of
the Limited Owner, (B) the personal representative or heir of
a deceased Limited Owner, (C) the trustee of a trust whose
beneficiary is the Limited Owner or another person to whom
a transfer could otherwise be made or (D) the shareholders,
partners, or beneficiaries of a corporation, partnership or
trust upon its termination or liquidation, then the "effective
date" of an assignment of an Interest in the Trust shall be
the first day of the calendar month immediately following the
month in which the written instrument of assignment is
received by the Managing Owner.
(iii) Anything herein to the contrary notwithstanding,
the Trust and the Managing Owner shall be entitled to treat
the permitted assignor of such Interest as the absolute
owner thereof in all respects, and shall incur no liability for
distributions made in good faith to him, until such time as
the written assignment has been received by, and recorded
on the books of, the Trust.
(e)(i) No assignment or transfer of an Interest may be made
which would result in the Limited Owners and permitted assignees of
the Limited Owners owning, directly or indirectly, individually or in the
aggregate, five percent (5%) or more of the stock of the Managing
Owner or any related person as defined in Sections 267(b) and 707(b)(1)
of the Code. If any such assignment or transfer would otherwise be
made by bequest, inheritance of operation of law, the Interest
transferred shall be deemed sold by the transferor to the Trust
immediately prior to such transfer in the same manner as provided in
Section 5.3(e)(iii).
(ii) No assignment or transfer of an interest in the
Trust may be
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made which would contravene the NASAA
Guidelines, as adopted in any state in which the proposed
transferor and transferee reside including, without limitation,
the restriction set forth in Paragraph F(2) of Article V
thereof, which precludes any assignment (except for
assignments by gift, inheritance, intrafamily assignment,
family dissolutions and transfers to affiliates), which would
result in either the assignee or the assignor holding
Interests valued at less than $5,000 (or $2,000 in the case if
IRAs), provided, however, that this limitation shall not apply
in respect of a Limited Owner wishing to assign its or his
entire interest in the Trust.
(iii) Anything else to the contrary contained herein
notwithstanding: (A) In any particular twelve (12)
consecutive month period no assignment or transfer of an
Interest may be made which would result in increasing the
aggregate total of Interests previously assigned and/or
transferred in said period to forty-nine percent (49%) or
more of the outstanding Interests. This limitation is
hereinafter referred to as the "forty-nine percent (49%)
limitation"; (B) Clause (ii)(A) hereof shall not apply to a
transfer by gift, bequest or inheritance, or a transfer to the
Trust, and, for purposes of the forty-nine percent (49%)
limitation, any such transfer shall not be treated as such; (C)
If, after the forty-nine percent (49%) limitation is reached in
any consecutive twelve (12) month period, a transfer of an
Interest would otherwise take place by operation of law (but
not including any transfer referred to in clause (iii)(B)
hereof) and would cause a violation of the forty-nine percent
(49%) limitation, then said Interest(s) shall be deemed to
have been sold by the transferor to the Trust in liquidation
of said Interest(s) immediately prior to such transfer for a
liquidation price equal to the Net Asset Value of said
Interest(s) on such date of transfer. The liquidation price
shall be paid within ninety (90) days after the date of the
transfer.
(f) The Managing Owner, in its sole discretion, may cause
the Trust to make, refrain from making, or once having made, to revoke,
the election referred to in Section 754 of the Code, and any similar
election provided by state or local law, or any similar provision enacted
in lieu thereof.
(g) The Managing Owner, in its sole discretion, may cause
the Trust to make, refrain from making, or once having made, to revoke
the election by a qualified fund under Section 988(c)(1)(E)(V), and any
similar election provided by state or local law, or any similar provision
enacted in lieu thereof.
(h) Each Limited Owner hereby agrees to indemnify and
hold harmless the Trust and each Interestholder against any and all
losses, damages, liabilities or expense (including, without limitation, tax
liabilities or loss of tax benefits) arising, directly or indirectly, as a
result of any transfer or purported transfer by such Limited Owner in
violation of any provision contained in this Section 5.3.
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ARTICLE VI
DISTRIBUTION AND ALLOCATIONS
SECTION 6.1 Capital Accounts. A capital account shall be
established for each Interestholder on the books of the Trust (such
account sometimes hereinafter referred to as a "book capital account").
The initial balance of each Interestholder's book capital account shall be
the amount of his initial Capital Contribution to the Trust.
SECTION 6.2 Monthly Allocations. As of the close of business (as
determined by the Managing Owner) on the last Business Day of each
calendar month during each Fiscal Year of the Trust, the following
determinations and allocations shall be made:
(a) First, any increase or decrease in the Trust's Net Asset
Value as of such date as compared to the next previous determination
of Net Asset Value shall be credited or charged to the book capital
accounts of the Interestholders in the ratio that the balance of each
Interestholder's book capital account bears to the balance of all
Interestholders' book capital accounts; and
(b) Next, the amount of any distribution to be made to an
Interestholder and any amount to be paid to an Interestholder upon
redemption of his Interests shall be charged to that Interestholder's
book capital account as of the applicable record date and Redemption
Date, respectively.
SECTION 6.3 Allocation of Profit and Loss for United States
Federal Income Tax Purposes. As of the end of each Fiscal Year of the
Trust, the Trust's recognized profit and loss shall be allocated among
the Interestholders pursuant to the following subparagraphs for federal
income tax purposes. Except as otherwise provided herein, such
allocations of profit and loss shall be pro rata from Disposition Gain (or
Disposition Loss) and Profits (or Losses).
(a) First, the Profits or Losses of the Trust shall be
allocated pro rata among the Interestholders based on their respective
book capital accounts as of the last of each calendar month in which
such Profits or Losses accrued.
(b) Next, Disposition Gain or Disposition Loss from the
Trust's trading activities for each Fiscal Year of the Trust shall be
allocated among the Interestholders as follows:
(i) There shall be established a tax capital account
with respect to each outstanding Interest. The initial
balance of each tax capital account shall be the amount paid
by the Interestholder to the Trust for the Interest. Tax
capital accounts shall be adjusted as of the end of each
Fiscal Year as follows: (A) Each tax capital account shall
be increased by the amount of income (Profits or
Disposition Gain) which shall have been allocated to the
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Interestholder who shall hold the Interest pursuant to
Section 6.3(a) above and Sections 6.3(b)(ii) and 6.3(b)(iii)
below; (B) Each tax capital account shall be decreased by
the amount of expense or loss (Losses or Disposition
Losses) which shall have been allocated to the
Interestholder who shall hold the Interest pursuant to
Section 6.3(a) above and Sections 6.3(b)(iv) and 6.3(b)(v)
below and by the amount of any distribution which shall
have been received by the Interestholder with respect to the
Interest (other than on redemption of Interests); and (C) If
an Interest is redeemed, the tax capital account with respect
to such Interest shall be eliminated on the Redemption Date.
(ii) Disposition Gain realized during any calendar
month shall be allocated first among all Interestholders
whose book capital accounts shall be in excess of their
Interests' tax capital accounts (after making the adjustments,
other than adjustments resulting from the allocations to be
made pursuant to this Section 6.3(b)(ii) for the current
calendar month, described in Section 6.3(b)(i) above) in the
ratio that each such Interestholder's excess shall bear to all
such Interestholder's excesses.
(iii) Disposition Gain realized during any calendar
month that remains after the allocation pursuant to Section
6.3(b)(ii) above shall be allocated to those Interestholders
who were Interestholders during such month in the ratio that
each such Interestholder's book capital account bears to all
such Interestholders' book capital accounts for such month.
(iv) Disposition Loss realized during any calendar
month shall be allocated first among all Interestholders
whose Interests' tax capital accounts shall be in excess of
their book capital accounts (after making the adjustments,
other than adjustments resulting from the allocations to be
made pursuant to this Section 6.3(b)(iv) for the current
calendar month, described in Section 6.3(b)(i) above) in the
ratio that each such Interestholder's excess shall bear to all
such Interestholders' excesses.
(v) Disposition Loss realized during any calendar
month that remains after the allocation pursuant to Section
6.3(b)(iv) above shall be allocated to those Interestholders
who were Interestholders during such calendar month in the
ratio that each such Interestholder's book capital account
bears to all such Interestholders' book capital accounts for
such calendar month.
(c) The tax allocations prescribed by this Section 6.3 shall
be made to each holder of an Interest whether or not the holder is a
substituted Limited Owner. For purposes of this Section 6.3, tax
allocations shall be made to the Managing Owner's Interests on an
Interest-equivalent basis.
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(d) The allocation of income and loss (and items thereof)
for federal income tax purposes set forth in this Section 6.3 is intended
to allocate taxable income and loss among Interestholders generally in
the ratio and to the extent that net profit and net loss shall be allocated
to such Interestholders under Section 6.2 so as to eliminate, to the
extent possible, any disparity between an Interestholder's book capital
account and his tax capital account, consistent with the principles set
forth in Sections 704(b) and (c)(2) of the Code.
(e) Notwithstanding this Section 6.3, if after taking into
account any distributions to be made with respect to such Interest for
the relevant period pursuant to Section 6.4 herein, any allocation would
produce a deficit in the book capital account of an Interest, the portion
of such allocation that would create such a deficit shall instead be
allocated pro rata to the book capital accounts of the other Interests
held by the same Interestholder (subject to the same limitation) and, as
to any balance, shall be allocated pro rata to the book capital accounts
of all the remaining Interestholders (subject to the same limitation).
SECTION 6.4 Allocation of Distributions. Initially, distributions
shall be made by the Managing Owner, and the Managing Owner shall
have sole discretion in determining the amount and frequency of
distributions, other than redemptions, which the Trust shall make with
respect to the Interests; provided, however, that the Trust shall not
make any distribution that violates the Business Trust Statute. The
aggregate distributions made in a Fiscal Year (other than distributions
on termination, which shall be allocated in the manner described in
Article VIII) shall be allocated among the holders of record of Interests
in the ratio in which the number of Interests held of record by each of
them bears to the number of Interests held of record by all of the
Interestholders as of the record date of such distribution; provided,
further, however, that any distribution made in respect of an Interest
shall not exceed the book capital account for such Interest.
SECTION 6.5 Admissions of Interestholders; Transfers. For
purposes of this Article VI, Interestholders shall be deemed admitted,
and a tax and book capital account shall be established in respect of the
Interests acquired by such Interestholder or in respect of additional
Interests acquired by an existing Interestholder, as of the first day of the
calendar month following the calendar month in which such
Interestholder's subscription or additional Capital Contribution, as the
case may be, is accepted, or the transfer of Interests to such
Interestholder is recognized, except that persons accepted as
subscribers to the Trust pursuant to Section 3.2(b) shall be deemed
admitted on the date determined pursuant to such Section. Any
Interestholder to whom an Interest had been transferred shall succeed
to the tax and book capital accounts attributable to the Interest
transferred.
SECTION 6.6 Liability for State and Local and Other Taxes. In the
event that the Trust shall be separately subject to taxation by any state
or local or by any foreign taxing authority, the Trust shall be obligated
to pay such taxes to such jurisdiction. In the event that the Trust shall
be required to make payments to any Federal, state or local or any
foreign taxing authority in respect of any Interestholder's allocable share
of Trust income,
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the amount of such taxes shall be considered a loan by
the Trust to such Interestholder, and such Interestholder shall be liable
for, and shall pay to the Trust, any taxes so required to be withheld and
paid over by the Trust within ten (10) days after the Managing Owner's
request therefor. Such Interestholder shall also be liable for (and the
Managing Owner shall be entitled to redeem additional Interests of the
foreign Interestholder as necessary to satisfy) interest on the amount of
taxes paid over by the Trust to the IRS or other taxing authority, from
the date of the Managing Owner's request for payment to the date of
payment or the redemption, as the case may be, at the rate of two
percent (2%) over the prime rate charged from time to time by Citibank,
N.A. The amount, if any, payable by the Trust to the Interestholder in
respect of its Interests so redeemed, or in respect of any other actual
distribution by the Trust to such Interestholder, shall be reduced by any
obligations owed to the Trust by the Interestholder, including, without
limitation, the amount of any taxes required to be paid over by the Trust
to the IRS or other taxing authority and interest thereon as aforesaid.
Amounts, if any, deducted by the Trust from any actual distribution or
redemption payment to such Interestholder shall be treated as an actual
distribution to such Interestholder for all purposes of this Trust
Agreement.
ARTICLE VII
REDEMPTIONS
SECTION 7.1 Redemption of Interests. The Interestholders
recognize that the profitability of the Trust depends upon long-term and
uninterrupted investment of capital. It is agreed, therefore, that Trust
profits and gains may be automatically reinvested, and that
distributions, if any, of profits and gains to the Interestholders will be on
a limited basis. Nevertheless, the Interestholders contemplate the
possibility that one or more of the Limited Owners may elect to realize
and withdraw profits, or withdraw capital through the redemption of
Interests prior to the dissolution of the Trust. In that regard and subject
to the provisions of Section 4.2(h):
(a) Subject to the conditions set forth in this Article VII,
each Limited Owner (or any permitted assignee thereof) shall have the
right to redeem any Limited Interest or portion thereof that he owns
immediately following the close of business on the last day of a month
following the date the Managing Owner is in receipt of written notice of
redemption for at least ten (10) days (a "Redemption Date"),
commencing with the end of the first full calendar month of Trust
trading activity. Interests will be redeemed on a "first in, first out" basis
based on time of receipt of redemption requests. If an Interestholder (or
permitted assignee thereof) is permitted to redeem any or all of his
Interests as of a date other than a Redemption Date, such adjustments
in the determination and allocation among the Interestholders of
Disposition Gain, Disposition Loss, Profits, Losses and items of income
or deduction for tax accounting purposes shall be made as are
necessary or appropriate to reflect and give effect to the redemption.
(b) Subject to the provisions of Section 13.1(h), in the
event that the Net
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Asset Value per Interest as of the close of any
Business Day shall decrease to less than fifty percent (50%) of the Net
Asset Value per Interest as of the last day of the preceding month,
Limited Owners shall be given notice of such event, as provided in
Section 9.4 hereof. In such event, (i) the Managing Owner will cease its
commodity trading activities for twenty (20) Business Days and (ii)
Limited Owners shall be permitted to redeem one or more whole or
fractional Interests that they own by notifying the Managing Owner of
their intent to redeem. Such special redemptions will be effective as of
the twentieth (20th) Business Day following the mailing date of the
notice described in Section 9.4 hereof (the "Special Redemption Date"),
provided the Managing Owner is in receipt of such notice from the
Limited Owner for a least five (5) Business Days. Interests will be
valued as of the close of business on the Special Redemption Date.
(c) The value of an Interest for purposes of redemption
shall be the book capital account balance of such Interest at the close
of business on the Redemption Date, less any amount owing by such
Limited Owner (and his permitted assignee, if any) to the Trust pursuant
to Sections 4.6(g), 5.3(h) or 6.6 of this Trust Agreement; provided,
however, that Interests which are redeemed on or prior to the end of the
first and second six-month periods after such Interests are sold will be
assessed redemption charges of 4% and 3%, respectively, which
redemption charges will be paid to the Managing Owner, provided,
however, that no such redemption charges will be imposed with respect
to any Interests in the event that the Limited Owner thereof certifies to
the Trust that the Interests are being redeemed as a result of an
increase in fees and expenses imposed on the Trust above those
disclosed in the Prospectus. If redemption of an Interest shall be
requested by a permitted assignee, all amounts which shall be owed to
the Trust under Sections 4.6(g), 5.3(h) or 6.6 hereof by the Interestholder
of record, as well as all amounts which shall be owed by all permitted
assignees of such Interests, shall be deducted from the Net Asset Value
of such Interests upon redemption.
(d) The effective date of redemption shall be the
Redemption Date and payment of the value of the redeemed Interests
generally shall be made within ten (10) Business Days following the
Redemption Date; provided, that all liabilities, contingent or otherwise,
of the Trust, except any liability to Interestholders on account of their
Capital Contributions, have been paid or there remains property of the
Trust sufficient to pay them; and provided further, that under
extraordinary circumstances as may be determined by the Managing
Owner in its sole discretion, including, but not limited to, the inability to
liquidate Commodity positions as of such Redemption Date, or default
or delay in payments due the Trust from commodity brokers, banks or
other Persons, or significant administrative hardship, the Trust may in
turn delay payment to Limited Owners requesting redemption of
Interests of the proportionate part of the value of redeemed Interests
represented by the sums which are the subject of such default or delay,
in which event payment for redemption of such Interests will be made
to Limited Owners as soon thereafter as is practicable. A Limited Owner
may revoke his notice of intent to redeem on or prior to the Redemption
Date by written instructions to the Managing Owner. If a Limited Owner
revokes his notice of intent to redeem and thereafter wishes to redeem,
such Limited Owner will be required to submit written notice thereof in
accordance with Section 7.1(e) and will
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be redeemed on the first Redemption Date to occur after the Managing Owner
shall have been in receipt of such written notice for at least ten (10)
Business Days.
(e) A Limited Owner (or any permitted assignee thereof)
wishing to redeem Interests must provide the Managing Owner with
written notice of his intent to redeem, which notice shall specify the
name and address of the redeeming Limited Owner and the amount of
Limited Interests sought to be redeemed. The notice of redemption
shall be in the form annexed to the Prospectus or in any other form
acceptable to the Managing Owner and shall be mailed or delivered to
the principal place of business of the Managing Owner. Such notice
must include representations and warranties that the redeeming Limited
Owner (or any permitted assignee thereof) is the lawful and beneficial
owner of the Interests to be redeemed and that such Interests are not
subject to any pledge or otherwise encumbered in any fashion. In
certain circumstances, the Trust may require additional documents,
such as, but not limited to, trust instruments, death certificates,
appointments as executor or administrator or certificates of corporate
authority. Limited Owners requesting redemption shall be notified in
writing within ten (10) Business Days following the Redemption Date
whether or not their Interests will be redeemed, unless payment for the
redeeming Interests is made within that ten (10) Business Day period,
in which case the notice of acceptance of the redemption shall not be
required.
(f) The Managing Owner may suspend temporarily any
redemption if the effect of such redemption, either alone or in
conjunction with other redemptions, would be to impair the Trust's
ability to operate in pursuit of its objectives. In addition, the Managing
Owner may mandatorily redeem Interests pursuant to Section 4.2(h).
(g) Interests that are redeemed shall be extinguished and
shall not be retained or reissued by the Trust.
(h) Except as discussed above, all requests for redemption
in proper form will be honored, and the Trust's positions will be
liquidated to the extent necessary to discharge its liabilities on the
Redemption Date.
SECTION 7.2 Redemption By the Managing Owner.
Notwithstanding any provision in this Trust Agreement to the contrary,
for so long as it shall act as the Trust's Managing Owner, the Managing
Owner shall not transfer or redeem any of its General Interests to the
extent that any such transfer or redemption would result in its having
less than a one percent (1%) interest in the Trust.
ARTICLE VIII
THE LIMITED OWNERS
SECTION 8.1 No Management or Control; Limited Liability. The
Limited Owners shall not participate in the management or control of the
Trust's business nor shall they
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transact any business for the Trust or have the power to sign for or bind
the Trust, said power being vested solely and exclusively in the Managing
Owner. Except as provided in Section 8.3 hereof, no Limited Owner shall be
bound by, or be personally liable for, the expenses, liabilities or
obligations of the Trust in excess of his Capital Contribution plus his
share of the Trust Estate and profits remaining in the Trust, if any. Except
as provided herein, each Limited Interest owned by a Limited Owner shall be
fully paid and no assessment shall be made against any Limited Owner. No
salary shall be paid to any Limited Owner in his capacity as a Limited Owner,
nor shall any Limited Owner have a drawing account or earn interest on
his contribution.
SECTION 8.2 Rights and Duties. The Limited Owners shall have
the following rights, powers, privileges, duties and liabilities:
(a) The Limited Owners shall have the right to obtain
information of all things affecting the Trust, provided that such is for a
purpose reasonably related to the Limited Owner's interest as a
beneficial owner of the Trust, including, without limitation, such reports
as are set forth in Article IX and such information as is set forth in
Section 4.3(l) hereof. In the event that the Managing Owner neglects or
refuses to produce or mail to a Limited Owner a copy of the information
set forth in Section 4.3(l) hereof, the Managing Owner shall be liable to
such Limited Owner for the costs, including reasonable attorney's fees,
incurred by such Limited Owner to compel the production of such
information, and for any actual damages suffered by such Limited
Owner as a result of such refusal or neglect; provided, however, it shall
be a defense of the Managing Owner that the actual purpose of the
Limited Owner's request for such information was not reasonably
related to the Limited Owner's interest as a beneficial owner in the Trust
(e.g., to secure such information in order to sell it, or to use the same
for a commercial purpose unrelated to the participation of such Limited
Owner in the Trust). The foregoing rights are in addition to, and do not
limit, other remedies available to Limited Owners under federal or state
law.
(b) The Limited Owners shall receive from the Trust the
share of the distributions provided for in this Trust Agreement in the
manner and at the times provided for in this Trust Agreement.
(c) Except for the Limited Owners' redemption rights set
forth in Article VII hereof or upon a mandatory redemption effected by
the Managing Owner pursuant to Section 4.2(h) hereof, Limited Owners
shall have the right to demand the return of their capital account only
upon the dissolution and winding up of the Trust and only to the extent
of funds available therefor. In no event shall a Limited Owner be
entitled to demand or receive property other than cash. No Limited
Owner shall have priority over any other Limited Owner either as to the
return of capital or as to profits, losses or distributions. No Limited
Owner shall have the right to bring an action for partition against the
Trust.
(d) Limited Owners holding at least a majority in interest
(over 50%) of the outstanding Interests (not including Interests held by
the Managing Owner and its
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Affiliates, including the commodity broker) may vote to (i) continue the
Trust as provided in Section 13.1(b), (ii) approve the voluntary withdrawal
of the Managing Owner and elect a successor Managing Owner as provided in
Section 4.10, (iii) remove the Managing Owner on reasonable prior written
notice to the Managing Owner, (iv) elect and appoint one or more additional
Managing Owners, (v) approve a material change in the trading policies of the
Trust, or the brokerage fees paid by the Trust, as set forth in the
Prospectus, which change shall not be effective without the prior written
approval of such majority, (vi) approve the termination of any agreement
entered into between the Trust and the Managing Owner or any Affiliate of
the Managing Owner for any reason, without penalty, (vii) approve
amendments to this Trust Agreement as set forth in Section 11.1 hereof,
and (viii) terminate the Trust as provided in Section 13.1(g), and in the
case of (iv), (v) and (vi) in each instance on sixty (60) days' prior written
notice.
Except as set forth above, the Limited Owners shall have no
voting or other rights with respect to the Trust. Prior to the exercise by
the Limited Owners of the rights set forth in Section 8.2(d), the Trust
will, if practicable, provide the Limited Owners with an opinion of
independent legal counsel in each state where the Trust may be deemed
to be conducting its business with respect to whether or not such
exercise would constitute such participation in the control of the Trust
business as would adversely affect the Limited Owners limited liability
under the laws of such state.
SECTION 8.3 Limitation on Liability.
(a) Except as provided in Sections 4.6(g), 5.3(h) and 6.6
hereof, and as otherwise provided under Delaware law, the Limited
Owners shall be entitled to the same limitation of personal liability
extended to stockholders of private corporations for profit organized
under the general corporation law of Delaware and no Limited Owner
shall be liable for claims against, or debts of the Trust in excess of his
Capital Contribution and his share of the Trust Estate and undistributed
profits, except in the event that the liability is founded upon
misstatements or omissions contained in such Limited Owner's
Subscription Agreement delivered in connection with his purchase of
Interests. In addition, and subject to the exceptions set forth in the
immediately preceding sentence, the Trust shall not make a claim
against a Limited Owner with respect to amounts distributed to such
Limited Owner or amounts received by such Limited Owner upon
redemption unless, under Delaware law, such Limited Owner is liable to
repay such amount.
(b) The Trust shall indemnify, to the full extent permitted
by law, to the extent of the Trust Estate, each Limited Owner (excluding
the Managing Owner to the extent of its ownership of any Limited
Interests) against any claims of liability asserted against such Limited
Owner solely because he is a beneficial owner of the Trust (other than
for taxes for which such Limited Owner is liable under Section 6.6
hereof).
(c) Every written note, bond, contract, instrument,
certificate or undertaking made or issued by the Managing Owner shall
give notice to the effect that the same was executed or made by or on
behalf of the Trust and that the obligations of such
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instrument are not binding upon the Limited Owners individually but are
binding only upon the assets and property of the Trust, and no resort shall
be had to the Limited Owners' personal property for satisfaction of any
obligation or claim thereunder, and appropriate references may be made to
this Trust Agreement and may contain any further recital which the Managing
Owner deems appropriate, but the omission thereof shall not operate to
bind the Limited Owners individually or otherwise invalidate any such
note, bond, contract, instrument, certificate or undertaking.
ARTICLE IX
BOOKS OF ACCOUNT AND REPORTS
SECTION 9.1 Books of Account. Proper books of account shall
be kept and shall be audited annually by an independent certified public
accounting firm selected by the Managing Owner in its sole discretion,
and there shall be entered therein all transactions, matters and things
relating to the Trust's business as are required by the CE Act and
regulations promulgated thereunder, and all other applicable rules and
regulations, and as are usually entered into books of account kept by
Persons engaged in a business of like character. The books of account
shall be kept at the principal office of the Trust and each Limited Owner
(or any duly constituted designee of a Limited Owner) shall have, at all
times during normal business hours, free access to and the right to
inspect and copy the same for any purpose reasonably related to the
Limited Owner's interest as a beneficial owner of the Trust, including
such access as is required under CFTC rules and regulations. Such
books of account shall be kept, and the Trust shall report its Profits and
Losses on, the accrual method of accounting for financial accounting
purposes on a Fiscal Year basis as described in Article X.
SECTION 9.2 Annual Reports and Monthly Statements. Each
Limited Owner shall be furnished as of the end of each month and as of
the end of each Fiscal Year with (a) such reports (in such detail) as are
required to be given to Limited Owners by the CFTC and the NFA, (b)
any other reports (in such detail) required by any other governmental
authority which has jurisdiction over the activities of the Trust and (c)
any other reports or information which the Managing Owner, in its
discretion, determines to be necessary or appropriate.
SECTION 9.3 Tax Information. Appropriate tax information
(adequate to enable each Limited Owner to complete and file his federal
tax return) shall be delivered to each Limited Owner as soon as
practicable following the end of each Fiscal Year but generally no later
than March 15.
SECTION 9.4 Calculation of Net Asset Value. Net Asset Value will
be estimated on each Business Day. Upon request, on any Business
Day, the Managing Owner shall make available to any Limited Owner the
estimated Net Asset Value per Interest. Each Limited Owner shall be
notified of any decline in the estimated Net Asset Value per
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Interest to less than 50% of the Net Asset Value per Interest as of the last
day of the preceding month within seven (7) Business Days of such
occurrence. Included in such notification shall be a description of the
Limited Owners' voting rights as set forth in Section 8.2 hereof and
redemption rights as set forth in Section 7.1 hereof.
SECTION 9.5 Other Reports. The Managing Owner shall send
such other reports and information, if any, to the Limited Owners as it
may deem necessary or appropriate. Each Limited Owner shall be
notified of (a) any material change in the terms of the Advisory
Agreement, including any change in the Trading Manager or any
modification in connection with the method of calculating the incentive
fee; (b) any change of Trustee; (c) any other material change affecting
the compensation of any party within seven (7) Business Days of such
occurrence; and (d) a description of any material effect on the Interests
such changes may have. Included in such notification shall be a
description of the Limited Owners' voting rights as set forth in Section
8.2 hereof and redemption rights as set forth in Section 7.1 hereof. In
addition, the Managing Owner shall submit to the Securities
Administrator of any State having jurisdiction over the Trust any
information required to be filed with such Administrator, including, but
not limited to, reports and statements required to be distributed to the
Limited Owners.
SECTION 9.6 Maintenance of Records. The Managing Owner shall
maintain (a) for a period of at least eight (8) Fiscal Years all books of
account required by Section 9.1 hereof; a list of the names and last
known address of, and number of Interests owned by, all
Interestholders, a copy of the Certificate of Trust and all certificates of
amendment thereto, together with executed copies of any powers of
attorney pursuant to which any certificate has been executed; copies of
the Trust's federal, state and local income tax returns and reports, if
any; and a record of the information obtained to indicate that a Limited
Owner meets the investor suitability standards set forth in the
Prospectus, and (b) for a period of at least six (6) Fiscal Years copies of
any effective written trust agreements, subscription agreements and any
financial statements of the Trust.
SECTION 9.7 Certificate of Trust. Except as otherwise provided
in the Business Trust Statute or this Trust Agreement, the Managing
Owner shall not be required to mail a copy of any Certificate of Trust
filed with the Secretary of State of the State of Delaware to each Limited
Owner; however, such certificates shall be maintained at the principal
office of the Trust and shall be available for inspection and copying by
the Limited Owners in accordance with this Trust Agreement.
SECTION 9.8 Registration of Interests. Subject to Section 4.3(l)
hereof, the Managing Owner shall keep, at the Trust's principal place of
business, an Interest Register in which, subject to such reasonable
regulations as it may provide, it shall provide for the registration of
Interests and of transfers of Interests. Subject to the provisions of
Article V, the Managing Owner may treat the Person in whose name any
Interest shall be registered in the Interest Register as the Interestholder
of such Interest for the purpose of receiving distributions pursuant to
Article VI and for all other purposes whatsoever.
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ARTICLE X
FISCAL YEAR
SECTION 10.1 Fiscal Year. The Fiscal Year shall begin on the 1st
day of January and end on the 31st day of December of each year. The
first Fiscal Year of the Partnership shall commence on the date of filing
of the Certificate of Trust and end on the 31st day of December 1995.
The Fiscal Year in which the Trust shall terminate shall end on the date
of termination of the Trust.
ARTICLE XI
AMENDMENT OF TRUST AGREEMENT; MEETINGS
SECTION 11.1 Amendments to the Trust Agreement.
(a) Amendments to this Trust Agreement may be proposed
by the Managing Owner or by Limited Owners holding at least ten
percent (10%) of the then outstanding Interests. Following such
proposal, the Managing Owner shall submit to the Limited Owners a
verbatim statement of any proposed amendment, and statements
concerning the legality of such amendment and the effect of such
amendment on the limited liability of the Limited Owners. The Managing
Owner shall include in any such submission its recommendations as to
the proposed amendment. The amendment shall become effective only
upon the written approval or affirmative vote of Limited Owners holding
at least a majority in interest (over 50%) of the then outstanding
Interests (excluding Interests held by the Managing Owner and its
Affiliates), or such higher percentage as may be required by applicable
law, and upon receipt of an opinion of independent legal counsel as set
forth in Section 8.2 hereof and to the effect that the amendment is legal,
valid and binding and will not adversely affect the limitations on liability
of the Limited Owners as described in Section 8.3 of this Trust
Agreement. Notwithstanding the foregoing, where any action taken or
authorized pursuant to any provision of this Trust Agreement requires
the approval or affirmative vote of Limited Owners holding a greater
interest in Limited Interests than is required to amend this Trust
Agreement under this Section 11.1, and/or the approval or affirmative
vote of the Managing Owners, an amendment to such provision(s) shall
be effective only upon the written approval or affirmative vote of the
minimum number of Interestholders which would be required to take or
authorize such action, or as may otherwise be required by applicable
law, and upon receipt of an opinion of independent legal counsel as set
forth above in this Section 11.1. In addition, except as otherwise
provided below, reduction of the capital account of any assignee or
modification of the percentage of Profits, Losses or distributions to
which an assignee is entitled hereunder shall not be affected by
amendment to this Trust Agreement without such assignee's approval.
(b) Notwithstanding any provision to the contrary
contained in Section
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11.1(a) hereof, the Managing Owner may, without the approval of the Limited
Owners, make such amendments to this Trust Agreement which (i) are necessary
to add to the representations, duties or obligations of the Managing Owner or
surrender any right or power granted to the Managing Owner herein, for the
benefit of the Limited Owners, (ii) are necessary to cure any ambiguity, to
correct or supplement any provision herein which may be inconsistent with any
other provision herein or in the Prospectus, or to make any other
provisions with respect to matters or questions arising under this Trust
Agreement or the Prospectus which will not be inconsistent with the
provisions of the Trust Agreement or the Prospectus, or (iii) the
Managing Owner deems advisable, provided, however, that no
amendment shall be adopted pursuant to this clause (iii) unless the
adoption thereof (A) is not adverse to the interests of the Limited
Owners; (B) is consistent with Section 4.1 hereof; (C) except as
otherwise provided in Section 11.1(c) below, does not affect the
allocation of Profits and Losses among the Limited Owners or between
the Limited Owners and the Managing Owner; and (D) does not
adversely affect the limitations on liability of the Limited Owners, as
described in Article VIII hereof or the status of the Trust as a partnership
for federal income tax purposes.
(c) Notwithstanding any provision to the contrary
contained in Sections 11.1(a) and (b) hereof, the Managing Owner may,
without the approval of the Limited Owners, amend the provisions of
Article VI of this Trust Agreement relating to the allocations of Profits,
Losses, Disposition Gain, Disposition Loss and distributions among the
Interestholders if the Trust is advised at any time by the Trust's
accountants or legal counsel that the allocations provided in Article VI
of this Trust Agreement are unlikely to be respected for federal income
tax purposes, either because of the promulgation of new or revised
Treasury Regulations under Section 704 of the Code or other
developments in the law. The Managing Owner is empowered to amend
such provisions to the minimum extent necessary in accordance with
the advice of the accountants and counsel to effect the allocations and
distributions provided in this Trust Agreement. New allocations made
by the Managing Owner in reliance upon the advice of the accountants
or counsel described above shall be deemed to be made pursuant to the
obligation of the Managing Owner to the Trust and the Limited Owners,
and no such new allocation shall give rise to any claim or cause of
action by any Limited Owner.
(d) Upon amendment of this Trust Agreement, the
Certificate of Trust shall also be amended, if required by the Business
Trust Statute, to reflect such change.
(e) No amendment shall be made to this Trust Agreement
without the consent of the Trustee if such amendment adversely affects
any of the rights, duties or liabilities of the Trustee; provided, however,
that the Trustee may not withhold its consent for any action which the
Limited Owners are permitted to take under Section 8.2(d) above. The
Trustee shall execute and file any amendment to the Certificate of Trust
if so directed by the Managing Owner or if such amendment is required
in the opinion of the Trustee.
SECTION 11.2 Meetings of the Trust. Meetings of the Trust may
be called by the Managing Owner and will be called by it upon the
written request of Limited Owners
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holding at least ten percent (10%) of the outstanding Interests. Such call
for a meeting shall be deemed to have been made upon the receipt by the
Managing Owner of a written request from the requisite percentage of Limited
Owners. The Managing Owner shall deposit in the United States mails, within
fifteen (15) days after receipt of said request, written notice to all
Interestholders of the meeting and the purpose of the meeting, which shall be
held on a date, not less than thirty (30) nor more than sixty (60) days after
the date of mailing of said notice, at a reasonable time and place. Any
notice of meeting shall be accompanied by a description of the action to be
taken at the meeting and an opinion of independent counsel as to the effect
of such proposed action on the liability of Limited Owners for the debts
of the Trust. Interestholders may vote in person or by proxy at any
such meeting.
SECTION 11.3 Action Without a Meeting. Any action required or
permitted to be taken by Interestholders by vote may be taken without
a meeting on written consent setting forth the actions so taken, signed
by the holders of the Interests having not less than the minimum
number of votes that would be necessary to authorize or take such
action at a meeting at which holders of all Interests entitled to vote
thereon were present and voted.
ARTICLE XII
TERM
SECTION 12.1 Term. The term for which the Trust is to exist shall
commence on the date of the filing of the Certificate of Trust, and shall
expire on December 31, 2015, unless sooner terminated pursuant to the
provisions of Article XIII hereof or as otherwise provided by law.
ARTICLE XIII
TERMINATION
SECTION 13.1 Events Requiring Dissolution. The Trust shall
dissolve at any time upon the happening of any of the following events:
(a) The expiration of its term as provided in Article XII
hereof.
(b) The filing of a certificate of dissolution or revocation
of the charter (and the expiration of 90 days after the date of notice to
the Managing Owner of revocation without a reinstatement of its charter)
of the Managing Owner, or upon the withdrawal, removal, adjudication
of bankruptcy or insolvency of the Managing Owner (each of the
foregoing events an "Event of Withdrawal") unless (i) at the time there
is at least one remaining Managing Owner and that remaining Managing
Owner carries on the business of the Trust or (ii) within ninety (90) days
of such Event of Withdrawal all the remaining
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Interestholders agree in writing to continue the business of the Trust and
to select, effective as of the date of such event, one or more successor
Managing Owners. If the Trust is terminated as the result of an Event of
Withdrawal of a Managing Owner and a failure of the Interestholders to
continue the business of the Trust and appoint a successor Managing Owner as
provided in clause (b)(ii) above, within one hundred and twenty (120)
days of such Event of Withdrawal, Limited Owners holding a majority in
interest (over 50%) of the outstanding Interests (not including Interests
held by the Managing Owner and its Affiliates) may elect to continue the
business of the Trust by forming a new business trust (the
"Reconstituted Trust") on the same terms and provisions as set forth in
this Trust Agreement (whereupon the parties hereto shall execute and
deliver any documents or instruments as may be necessary to reform
the Trust). Any such election must also provide for the election of a
Managing Owner to the Reconstituted Trust. If such an election is
made, all Limited Owners of the Trust shall be bound thereby and
continue as Limited Owners of the Reconstituted Trust.
(c) The occurrence of any event which would make
unlawful the continued existence of the Trust.
(d) In the event that subscriptions for at least 100,000
Interests are not sold during the Initial Offering Period.
(e) In the event of the suspension, revocation or
termination of the Managing Owner's registration as a commodity pool
operator under the CE Act, or membership as a commodity pool
operator with the NFA unless at the time there is at least one remaining
Managing Owner whose registration or membership has not been
suspended, revoked or terminated.
(f) The Trust becomes insolvent or bankrupt.
(g) The vote of Limited Owners holding more than fifty
percent (50%) of the outstanding Interests (which excludes the Interests
of the Managing Owner) to terminate the Trust, notice of which is sent
to the Managing Owner not less than ninety (90) Business Days prior to
the effective date of such termination.
(h) The decline of the Net Asset Value of the Trust Estate
by fifty percent (50%) from the Net Asset Value of the Trust Estate (i) at
the commencement of the Trust's trading activities or (ii) on the first day
of a fiscal year, in each case after appropriate adjustment for
distributions, additional capital contributions and redemptions.
(i) The determination of the Managing Owner that the
Trust's aggregate net assets in relation to the operating expenses of the
Trust make it unreasonable or imprudent to continue the business of the
Trust.
The death, legal disability, bankruptcy, insolvency, dissolution, or
withdrawal of any Limited Owner (as long as such Limited Owner is not
the sole Limited Owner of the Trust)
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shall not result in the termination of the Trust, and such Limited Owner,
his estate, custodian or personal representative shall have no right to
withdraw or value such Limited Owner's Interests except as provided in
Section 7.1 hereof. Each Limited Owner (and any assignee thereof) expressly
agrees that in the event of his death, he waives on behalf of himself and his
estate, and he directs the legal representative of his estate and any person
interested therein to waive the furnishing of any inventory, accounting or
appraisal of the assets of the Trust and any right to an audit or examination
of the books of the Trust, except for such rights as are set forth in Article
IX hereof relating to the Books of Account and reports of the Trust.
SECTION 13.2 Distributions on Dissolution. Upon the dissolution
of the Trust, the Managing Owner (or in the event there is no Managing
Owner, such person (the "Liquidating Trustee") as the majority in
interest of the Limited Owners may propose and approve) shall take full
charge of the Trust assets and liabilities. Any Liquidating Trustee so
appointed shall have and may exercise, without further authorization or
approval of any of the parties hereto, all of the powers conferred upon
the Managing Owner under the terms of this Trust Agreement, subject
to all of the applicable limitations, contractual and otherwise, upon the
exercise of such powers, and provided that the Liquidating Trustee shall
not have general liability for the acts, omissions, obligations and
expenses of the Trust. Thereafter, the business and affairs of the Trust
shall be wound up and all assets shall be liquidated as promptly as is
consistent with obtaining the fair value thereof, and the proceeds
therefrom shall be applied and distributed in the following order of
priority: (a) to the expenses of liquidation and termination and to
creditors, including Interestholders who are creditors, to the extent
otherwise permitted by law, in satisfaction of liabilities of the Trust
(whether by payment or the making of reasonable provision for payment
thereof) other than liabilities for distributions to Interestholders, and (b)
to the Managing Owner and each Limited Owner pro rata in accordance
with his positive book capital account balance, less any amount owing
by such Interestholder to the Trust, after giving effect to all adjustments
made pursuant to Article VI and all distributions theretofore made to the
Interestholders pursuant to Article VI. After the distribution of all
remaining assets of the Trust, the Managing Owner will contribute to the
Trust an amount equal to the lesser of (i) the deficit balance, if any, in
its book capital account, and (ii) the excess of 1.01% of the total Capital
Contributions of the Limited Owners over the capital previously
contributed by the Managing Owner. Any Capital Contributions made
by the Managing Owner pursuant to this Section shall be applied first
to satisfy any amounts then owed by the Trust to its creditors, and the
balance, if any, shall be distributed to those Interestholders in the Trust
whose book capital account balances (immediately following the
distribution of any liquidation proceeds) were positive, in proportion to
their respective positive book capital account balances.
SECTION 13.3 Termination; Certificate of Cancellation. Following
the dissolution and distribution of the assets of the Trust, the Trust shall
terminate and Managing Owner or Liquidating Trustee, as the case may
be, shall execute and cause such certificate of cancellation of the
Certificate of Trust to be filed in accordance with the Business Trust
Statute. Notwithstanding anything to the contrary contained in this
Trust Agreement,
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the existence of the Trust as a separate legal entity
shall continue until the filing of such certificate of cancellation.
ARTICLE XIV
POWER OF ATTORNEY
SECTION 14.1 Power of Attorney Executed Concurrently.
Concurrently with the written acceptance and adoption of the provisions
of this Trust Agreement, each Limited Owner shall execute and deliver
to the Managing Owner a Power of Attorney as part of the Subscription
Agreement, or in such other form as may be prescribed by the Managing
Owner. Each Limited Owner, by its execution and delivery hereof,
irrevocably constitutes and appoints the Managing Owner and its
officers and directors, with full power of substitution, as the true and
lawful attorney-in-fact and agent for such Limited Owner with full power
and authority to act in his name and on his behalf in the execution,
acknowledgment, filing and publishing of Trust documents, including,
but not limited to, the following:
(a) Any certificates and other instruments, including but
not limited to, any applications for authority to do business and
amendments thereto, which the Managing Owner deems appropriate to
qualify or continue the Trust as a business trust in the jurisdictions in
which the Trust may conduct business, so long as such qualifications
and continuations are in accordance with the terms of this Trust
Agreement or any amendment hereto, or which may be required to be
filed by the Trust or the Interestholders under the laws of any
jurisdiction;
(b) Any instrument which may be required to be filed by
the Trust under the laws of any state or by any governmental agency,
or which the Managing Owner deems advisable to file; and
(c) This Trust Agreement and any documents which may
be required to effect an amendment to this Trust Agreement approved
under the terms of the Trust Agreement, and the continuation of the
Trust, the admission of the signer of the Power of Attorney as a Limited
Owner or of others as additional or substituted Limited Owners, or the
termination of the Trust, provided such continuation, admission or
termination is in accordance with the terms of this Trust Agreement.
SECTION 14.2 Effect of Power of Attorney. The Power of Attorney
concurrently granted by each Limited Owner to the Managing Owner:
(a) Is a special, irrevocable Power of Attorney coupled
with an interest, and shall survive and not be affected by the death,
disability, dissolution, liquidation, termination or incapacity of the
Limited Owner;
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(b) May be exercised by the Managing Owner for each
Limited Owner by a facsimile signature of one of its officers or by a
single signature of one of its officers acting as attorney-in-fact for all of
them; and
(c) Shall survive the delivery of an assignment by a
Limited Owner of the whole or any portion of his Limited Interests;
except that where the assignee thereof has been approved by the
Managing Owner for admission to the Trust as a substituted Limited
Owner, the Power of Attorney of the assignor shall survive the delivery
of such assignment for the sole purpose of enabling the Managing
Owner to execute, acknowledge and file any instrument necessary to
effect such substitution.
Each Limited Owner agrees to be bound by any representations
made by the Managing Owner and by any successor thereto, determined
to be acting in good faith pursuant to such Power of Attorney and not
constituting negligence or misconduct.
SECTION 14.3 Limitation on Power of Attorney. The Power of
Attorney concurrently granted by each Limited Owner to the Managing
Owner shall not authorize the Managing Owner to act on behalf of
Limited Owners in any situation in which this Trust Agreement requires
the approval of Limited Owners unless such approval has been obtained
as required by this Trust Agreement. In the event of any conflict
between this Trust Agreement and any instruments filed by the
Managing Owner or any new Managing Owner pursuant to this Power
of Attorney, this Trust Agreement shall control.
ARTICLE XV
MISCELLANEOUS
SECTION 15.1 Governing Law. The validity and construction of
this Trust Agreement and all amendments hereto shall be governed by
the laws of the State of Delaware, and the rights of all parties hereto and
the effect of every provision hereof shall be subject to and construed
according to the laws of the State of Delaware without regard to the
conflict of laws provisions thereof; provided, however, that causes of
action for violations of federal or state securities laws shall not be
governed by this Section 15.1, and provided, further, that the parties
hereto intend that the provisions hereof shall control over any contrary
or limiting statutory or common law of the State of Delaware (other than
the Business Trust Statute) and that, to the maximum extent permitted
by applicable law, there shall not be applicable to the Trust, the Trustee,
the Managing Owner, the Interestholders or this Trust Agreement any
provision of the laws (statutory or common) of the State of Delaware
(other than the Business Trust Statute) pertaining to trusts which relate
to or regulate in a manner inconsistent with the terms hereof: (a) the
filing with any court or governmental body or agency of trustee
accounts or schedules of trustee fees and charges, (b) affirmative
requirements to post bonds for trustees, officers, agents, or employees
of a trust, (c) the necessity for obtaining court or other governmental
approval concerning the acquisition, holding or disposition of real or
personal property, (d) fees or other sums
A-48
payable to trustees, officers, agents or employees of a trust, (e) the
allocation of receipts and expenditures to income or principal, (f)
restrictions or limitations on the permissible nature, amount or
concentration of trust investments or requirements relating to the titling,
storage or other manner of holding of trust assets, or (g) the establishment
of fiduciary or other standards or responsibilities or limitations on the
acts or powers of trustees or managers that are inconsistent with the
limitations on liability or authorities and powers of the Trustee or the
Managing Owner set forth or referenced in this Trust Agreement. Section 3540
of Title 12 of the Delaware Code shall not apply to the Trust. The Trust
shall be of the type commonly called a "business trust," and without limiting
the provisions hereof, the Trust may exercise all powers that are ordinarily
exercised by such a trust under Delaware law. The Trust specifically
reserves the right to exercise any of the powers or privileges afforded
to business trusts and the absence of a specific reference herein to any
such power, privilege or action shall not imply that the Trust may not
exercise such power or privilege or take such actions.
SECTION 15.2 Provisions In Conflict with Law or Regulations.
(a) The provisions of this Trust Agreement are severable,
and if the Managing Owner shall determine, with the advice of counsel,
that any one or more of such provisions (the "Conflicting Provisions")
are in conflict with the Code, the Business Trust Statute or other
applicable federal or state laws, the Conflicting Provisions shall be
deemed never to have constituted a part of this Trust Agreement, even
without any amendment of this Trust Agreement pursuant to this Trust
Agreement; provided, however, that such determination by the Managing
Owner shall not affect or impair any of the remaining provisions of this
Trust Agreement or render invalid or improper any action taken or
omitted prior to such determination. No Managing Owner or Trustee
shall be liable for making or failing to make such a determination.
(b) If any provision of this Trust Agreement shall be held
invalid or unenforceable in any jurisdiction, such holding shall not in
any manner affect or render invalid or unenforceable such provision in
any other jurisdiction or any other provision of this Trust Agreement in
any jurisdiction.
SECTION 15.3 Construction. In this Trust Agreement, unless the
context otherwise requires, words used in the singular or in the plural
include both the plural and singular and words denoting any gender
include all genders. The title and headings of different parts are
inserted for convenience and shall not affect the meaning, construction
or effect of this Trust Agreement.
SECTION 15.4 Notices. All notices or communications under this
Trust Agreement (other than requests for redemption of Interests,
notices of assignment, transfer, pledge or encumbrance of Interests, and
reports and notices by the Managing Owner to the Limited Owners) shall
be in writing and shall be effective upon personal delivery, or if sent by
mail, postage prepaid, or if telegraphed, by prepaid telegram; and
addressed, in each such case, to the address set forth in the books and
records of the Trust or such other
A-49
address as may be specified in writing, of the party to whom such notice is
to be given, upon the deposit of such notice in the United States mail.
Requests for redemption, notices of assignment, transfer, pledge or
encumbrance of Interests shall be effective upon timely receipt by the
Managing Owner in writing.
SECTION 15.5 Counterparts. This Trust Agreement may be
executed in several counterparts, and all so executed shall constitute
one agreement, binding on all of the parties hereto, notwithstanding that
all the parties are not signatory to the original or the same counterpart.
SECTION 15.6 Binding Nature of Trust Agreement. The terms and
provisions of this Trust Agreement shall be binding upon and inure to
the benefit of the heirs, custodians, executors, estates, administrators,
personal representatives, successors and permitted assigns of the
respective Interestholders. For purposes of determining the rights of
any Interestholder or assignee hereunder, the Trust and the Managing
Owner may rely upon the Trust records as to who are Interestholders
and permitted assignees, and all Interestholders and assignees agree
that the Trust and the Managing Owner, in determining such rights, shall
rely on such records and that Limited Owners and assignees shall be
bound by such determination.
SECTION 15.7 No Legal Title to Trust Estate. The Interestholders
shall not have legal title to any part of the Trust Estate.
SECTION 15.8 Creditors. No creditors of any Interestholders shall
have any right to obtain possession of, or otherwise exercise legal or
equitable remedies with respect to the Trust Estate.
SECTION 15.9 Integration. This Trust Agreement constitutes the
entire agreement among the parties hereto pertaining to the subject
matter hereof and supersedes all prior agreements and understandings
pertaining thereto.
A-50
IN WITNESS WHEREOF, the undersigned have duly executed
this Declaration of Trust and Trust Agreement as of the day and year
first above written.
WILMINGTON TRUST COMPANY,
as Trustee
By:--------------------------
Name:
Title:
PRUDENTIAL SECURITIES FUTURES
MANAGEMENT INC.,
as Managing Owner
By:--------------------------
Name:
Title:
All Limited Owners now and
hereafter admitted as Limited
Owners of the Trust, pursuant to
powers of attorney now and
hereafter executed in favor of, and
granted and delivered to, the
Managing Owner
By:--------------------------
Attorney-in fact
A-51
EXHIBIT A
CERTIFICATE OF TRUST
OF
WILLOWBRIDGE STRATEGIC TRUST
THIS Certificate of Trust of WILLOWBRIDGE STRATEGIC TRUST
(the "Trust"), dated October 16, 1995, is being duly executed and filed
by Wilmington Trust Company, a Delaware banking corporation, as
trustee, to form a business trust under the Delaware Business Trust Act
(12 Del.C. S 3801 et seq.).
1. Name. The name of the business trust formed hereby
is WILLOWBRIDGE STRATEGIC TRUST.
2. Delaware Trustee. The name and business address of
the trustee of the Trust in the State of Delaware is Wilmington Trust
Company, Rodney Square North, 1100 North Market Street, Wilmington,
Delaware 19890, Attention: Corporate Trust Administration.
3. Effective Date. This Certificate of Trust shall be
effective as of its filing.
IN WITNESS WHEREOF, the undersigned, being the sole
trustee of the Trust, has executed this Certificate of Trust as of the date
first above written.
WILMINGTON TRUST COMPANY,
as trustee
By:--------------------------
Name:
Title:
By:--------------------------
Name:
Title:
A-52
EXHIBIT B
WILLOWBRIDGE STRATEGIC TRUST
REQUEST FOR REDEMPTION
, 19
(Please date)
PRUDENTIAL SECURITIES FUTURES MANAGEMENT INC.
c/o Prudential Securities Incorporated
P.O. Box 2016
Peck Slip Station
New York, New York 10272
Attention:
Dear Sirs:
I hereby request redemption of the number of limited liability
beneficial interests ("Interests") of Willowbridge Strategic Trust ("Trust")
specified below, subject to all of the conditions set forth in the Trust
Agreement, as described in the prospectus:
(specify number of Interests to be redeemed)
Redemption will be effective as of the close of business on the last
day of the month in which this Request for Redemption is received by the
Managing Owner on at least ten (10) days' prior written notice ("Redemption
Date"). I understand that if I redeem my Interests on or prior to the end of
the first and second successive six month periods after their purchase, a
redemption fee of 4% and 3% of the Net Asset Value at which they are
redeemed, respectively, will be charged. I (either in my individual capacity
or as an authorized representative of an entity, if applicable) hereby
represent and warrant that I am the true, lawful, and beneficial owner of the
Interest or Interests to which this Request for Redemption relates, with full
power and authority to request Redemption of such Interests. Such Interests
are not subject to any pledge or otherwise encumbered in any fashion. My
signature has been guaranteed by a commercial bank with a correspondent
in New York or by a member of a registered national securities exchange.
United States Taxable Limited Owners Only
Under the penalties of perjury, I hereby certify that the Social Security
Number or Taxpayer ID Number indicated on this Request for Redemption is
my true, correct and complete Social Security Number or Taxpayer ID
Number and that I am not subject to backup withholding under the
provisions of Section 3406(a)(1)(C) of the Internal Revenue Code.
Non-United States Limited Owners Only
Under penalties of perjury I hereby certify that (a) I am not a citizen or
resident of the United States and have not been present in the United States
for 183 days or more during any calendar year or (b) I am a non-United
States corporation, partnership, estate or trust.
SIGNATURES ON REVERSE SIDE MUST BE IDENTICAL TO NAME(S)
IN WHICH INTERESTS OF TRUST ARE REGISTERED
INTERESTS REGISTERED IN THE NAME(S) OF:
Type or Print Name Social Security or Taxpayer ID
Street
City State Zip Code
Account # Type FA
B-1
SIGNATURE(S)
Individual Owner(s) or Assignee(s)
Signature(s) Guaranteed by:
Signature(s) of owner(s) or assignee(s)
Entity Owner (or assignee)
Signature(s) Guaranteed by:
By:
(Trustee, partner, or authorized officer.
If a corporation, include certified copy
of authorizing resolution.)
NOTE: If the entity owner is a trustee, custodian, or fiduciary of an
Individual Retirement Account, Keogh Plan without common law
employees or employee benefit plan under which a plan participant
may exercise control over assets in his account, the signature of the
plan participant must also be supplied.
Plan Participant
Signature(s) Guaranteed by:
Type or Print Name
(Signature)
THIS REQUEST FOR REDEMPTION MUST BE RECEIVED BY THE MANAGING
OWNER AT LEAST TEN (10) DAYS PRIOR TO THE LAST DAY OF THE MONTH IN
WHICH REDEMPTION IS TO BE EFFECTIVE.
B-2
EXHIBIT C
WILLOWBRIDGE STRATEGIC TRUST
SUBSCRIPTION AGREEMENT FOR
LIMITED LIABILITY BENEFICIAL INTERESTS
INSTRUCTIONS--please read carefully
A. Using a typewriter or printing in ink, check the appropriate box and fill
in the blanks as directed herein.
CHECK THE APPROPRIATE BOX
Boxes (i) NEW SUBSCRIBER(S)
(ii) EXISTING OWNER(S) ADDING LIMITED INTERESTS
a) INFORMATION IS THE SAME AS IN THE ORIGINAL
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY.
b) INFORMATION HAS CHANGED FROM THE ORIGINAL
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY;
CONSEQUENTLY. FOLLOW INSTRUCTIONS FOR NEW
SUBSCRIBERS (i).
Number 1 TOTAL DOLLAR AMOUNT OF SUBSCRIPTION. MINIMUM INVESTMENT
$5,000 FOR INDIVIDUALS OR INSTITUTIONS OR ERISA PLANS (EXCEPT
IRAs), $2,000 FOR IRAs AND OTHER QUALIFIED ACCOUNTS. ADDITIONAL
PURCHASES IN EXCESS OF THE MINIMUM MAY BE MADE IN $100
INCREMENTS. EXISTING INVESTORS (EXCEPT IN CERTAIN STATES) MAY
SUBSCRIBE FOR ADDITIONAL INTERESTS IN $100 INCREMENTS. (NEW
SUBSCRIPTION AGREEMENTS ARE REQUIRED WITH EACH ADDITIONAL
PURCHASE). SEE "STATE SUITABILITY REQUIREMENTS" ON C-7.
Number 2 SOCIAL SECURITY AND/OR TAXPAYER I.D. NUMBER. CHECK
BACK UP WITHHOLDING BOX (IF APPLICABLE).
Number 3 PRUDENTIAL SECURITIES ACCOUNT NUMBER.
Number 3a CHECK ONE OF THE BOXES TO INDICATE WHETHER YOU ARE A
PRUDENTIAL SECURITIES EMPLOYEE.
Number 4 ACCOUNT TYPE (CHECK ONLY ONE BOX).
Number 5 CLIENT NAME, ADDRESS AND BUSINESS PHONE NUMBER. FOR IRA OR
TRUST ACCOUNT INCLUDE: "FOR THE BENEFIT OF_____________."
INSERT NET WORTH AND ANNUAL GROSS INCOME.
Number 6 ADDRESS REQUIRED IF #5 IS A P.O. BOX OR IS NOT THE INVESTOR'S
RESIDENCE ADDRESS OR THE ENTITY'S PLACE OF FORMATION.
Number 7 TO BE COMPLETED AND SIGNED BY THE FINANCIAL ADVISOR. ALL
SIGNATURE PAGES MUST BE COUNTERSIGNED BY THE BRANCH
MANAGER.
Number 8 CLIENT(S) SIGNATURE(S) IF ACCOUNT TYPE IS INDIVIDUAL OR JOINT.
Number 9 CLIENT'S SIGNATURE IF ACCOUNT TYPE IS AN INDIVIDUAL RETIREMENT
ACCOUNT OR KEOGH PLAN WITHOUT ANY COMMON LAW EMPLOYEES.
Number 10 SIGNATURE OF AUTHORIZED CORPORATE OFFICER, PARTNER,
TRUSTEE CUSTODIAN OR FIDUCIARY IF ACCOUNT TYPE IS A
CORPORATION, PARTNERSHIP, TRUST, KEOGH WITH EMPLOYEES
OR OTHER EMPLOYEE BENEFIT PLAN (E.G., PENSION OR PROFIT
SHARING PLAN).
Number 11 SUBSCRIBER(S) MUST INITIAL EACH APPLICABLE REPRESENTATION
AND WARRANTY IN THE SPACE PROVIDED IN THE LEFT MARGIN.
B. Subscribers must deliver to Prudential Securities or an Additional Seller a
fully completed, dated, and signed Subscription Agreement for subscriptions
NO LATER THAN FIVE (5) calendar days prior to the end of a month. A
subscriber may not deliver his Subscription Agreement to the Trust's
offices. If such delivery is made, the Subscription Agreement will be
returned to the subscriber to be forwarded to his Prudential Securities
branch office or to an Additional Seller.
C. U.S. subscribers must have W-9s and non-U.S. subscribers must have W-8s on
file with Prudential Securities.
C-1
SUBSCRIPTION AGREEMENT and POWER OF ATTORNEY
Willowbridge Strategic Trust
SUBSCRIBER(S) (check status) -
(i) / / New Subscriber(s) [(complete Items 1 through 6, plus Items
8, 9 or 10 (as applicable) plus Item 11,
and have FA and Branch Manager fill out
Item 7)]
(ii) / / Existing Owner(s) [(a) if information previously provided
remains accurate: complete item 1, plus
Items 8, 9 or 10 (as applicable) plus
Item 11; and have FA and Branch Manager
fill out Item 7; (b) if information has
changed, follow instructions for new
subscriber(s).]
1. Total Dollar Amount of Subscription $
2. Social Security Number 3. Prudential Securities Account Number of
Subscriber
or
Taxpayer I.D. Number 3a. Is the Subscriber a Prudential Securities
Employee
/ / Yes / / No
or
I have checked the following box because I (we) am (are) subject to backup
withholding under the provisions of Section 3406(a)(1)(C) of the Internal
Revenue Code:
4. Check Account Type
/ / Individual Ownership / / Corporation
/ / Joint Tenants with Right of Survivorship / / Keogh Plan (no common law
(All tenants' Signatures required) employees)
/ / Tenants in Common (All tenants' Signatures
required)
/ / Community Property (Both Signatures / / Other Employee Benefit
required) Plan (e.g., Pension, Profit
/ / Custodian Sharing, Keogh plan with
/ / Partnership employees)
/ / Trust / / Individual Retirement
Account (Non-PSI employees)
/ / UGMA or UTMA / / INDIVIDUAL RETIREMENT
ACCOUNT (PSI employees)
5. Full Name of Account, Joint Owners, Trustee, if trust account, Custodian, if
custodian account or other Authorized Person, if Partnership, Corporation or
Institutional Trustee or Plan fiduciary (No Initials).
Mailing Address. If trust or custodian account, address of Trustee,
Custodian or Plan Fiduciary.
City /State Zip Code Country Business Telephone No. or
if none, Home No.
New Worth of Subscriber (exclusive of home, home furnishings and
automobiles): $
Annual Gross Income of Subscriber: $
6. The following information must be provided if the above address is a P.O.
Box or is not the investor's residence address or the entity's place of
formation.
Residence Address (P.O. Box alone not acceptable).
City /State Zip Code Country
7. FINANCIAL ADVISOR USE ONLY (MUST BE COMPLETED IN FULL, AND, EXCEPT
FOR SIGNATURE, MUST BE TYPED OR LEGIBLY PRINTED IN INK BY FINANCIAL
ADVISOR, ILLEGIBLE OR INCOMPLETE DOCUMENTS WILL BE REJECTED)
The undersigned FA hereby certifies that: (1) the FA has informed the
person(s) named above of all pertinent facts relating to the liquidity and
marketability of the Limited Interests as set forth in the Prospectus; and
(2) the FA has reasonable grounds to believe (on the basis of information
obtained from the person(s) named above concerning such person(s') age,
investment objectives, investment experience, income, net worth, financial
situation and needs, other investments, and any other information known by
the FA) that (a) the purchase of the Interests is a suitable and
appropriate investment for such person(s); (b) such person(s) meet(s) the
minimum income and net worth standards; (c) such person(s) can benefit from
the investment based on such person(s) overall investment objectives
and portfolio structure; (d) such person(s) can bear the economic risk of
the investment; and (e) such person(s) has (have) an understanding of the
fundamental risks of the investment, the risk that an investor may lose its
entire investment, the restriction on the liquidity of the Limited
Interests, the restrictions on the transferability of the Interests and
the background and qualifications of the FA.
Does the undersigned FA have discretionary authority for the account of the
person(s) named above? Yes No
The FA must insure that a current Prospectus, together with the most recent
Monthly Report of the Trust, has been furnished to the person(s) named above
under the caption "Subscriber(s)."
C-2
PRINT FULL NAME OF FA FA# WIRE CODE OF BRANCH
FA'S SIGNATURE FA'S TELEPHONE NUMBER
I have received all documents required to accept this subscription and
acknowledge the suitability of the subscriber and the amount of the
subscription
for the Trust. If the subscriber is other than an individual subscriber, I
acknowledge that my review of the subscriber's governing documents indicates
that such documents permit investment in commodities funds whose principal
business is speculative futures trading.
( )
BRANCH MANAGER'S SIGNATURE FOR ALL ACCOUNTS BRANCH MANAGER'S
TELEPHONE NUMBER
SIGNATURE(S) -- DO NOT SIGN WITHOUT READING THE "REPRESENTATIONS
AND WARRANTIES" AND "NOTICE OF RISKS TO
SUBSCRIBERS" AND FAMILIARIZING YOURSELF WITH THE
PROSPECTUS INCLUDING, (I) THE FUNDAMENTAL RISKS AND
POSSIBLE FINANCIAL HAZARDS OF THIS INVESTMENT,
INCLUDING THE RISK OF LOSING YOUR ENTIRE INVESTMENT;
(II) THE LACK OF LIQUIDITY OF THIS INVESTMENT; (III) THAT
LIMITED OWNERS MAY NOT TAKE PART IN THE MANAGEMENT
OF THE TRUST; (IV) THE EXISTENCE OF ACTUAL AND
POTENTIAL CONFLICTS OF INTEREST IN THE STRUCTURE AND
OPERATION OF THE TRUST; (V) THE TRUST'S FEE
STRUCTURE; (VI) THAT THE PERFORMANCE AND PRO FORMA
TABLES INCLUDED IN THE PROSPECTUS MUST BE READ ONLY
IN CONJUNCTION WITH THE NOTES THERETO; (VII) THE TAX
CONSEQUENCES OF AN INVESTMENT IN THE TRUST; (VIII) THE
LIMITATIONS ON LIMITED LIABILITY; (IX) THAT THERE ARE
SUBSTANTIAL RESTRICTIONS ON THE TRANSFERABILITY OF
INTERESTS; AND (X) THE TRUST'S STRUCTURE AND HIGHLY
LEVERAGED TRADING ACTIVITIES.
Payment of the above subscription will be made by charging the subscriber's
account with Prudential Securities Incorporated or any Additional Seller. In the
event that the subscriber does not have a customer account with Prudential
Securities Incorporated or any Additional Seller or does not have sufficient
funds in its existing account, the Subscriber should make appropriate
arrangements with its financial advisors, if any, and if none, should contact
its local Prudential Securities Incorporated branch office or the branch office
of any Additional Seller.
SIGN BELOW UNDER CORRESPONDING ACCOUNT TYPE
8. INDIVIDUAL OR JOINT SUBSCRIPTION
If this subscription is for a joint account, the statements,
representations, warranties, and undertakings set forth above will be
deemed to have been made by each owner of the account
X X
(Signature of Subscriber) (Signature of Joint Owner, if any) Date
(Print or Type Name of Signatory) (Print or Type Name of Signatory)
9. IRA AND KEOGH PLAN (WITHOUT COMMON LAW EMPLOYEES) SUBSCRIPTION
X
(Signature of IRA beneficiary or plan participants) Date
(Print or Type Name of Signatory)
10. ENTITY (CUSTODIAN, CORPORATION, PARTNERSHIP, TRUST, EMPLOYEE
BENEFIT PLAN) SUBSCRIPTION
The undersigned corporate officer, partner, or trustee custodian or
fiduciary hereby certifies and warrants that s/he has full power and
authority from and on behalf of the entity named below and (as applicable)
from its shareholders, partners, or beneficiaries or plan participants to
complete, execute, and deliver this Subscription Agreement on their behalf
including on behalf of the plan participants, and trust or custodial account
beneficiaries, and that investment in the Trust has been affirmatively
authorized by the governing board or body, if any, of the entity (if a
corporation or partnership) and is not prohibited by law or the governing
documents of the entity.
(Type or Print Name of Entity, Trust or Custodial Account)
X
(Signature of Authorized Corporate Officer, Partner, Trustee Custodian or
Fiduciary) Date
(Print or Type Name of Signatory)
C-3
PAGE
11. REPRESENTATIONS AND WARRANTIES
I (we) hereby represent and warrant to the Managing Owner and the Trust as
follows (please initial each applicable representation and warranty):
____ (1) I (we) satisfy one of the following financial standards outlined
below for subscription in the Trust. I (we) am (are) not acting on
behalf of an Employee Benefit Plan and I (we) have either (A) a net
worth (exclusive of home, home furnishings, and automobiles) of at
least $150,000 or (B) a net worth (similarly calculated) of at least
$45,000 and an annual gross income of at least $45,000 and not more
than 10% of my net worth is invested in the Trust. If I (we) am (are)
acting on behalf of an IRA or a Keogh Plan which covers no common law
employees, each Participant meets and, if I (we) am (are) a
participant in a Plan, it meets the net worth and gross income
requirement in (A) or (B) above and its investment in the Trust does
not exceed 10% of the assets of the IRA or Keogh Plan at the time
of investment. If I (we) am (are) acting on behalf of an Employee
Benefit Plan (other than an IRA or a Keogh Plan which covers no
common law employees), the assets of the Plan are at least $150,000
and its investment in the Trust does not exceed 10% of the assets of
the Plan at the time of investment. If I (we) am (are) a resident(s)
of one of those states listed under "State Suitability Requirements",
I (we) meet the more restrictive suitability requirements imposed by
the State in which I (we) reside and not more than 10% of my net worth
is invested in the Trust.
____ (2) The address set forth under the caption "Subscriber(s)" is my
(our) true and correct address and I (we) have no present intention of
becoming a resident of any other state or country. The information
provided under that caption is true, correct, and complete as of the
date of this Subscription Agreement and if there should be any material
change in such information prior to my (our) admission to the Trust
as a Limited Owner, I (we) will immediately furnish such revised or
corrected information to the Managing Owner. I (we) will furnish the
Managing Owner with such other documents as it may request to evaluate
this subscription.
____ (3) I (we) am (are) over 21 years old and am (are) legally competent
and am (are) permitted by applicable law to execute and deliver this
Subscription Agreement.
____ (4) If the subscriber is a trust under an Employee Benefit Plan, none
of the Trustee, Managing Owner, Prudential Securities, the Trading
Manager, any other Selling Agent or any of their affiliates either:
(A) has investment discretion with respect to the investment of the
assets of such trust being used to purchase Limited Interests; (B)
has authority or responsibility to give or regularly gives investment
advice with respect to such trust assets for a fee and pursuant to an
agreement or understanding that such advice will serve as a primary
basis for investment decisions with respect to such trust assets and
that such advice will be based on the particular investment needs of
the trust; or (C) is an employer maintaining or contributing to the
trust.
____ (5) I (we) have received a Prospectus of the Trust which constitutes
its Commodity Futures Trading Commission ("CFTC") Disclosure Document,
as well as a copy of the most recent monthly report required by the
CFTC.
____ (6) I (we) am (are) purchasing the Limited Interests for our own
account.
By making these representations and warranties, Subscribers are not waiving
any rights of action which they may have under applicable federal or state
securities laws. Federal securities law provides that any such waiver would be
unenforceable. Subscribers should be aware, however, that the representations
and warranties set forth herein may be asserted in the defense of the Trust or
others in any subsequent litigation or other proceeding.
12. RISKS
These securities are speculative and involve a high degree of risk. Risk
Factors relating to the Interests which are more fully described in the
Prospectus include the following: (i) futures, forward and options trading is
speculative, volatile and highly leveraged; (ii) the Trust is largely reliant
on the Trading Manager for success; (iii) past performance is not necessarily
indicative of future results; (iv) a Limited Owner's tax liability is likely to
exceed cash distributions to him; (v) substantial charges will be imposed on
the Trust; and it is estimated the Trust will have to achieve net trading
profits (after taking interest income into account) of approximately 6.55% per
annum in order to offset expenses, and of approximately 9.55% to also offset
the 3% redemption charge imposed on an Interest being redeemed as of the end
of the 12th month following its sale; (vi) Limited Owners will have limited
voting rights and no control over the Trust's business; (vii) a Limited
Owner could lose a substantial portion, or even all, of his investment; (viii)
Limited Owners will have a limited ability to liquidate their Interests
because transferability is restricted, redemption is limited and no trading
market exists; (ix) actual and potential conflicts of interest exist; and (x)
Prudential Securities and its affiliates have been involved in several
lawsuits, investigations, and enforcement actions by regulatory authorities,
including various matters surrounding allegations relating to the sale of
interests in over 700 non-commodities limited partnerships. See "Risk Factors"
in the Prospectus.
C-4
PAGE
THE EXECUTION COPY OF THE SUBSCRIPTION AGREEMENT AND POWER
OF ATTORNEY ACCOMPANIES THIS PROSPECTUS AS A SEPARATE DOCUMENT
WILLOWBRIDGE STRATEGIC TRUST
UNITS OF BENEFICIAL INTEREST
BY EXECUTING THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
SUBSCRIBERS ARE NOT WAIVING ANY RIGHTS UNDER THE
SECURITIES ACT OF 1933 OR THE SECURITIES
EXCHANGE ACT OF 1934
SUBSCRIPTION AGREEMENT AND
POWER OF ATTORNEY
Willowbridge Strategic Trust
Prudential Securities Futures
Management Inc.
One New York Plaza
New York, New York 10292
Dear Sirs:
1. Subscription for Limited Interests. I hereby subscribe for the
dollar amount of units of beneficial interest ("Limited Interests") in
Willowbridge Strategic Trust (the "Trust") set forth in the Subscription
Agreement and Power of Attorney Signature Page attached hereto (minimum $5,000;
$2,000 for trustees or custodians of employee benefit plans, except in the
case of certain states, see State Suitability Requirements attached hereto) at
a purchase price of the Net Asset Value per Limited Interest. Incremental
subscriptions in excess of the foregoing minimums are permitted in $100
multiples. Existing Limited Owners (except in certain states) may subscribe for
additional Limited Interests in $100 increments. Fractional Limited Interests
will be issued to three decimal places. The terms of the offering of the
Limited Interests are described in the Trust's Prospectus. I have authorized
my selling agent to debit my securities account at Prudential Securities in
the amount of my subscription. I acknowledge that I must have my subscription
payment in such account on but not before the settlement date for my
purchase of Limited Interests. My Financial Advisor shall inform me of such
settlement date, on which date my account will be debited and the amounts so
debited will be transmitted by Prudential Securities Inc. to the Trust.
Prudential Securities Futures Management Inc. (the "Managing Owner") may, in
its sole and absolute discretion, accept or reject this subscription in whole
or in part. THE SALE OF LIMITED INTERESTS WILL NOT BE FINAL AND BINDING ON
ANY SUBSCRIBER UNTIL AT LEAST FIVE (5) BUSINESS DAYS AFTER SUCH SUBSCRIBER
RECEIVES A FINAL PROSPECTUS. Thereafter, all subscriptions are irrevocable.
Subscriptions generally must be submitted no later than five (5)
calendar days prior to the end of a month in order to be invested in the
Limited Interests as of the beginning of the following month.
2. Representations and Warranties of Subscriber. I have received the
Prospectus together with the most recent Monthly Report of the Trust. I
acknowledge that I satisfy the applicable requirements relating to net worth
and annual income as set forth in "State Suitability Requirements" attached
hereto. If subscriber is an employee benefit plan, the investment in the
Limited Interests by such employee benefit plan is in compliance with all
federal laws relating to such plans. If the subscriber is a trust under
an employee benefit plan, none of the Trustee, the Managing Owner, any Selling
Agent or Additional Selling Agent, any of their respective affiliates or any of
their respective agents or employees: (i) has investment discretion with
respect to the investment of the assets of such trust being used to purchase
Limited Interests; (ii) has authority or responsibility to give or regularly
gives investment advice with respect to such trust assets for a fee and
pursuant to an agreement or understanding that such advice will
serve as the primary basis for investment decisions with respect to such Plan
or trust assets and that such advice will be based on the particular investment
needs of the trust; or (iii) is an employer maintaining or contributing
C-5
to the trust. If subscriber is not an individual, the person signing the
Subscription Agreement and Power of Attorney Signature Page on behalf of the
subscriber is duly authorized to execute such Signature Page.
3. Power of Attorney. In connection with my purchase of Limited
Interests, I do hereby irrevocably constitute and appoint the Managing Owner
and its successors and assigns, as my true and lawful Attorney-in-Fact, with
full power of substitution, in my name, place and stead, to (i) file,
prosecute, defend, settle or compromise litigation, claims or arbitrations on
behalf of the Trust and (ii) make, execute, sign, acknowledge, swear to,
deliver, record and file any documents or instruments which may be
considered necessary or desirable by the Managing Owner to carry out fully
the provisions of the Declaration of Trust and Trust Agreement of the Trust,
including, without limitation, the execution of the said Agreement itself, and
the execution of all amendments permitted by the terms thereof. The Power of
Attorney granted hereby shall be deemed to be coupled with an interest, shall
be irrevocable, shall survive, and shall not be affected by, my subsequent
death, incapacity, disability, insolvency or dissolution or any delivery by me
of an assignment of the whole or any portion of my Limited Interests.
4. Governing Law. Subscriber hereby acknowledges and agrees that
this Subscription Agreement and Power of Attorney shall be governed by and be
interpreted in accordance with the laws of the State of Delaware, without
regard to principles of conflicts of laws.
PLEASE COMPLETE THE SUBSCRIPTION AGREEMENT AND POWER OF
ATTORNEY SIGNATURE PAGE WHICH ACCOMPANIES THIS PROSPECTUS CAREFULLY.
C-6
PAGE
STATE SUITABILITY REQUIREMENTS
All states except as listed below.
The general suitability requirement for subscribers to the Trust is that
subscribers have a net worth (exclusive of home, home furnishings and
automobiles) of at least $150,000 or, failing that standard, have a net worth
(similarly calculated) of at least $45,000 and an annual gross income of at
least $45,000. In addition, the minimum aggregate purchase is $5,000 or
$2,000 in the case of Individual Retirement Accounts.
Higher Suitability Requirement.
The States listed below have more restrictive suitability requirements.
Please read the following list to make sure that you meet the suitability
and/or investment requirements for the State in which you reside.
(As used below, "NW" means net worth exclusive of home, home furnishings and
automobiles; "AI" means annual gross income; and "TI" means annual taxable
income for federal income tax purposes).
Alaska . . . . . . (a) $225,000 NW, or (b) $60,000 NW and $60,000 AI.
Arizona. . . . . . (a) $225,000 NW, or (b) $60,000 NW and $60,000 AI.
California . . . . (a) $250,000 NW, or (b) $100,000 NW and $65,000 AI, and not
more than 25% of this offering may be sold in California.
Idaho. . . . . . . No offers or sales permitted except in compliance with
Section 30-1435 of the Idaho Securities Regulations.
Iowa . . . . . . . (a) $225,000 NW, or (b) $60,000 NW and $60,000 TI. Minimum
subscription for IRAs is $2,100.
Maine. . . . . . . (a) $225,000 NW, or (b) $100,000 NW and $100,000 AI;
Minimum subscription for all investors (including IRAs) is
$5,000. Additional increments for existing Limited Owners
must also be at least $5,000.
Massachusetts. . . (a) $225,000 NW, or (b) $60,000 NW and $60,000 TI.
Michigan . . . . . (a) $225,000 NW, or (b) $60,000 NW and $60,000 TI.
Minnesota. . . . . (a) $225,000 NW, or (b) $100,000 NW and $100,000 AI.
Mississippi. . . . (a) $225,000 NW, or (b) $60,000 NW and $60,000 AI.
Missouri . . . . . (a) $225,000 NW, or (b) $60,000 NW and $60,000 TI.
Nebraska . . . . . (a) $225,000 NW, or (b) $60,000 NW and $60,000 TI.
New Hampshire. . . (a) $225,000 NW, or (b) $60,000 NW and $60,000 TI.
North Carolina . . (a) $225,000 NW, or (b) $60,000 NW and $60,000 TI.
Oklahoma . . . . . (a) $225,000 NW, or (b) $60,000 NW and $60,000 AI.
Oregon . . . . . . (a) $225,000 NW, or (b) $60,000 NW and $60,000 AI.
Pennsylvania . . . (a) $175,000 NW, or (b) $100,000 NW and $50,000 TI.
South Dakota . . . (a) $225,000 NW, or (b) $60,000 NW and $60,000 AI.
Tennessee. . . . . (a) $250,000 NW, or (b) $60,000 NW and $60,000 TI.
Texas. . . . . . . (a) $225,000 NW, or (b) $60,000 NW and $60,000 TI.
AN INVESTMENT IN THE TRUST MAY NOT EXCEED 10% OF NW
C-7
WILLOWBRIDGE STRATEGIC TRUST
The date of this Prospectus is April 1, 1997.
The Trust files annual, quarterly and current reports and other
information with the SEC. You may read and copy any
reports, statements or other information we file at the SEC's
public reference room in Washington, D.C. You can request
copies of these documents, upon payment of a duplicating fee,
by writing the SEC. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the public reference
rooms. Our SEC filings are also available to the public on the
SEC Internet site (http://www.sec.gov).
PAGE
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 15. Recent Sales of Unregistered Securities.
As required by the Trust Agreement, the Managing Partner of the Trust
has to date purchased $439,000 of Interests in the Trust. No underwriter or
selling agent was used in this transaction, which was exempt from
registration under Section 4(2) of the Securities Act of 1933.
Item 16. Exhibits and Financial Statement Schedules.
(a) The following documents (unless otherwise indicated) are filed
herewith and made a part of this Registration Statement:
*1.1 Form of Underwriting Agreement among the Registrant,
Prudential Securities Futures Management Inc. and
Prudential Securities Incorporated.
*3.1
and
4.1 Second Amended and Restated Declaration of Trust and
Trust Agreement of the Registrant (annexed to the
Prospectus as Exhibit A).
*4.2 Form of Subscription Agreement (annexed to the
Prospectus as Exhibit C).
*4.3 Form of Request for Redemption (annexed to the
Prospectus as Exhibit B).
*5.1 Opinion of Rosenman & Colin LLP as to the legality of
Interests.
8.1 Opinion of Rosenman & Colin LLP as to income tax
matters.
*10.1 Form of Escrow Agreement among the Registrant,
Prudential Securities Futures Management Inc., Prudential
Securities Incorporated and The Bank of New York.
*10.2 Form of Brokerage Agreement between the Registrant and
Prudential Securities Incorporated.
*10.3 Form of Advisory Agreement among the Registrant,
Prudential Securities Futures Management Inc., and
Willowbridge Associates Inc.
____________________
* Previously filed
II-1
*10.4 Form of Representation Agreement Concerning the
Registration Statement and the Prospectus among the
Registrant, Prudential Securities Futures Management Inc.,
Prudential Securities Incorporated, Wilmington Trust
Company and Willowbridge Associates Inc.
*10.5 Form of Net Worth Agreement between Prudential
Securities Futures Management Inc. and Prudential
Securities Group Inc.
*10.6 Form of Secured Demand Note.
*10.7 Form of Secured Demand Note Collateral Agreement
between Prudential Securities Futures Management Inc.
and Prudential Securities Group Inc.
*10.8 Form of Foreign Currency Addendum to Brokerage
Agreement between the Registrant and Prudential
Securities Incorporated (incorporated by reference to
Exhibit 10.8 of the Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 1996.
*16.1 Letter dated May 15, 1996 from Deloitte & Touche LLP to
the Securities and Exchange Commission regarding
change in certifying accountant (incorporated by reference
to Exhibit 16.1 to the Registrant's Current Report on Form
8-K dated May 14, 1996.
23.1.1 The consent of Price Waterhouse LLP is included herewith.
23.1.2 The consent of Deloitte & Touche LLP is included herewith.
23.2 The consent of Rosenman & Colin LLP is included
herewith.
23.3 The consent of Richards, Layton & Finger is included
herewith.
(b) The following financial statements are included in the Prospectus:
1. Willowbridge Strategic Trust
(i) Report of Independent Public Accountants.
(ii) Audited Statements of Financial Condition as of
December 31, 1996 and December 31, 1995.
____________________
* Previously filed
II-2
(iii) Notes to Statements of Financial Condition.
2. Prudential Securities Futures Management Inc.
(i) Report of Independent Public Accountants.
(ii) Audited Statement of Financial Condition as of
December 31, 1996.
(iii) Notes to Statement of Financial Condition.
3. Diversified Futures Trust I.
(i) Audited Statement of Financial Condition as of
December 31, 1996.
(ii) Notes to Statement of Financial Condition.
All schedules have been omitted as the required information is
inapplicable or is presented in the Statements of Financial Condition or
related notes. No Financial Data Schedule is required under Item 27.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 31st day of March, 1997.
WILLOWBRIDGE STRATEGIC TRUST
By: Prudential Securities Futures Management, Inc., Managing Owner
By: /s/ James M. Kelso
James M. Kelso
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in their
capacities as directors or officers of Prudential Securities Futures Management
Inc., the Managing Owner of the Registrant, on the dates indicated below.
Signature Title Date
/s/ James M. Kelso Director and March 31, 1997
James M. Kelso President
A. Laurence Norton, Jr. Director March 31, 1997
/s/ Guy S. Scarpaci Director March 31, 1997
Guy S. Scarpaci
/s/ Barbara J. Brooks Chief Financial March 31, 1997
Barbara J. Brooks Officer and
Treasurer
/s/ Steven Carlino Chief Accounting March 31, 1997
Steven Carlino Officer and
Vice President
(Being the principal executive officer, the principal financial officer,
the principal accounting officer and a majority of the directors of
Prudential Securities Futures Management Inc.)
II-4
EXHIBIT INDEX
Exhibit Number Description of Document
8.1 Opinion of Rosenman & Colin LLP as to income
tax matters.
23.1.1 Consent of Price Waterhouse LLP
23.1.2 Consent of Deloitte & Touche LLP
23.2 Consent of Rosenman & Colin LLP
23.3 Consent of Richards, Layton & Finger
EXHIBIT 8.1
OPINION OF ROSENMAN & COLIN LLP
AS TO INCOME TAX MATTERS
March 31, 1997
Willowbridge Strategic Trust
One New York Plaza, 13th Floor
New York, New York 10292
Gentlemen:
We have acted as counsel to Willowbridge Strategic Trust (the "Trust") in
connection with the preparation of Post-Effective Amendment No. 3 (the
"Post-Effective Amendment") to the Form S-1 Registration Statement
(including the Prospectus contained therein) under the Securities Act of 1933
with respect to the Trust. The Post-Effective Amendment refers to our
opinion set forth herein.
We have reviewed the Post-Effective Amendment. Our opinion is expressly
conditioned on the accuracy of the facts, information, statements and
representations contained in the Post-Effective Amendment.
In rendering our opinion, we have considered applicable federal income tax
law as currently in effect, including the Internal Revenue Code of 1986, as
amended, existing judicial decisions and administrative regulations, rulings,
procedures and practice.
Based upon and subject to the foregoing, it is our opinion that the
discussion of federal income tax consequences under the heading "Income
Tax Consequences" in the Prospectus contained in the Post-Effective
Amendment is accurate as of the date hereof in all material respects insofar
as it involves matters of federal income tax law. We have not, however,
independently verified any
Willowbridge Strategic Trust
March 31, 1997
of the financial statements or assumptions set forth under such heading or
elsewhere in the Prospectus.
We hereby consent to the use of this opinion as an exhibit to the Post-
Effective Amendment.
Very truly yours,
ROSENMAN & COLIN LLP
By: /s/ Rosenman & Colin LLP
A Partner
JED:rm