424B3 1 0001.txt WORLD MONITOR TRUST II -- SERIES D, E, F WORLD MONITOR TRUST II Series D ($50 million), Series E ($50 million) and Series F ($50 million) Minimum Initial Purchase $5,000 or $2,000 (for IRAs only) in one or more series Minimum Per Series $1,000 Minimum Additional Purchases $100 per series Each series trades speculatively in a diversified portfolio of futures, forward (including interbank foreign currencies) and/or options contracts. Interests in each series are separately offered. The assets of each series are segregated from the other series. Each series is separately valued and independently managed. Each week you are able to purchase additional interests, exchange your interests in one series for interests in another series or redeem your interests. Interests are priced at their net asset value as of the end of each week. Series Trading Advisor Trading Program(s) D Bridgewater Associates, Inc. Aggressive Pure Alpha Futures Only System E Graham Capital Management, L.P. Global Diversified Program F Campbell & Company, Inc. FME Small Portfolio -These are speculative securities. Before you decide whether to invest, read this entire prospectus carefully and consider the "RISK FACTORS" section that begins on page 17. In particular, you should be aware that: -Futures, forward and options trading is speculative, volatile and highly leveraged. -You could lose a substantial portion, or even all, of your investment. -Past performance is not necessarily indicative of future results. -Each series relies on its trading advisor for success. -Your annual tax liability for taxable income from a series will exceed distributions to you. -If you redeem an interest in any series during the first 12 months following the effective date of your purchase of that interest, you will be charged a redemption fee, except in defined circumstances. -The fixed expenses of each series requires estimated gains of 4.88% per annum (Series D), 5.31% per annum (Series E) and 5.00% per annum (Series F) to break even. These break even amounts increase if you have to pay redemption fees. -Transfers are restricted, the interests are not exchange listed and no other secondary market exists for the interests. -You are required to make representations and warranties in connection with this investment. You are encouraged to discuss this investment with your individual financial, legal and tax advisors. -Your liability for any series will not exceed your investment in that series. -Subscription funds will not be subject to fees or other deductions. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC") OR ANY STATE SECURITIES COMMISSION NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE COMMODITY FUTURES TRADING COMMISSION (THE "CFTC") HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THE TRUST NOR HAS THE CFTC PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. PRUDENTIAL SECURITIES INCORPORATED Selling Agent and Clearing Broker PRUDENTIAL SECURITIES FUTURES MANAGEMENT INC. Managing Owner and Sponsor The date of this prospectus is April 3, 2001 COMMODITY FUTURES TRADING COMMISSION 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 94 TO 99 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 15. 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 PAGES 17 TO 23. 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. -------------- -You should rely only on the information contained in this prospectus or incorporated by reference (all of which legally form a part of the prospectus). We have not authorized anyone to provide you with information that is different. -There is no guarantee that information in this prospectus is correct as of any time after the date appearing on the cover. -This prospectus must be accompanied by a recent monthly report of the Trust. -Prudential Securities Incorporated (referred to as Prudential Securities) and any additional sellers must deliver any supplemented or amended prospectus issued by the Trust. -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. -World Monitor Trust II (referred to as the 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 the regulations under that Act. -You should not invest more than 10% of your "liquid" net worth (exclusive of home, home furnishings and automobiles in the case of individuals or readily marketable securities in the case of entities) in any series of the Trust or in the Trust as a whole. -If you are an Individual Retirement Account (referred to as an IRA), 401(k) or ERISA plan, you should not invest more than 10% of your assets in the Trust. 2 TABLE OF CONTENTS ----------------- PART ONE: CFTC DISCLOSURE DOCUMENT CFTC RISK DISCLOSURE STATEMENT 2 SUMMARY OF THE PROSPECTUS 5 Seclected Financial Information 13 Summary Of Fees And Expenses 14 Projected Twelve-Month Break-Even Analyses 15 RISK FACTORS 17 Trading And Performance Risks 17 Trading Advisor Risks 20 Trust And Offering Risks 20 Tax Risks 21 Regulatory Risks 22 ACTUAL AND POTENTIAL CONFLICTS OF INTEREST 24 STRUCTURE OF THE TRUST 26 PERFORMANCE OF EACH SERIES 27 SERIES D 40 Bridgewater Associates And Its Principals 40 Bridgewater Associates' Trading Strategy 41 Bridgewater Associates' Past Performance For All Of Its Clients 43 SERIES E 49 Graham Capital And Its Principals 49 Graham Capital's Trading Strategy 51 Graham Capital's Past Performance For All Of Its Clients 55 SERIES F 60 Campbell & Company And Its Principals 60 Campbell & Company's Trading Strategy 62 Campbell & Company's Past Performance For All of Its Clients 65 TRADING LIMITATIONS AND POLICIES 70 DESCRIPTION OF THE TRUST, TRUSTEE, MANAGING OWNER AND AFFILIATES 72 DUTIES AND COMMITMENTS OF THE MANAGING OWNER 81 FIDUCIARY RESPONSIBILITIES 83 THE OFFERING 84 WHO MAY SUBSCRIBE 88 HOW TO SUBSCRIBE FOR, EXCHANGE AND REDEEM INTERESTS 91 FEES AND EXPENSES 94 Charges To Be Paid By The Trust 94 3 Charges To Be Paid By Prudential Securities Or Its Affiliates 98 Charges To Be Paid By Limited Owners 98 Projected Twelve-Month Break-Even Analysis 99 SUMMARY OF AGREEMENTS 100 Advisory Agreements 100 Brokerage Agreement 101 Trust Agreement 102 U.S. FEDERAL INCOME TAX CONSEQUENCES 111 LEGAL MATTERS 114 ADDITIONAL INFORMATION 114 EXPERTS 114 PART TWO: CFTC STATEMENT OF ADDITIONAL INFORMATION THE FUTURES MARKETS 115 HOW MANAGED FUTURES FIT INTO A PORTFOLIO 120 GLOSSARY OF TERMS 122 INDEX TO CERTAIN FINANCIAL INFORMATION 127 FINANCIAL STATEMENTS World Monitor Trust II -- Series D 128 World Monitor Trust II -- Series E 136 World Monitor Trust II -- Series F 144 Managing Owner 152 Diversified Futures Trust I 157 EXHIBIT A -- FORM OF TRUST AGREEMENT A-1 EXHIBIT B -- FORM OF REDEMPTION REQUEST B-1 EXHIBIT C -- FORM OF EXCHANGE REQUEST C-1 EXHIBIT D -- FORM OF SUBSCRIPTION AGREEMENT D-1 State Suitability Requirements D-13 4 PART ONE CFTC DISCLOSURE DOCUMENT This is Part One of a two-part CFTC disclosure document. SUMMARY OF THE PROSPECTUS This summary outlines certain important aspects of an investment in Series D, Series E and/or Series F. You are referred to the Glossary beginning on page 122 for the definition of any term you may not understand. The Trust The Trust was formed as a Delaware Business Trust on April 22, 1999, with separate series of interests. The principal offices of the Trust and of Prudential Securities Futures Management Inc. (referred to as the managing owner) are located at One New York Plaza, 13th Floor, New York, New York 10292-2013; phone (212) 778-7866. The Series Currently, the Trust's interests are offered in three separate and distinct series: Series D, Series E and Series F. The series commenced trading activities during March and April of 2000. Each series: -Engages in the speculative trading of a diversified portfolio of futures, forward (including interbank foreign currencies) and/or options contracts and may, from time to time, engage in cash and spot transactions. -Has a one-year renewable contract with its own independent professional trading advisor that manages 100% of that series' assets and makes the trading decisions for that series. -Trades and accounts for its assets separately from the other series and the other Trust assets. -Segregates its assets from the other series and maintains separate and distinct records. -Calculates the net asset value (sometimes referred to as the NAV) of its interests separately from the net asset value of the other series. -Has an investment objective of increasing the value of your interests over the long term (capital appreciation), while controlling risk and volatility. 5 Performance of Each Series Series D Series E Series F Date trading started (3/13/00) (4/5/00) (3/1/00) NAV on start date $5,279,158 $5,147,459 $5,185,772 NAV on 12/31/00 $6,052,627 $6,106,314 $7,925,332 NAV on 3/31/01 $5,272,096 $6,942,871 $10,034,148 NAV per interest on start date $100 $100 $100 NAV per interest on 12/31/00 $87.49 $120.36 $106.90 NAV per interest on 3/31/01 $77.36 $133.52 $112.51 Series D Trading for Series D is directed by Bridgewater Associates, Inc. (referred to as Bridgewater Associates). Bridgewater Associates has been operating its trading systems since 1985. As of February 28, 2001, Bridgewater Associates had an estimated $15.8 billion in investor funds (including notional funds) under management. Bridgewater Associates directs trading for 100% of Series D's assets pursuant to its Aggressive Pure Alpha Futures Only System. Series D trades a portfolio of financial related instruments. Series E Trading for Series E is directed by Graham Capital Management, L.P. (referred to as Graham Capital). Graham Capital has been operating its trading systems on behalf of clients since February 1995. As of February 28, 2001, Graham Capital had approximately $741 million in investor funds (including notional funds) under management. Graham Capital directs trading for 100% of Series E's assets according to its Global Diversified Program. Series E trades a diversified portfolio including approximately 80 global markets. Series F Trading for Series F is directed by Campbell & Company, Inc. (referred to as Campbell & Company). Campbell & Company has been operating its trading systems since April 1978 and is a successor to a partnership originally organized in January 1974. As of February 28, 2001, Campbell & Company had approximately $2.3 billion in investor funds (including notional funds) under management. Campbell & Company directs trading for 100% of Series' F's assets pursuant to The Financial, Metal & Energy Small Portfolio (referred to as its the FME Small Portfolio) which invests in a broadly diversified futures portfolio of currency, interest rate, stock index, metal and energy contracts. Risk Factors To Consider Interests in each series are speculative securities, and an investment in any series of the Trust involves a high degree of risk. You should be aware that the following risks, listed in descending order of significance, apply to each series. -Futures, forward and options contracts trading is speculative, volatile and highly leveraged, and you could lose a substantial portion or even all of your investment. -The trading advisors' programs may not perform for each series as they have performed in the past, and you should not rely on past performance to predict the results of an investment in a series. 6 Risk Factors To Consider (Continued) -Each series is traded by a single advisor rather than by dispersing the risk among several advisors, and if that advisor does not trade well, that series will not be profitable. There is no guarantee that any series will meet its intended objective. -Your annual tax liability for any taxable income from a series will exceed cash distributions to you from the Trust. -If you redeem an interest in any series during the first 12 months following the effective date of your purchase, you will be charged redemption fees (4% in the first 6-month period, 3% in the second 6-month period), except in defined circumstances. -Each series has large fixed expenses. Assuming a net asset value of $5 million and interest income equal to 5.00% annually, we estimate that the series' gains from trading must be 4.88% per annum (Series D), 5.31% per annum (Series E) and 5.00% per annum (Series F) in order to break even. These break even amounts increase if you have to pay redemption fees. -Although the Trust offers weekly purchase, exchange and redemption rights, liquidity is limited because of transfer restrictions and because of the absence of any exchange listing or secondary trading market for the interests. -Actual and potential conflicts of interest exist among Prudential Securities, the managing owner and the trading advisors. For example, conflicts related to the brokerage fee and effecting transactions or trading for their own accounts and other accounts may create an incentive for Prudential Securities, the managing owner and the trading advisors to benefit themselves rather than you, the investor. -You will have limited voting rights and no control over the Trust's business. -Although an investment in the series is designed to diversify your portfolio, we cannot assure you that diversification will create profits for you. The Trustee Wilmington Trust Company, a Delaware banking corporation, is the Trust's sole trustee (referred to as the trustee). The trustee has 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 and liabilities to the Trust. The Managing Owner The managing owner is a wholly-owned subsidiary of Prudential Securities, and as the managing owner it: -Administers the business and affairs of each series (excluding commodity trading decisions, except in certain limited, and essentially emergency, situations). -Makes a contribution to each series in order to maintain at least a 1% interest in the profits and losses of each series at all times. -Accepts responsibility for the obligations of any series whose liabilities exceed its assets. 7 Prudential Securities Prudential Securities, the parent company of the managing owner, is the Trust's selling agent and clearing broker. Its affiliates also indirectly engage in foreign currency forward transactions with the various series for a profit. Because of Prudential Securities' affiliation with the managing owner, these arrangements have not been negotiated at arm's length. All compensation to Prudential Securities and its affiliates is within the limits of applicable regulatory guidelines. Limitation Of Liabilities The debts, liabilities, obligations, claims, and expenses of a particular series are charged against the assets of that series only and not against the assets of the Trust generally or against the assets of any other series. Liabilities You Assume You cannot lose more than your investment in any series, and you will not be subject to the losses or liabilities of any series in which you have not invested. We have received opinions of Rosenman & Colin LLP, counsel to the Trust, and Richards, Layton & Finger, P.A., special Delaware counsel to the Trust and the trustee. These opinions provide that creditors of and equity holders in any particular series have recourse only to the assets of that series and to the assets of the managing owner and not to the assets of any other series, provided that certain requirements are met. These requirements include treating each series as separate and distinct from the other series. See the "Liabilities" section in the trust agreement for a more complete explanation. Who May Subscribe To subscribe for the interests of any series: -You must generally 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 $45,000, although several states impose higher requirements. See the section in the subscription agreement (Exhibit D) entitled "State Suitability Requirements." -You may not invest more than 10% of your liquid net worth in any series or combination of series. -IRAs, 401(k) accounts and other employee benefit plans are subject to special suitability requirements. -If your aggregate interests in all series, when added to your aggregate interests in the various series of World Monitor Trust, another public futures fund sponsored by the managing owner, total at least $5 million, you may receive a discount on the purchase price of an interest and/or have any applicable redemption fees waived. What You Must Understand Before You Subscribe You should not subscribe for interests unless you understand: -The fundamental risks and possible financial hazards of this investment. -The trading strategy or strategies to be followed in the series you invest in. -The tax consequences of your investment in the series. 8 What You Must Understand Before You Subscribe (continued) -That if you decide to sell securities in your Prudential Securities account to subscribe for interests, you may have income tax consequences from that sale. -The fees and expenses to which you will be subject. -Your rights and obligations as a limited owner. Your Minimum Subscription And Interest Pricing Minimum required subscriptions and interest prices are as follows: -Your minimum initial purchase is $5,000, unless you are investing in an IRA in which case your minimum initial investment is $2,000. -You may purchase interests in all or any combination of the series so long as your total minimum subscription amount is satisfied, but your minimum initial purchase in any one series must be at least $1,000. -Each series' interests are being offered and sold at their weekly net asset value; if you are an existing limited owner, you may purchase additional interests in increments of $100. -No front-end sales charges or selling commissions are charged. A series' net asset value is not diluted by the Trust's organization and ongoing offering expenses because Prudential Securities or an affiliate is not responsible for payment of those expenses. How To Subscribe To subscribe for and be permitted to purchase any series' interests: -You must complete and sign a subscription agreement (Exhibit D). -You are required to have a securities account with Prudential Securities (or with another brokerage firm, which is referred to as an additional seller) and to have funds in that account equal to the amount of your purchase at the time you subscribe. -You must subscribe in cash. -You must meet the established application time deadlines. You may revoke your subscription within five business days after you submit a subscription agreement to Prudential Securities or to an additional seller. You may not revoke it after that time. The managing owner may reject any subscription in whole or in part for any reason. How The Offering Works Interests in each series will be sold once each week until the total amount of interests registered for sale with the SEC for each series is issued, either through sale or exchange. For purposes of describing the purchase, exchange and redemption of interests, the following terms are used: -"Dealing day" means the first business day of each week. -"Valuation point" means the close of business on Friday of each week. The sale price, or net asset value per interest, is set at a valuation point, and subscriptions for new interests become effective on a dealing day. Generally, interests are priced at the close of business on a Friday, and new purchases become effective at that price on the following Monday. To 9 How The Offering Works (Continued) purchase interests, you must submit your subscription agreement (Exhibit D) at least five business days (or two business days if you are an existing investor purchasing additional interests of a series you currently own) before any given dealing day. Additional time may be required before your subscription is approved by the managing owner. Due to this waiting period, the purchase price of your interests is not fixed on the date you submit your subscription but is instead finalized on the valuation point immediately preceding the dealing day on which your purchase is eligible to become effective. There may be a considerable difference between the net asset value of an interest on the date you submit your subscription and the dealing day on which your purchase becomes effective. Purchases Of Additional Interests If you are a limited owner of interests in a particular series and wish to purchase additional interests in that same series, you must submit your subscription agreement (Exhibit D) at least two business days before any given dealing day, and your subscription for additional interests must be approved by the managing owner. Additional interests will be sold at the applicable series' then-current net asset value per interest at the valuation point immediately preceding the dealing day on which your purchase of additional interests is eligible to become effective. Purchases of additional interests are subject to changes in net asset value per interest between the date you submit a subscription agreement (Exhibit D) and the dealing day on which your purchase becomes effective. Exchange Of Interests Interests you own in one series may be exchanged for interests of one or more other series for as long as the interests in the series for which exchange is being made are offered for sale. To make an exchange, you must complete an exchange request (Exhibit C). You must submit your exchange request at least five business days before any given dealing day, and the exchange must be approved by the managing owner. Exchanges are made at the applicable series' then-current net asset values per interest at the valuation point immediately preceding the dealing day on which your exchange is eligible to become effective. Exchanges, like subscriptions, are subject to changes in net asset value per interest between the date you submit an exchange request and the dealing day on which your exchange becomes effective. The exchange of interests will be treated as a redemption of interests in one series and the simultaneous purchase of interests in the series you exchange into. Tax consequences will result. No exchange charges are imposed. Segregated Accounts/ Interest Income The proceeds of the offering for each series are deposited in cash in separate segregated trading accounts maintained for each series at Prudential Securities in accordance with CFTC regulatory requirements. These funds are maintained in segregation unless they are (i) secured amounts used as margin for trading on foreign exchanges or (ii) used as margin to maintain a series' forward currency contract positions or a position on a non-U.S. exchange. Funds are maintained in cash. On the last day of each month, each series receives interest income on 100% of its average daily equity maintained in cash in the series' account with Prudential Securities during that month at a 13-week (91-day) Treasury bill rate. This rate is determined weekly by Prudential Securities and is the rate awarded to all bidders during that week based on the results of that week's auction of 13-week (91- day) Treasury bills. The weekly interest rate may be found on the Internet at www.publicdebt.treas.gov. While funds currently are maintained in cash, in the event that funds are maintained in Treasury bills instead of cash, the series will receive the interest income paid on such Treasury bills. 10 Segregated Accounts/ Interest Income (continued) If you redeem or purchase interests of a series on a day other than the last day of a month, the interest income will be pro rated through the date of purchase or redemption for purposes of determining net asset value. Use Of Proceeds One hundred percent of each series' offering proceeds is used for that series' trading activities. Organization And Offering Expenses Prudential Securities or an affiliate is responsible for the payment of all of the expenses associated with the organization of the Trust and the offering of each series' interests. No series is required to reimburse Prudential Securities or its affiliate for these expenses. Transfer Of Interests The trust agreement restricts the transferability and assignability of the interests of each series. There is not now, nor is there expected to be, a primary or secondary trading market for the interests of any series. Redemption Of Interests You may sell back to the Trust, in whole or in part, interests you own in any series. This sale is referred to as a redemption. Redemptions may be made each week at the beginning of the dealing day. To redeem your interests, you must deliver your redemption request (Exhibit B) at least two business days prior to a given dealing day. The redemption price is the net asset value per interest on the valuation point immediately preceding the dealing day on which your redemption is eligible to become effective. Redemptions are subject to changes in net asset value between the date you deliver your redemption request and the dealing day on which your redemption becomes effective. Redemption Fees If you redeem interests in any series on or before the end of 12 full months following the effective date of purchase of the interests being redeemed, you will be subject to the following redemption fees: Redemption Date Redemption Fee up to six months 4% of redemption price from the effective date of purchase after the sixth 3% of redemption price month and through the 12th month from the effective date of purchase Redemption fees may be waived if: -Your aggregate interests in all series, when added to your aggregate interests in the various series of World Monitor Trust, another public futures fund sponsored by the managing owner, total at least $5 million. Redemption fees will be waived if: -The redemption proceeds are used to effect an exchange for interests in another series. -The redemption proceeds are used to purchase interests in another fund sponsored by the managing owner. Distributions The managing owner does not intend to make ongoing distributions. 11 Income Tax Consequences Based on the facts set forth in this prospectus, the managing owner's representations and current U.S. federal income tax law, we have obtained an opinion of Rosenman & Colin LLP to the effect that each series in the Trust will be treated as a partnership provided that at least 90% of each series' annual gross income consists of "qualifying income" as defined in the Internal Revenue Code. The managing owner believes that each series currently satisfies this test. As long as each series is treated as a partnership for U.S. federal income tax purposes, the Trust and each series in the Trust will not be subject to any U.S. federal income tax as an entity. Instead, as a limited owner, your allocable share of annual trading profits and other income generated from the series in which you have purchased interests will be taxable to you whether or not any cash is distributed to you by the Trust. Your ability to deduct any losses that may be incurred and the expenses relating to the Trust's trading activities may be subject to significant limitations. The excess of a series' capital losses over capital gains will be deductible by you if you are a non-corporate limited owner only against your capital gain income each year (and up to $3,000 per year against your ordinary income). Furthermore, special tax risks apply if you are a tax-exempt limited owner or a non-U.S. investor. Reports During the year, you will receive unaudited monthly reports and an annual financial statement audited by the Trust's independent accountants. You also will be provided with appropriate information to permit you to file your federal and state income tax returns. Fiscal Year The Trust's fiscal year runs from January 1 through December 31. Financial Information Financial information concerning the Trust and the managing owner is set forth under "FINANCIAL STATEMENTS." 12 Selected Financial Information As of December 31, 2000 and for the period from commencement of operations to December 31, 2000 Series D Series E Series F Commencement of Operations 3/13/00 4/5/00 3/1/00 Total Assets $6,176,069 $6,444,621 $8,131,557 Total Liabilities $123,442 $338,307 $206,225 Total Trust's Capital $6,052,627 $6,106,314 $7,925,332 Total Income (Loss) $(375,118) $1,660,064 $1,172,280 Net Income (Loss) $(834,523) $1,035,768 $556,293 Net Asset Value Per Interest $87.49 $120.36 $106.90 Net Income (Loss) Per Weighted Average Interest $(13.32) $19.41 $8.41 13 Summary Of Fees And Expenses Fees Paid By The Trust Brokerage Fee -- 6% of each series' net asset value, normally not more than 2% of which are paid as employee "trailing compensation". This fee, plus trading transaction costs, equated to an amount per round-turn transaction of: Actual Expected for 2000 going forward Series D: $66 $28 Series E: $56 $38 Series F: $87 $72 Prudential Securities receives this brokerage fee for brokerage services it renders and for assisting the managing owner. In addition, the series pay all trading transaction costs as set out in the break-even analyses on the following page. The brokerage fee is determined at the close of business each Friday, and the sum of the amounts determined each week is paid monthly. The amount per round-turn transaction will vary depending on how frequently a trading advisor makes trades Management Fee -- an annual percentage of each series' net asset value: Series D: 1.25% Series E: 2% Series F: 2% Each trading advisor receives a monthly management fee for its trading advisory services. The management fee is determined at the close of business each Friday, and the sum of the amounts determined each week is paid monthly. Incentive Fee Series D: 22% Series E: 22% Series F: 22% Each trading advisor receives a quarterly incentive fee for the profit (realized and unrealized) it achieves for a series. The incentive fee for each series is determined as of the close of business on the last Friday of each calendar quarter. Routine Operating Expenses -- the lesser of the actual amount of expenses incurred or 1.50% annually of each series' net asset value. If the actual expenses exceed 1.50% annually of a Series' net asset value (or if such expenses, excluding legal and audit charges, exceed 0.5% of Series E's or Series F's, and 1.25% of Series D's, net asset value annually), the excess is paid by Prudential Securities. Routine operating expenses include legal, auditing, cash management, accounting, postage, printing, photocopying and similar expenses incurred on behalf of the Trust. Extraordinary Expenses Extraordinary expenses, including expenses associated with litigation or other extraordinary events, are paid if, and as, they are incurred. Fees Paid By The Investors Redemption Fees -- 4% or 3%, if applicable The managing owner receives these fees. See "Redemption Fees" on page 11 for details. The above fees constitute all fees paid, or to be paid, either directly or indirectly, to Prudential Securities and/or its affiliates or to the trading advisors. Fees Paid By Prudential Securities Or Its Affiliates: Organization, Offering and Excess Operating Expenses Approximately $250,000 per series for the organization and initial offering, and approximately $75,000 per series each year during the continuous offering. Excess operating expenses will vary from year to year. Organization and offering expenses include legal, accounting, filing, and printing expenses for the initial and continuous offering of interests. Excess operating expenses are routine operating expenses in excess of the limits on such expenses payable by the Trust, as described above. 14 Projected Twelve-Month Break-Even Analyses The following is the projected twelve-month break-even analysis for each series at a $5 million net asset value. The projection takes into account all fees and expenses other than advisory incentive fees and extraordinary expenses which are impossible to predict. This analysis is expressed both as a dollar amount and as a percentage of a $5,000 initial investment:
SERIES D SERIES E SERIES F Description of Dollar Percentage Dollar Percentage Dollar Percentage Charges Break-Even Break-Even Break-Even Break-Even Break-Even Break-Even Brokerage Fees $300.00 6.00% $300.00 6.00% $300.00 6.00% Trading Transaction Costs (1) $56.50 1.13% $54.00 0.81% $25.00 0.50% Advisory Management Fees $62.50 1.25% $100.00 2.00% $100.00 2.00% Advisory Incentive Fees (2) -- -- -- -- -- -- Routine Operating Expenses (3) $75.00 1.50% $75.00 1.50% $75.00 1.50% Total $494.00 9.88% $529.00 10.31% $500.00 10.00% Less Estimated Interest Income (4) $(250.00) (5.00)% $(250.00) (5.00)% $(250.00) (5.00)% Estimated 12-Month Break-Even Level Without Redemption Charges (5)(7)(8) $244.00 4.88%(9) $279.00 5.31%(10) $250.00 5.00%(11) Redemption Charges (5)(6) $150.00 3.00% $150.00 3.00% $150.00 3.00% Estimated 12-Month Break-Even Level After Redemption Charges (6)(7)(8) $394.00 7.88% (9) $429.00 8.31%(10) $400.00 8.00%(11)
----------------------- 1 Trading transaction costs consist of execution charges, floor brokerage expenses and give-up charges, as well as the National Futures Association fees, the exchange fees and the clearing fees which are incurred in connection with each series' futures trading activities. 2 Advisory incentive fees are paid only on new high net trading profits. New high net trading profits are determined after deducting brokerage fees, trading transaction costs, advisory management fees, and routine operating expenses for which a series is responsible and extraordinary expenses related to that series' trading advisor, and do not include interest income. Each series could pay advisory incentive fees in years in which the series breaks even, or even loses money, due to the quarterly, rather than annual, nature of such fees. 3 Routine operating expenses are currently approximately $125,000 to $150,000 per series each year. However, during each year, no series will pay more than the amount that equals the lesser of the actual expenses or 1.50% (with a maximum of 0.5% attributable to non-legal and audit expenses for Series E and Series F, and a maximum of 1.25% attributable to non-legal and audit expenses for Series D) of that series net asset value for that year. (For example, if a series' net asset value remained constant at $5 million during a year no series will pay more than $75,000 for that period, even if the actual expenses are higher.) For each series, if the actual expenses exceed 1.50% of a series' net asset value (or the other stated limits) for the year, Prudential Securities will pay the additional amount. As the number of investors in each series increases, the aggregate amount of these expenses are expected to increase, but as a percentage of the series' net asset value these expenses are expected to decrease as asset levels increase. (Notes are continued on the next page) 15 4 Funds currently are maintained in cash. On the last day of each month, each series receives interest income on 100% of its average daily equity maintained in cash in the series' account with Prudential Securities during that month at a 13- week (91-day) Treasury bill discount rate. This rate is determined weekly by Prudential Securities and is the rate awarded to all bidders during that week based on the results of that week's auction of 13-week (91-day) Treasury bills. The weekly interest rate may be found on the Internet at www.publicdebt.treas.gov. While it is anticipated that funds will continue to be maintained in cash, in the event that funds are maintained in Treasury bills instead of cash, the series will receive the interest income paid on such Treasury bills. If you purchase or redeem interests of a series on a day other than the last day of a month, the interest income will be pro rated through the date of purchase or redemption for purposes of determining net asset value. 5 A redemption fee of 4% will be assessed on an interest redeemed on or before the end of the sixth full month after the effective date of its purchase. A redemption fee of 3% will be assessed on an interest redeemed after the end of the sixth full month but on or before the end of the 12th full month after its purchase. Redemption fees will not be charged if you effect an exchange of interests or if you invest your redemption proceeds concurrently in another fund sponsored by the managing owner, and they may be waived if your aggregate interests in all series, when added to your aggregate interests in the various series of World Monitor Trust, another public futures fund sponsored by the managing owner, total at least $5 million. 6 Because this break-even analysis is a twelve-month computation, only the 3% redemption fee, which is imposed at the end of the twelve-month period, is used. 7 If this break-even analysis was separately computed for a $2,000 initial IRA account investment, the break-even percentages would be equally applicable to that investment. 8 Extraordinary expenses, which are impossible to predict, are not included as part of this break- even analysis. 9 If Series D were operating at $50 million net asset value, the estimated 12-month break-even percentage would be 3.84% without redemption charges and 6.84% with the 3% redemption charge. 10 If Series E were operating at $50 million net asset value, the estimated 12-month break-even percentage would be 4.27% without redemption charges and 7.27% with the 3% redemption charge. 11 If Series F were operating at $50 million net asset value, the estimated 12-month break-even percentage would be 3.96% without redemption charges and 6.96% with the 3% redemption charge. 16 RISK FACTORS The Trust is a venture in a high-risk business. An investment in the interests of each series is very speculative. You should not make an investment in any series before consulting with independent, qualified sources of investment advice. You should only make an investment if your financial condition permits you to bear the risk of a total loss of your investment. Moreover, to evaluate the risks of this investment properly, you must familiarize yourself with the relevant terms and concepts relating to commodities trading and the regulation of commodities trading which are discussed in this prospectus in the section captioned "THE FUTURES MARKETS." Trading And Performance Risks Futures, Forward And Options Trading Is Volatile And Highly Leveraged A principal risk in futures, forward and options trading is volatile performance, i.e., potentially wide variations in daily, weekly and monthly contract values. This volatility can lead to wide swings in the value of your investment. This risk is increased by the low margin normally required in futures, forward and options trading, which 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. Options Trading Can Be More Volatile Than Futures Trading Successful options trading requires a trader to assess accurately near-term market volatility, because that volatility is directly reflected in the price of outstanding options. Correct assessment of market volatility can therefore be of much greater significance in trading options than it is in many long-term futures strategies where volatility does not have so great an effect on the price of a futures contract. Single-Advisor Funds Are More Volatile Than Multi-Advisor Funds Each series functions like a single-advisor fund. In single-advisor funds, volatility may increase as compared to a fund where more than one advisor diversifies risk to a greater extent. To the extent a single advisor concentrates trading in one or only a few markets, volatility and risk increases further. There Is No Protection Against The Loss Of Your Principal You will not be assured of any minimum return. This means you could lose your entire investment (including any undistributed profits), in addition to losing the use of your subscription funds for the period you maintain an investment in any series. Past Performance Is Not Necessarily Indicative Of Future Performance You must consider the uncertain significance of past performance, and you should not rely to a substantial degree on the trading advisors' or the managing owner's records to date for predictive purposes. You should not assume that any trading advisor's future trading decisions will create profit, avoid substantial losses, or result in performance for the series comparable to that trading advisor's past performance. In fact, as a significant amount of academic study has shown, futures funds more frequently than not underperform the past performance records included in their prospectuses. Because you and other investors will acquire, exchange and redeem interests at different times, you may experience a loss on your interests even though the series in which you have invested in is profitable as a whole and even though other investors who invest in that series experience a profit. The past performance of any series may not be representative of each investor's investment experience in it. 17 Likewise, you and other investors will invest in different series managed by different trading advisors. Each series' assets are: -Segregated from every other series' assets. -Traded separately from every other series. -Valued and accounted for separately from every other series. Consequently, the past performance of one series has no bearing on the past performance of another series. You should not consider the past performance record of one series when deciding whether to invest in another series. Performance Is Not Correlated To The Debt Or Equity Markets We anticipate that over time each series' performance will not be similar to the performance of the general financial markets for equity and debt, and will move up and down independently. For example, the net asset value of a series may rise or fall while general stock indices rise or while stock indices fall. Non-correlation is not, however, negative correlation. Negative correlation would mean that there is an inverse and opposite relationship between a series' performance and the performance of the general financial markets. Because of non-correlation, during certain periods a given series may perform in a manner very similar to or in a manner different from a more traditional portfolio, providing few, if any, diversification benefits. The Series Have Limited Operating Histories Series D and F each commenced trading during March 2000 and Series E commenced trading in April 2000. Futures, Forward And Options Trading May Be Illiquid Although each series generally purchases and sells actively traded contracts, 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 Graham Capital and Campbell & Company use primarily technical trading systems for many of their trading decisions. For any technical trading system to be profitable, there must be price moves or "trends" -- either upward or downward -- in some commodities that the system can track and those trends must be significant enough to dictate entry or exit decisions. Trendless markets have occurred in the past, however, 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 traders 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 technical systems will be profitable. The Large Number Of Existing Technical Traders Could Adversely Affect Each Series In recent years, there has been 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 trading volume in the particular markets included in each series' portfolio could result in traders attempting to initiate or liquidate substantial positions at or about the same time as a series' trading advisor, or otherwise altering historical trading patterns or affecting the execution of trades, all to the significant detriment of a series. 18 Discretionary Decision-Making May Result In Missed Opportunities Or Losses Each of the trading advisors' strategies involves some discretionary aspects in addition to their technical factors. For example, the trading advisors often use discretion in selecting contracts and markets to be followed. Discretionary decision making may result in a trading advisor's failing to capitalize on certain price trends or making unprofitable trades in a situation where another trader relying solely on a systematic approach might not have done so. Recent Legislative Changes Permit the Series to Engage in Transactions Subject to Little or No Regulation Congress passed the Commodity Futures Modernization Act of 2000 in December 2000. This legislation was designed to streamline and reduce the amount of regulation governing commodity exchanges and transactions. Under the new legislation "eligible contract participants," a term which includes each series, may enter into off-exchange transactions in certain commodities that are not subject to the provisions of the Commodity Exchange Act, other than the antifraud and antimanipulation provisions and, in some cases, the provisions relating to recognized clearing organizations. Each series will also be eligible to trade on two new types of exchanges created by the legislation, "derivatives transaction execution facilities" and "exempt boards of trade." These trading facilities, once created, will be subject to less regulatory oversight than futures exchanges have been in the past. Any trading conducted directly with a counterparty or on a less regulated exchange, may involve more risks than trading through a facility subject to more oversight by the CFTC. Because the legislation was passed so recently, it is impossible to predict exactly what the effects on the series trading will be. Trading On Exchanges Outside The U.S. May Be Riskier Than Trading On U.S. Exchanges Each series trades on non-U.S. exchanges as a component of its trading programs. Foreign exchanges, whether or not linked to a U.S. exchange, are not regulated by the CFTC or by any other U.S. governmental agency or instrumentality and may be subject to regulations (i) that are different from those to which U.S. exchanges are subject and (ii) that provide less protection to investors than the U.S. regulations provide. Therefore, trading on non-U.S. exchanges involves more risks than similar trading on U.S. exchanges. The Unregulated Nature Of The Forward Markets Creates Counterparty Risks That Do Not Exist In Futures Trading Forward contracts are entered into between private parties off an exchange, and are thus not subject to exchange regulations as to quantity, method of settlement, time for delivery, etc. Furthermore, forward contracts are not regulated by the CFTC or by any other U.S. government agency, and forward contracts are not guaranteed by an exchange or its clearinghouse. If a series takes a position as a principal with a counterparty that fails, a default would most likely result, depriving that series of any profit potential or forcing the series to cover its commitments for resale, if any, at the then current market price. Because each series executes its forward trading exclusively with Prudential Securities (and its affiliate, Prudential-Bache Global Markets Inc.) as principal, liquidity problems might be greater in a series' 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 series' forward trading might be limited to less than desired levels. Effect Of The European Monetary Union The January 1, 1999 conversion of most European currencies to a single euro-currency, or continuing market reaction to that conversion or to any nation's withdrawal from the European Monetary Union, may adversely affect the trading advisors' trading and investing opportunities. The process of conversion is an ongoing one, with further steps, including the withdrawal of national bank notes and coins from circulation, to continue through early 2002. The conversion to a single euro-currency is a very significant and novel political and economic event, and there can be no certainty about the direct or indirect future effects on the European currency markets and, in turn, the Series. 19 Trading Advisor Risks Each Series Relies On Its Trading Advisor For Success The trading advisor for each series makes the commodity trading decisions for that series. Therefore, the success of each series largely depends on the judgment and ability of its trading advisor. We cannot assure you that a trading advisor's trading for any series will prove successful under all or any market conditions. We Cannot Assure You That The Trading Advisors Or Their Trading Strategies Will Continually Serve The Series We cannot assure you that: (i) a trading advisor or the Trust will not exercise its rights to terminate an advisory agreement for a series under certain conditions, (ii) the advisory agreement with a trading advisor will be renewed on the same terms as the current advisory agreement for that trading advisor once it expires or (iii) if any series retains a new trading advisor, that the new advisor will be retained on terms as favorable to the series as those negotiated with that series' current trading advisor or that the new advisor will be required to recoup any losses sustained by the prior advisor before the new advisor is entitled to receive incentive fees. Each Trading Advisor's Past Performance Record Is Inconsistent The performance records of each trading advisor reflect significant variations in profitability and draw-downs from period to period. Other Clients Of Each Trading Advisor May Compete With Each Series Each trading advisor manages large amounts of other funds and advises other clients at the same time as it is managing series assets; consequently, each series may experience increased competition for the same positions. Possible Adverse Effects Of Increasing The Assets Under Each Trading Advisor's Discretion No trading advisor has agreed to limit the amount of additional equity that it may manage. If a trading advisor accepts more equity than it has capacity for, the trading advisor's strategies may not function to create profit. "Capacity" is the amount that a trading advisor can trade effectively without exceeding its trading and risk management capabilities. Trust And Offering Risks You Will Have A Limited Ability To Transfer Your Interests, And Your Ability To Liquidate Your Interests May Be Impeded There is not expected to be any primary or secondary market for the interests. In addition, the trust agreement restricts your ability to transfer, assign, and redeem interests. You will be charged a redemption fee, unless certain conditions are met. These redemption fees, if applicable, are paid to the managing owner. If a substantial number of limited owners redeem their interests in a series, that series could be required to liquidate positions at unfavorable prices. However, redemptions in one series will not affect trading in any other series. Under extra- ordinary circumstances, such as an inability to liquidate positions, the Trust may delay redemption payments to you beyond the payment period specified in the trust agreement . Each Series Will Have To Overcome Substantial Fixed Expenses In Order To Break Even Each Year Each series has substantial fixed overhead expenses. At current asset levels, we estimate that the series' gains from trading must be 4.88% per annum (Series D), 5.31% per annum (Series E) and 5.00% per annum (Series F) in order to break even. This break even amount will increase if redemption fees are imposed upon you because you decide to redeem any interests held by you for 12 months or less, and will decrease if asset levels increase substantially. 20 The Payment Of Quarterly Incentive Fees Does Not Assure Profits Each series also pays its trading advisor a quarterly incentive fee based upon any new high net trading profits earned by that trading advisor on the net asset value of the series for which the trading advisor has trading responsibility. These profits include unrealized appreciation on open positions. Accordingly, it is possible that a series will pay an incentive fee on trading profits that do not become realized (in whole or in part). Each series' trading advisor will retain all incentive fees paid, even if that series incurs a subsequent loss after payment of any quarter's fees. Because incentive fees are paid quarterly, it is possible that an incentive fee may be paid during a year in which the net asset value per interest of a series ultimately declines from the outset due to 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. The Trust Is Subject To Conflicts Of Interest A number of actual and potential conflicts of interest exist and will continue to exist among the managing owner, Prudential Securities, Prudential Securities Group Inc. and the trading advisors. Conflicts involving (i) the brokerage fee, (ii) effecting transactions or trading for their own accounts and other accounts, (iii) Prudential Securities' advising on redemptions, (iv) other commodity funds sponsored by Prudential Securities, (v) management of other accounts by the trading advisors and (vi) engaging in forward transactions, may each create an incentive for Prudential Securities and its affiliates, the managing owner and the trading advisors to benefit themselves rather than you. However, no specific policies regarding conflicts of interest have been adopted by the Trust or by any of the series. You Have Limited Rights You will exercise no control over the Trust's business. However, certain actions, such as termination or dissolution of a series, may be taken or approved upon the affirmative vote of limited owners holding interests representing at least a majority (over 50%) of the net asset value of the series (excluding interests owned by the managing owner and its affiliates). Failure Of The Trust's Clearing Broker Or Other Counterparties You may lose some or all of your investment in the event of the bankruptcy of Prudential Securities or of any counterparty with whom it trades. 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 advisors and the trustee, the terms of this offering and the structure of the Trust have not been established as the result of arms-length negotiation. Tax Risks Your Tax Liability Is Anticipated To Exceed Distributions To You For U.S. federal income tax purposes, the amount of your taxable income or loss for each taxable year of the Trust will be determined on the basis of your allocable share of ordinary income and loss generated from the series in which you have purchased interests, as well as capital gains and losses recognized by the series during each year. If the series in which you own interests has taxable income for a year, that income will be taxable to you in accordance with your allocable share of Trust income from that series, whether or not any amounts have been or will be distributed to you. If you are an employee benefit plan or an individual retirement account or other tax- exempt limited owner, under certain circumstances, all or part of such income may be taxable to you. Also, the series in which you have an interest might sustain losses after the end of a profitable 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 21 owner, in its discretion, will determine whether, and in what amount, the Trust will make distributions. There is no present intention to make distributions. Accordingly, it is anticipated that you will incur tax liabilities as a result of being allocated taxable income from a series even though you will not receive current cash distributions with which to pay such taxes. Deductions May be Limited Your ability to claim current deductions for certain expenses and losses, including capital losses of the series in which you have interests, is subject to various limitations. Taxes And Economics May Not Match During A Calendar Year The income tax effects of a series' transactions to you may differ from the economic consequences of those transactions to you during a calendar year. Partnership Treatment Is Not Assured The Trust has received an opinion of counsel from Rosenman & Colin LLP to the effect that, under current U.S. federal income tax law, each series in the Trust will be treated as a partnership for U.S. federal income tax purposes, provided that (i) at least 90% of each series' annual gross income consists of "qualifying income" as defined in the Internal Revenue Code and (ii) each series is organized and operated in accordance with its governing agreements and applicable law. The managing owner believes that each series currently meets this income test and that it is likely, but not certain, that each series will continue to meet the income test. An opinion of counsel is subject to any changes in applicable tax laws and is not binding on the Internal Revenue Service or the courts. If a series of the Trust were to be treated as a corporation instead of as a partnership for U.S. federal income tax purposes, (i) the net income of that series would be taxed at corporate income tax rates, thereby substantially reducing that series' profitability, (ii) you would not be allowed to deduct your share of losses of that series and (iii) distributions to you, other than liquidating distributions, would constitute dividends to the extent of the current or accumulated earnings and profits of that series, and would be taxable as such. There Is The Possibility Of A Tax Audit We cannot assure you that a series' tax returns will not be audited by a taxing authority or that an audit will not result in adjustments to the series' returns. If an audit results in an adjustment, you may be required to file amended returns and to pay additional taxes plus interest. You are strongly urged to consult your own tax advisor and counsel about the possible federal, state and local tax consequences to you of an investment in the Trust. Tax consequences may differ for different investors, and you could be affected by future changes in the tax laws. Regulatory Risks Government Regulations May Change Commodity pool regulations are constantly changing and there is no way to predict the impact of future changes on the Trust. In addition, future 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 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 any series of the Trust. 22 CFTC Registrations Could Be Terminated If the Commodity Exchange Act registrations or National Futures Association memberships of the managing owner, any of the trading advisors 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. 23 ACTUAL AND POTENTIAL CONFLICTS OF INTEREST While the managing owner, Prudential Securities and its affiliates and the trading advisors seek to avoid conflicts of interest to the extent feasible and to resolve all conflicts that may arise equitably and in a manner consistent with their responsibilities to the Trust and the various series, no specific policies regarding conflicts of interest have been or are intended to be adopted by the Trust or by any of the series. The following actual and potential conflicts of interest do and may continue to exist. Conflicts Related To The Payment Of The Brokerage Fee To Prudential Securities The Brokerage Fee May Not Be The Lowest Available Fee Because the managing owner is an affiliate of Prudential Securities, the fixed fee Prudential Securities receives was not the result of arm's-length negotiations, and the fixed fee may not be comparable to the fee each series would be charged if the fee were negotiated with an unrelated party. Furthermore, other customers of Prudential Securities may pay commissions that are effectively lower than the fixed fee payable by a series (e.g., if Prudential Securities determines that the size of any such other account, the anticipated volume and frequency of its trading and the costs associated with the servicing of that account, and/or any other reasons, justify a lower rate). To the extent that other brokers would charge lower commission rates than those charged by Prudential Securities, each series will pay effectively higher commissions for similar trades. However, the managing owner, in accordance with its obligation under the NASAA guidelines to seek the best price and services available for commodity brokerage transactions, believes that limited owners receive additional administrative benefits through the series' brokerage arrangements with Prudential Securities, as well as several other benefits from investing in the Trust that might not otherwise be available to them for an investment as reasonable as the minimum investment in the Trust (e.g., limited liability, investment diversification and administrative convenience). Selection Of Trading Advisors May Benefit Prudential Securities The managing owner is responsible for selecting the trading advisors and is responsible for selecting any new commodity trading advisors for any series. Because Prudential Securities receives the same fee regardless of how many transactions are effected for a series, the managing owner may have an incentive to select trading advisors that do not trade frequently, rather than trading advisors with better track records who do trade frequently. The trust agreement requires the managing owner to determine whether each series is receiving the best price and services available under the circumstances and whether the rates are competitive, and, if necessary, to renegotiate the fee structure to obtain such rates and services for the each series. In making the foregoing determinations, the managing owner may not rely solely on a comparison of the fees paid by other major commodity pools. Prudential Securities Financial Advisors Have An Incentive To Discourage Investor Redemptions Since Prudential Securities financial advisors receive continuing compensation that is paid from the fixed fee that is paid to Prudential Securities, and since such compensation is paid by Prudential Securities in proportion to the number of then outstanding interests for which each financial advisor is providing ongoing services, Prudential Securities financial advisors have a financial incentive to advise you not to redeem interests in any series. However, Prudential Securities' financial advisors are expected to act in your best interests, notwithstanding any personal interests to the contrary. The Trust's Foreign Exchange Dealer Will Not Be Independent The Trust, acting through its trading advisors, executes over-the-counter, spot, forward and option foreign exchange transactions with Prudential Securities. Prudential Securities then engages in back-to-back trading with its affiliate, Prudential- Bache Global Markets Inc. Because Prudential-Bache Global Markets Inc., Prudential Securities and the managing owner are wholly owned subsidiaries of Prudential Securities Group Inc., the managing owner has an incentive to utilize Prudential Securities and Prudential-Bache Global Markets Inc. as the Trust's foreign exchange dealer and counterparty, even though other entities may offer better terms. However, since the managing owner has a fiduciary obligation to the Trust, the managing owner does not utilize affiliated entities for foreign exchange trading if the managing owner determines that it would not be in the best interest of the Trust to do so. 24 Other Activities Of Prudential Securities And The Managing Owner The officers, directors, and employees of the managing owner and of Prudential Securities and the 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 for itself, its officers, directors, employees or customers, agents or correspondents (or employees of such agents or correspondents) or the managing owner. These transactions might be effected when similar series trades are not executed or are executed at less favorable prices, or these persons or entities might compete with a series in bidding or offering on purchases or sales of contracts without knowing that series also is so bidding or offering. In very illiquid markets, such activities could adversely affect series transactions. Although you will not be permitted to inspect such persons' trading records in light of their confidential nature, the managing owner has access to these records. Management Of Other Accounts By The Trading Advisors The trading advisors are permitted to manage and trade accounts for other investors (including other commodity pools) and to trade commodities for their own accounts and the accounts of their principals. The trading records for these accounts are not available for inspection by limited owners. The trading advisors are free to trade accounts for others, so long as each trading advisor's ability to carry out its obligations and duties to the series for which it has trading responsibility under the advisory agreements is not materially impaired thereby. However, various conflicts may arise as a result. Other Accounts Managed By The Trading Advisors May Compete With The Series The trading advisors may compete with the series in bidding or offering on purchases or sales of contracts through the same or a different trading program than that to be used by a series, and there can be no assurance that any such trades will be consistent with those of the series, or that the trading advisors or their principals will not be the other party to a trade entered into by any series. The trading advisor's management of other clients' accounts may increase the level of competition among other clients and a series for the execution of the same or similar transactions and may affect the priority of order entry. Trading Advisor May Receive Higher Compensation From Other Clients Because the financial incentives of a trading advisor in other accounts managed by it may exceed any incentives payable by a series, the trading advisor might have an incentive to favor those accounts over a series in trading. 25 STRUCTURE OF THE TRUST The Trust was formed on April 22, 1999 as a Delaware Business Trust with separate series, pursuant to the requirements of the Delaware Business Trust Act. The Trust's registered office is c/o Wilmington Trust Company, Rodney Square North, 1110 North Market Street, Wilmington, Delaware 19890. The Delaware Business Trust Act provides that, except as otherwise provided in the trust agreement, interest-holders in a Delaware Business Trust have the same limitation of liability as do shareholders of private, for-profit, Delaware cor- porations. The trust agreement confers substantially the same limited liability, and contains the same limited exceptions thereto, as would a limited partner- ship 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 a series in excess of that series' assets. Limited owners do have any such liability. Overview Of The Series Currently, the Trust's interests are offered in three separate and distinct series: Series D, Series E and Series F. The investment objective of each series is to increase the value of your interests over the long term (capital appreciation) while attempting to control risk and volatility. Each series engages in the speculative trading of a diversified portfolio of futures, forward (including interbank foreign currencies) and options contracts and may, from time to time, engage in cash and spot transactions. Each series has its own professional commodity trading advisor (sometimes referred to simply as a trading advisor or collectively as the trading advisors) that manages 100% of that series' assets and makes that series' trading decisions. Currently between 15% and 40% of each series' assets normally are committed as margin for commodities trading, but from time to time these percentages may be substantially more or less. See "TRADING LIMITATIONS AND POLICIES." The trading advisors for the series were selected based upon the managing owner's evaluation of each trading advisor's past performance, trading portfolios and strategies, as well as how each trading advisor's performance, trading portfolio and strategies complement and differ from that of the other trading advisors. The managing owner is authorized under the advisory agreements, however, to utilize the services of additional trading advisors for any series. For each of Series D, Series E and Series F, the managing owner allocates 100% of the proceeds from the offering of each series' interests to the trading advisor for that series for commodities trading purposes. It is currently contemplated that each series' trading advisor will continue to be allocated 100% of additional capital raised from that series during the continuous offering of interests. The trading advisors are not affiliated with the Trust, the trustee, the managing owner or Prudential Securities, but Bridgewater Associates does currently act as a commodity trading advisor to another public fund sponsored by Prudential Securities. If a trading advisor's trading reaches a level where certain position limits restrict its trading, that trading advisor will modify its trading instructions for the series and its other accounts in a good faith effort to achieve an equitable treatment of all accounts. None of the trading advisors nor any of their principals currently have any beneficial interest in the Trust, but some or all of such persons may acquire such an interest in the future. For a summary of the advisory agreements between each trading advisor, the Trust, and the managing owner, see the section in this prospectus "SUMMARY OF AGREEMENTS-Advisory Agreements." Description Of Sections To Follow The pages that follow contain capsule summaries of each series performance from inception to date in accordance with CFTC rules, a description of each series' trading advisor and its principals and a general description of the trading strategies and trading portfolios each trading advisor employs while trading on behalf of the Trust, along with past performance capsule summaries of all other accounts managed by the trading advisors for the various periods shown. The trading advisor descriptions were derived by the managing owner in part from information contained in each trading advisor's CFTC Disclosure Document, which each trading advisor itself prepared. Because the trading advisors' trading strategies are proprietary and confidential, the descriptions that follow are general in nature. 26 PERFORMANCE OF EACH SERIES Set forth hereafter in summary form is the actual performance of each series from the start of trading through March 31, 2001. The information in the capsules has not been audited. However, the managing owner represents and warrants that the capsules are accurate in all material respects. It should not be assumed that each series will experience results in the future that are comparable to the results experienced to date. PAST PERFORMANCE FOR EACH SERIES IS FOUND ON PAGES 28 TO 39 PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS 27 Past Performance Of Series D Capsule Performance of World Monitor Trust II - Series D Commodity Trading Advisor: Bridgewater Associates Rates of Return (Computed on a Daily Basis) Month 2001 2000 January (2.78)% February (3.54)% March (5.72) (2.07)% April (1.59)% May 9.10% June (2.07)% July (1.80)% August (8.01)% September (6.36)% October (7.84)% November 3.81% December 5.00% Annual (11.58)% (12.51)% Name of Pool: World Monitor Trust II -- Series D Type of Pool: Publicly-Offered Start Date: March 13, 2000 Aggregate subscriptions: $8,187,244 (as of March 31, 2001) Current net asset value per interest: $77.36 (as of March 31, 2001) "Draw-down" means losses experienced by World Monitor Trust II -- Series D over a specified period. Largest monthly draw-down: (8.01)% August 2000 "Largest monthly draw-down" means the greatest percentage decline in Net Asset Value due to losses sustained by World Monitor Trust II -- Series D from the beginning to the end of a calendar month. Largest peak-to-valley draw-down: (26.42)% June 2000 to March 2001 "Largest peak-to-valley draw-down" means the greatest cumulative percentage decline in month-end Net Asset Value of World Monitor Trust II -- Series D due to losses sustained during a period in which the initial month-end Net Asset Value of World Monitor Trust II -- Series D is not equaled or exceeded by a subsequent month-end Net Asset Value of World Monitor Trust II -- Series D. "Rate of Return" is calculated daily by dividing net performance by beginning equity. The daily returns are then compounded to arrive at the rate of return for the month, which is in turn compounded to arrive at the rate of return for the year to date. Past Performance Is Not Necessarily Indicative Of Future Results 28 Management's Discussion And Analysis Of Financial Condition And Results Of Operations -- Series D Liquidity and Capital Resources Series D commenced operations on March 13, 2000 with gross proceeds of $5,279,158 allocated to commodities trading. Additional contributions raised through the continuous offering for the period from March 13, 2000 (commencement of operations) through December 31, 2000 resulted in additional gross proceeds to Series D of $2,949,494. Additional Limited Interests of Series D will continue to be offered on a weekly basis at the net asset value per Interest until the subscription maximum is sold. Limited Interests in Series D may be redeemed on a weekly basis, but are subject to a redemption fee if transacted within one year of the effective date of purchase. Redemptions from March 13, 2000 (commencement of operations) to December 31, 2000 were $1,306,910 and $35,592 for Limited Interests and general interests, respectively. Additionally, Interests owned in any series of World Monitor Trust II (Series D, E or F) may be exchanged, without any charge, for Interests of one or more other series of World Monitor Trust II on a weekly basis for as long as Limited Interests in those series are being offered to the public. Future contributions, redemptions and exchanges will impact the amount of funds available for investment in commodity contracts in subsequent periods. At December 31, 2000, 100% of Series D's net assets were allocated to commodities trading. A significant portion of the net assets was held in cash, which is used as margin for trading in commodities. Inasmuch as the sole business of Series D is to trade in commodities, Series D continues to own such liquid assets to be used as margin. Prudential Securities credits Series D with interest income on 100% of its average daily equity maintained in cash in its accounts with Prudential Securities during each month at the 13-week Treasury bill discount rate. This rate is determined weekly by Prudential Securities and represents the rate awarded to all bidders during each week's auction of 13-week Treasury bills. 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 certain 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 Series D from promptly liquidating its commodity futures positions. Since Series D's business is to trade futures and forward 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). Series D's exposure to market risk is influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of Series D's speculative trading as well as the development of drastic market occurrences could result in monthly losses considerably beyond Series D's experience to date and could ultimately lead to a loss of all or substantially all of investors' capital. The Managing Owner attempts to minimize these risks by requiring Series D and its trading advisor to abide by various trading limitations and policies which include limiting margin amounts, trading only in liquid markets and permitting the use of stop loss provisions. See Note F to the financial statements for a further discussion on the credit and market risks associated with Series D's futures and forward contracts. Series D does not have, nor does it expect to have, any capital assets. Results of Operations Series D commenced trading operations on March 13, 2000, and as such, no comparative information to prior periods is available. As of December 31, 2000, Series D reported a net asset value per Interest of $87.49, a decrease of 12.51% from the March 13, 2000 initial net asset value per Interest of $100.00. The MAR (Managed Account Reports) 29 Fund/Pool Index, which tracks the performance of approximately 300 futures funds, returned 9.33% for the March through December 2000 period. Past performance is not necessarily indicative of future results. Series D's gross trading losses for the period from March 13, 2000 (commencement of operations) to December 31, 2000 were $657,000. A detailed discussion of the trading results is presented below. Net losses for Series D were experienced in the currency and interest rate sectors. Profits were the result of gains in the stock index and metal sectors. The euro began 2000 lower versus the U.S. dollar, Japanese yen and British pound before rallying slightly in June as a result of solid European economic data and sentiment that the currency was undervalued. However, gains on long euro positions in the second quarter were offset by losses during the third quarter. Despite a brief rally after intervention by the European Central Bank and other G-7 central banks to boost the failing euro in September, the euro settled back down more than $0.02 below its intervention peaks and long positions incurred losses. Long euro positions produced some gains during the fourth quarter as the euro rose against the U.S. dollar and Japanese yen after hitting an all time low in October, yet euro positions produced a net loss for the year. The Swiss franc spent most of the second and third quarters of 2000 drifting lower against the U.S. dollar, tracking the euro's trend and incurring losses for long positions. The Swiss franc and other foreign currencies rose against the U.S. dollar in the fourth quarter due to a weakening U.S. economy. Gains in long Swiss franc positions during the fourth quarter were not enough to cover losses incurred during the rest of the year. Prior to commencement of Series D's operations in March 2000, the Japanese yen rallied sharply, gaining on the U.S. dollar and most other currencies in the final months of Japan's fiscal year (which ended March 31st). This was attributed to positive sentiment regarding Japan's economy. In May, the yen rose slightly against the U.S. dollar supported by expectations of a possible change in the Bank of Japan's (BOJ) zero-interest rate policy and continued to rise when the BOJ increased short-term interest rates in August. Long yen positions produced gains for Series D during the second and third quarters of the year. Political and economic uncertainty in Japan during the fourth quarter caused the yen to fall against the U.S. dollar and short Japanese yen positions resulted in gains. Global bond markets began 2000 on a strong note. Despite rate hikes and news of robust worldwide economic growth, global bond markets continued to rally partially due to investors seeking refuge from volatile equity markets. Long U.S. and euro bond positions resulted in gains during the second quarter of the year. Negative equity performance throughout the third and fourth quarters and mounting fears of a global economic slowdown contributed to a bond market rally toward year end as investors continued their flight to quality from the stock market. Prices of long- and short-term interest rate instruments rose and Series D incurred losses in short U.S. and euro bond positions during the last two quarters of the year. Extreme volatility in world financial markets during the first half of 2000 resulted in losses for equity index positions. During the second half, equity markets continued to experience volatility, but markets trended downward as global economies began showing signs of slowing down. Most major indices ended the year lower resulting in gains for short positions during the fourth quarter. Long copper positions provided positive performance for Series D throughout most of the year as strong demand and fear of inflation drove prices higher. In addition, the high cost of energy, which is used in the production of base metals, caused a decrease in metal supply driving prices higher and resulting in gains for long positions. Interest income is earned on the average daily equity maintained in cash with Prudential Securities at the 13-week Treasury bill discount rate and, therefore, varies weekly according to interest rates, trading performance, contributions and redemptions. Interest income for the period from March 13, 2000 (commencement of operations) to December 31, 2000 was $282,000. Commissions are calculated on Series D's net asset value at the end of each week and, therefore, vary according to weekly trading performance, contributions and redemptions. Other transaction fees consist of National Futures Association, exchange and clearing fees as well as floor brokerage costs and give-up charges, which are based on the number of trades the trading advisor executes, as well as which exchange, clearing firm or bank on, or 30 through, which the contract is traded. Commissions and other transaction fees for the period from March 13, 2000 (commencement of operations) to December 31, 2000 were $304,000. All trading decisions for Series D are made by Bridgewater Associates, Inc. (the "Trading Advisor"). Management fees are calculated on Series D's net asset value at the end of each week and, therefore, are affected by weekly trading performance, contributions and redemptions. Management fees for the period from March 13, 2000 (commencement of operations) to December 31, 2000 were $58,000. Incentive fees are based on the "New High Net Trading Profits" generated by the Trading Advisor, as defined in the advisory agreement among Series D, the Managing Owner and the Trading Advisor. Incentive fees for the period from March 13, 2000 (commencement of operations) to December 31, 2000 were $27,000. General and administrative expenses for the period from March 13, 2000 (commencement of operations) to December 31, 2000 were $70,000. These expenses include reimbursements of costs incurred by the Managing Owner on behalf of Series D, in addition to accounting, audit, tax and legal fees as well as printing and postage costs related to reports sent to limited owners. The total amount of general and administrative expenses charged to Series D in any year is limited to 1.5% of its net asset value during such year. Because applicable expenses exceeded their limits, a portion of the costs associated with services performed for Series D by the Managing Owner was borne by the Managing Owner or its affiliates. New Accounting Guidance In June 2000, FASB issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities--an amendment of FASB Statement No. 133 ("SFAS 138"), which became effective for Series D on July 1, 2000. SFAS 138 amends the accounting and reporting standards of FASB Statement No. 133 for certain derivative instruments and certain hedging activities. SFAS 138 has not had a material effect on the carrying value of assets and liabilities within the financial statements. Inflation Inflation has had no material impact on operations or on the financial condition of Series D from inception through December 31, 2000. PLEASE TURN TO PAGES 40 TO 42 FOR A DESCRIPTION OF BRIDGEWATER ASSOCIATES AND ITS PRINCIPALS AND TRADING PROGRAMS AND TO PAGES 43 TO 48 FOR ITS RECORD PERFORMANCE FOR ALL ACCOUNTS UNDER ITS MANAGEMENT FOR THE PAST FIVE YEARS 31 Past Performance Of Series E Capsule Performance of World Monitor Trust II -- Series E Commodity Trading Advisor: Graham Capital Rates of Return (Computed on a Daily Basis) Month 2001 2000 January (2.13)% February 2.51% March 10.56% April (0.80)% May (4.54)% June (5.59)% July (0.63)% August 4.94% September (0.77)% October 2.39% November 12.57% December 12.88% Annual 10.93% 20.38% Name of Pool: World Monitor Trust II -- Series E Type of Pool: Publicly-Offered Start Date: April 5, 2000 Aggregate subscriptions: $6,032,054 (as of March 31, 2001) Current net asset value per interest: $133.52 (as of March 31, 2001) "Draw-down" means losses experienced by World Monitor Trust II -- Series E over a specified period. Largest monthly draw-down: (5.59)% June 2000 "Largest monthly draw-down" means the greatest percentage decline in Net Asset Value due to losses sustained by World Monitor Trust II -- Series E from the beginning to the end of a calendar month. Largest peak-to-valley draw-down: (11.15)% April 2000 to July 2000 "Largest peak-to-valley draw-down" means the greatest cumulative percentage decline in month-end Net Asset Value of World Monitor Trust II -- Series E due to losses sustained during a period in which the initial month-end Net Asset Value of World Monitor Trust II -- Series E is not equaled or exceeded by a subsequent month-end Net Asset Value of World Monitor Trust II -- Series E. "Rate of Return" is calculated daily by dividing net performance by beginning equity. The daily returns are then compounded to arrive at the rate of return for the month, which is in turn compounded to arrive at the rate of return for the year to date. Past Performance Is Not Necessarily Indicative Of Future Results 32 Management's Discussion And Analysis Of Financial Condition And Results Of Operations -- Series E Series E commenced operations on April 6, 2000 with gross proceeds of $5,157,459 allocated to commodities trading. Additional contributions raised through the continuous offering for the period from April 6, 2000 (commencement of operations) through December 31, 2000 resulted in additional gross proceeds to Series E of $715,498. Additional Limited Interests of Series E will continue to be offered on a weekly basis at the net asset value per Interest until the subscription maximum is sold. Limited Interests in Series E may be redeemed on a weekly basis, but are subject to a redemption fee if transacted within one year of the effective date of purchase. Redemptions from April 6, 2000 (commencement of operations) to December 31, 2000 were entirely on Limited Interests and totaled $802,411. Additionally, Interests owned in any series of World Monitor Trust 11 (Series D, E or F) may be exchanged, without any charge, for Interests of one or more other series of World Monitor Trust II on a weekly basis for as long as Limited Interests in those series are being offered to the public. Future contributions, redemptions and exchanges will impact the amount of funds available for investment in commodity contracts in subsequent periods. At December 31, 2000, 1 00% of Series E's net assets were allocated to commodities trading. A significant portion of the net assets was held in cash which is used as margin for trading in commodities. Inasmuch as the sole business of Series E is to trade in commodities, Series E continues to own such liquid assets to be used as margin. Prudential Securities credits Series E with interest income on 100% of its average daily equity maintained in cash in its accounts with Prudential Securities during each month at the 13-week Treasury bill discount rate. This rate is determined weekly by Prudential Securities and represents the rate awarded to all bidders during each week's auction of 13-week Treasury bills. 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 certain 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 Series E from promptly liquidating its commodity futures positions. Since Series E's business is to trade futures and forward 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). Series E's exposure to market risk is influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of Series E's speculative trading as well as the development of drastic market occurrences could result in monthly losses considerably beyond Series E's experience to date and could ultimately lead to a loss of all or substantially all of investors' capital. The Managing Owner attempts to minimize these risks by requiring Series E and its trading advisor to abide by various trading limitations and policies which include limiting margin amounts, trading only in liquid markets and permitting the use of stop loss provisions. See Note F to the financial statements for a further discussion on the credit and market risks associated with Series E's futures and forward contracts. Series E does not have, nor does it expect to have, any capital assets. Results of Operations Series E commenced trading operations on April 6, 2000, and as such, no comparative information to prior periods is available. As of December 31, 2000, Series E reported a net asset value per Interest of $120.36, an increase of 20.36% from the April 6, 2000 initial net asset value per Interest of $100.00. This return compares favorably to the MAR (Managed Account Reports) Fund/Pool Index, which tracks the performance of approximately 300 futures 33 funds, and returned 10.44% for the April through December 2000 period. Past performance is not necessarily indicative of future results. Series E's gross trading gains for the period from April 6, 2000 (commencement of operations) to December 31, 2000 were $1,430,000. A detailed discussion of the trading results is presented below. Series E's favorable performance in 2000 was the result of gains in the energy, currency, stock index and interest rate sectors. Losses were experienced in the grain and metal sectors. Energy prices climbed throughout January and February and into the first week of March. Increased demand and low supplies caused oil prices to surge once again during the second and third quarters resulting in gains for long energy positions. Energy markets ended a year long uptrend with natural gas surging to an all time high in December as low supplies were strained by unusually cold temperatures in the U.S. Losses in short gas positions during the fourth quarter were not large enough to offset second and third quarter gains and positions in the energy sector produced net gains for the year. The euro began 2000 lower versus the U.S. dollar, Japanese yen and British pound before rallying slightly in June as a result of solid European economic data and sentiment that the currency was undervalued. Long euro positions produced gains. Despite a brief rally after intervention by the European Central Bank and other G-7 central banks to boost the failing euro in September, the euro settled back down more than $0.02 below its intervention peaks and short positions resulted in gains for Series E. The euro reversed its downtrend during the fourth quarter as it rose against the U.S. dollar and Japanese yen resulting in gains for long positions. Prior to commencement of Series E's operations in April 2000, the Japanese yen rallied sharply, gaining on the U.S. dollar and most other currencies in the final months of Japan's fiscal year (which ended March 31st). This was attributed to positive sentiment regarding Japan's economy. In May, the yen rose slightly against the U.S. dollar supported by expectations of a possible change in the Bank of Japan's (BOJ) zero-interest rate policy and continued to rise when the BOJ increased short-term interest rates in August. Long yen positions produced gains for Series E during the second and third quarters of the year. Political and economic uncertainty in Japan during the fourth quarter caused the yen to fall against the U.S. dollar and short Japanese yen positions resulted in gains. The British pound was down against the U.S. dollar during the second quarter of the year, loosely tracking the euro's downward trend. In June, long British pound positions were profitable for Series E as the Bank of England left interest rates unchanged and the pound sterling bounced back from its earlier decline. The British pound and other foreign currencies rose against the U.S. dollar in the fourth quarter due to a weakening U.S. economy resulting in gains for long positions. Global bond markets began 2000 on a strong note. Despite rate hikes and news of robust worldwide economic growth, global bond markets continued to rally partially due to investors seeking refuge from volatile equity markets. Short U.S. and euro bond positions resulted in losses in the second quarter of the year. Negative equity performance throughout the third and fourth quarters and mounting fears of a global economic slowdown contributed to a bond market rally towards year end as investors continued their flight to quality from the stock market. Prices of long- and short-term interest rate instruments rose and Series E experienced gains in long U.S., Australian and euro bond positions during the last quarter of the year. Extreme volatility in world financial markets during the second quarter of 2000 led to a lack of trending opportunities, resulting in losses for positions in stock indices. During the second half of the year, equity markets experienced continued volatility, but markets trended downward as global economies began to show signs of slowing down. Most major indices ended the year lower resulting in gains for short positions during the fourth quarter. In the grain sector, long positions in corn incurred losses during the second quarter of the year as corn prices trended down. Favorable growing conditions faced the corn market with a potentially large crop, consequently prices fell. Soybean markets rallied sharply in November following a decision by the European Union to ban meat based animal feed, which was expected to boost demand for soybean meal. Gains in long soybean meal and soybean oil positions were not sufficient to offset earlier losses in corn positions. 34 Short metal positions incurred losses for Series E throughout much of 2000 as strong demand and fears of inflation drove prices higher. In addition, the high cost of energy, which is used in the production of base metals, caused a decrease in metal supply driving prices higher and incurring losses for short positions. Interest income is earned on the average daily equity maintained in cash with Prudential Securities at the 13-week Treasury bill discount rate and, therefore, varies weekly according to interest rates, trading performance, contributions and redemptions. Interest income for the period from April 6, 2000 (commencement of operations) to December 31, 2000 was $230,000. Commissions are calculated on Series E's net asset value at the end of each week and therefore, vary according to weekly trading performance, contributions and redemptions. Other transaction fees consist of National Futures Association, exchange and clearing fees as well as floor brokerage costs and give-up charges, which are based on the number of trades the trading advisor executes, as well as which exchange, clearing firm or bank on, or through, which the contract is traded. Commissions and other transaction fees for the period from April 6, 2000 (commencement of operations) to December 31, 2000 were $250,000. All trading decisions for Series E are made by Graham Capital Management, L.P. (the "Trading Advisor"). Management fees are calculated on Series E's net asset value at the end of each week and therefore, are affected by weekly trading performance, contributions and redemptions. Management fees for the period from April 6, 2000 (commencement of operations) to December 31, 2000 were $77,000. Incentive fees are based on the "New High Net Trading Profits" generated by the Trading Advisor, as defined in the Advisory Agreement among Series E, the Managing Owner and the Trading Advisor. Incentive fees generated for the period from April 6, 2000 (commencement of operations) to December 31, 2000 were $239,000. General and administrative expenses for the period from April 6, 2000 (commencement of operations) to December 31, 2000 were $58,000. These expenses include accounting, audit, tax and legal fees as well as printing and postage costs related to reports sent to limited owners. The total amount of general and administrative expenses charged to Series E in any year is limited to 1.5% of its net asset value during such year and, because applicable expenses exceeded this limit, there were no expenses incurred to reimburse the Managing Owner and its affiliates for its costs incurred on behalf of Series E for the period from April 6, 2000 (commencement of operations) to December 31, 2000. New Accounting Guidance In June 2000, FASB issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities--an amendment of FASB Statement No. 133 ("SFAS 138"), which became effective for Series E on July 1, 2000. SFAS 138 amends the accounting and reporting standards of FASB Statement No. 133 for certain derivative instruments and certain hedging activities. SFAS 138 has not had a material effect on the carrying value of assets and liabilities within the financial statements. Inflation Inflation has had no material impact on operations or on the financial condition of Series E from inception through December 31, 2000. PLEASE TURN TO PAGES 49 TO 54 FOR A DESCRIPTION OF GRAHAM CAPITAL AND ITS PRINICPALS AND TRADING PROGRAMS AND TO PAGES 55 TO 59 FOR ITS PERFORMANCE RECORD FOR ALL ACCOUNTS UNDER ITS MANAGEMENT FOR THE PAST FIVE YEARS 35 Past Performance Of Series F Capsule Performance of World Monitor Trust II - Series F Commodity Trading Advisor: Campbell & Company Rates of Return (Computed on a Daily Basis) Month 2001 2000 January (1.88)% February 0.93% March 6.26% (0.80)% April (2.13)% May 1.86% June 0.87% July (3.01)% August 2.80% September (3.35)% October 2.67% November 7.04% December 1.18% Annual 5.25% 6.91% Name of Pool: World Monitor Trust II -- Series F Type of Pool: Publicly-Offered Start Date: March 1, 2000 Aggregate subscriptions: $9,794,830 (as of March 31, 2001) Current net asset value per interest: $112.51 (as of March 31, 2001) "Draw-down" means losses experienced by World Monitor Trust II -- Series F over a specified period. Largest monthly draw-down: (3.35)% September 2000 "Largest monthly draw-down" means the greatest percentage decline in Net Asset Value due to losses sustained by World Monitor Trust II -- Series F from the beginning to the end of a calendar month. Largest peak-to- valley draw-down: (3.86)% March 2000 to September 2000 "Largest peak-to-valley draw-down" means the greatest cumulative percentage decline in month-end Net Asset Value of World Monitor Trust II -- Series F due to losses sustained during a period in which the initial month-end Net Asset Value of World Monitor Trust II -- Series F is not equaled or exceeded by a subsequent month-end Net Asset Value of World Monitor Trust II -- Series F. "Rate of Return" is calculated daily by dividing net performance by beginning equity. The daily returns are then compounded to arrive at the rate of return for the month, which is in turn compounded to arrive at the rate of return for the year to date. Past Performance Is Not Necessarily Indicative Of Future Results 36 Management's Discussion And Analysis Of Financial Condition And Results Of Operations -- Series F Liquidity and Capital Resources Series F commenced operations on March 1, 2000 with gross proceeds of $5,185,012 allocated to commodities trading. Additional contributions raised through the continuous offering for the period from March 1, 2000 (commencement of operations) through December 31, 2000 resulted in additional gross proceeds to Series F of $3,002,818. Additional Limited Interests of Series F will continue to be offered on a weekly basis at the net asset value per Interest until the subscription maximum is sold. Limited Interests in Series F may be redeemed on a weekly basis, but are subject to a redemption fee if transacted within one year of the effective date of purchase. Redemptions from March 1, 2000 (commencement of operations) to December 31, 2000 were entirely on Limited Interests and totaled $818,791. Additionally, Interests owned in any series of World Monitor Trust 11 (Series D, E or F) may be exchanged, without any charge, for Interests of one or more other series of World Monitor Trust 11 on a weekly basis for as long as Limited Interests in those series are being offered to the public. Future contributions, redemptions and exchanges will impact the amount of funds available for investment in commodity contracts in subsequent periods. At December 31, 2000, 100% of Series F's net assets were allocated to commodities trading. A significant portion of the net assets was held in cash which is used as margin for trading in commodities. Inasmuch as the sole business of Series F is to trade in commodities, Series F continues to own such liquid assets to be used as margin. Prudential Securities credits Series F with interest income on 100% of its average daily equity maintained in cash in its accounts with Prudential Securities during each month at the 13-week Treasury bill discount rate. This rate is determined weekly by Prudential Securities and represents the rate awarded to all bidders during each week's auction of 13-week Treasury bills. 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 certain 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 Series F from promptly liquidating its commodity futures positions. Since Series F's business is to trade futures 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). Series F's exposure to market risk is influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets in which the contracts are traded and the relationships among the contracts held. The inherent uncertainty of Series F's speculative trading as well as the development of drastic market occurrences could result in monthly losses considerably beyond Series F's experience to date and could ultimately lead to a loss of all or substantially all of investors' capital. The Managing Owner attempts to minimize these risks by requiring Series F and its trading advisor to abide by various trading limitations and policies which include limiting margin amounts, trading only in liquid markets and permitting the use of stop loss provisions. See Note F to the financial statements for a further discussion on the credit and market risks associated with Series F's futures contracts. Series F does not have, nor does it expect to have, any capital assets. Results of Operations Series F commenced trading operations on March 1, 2000, and as such, no comparative information to prior periods is available. As of December 31, 2000, Series F reported a net asset value per Interest of $106.90, an increase of 6.9% from the initial net asset value per Interest of $100.00. The MAR (Managed Account Reports) Fund/Pool Index, 37 which tracks the performance of approximately 300 futures funds, returned 9.33% for the March through December 2000 period. Past performance is not necessarily indicative of future results. Series F's gross trading gains for the period from March 1, 2000 (commencement of operations) to December 31, 2000 were $839,000. A detailed discussion of the trading results is presented below. Net profits for Series F were the result of gains in the energy, currency and interest rate sectors. Losses were experienced in the stock index and metal sectors. Energy prices climbed throughout January and February and into the first week of March. Increased demand and low supplies caused oil prices to surge once again during the second and third quarters resulting in gains for long energy positions. Energy markets ended a year-long uptrend with natural gas surging to an all time high in December as low supplies were strained by unusually cold temperatures in the U.S. Long natural gas positions produced gains. The euro began 2000 lower versus the U.S. dollar, Japanese yen and British pound before rallying slightly in June as a result of solid European economic data and sentiment that the currency was undervalued. Despite a brief rally after intervention by the European Central Bank and other G-7 central banks to boost the failing euro in September, the euro settled back down more than $0.02 below its intervention peaks and short positions resulted in gains for the Series F. The euro reversed its downtrend during the fourth quarter as it rose against the U.S. dollar and Japanese yen resulting in gains for long positions. The Japanese yen rallied sharply, gaining on the U.S. dollar and most other currencies in the final months of Japan's fiscal year (which ended March 31st) as Series F entered the Japanese yen market. This was attributed to positive sentiment regarding Japan's economy. In May, the yen rose slightly against the U.S. dollar supported by expectations of a possible change in the Bank of Japan's (BOJ) zero-interest rate policy and continued to rise when the BOJ increased short-term interest rates in August. Short yen positions resulted in losses. Political and economic uncertainty in Japan during the fourth quarter caused the yen to fall against the U.S. dollar; short Japanese yen positions resulted in gains. The British pound was down against the U.S. dollar during the first half of the year, loosely tracking the euro's downward trend. In June, long British pound positions were profitable for Series F as the Bank of England left interest rates unchanged and the pound sterling bounced back from its earlier decline. The British pound and other foreign currencies rose against the U.S. dollar in the fourth quarter due to a weakening U.S. economy. This resulted in gains for long British pound, Australian dollar and Canadian dollar positions. Global bond markets began 2000 on a strong note. Despite rate hikes and news of robust worldwide economic growth, global bond markets continued to rally partially due to investors seeking refuge from volatile equity markets. Short U.S. and euro bond positions resulted in losses in the first half of the year. Negative equity performance throughout the third and fourth quarters and mounting fears of a global economic slowdown contributed to a bond market rally towards year end as investors continued their flight to quality from the stock market. Prices of long- and short-term interest rate instruments rose and Series F experienced gains in long U.S., Japanese and euro bond positions during the last quarter of the year. Extreme volatility in world financial markets during the second quarter of 2000 led to a lack of trending opportunities, resulting in losses for equity index positions. During the second half, equity markets continued to experience continued volatility, but markets trended downward as global economies began showing signs of slowing down. Most major indexes ended the year lower resulting in losses for long positions during the fourth quarter. Short metal positions provided negative performance for Series F throughout most of the year as strong demand and fears of inflation drove prices higher. In addition, the high cost of energy, which is used in the production of base metals, caused a decrease in metal supply driving prices higher and incurring losses for short positions. Interest income is earned on the average daily equity maintained in cash with Prudential Securities at the 13-week Treasury bill discount rate and, therefore, varies weekly according to interest rates, trading performance, contributions and redemptions. Interest income for the period from March 1, 2000 (commencement of operations) to December 31, 2000 was $334,000. 38 Commissions are calculated on Series F's net asset value at the end of each week and therefore, vary according to weekly trading performance, contributions and redemptions. Other transaction fees consist of National Futures Association, exchange and clearing fees as well as floor brokerage costs and give-up charges, which are based on the number of trades the trading advisor executes, as well as which exchange, clearing firm or bank on, or through, which the contract is traded. Commissions and other transaction fees for the period from March 1, 2000 (commencement of operations) to December 31, 2000 were $351,000. All trading decisions for Series F are made by Campbell & Company, Inc. (the "Trading Advisor"). Management fees are calculated on Series F's net asset value at the end of each week and therefore, are affected by weekly trading performance, contributions and redemptions. Management fees for the period from March 1, 2000 (commencement of operations) to December 31, 2000 were $111,000. Incentive fees are based on the "New High Net Trading Profits" generated by the Trading Advisor, as in the Advisory Agreement among Series F, the Managing Owner and the Trading Advisor. An incentive fee of $70,000 was generated for the period from March 1, 2000 (commencement of operations) to December 31, 2000. General and administrative expenses for the period from March 1, 2000 (commencement of operations) to December 31, 2000 were $84,000. These expenses include reimbursements of costs incurred by the Managing Owner on behalf of Series F, in addition to accounting, audit, tax and legal fees as well as printing and postage costs related to reports sent to limited owners. The total amount of general and administrative expenses charged to Series F in any year is limited to 1.5% of its net asset value during such year; because applicable expenses exceeded this limit, a portion of the costs associated with services performed for Series F by the Managing Owner was borne by the Managing Owner or its affiliates. New Accounting Guidance In June 2000, FASB issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities-an amendment of FASB Statement No. 133 ("SFAS 138"), which became effective for Series F on July 1, 2000. SFAS 138 amends the accounting and reporting standards of FASB Statement No. 133 for certain derivative instruments and certain hedging activities. SFAS 138 has not had a material effect on the carrying value of assets and liabilities within the financial statements. Inflation Inflation has had no material impact on operations or on the financial condition of Series F from inception through December 31, 2000. PLEASE TURN TO PAGES 60 TO 64 FOR A DESCRIPTION OF CAMPBELL & COMPANY AND ITS PRINICPALS AND TRADING PROGRAMS AND TO PAGES 65 TO 69 FOR ITS PERFORMANCE RECORD FOR ALL ACCOUNTS UNDER ITS MANAGEMENT FOR THE PAST FIVE YEARS 39 SERIES D Bridgewater Associates has been allocated 100% of Series D assets. In its trading, Bridgewater Associates utilizes its Aggressive Pure Alpha Futures Only System. Bridgewater Associates And Its Principals Bridgewater Associates has been registered as a registered investment adviser with the SEC since November 1989 and a commodity trading advisor registered with the CFTC since May 1992, and it is a member of the National Futures Association. Its executive offices are located at 1 Glendinning Place, Westport, Connecticut 06880. Raymond T. Dalio has been the president of Bridgewater Associates since its founding in 1973, and he is a principal of the firm. Mr. Dalio received his M.B.A. in finance from Harvard Business School in 1973. Mr. Dalio has been involved in analyzing the world's major markets by identifying the economic conditions that affect the directions of markets. From May 1973 until January 1974, he was Director of Commodities at Dominick and Dominick, a Wall Street-based brokerage house. Mr. Dalio then joined Shearson-Hayden Stone (now Salomon Smith Barney, Inc.) where he was in charge of institutional futures business. In 1975, he left Shearson-Hayden Stone to devote his full time and efforts to trading his own account and operating Bridgewater Group entities. Robert P. Prince, a vice president and principal of Bridgewater Associates, is director of research and trading. Mr. Prince became a C.P.A. in 1984, and he received his M.B.A. from the University of Tulsa in 1985. Prior to joining Bridgewater Associates in August of 1986, he spent three years as the Vice President and Manager of the Treasury Division of the First National Bank of Tulsa. He gained experience using interest rate futures, swaps, and options in hedging and risk management. Giselle F. Wagner is currently a vice president and chief operating officer of Bridgewater Associates, and she is a principal of the firm. Ms. Wagner received her B.A. in Economics from Smith College in 1976, her M.B.A. in Finance from Columbia in 1978, and her certified financial analyst status in 1992. From 1978 to 1984, she worked for Chemical Bank (now Chase Manhattan Bank) as Vice President in the Treasury Division. From 1984 to 1988, she worked for Morgan Stanley (now Morgan Stanley Dean Witter). In 1988, Ms. Wagner joined Bridgewater Associates. Peter R. La Tronica is a vice president and controller of Bridgewater Associates, and he is a principal of the firm. After graduating from Northeastern University in 1979, Mr. La Tronica joined Merrill Lynch & Co. During his tenure at Merrill Lynch & Co. and certain of its affiliates, he served in various capacities including assistant director commodity compliance and operations manager. From May of 1984 to August 1985, Mr. La Tronica was assistant vice president and assistant manager of the New York Institutional Futures Office for Dean Witter Reynolds, Inc. From August 1985 to June 1987, he served as assistant Vice President of Rudolf Wolff Futures Inc. (acquired in 1986 by Elders Finance Inc.) in charge of Operations and Compliance. In June of 1987, Mr. La Tronica joined Donaldson, Lufkin & Jenrette as Vice President of Option and Arbitrage Operations in the Equities Division. In March 1988, Mr. La Tronica joined Benefit Concepts N.Y. Inc., an insurance marketing firm, as associate in charge of product development. All of the companies mentioned in the above biographical information not otherwise identified were or are futures commission merchants registered under the Commodity Exchange Act and members of the National Futures Association. 40 Bridgewater Associates' Trading Strategy Series D is traded pursuant to the Aggressive Pure Alpha Futures Only System, a systematic trading program, that is traded in accordance with the policies described below. Pure Alpha Trading System Bridgewater Associates' trading strategy is both fundamental and technical. Fundamental analysis uses the theory that prices are primarily determined by macro-economic, supply/demand influences. Bridgewater Associates has developed what it believes to be precise rules for identifying shifts in the economic/market environment as they affect the price structure of investment assets. These rules express quantitatively the net strength of the pressures of fundamental influences on prices, based on the leading relationships between economic statistics and market movements. The rules are programmed into computerized trading systems that are used interactively to identify the relative attractiveness of alternative markets. Bridgewater Associates recognizes that its fundamental systems cannot fully gauge all price influences (e.g., shifts in sentiment and political changes) and are not designed to identify the optimal time and price for establishing and/or liquidating positions. Technical analysis uses the theory that a study of the markets themselves will provide a means of anticipating future price trends. Accordingly, Bridgewater Associates has also developed technical systems to be used in conjunction with its fundamental systems. The signals generated by the technical systems are used to confirm or rebut the buy and sell signals generated by the fundamental systems. Bridgewater Associates weights its fundamental readings more heavily than its technical readings in determining the sizes of its positions. The Aggressive Pure Alpha Futures Only System The Aggressive Pure Alpha Futures Only System is substantially similar to Bridgewater Associates Pure Alpha System. The principal differences are (i) certain of the products traded and (ii) the amount of leverage used. The Pure Alpha System trades cash bonds, a product that a publicly offered commodity pool cannot trade. Capital normally allocated to cash bonds will be reallocated to the other markets the advisor trades in an attempt to realize the same overall portfolio return as the strategy would have if it used cash bonds. In addition, the Aggressive Pure Alpha System is traded at 1.5 times the actual funds allocated to trading, while the Pure Alpha System uses different leverage. The Aggressive Pure Alpha System focuses on futures and forward contracts on financial instruments, interest rates, stock indices, and metals, although other markets may be traded. Bridgewater Associates follows more than 25 markets worldwide and may take a position for Series D in all, some or none of these markets at any point in time. As applicable regulatory authorities approve instruments or additional items, such as other stock market indices and sovereign debt instruments, Bridgewater Associates expects to trade such instruments for Series D. Series D assets are traded pursuant to the Aggressive Pure Alpha Futures Only System, and are invested in futures markets utilizing leverage, or margin. The margin-to-equity ratio tends to fluctuate between 5% and 30%, typically being in the range of 7.5% and 15%. See "RISK FACTORS -- Futures, Forward, And Options Trading Is Volatile And Highly Leveraged." 41 Allocation Among Markets Traded By Bridgewater Associates Set forth below is a bar graph showing the market sectors that are traded by Bridgewater Associates as of February 28, 2001. As of that date, investor funds are exposed to these sectors in approximately the percentage allocations stated; however, these percentage allocations are subject to change at Bridgewater Associates' discretion. Actual allocations change as market conditions and trading opportunities change, and it is likely that the targeted risk allocations may vary for Series D during future periods, although the focus will remain on the currency and financial instruments markets. Market Sector Percentage Interest Rates 50% Currencies 40 Stock Indices 8 Metals 2 Total 100% (GRAPH) 42 Bridgewater Associate's Past Performance For All Of Its Clients Capsule summaries D(1) and D(2) contain actual performance information for the periods indicated. Aggressive Pure Alpha Futures Only System The following is a capsule summary of the past performance for the Aggressive Pure Alpha Futures Only System as of February 28, 2001, the trading strategy which is used to trade Series D. Name of commodity trading advisor: Bridgewater Associates Program: Aggressive Pure Alpha Futures Only System Start Date: June 1, 1985 (All trading by Bridgewater Associates) August 26, 1998 (Aggressive Pure Alpha Futures Only System) No. Accounts: 3 Aggregate $$ In All Programs: $ 14,400,000,000 (All programs excluding notional; estimate) $ 15,800,000,000 (All programs including notional; estimate) $$ In This Program: $ 20,900,000 (Aggressive Pure Alpha Futures Only System excluding notional) $ 20,900,000 (Aggressive Pure Alpha Futures Only System including notional) Largest monthly draw- down: (8.60)% August 2000 "Largest monthly draw-down" means the greatest decline in month-end net asset value due to losses sustained by the program on a composite basis for any particular month or an individual account for any particular month. Largest peak-to- valley draw-down: (27.20)% August 1999 to October 2000 "Largest peak-to-valley draw-down" means the greatest cumulative percentage decline in month-end net asset value due to losses sustained by the program on a composite basis or an individual account during any period in which the initial month- end net asset value is not equaled or exceeded by a subsequent month- end net asset value. Closed accounts: Profitable = 0 Unprofitable = 0 CAPSULE D(1) -- AGGRESSIVE PURE ALPHA FUTURES ONLY SYSTEM MONTHLY/ANNUAL RATES OF RETURN* Month 2001 2000 1999 1998 January (2.47)% (1.30)% 0.69% February (3.43) 4.30 3.79 March (4.71) (1.91) April (1.44) (0.66) May 10.06 2.13 June (1.87) 0.57 July (1.78) 0.75 August (8.27) (1.50) (0.56)% September (6.00) (1.38) 2.78 October (7.95) (2.16) 10.18 November 3.88 (3.03) 2.19 December 5.17 (0.47) 5.83 Annual/YTD (5.82)% (11.08)% (3.35)% 21.77% (5 months) * All annual rates of return are computed on a compounded monthly basis PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS 43 CAPSULE D(2) PAST PERFORMANCE OF OTHER PROGRAMS OFFERED BY BRIDGEWATER ASSOCIATES AND ITS AFFILIATES THAT WILL NOT BE USED TO TRADE SERIES D ASSETS
Date Aggregate Dollars Name of Date CTA in All Programs Dollars in This Program Commodity CTA Began Number (in thousands) (in thousands) Trading Began Trading of (Excluding (Including (Excluding (Including Advisor Program Trading Program Accounts Notional) Notional) Notional) Notional) $ $ $ $ Bridgewater Associates Pure Alpha3,4 6/85 12/91 3 14,400,000 15,800,000 327,000 327,000 Pure Alpha Bridgewater Bond and Associates Currency Only3 6/85 7/97 2 14,400,000 15,800,000 34,000 146,000 Constrained Bridgewater Pure Associates Alpha3 6/85 1/89 4 14,400,000 15,800,000 576,000 616,000 Bridgewater Global Associates Bond Overlay3 6/85 5/95 0 14,400,000 15,800,000 0 0 Bridgewater Short-Term Associates Emerging Markets3 6/85 4/97 0 14,400,000 15,800,000 0 0 Bridgewater Inflation Associates Indexed Linked Bond Accounts- Leveraged3 6/85 4/94 3 14,400,000 15,800,000 161,000 161,000 Bridgewater Institutional Associates Account with Global Bond and Equity Benchmark3 6/85 3/94 1 14,400,000 15,800,000 721,000 721,000 Bridgewater Diversified Associates Global Bond3 6/85 3/96 2 14,400,000 15,800,000 859,000 859,000 Bridgewater Inflation Associates Linked Bonds3 6/85 1/97 0 14,400,000 15,800,000 0 0 Bridgewater Inflation Associates Linked Bonds and Nominal Bonds Unleveraged3 6/85 8/97 13 14,400,000 15,800,000 954,000 954,000 Bridgewater Active Associates International Bond Alpha Only Account 6/85 11/99 1 14,400,000 15,800,000 24,000 248,000 Bridgewater Global Associates9 Asset Allocation Speculative5 6/85 1/89 1 14,400,000 15,800,000 2,000 2,000 ANNUAL RATES OF RETURN* Largest Name of Largest Peak-to- Commodity Monthly Valley 2001 Trading Draw- Draw- Closed Accounts (through Advisor Program Down(1) Down(2) Profitable Unprofitable 1/31) 2000 1999 1998 1997 1996 % % % % % % % % Bridgewater (6.05) (14.10) Associates Pure Alpha3,4 10/00 7/00-10/00 2 0 0.87 (0.04) 5.64 26.74 15.07 24.37 Pure Alpha Bridgewater Bond and Associates Currency (0.89) (2.42) 1.94 Only3 10/00 8/00-10/00 0 0 (0.43) 4.57 3.48 9.04 (6 mos) -- Constrained Bridgewater Pure (1.69) (3.90) Associates Alpha3 10/00 8/00-10/00 2 0 0.63 4.57 5.15 8.80 5.41 4.21 Bridgewater Global Associates Bond (1.68) (2.44) 0.50 Overlay3 3/97 12/96-3/97 1 0 -- -- -- (1 mo) 0.40 4.87 Bridgewater Short-Term Associates Emerging (4.30) (17.58) 4.61 (11.55) Markets3 8/97 7/97-1/98 0 1 -- -- -- (7 mos) (9 mos) -- Bridgewater Inflation Associates Indexed Linked Bond Accounts- (7.15) (9.25) 8.45 4.00 Leveraged3 2/96 1/96-2/96 3 0 2.47 (7 mos) -- (3 mos) 11.84 15.21 Bridgewater Institutional Associates Account with Global Bond and Equity (9.65) (25.87) Benchmark3 10/00 7/00-11/00 0 0 (0.28) (18.26) 9.52 54.74 32.43 35.98 Bridgewater Diversified Associates Global (4.03) (4.03) 18.52 Bond3 3/97 3/97 0 0 1.59 12.01 (3.48) 10.68 14.77 (10 mos) Bridgewater Inflation Associates Linked (2.54) (4.56) 8.80 Bonds3 8/97 2/97-4/97 2 0 -- -- -- (11 mos) 8.25 -- Bridgewater Inflation Associates Linked Bonds and Nominal Bonds (2.75) (8.44) 9.23 Unleveraged3 4/99 1/99-6/99 1 0 1.42 11.76 (2.30) 14.36 (5 mos) -- Bridgewater Active Associates International Bond Alpha Only (0.71) (1.25) 6.61 Account 3/00 8/00-10/00 0 0 (0.06) 2.35 (0.51) (11 mos) -- -- Bridgewater Global Associates9 Asset Allocation (3.27) (8.06) Speculative5 8/00 6/00-10/00 2 1 (0.57) 0.84 4.25 19.04 10.99 17.64
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Date Aggregate Dollars Name of Date CTA in All Programs Dollars in This Program Commodity CTA Began Number (in thousands) (in thousands) Trading Began Trading of (Excluding (Including (Excluding (Including Advisor Program Trading Program Accounts Notional) Notional) Notional) Notional) $ $ $ $ Bridgewater Aggressive Associates9. Pure Alpha3 6/85 7/97 1 14,400,000 15,800,000 6,000 6,000 Bridgewater Pure Associates Alpha Futures Only3,6 6/85 1/98 4 14,400,000 15,800,000 17,000 44,000 Bridgewater Long Associates Duration Global Bond3 6/85 8/95 0 14,400,000 15,800,000 0 0 Bridgewater Long- Associates Term Emerging Markets3 6/85 5/96 3 14,400,000 15,800,000 183,000 183,000 Bridgewater Index Associates Overlay7 6/85 7/98 1 14,400,000 15,800,000 12,000 78,000 Bridgewater Global Associates Tactical Asset Allocation 6/85 5/99 1 14,400,000 15,800,000 6,000 106,000 Bridgewater Aggressive Associates Pure Alpha 6/85 12/99 1 14,400,000 15,800,000 40,000 93,000 Bridgewater Aggressive Associates Pure Alpha Futures Only-B 6/85 9/99 1 14,400,000 15,800,000 47,000 47,000 Bridgewater Aggressive Associates Pure Alpha Futures Only-C 6/85 12/99 2 14,400,000 15,800,000 4,000 18,000 Bridgewater Pure Associates Alpha Futures Only-B 6/85 5/99 1 14,400,000 15,800,000 276 4,000 Bridgewater Pure Associates Alpha Futures Only-C 6/85 1/99 7 14,400,000 15,800,000 43,000 108,000 Bridgewater Pure Associates Alpha with Canadian Bond Benchmark 6/85 11/99 1 14,400,000 15,800,000 25,000 25,000 Bridgewater Passive Associates9 International Bond Account 6/85 11/99 1 14,400,000 15,800,000 28,000 128,000 Bridgewater Pure Associates Alpha with a Passive U.S. Bond Benchmark 6/85 2/00 1 14,400,000 15,800,000 6,000 6,000 Bridgewater Passive Associates U.S. Bond 6/85 2/00 1 14,400,000 15,800,000 587,000 587,000 ANNUAL RATES OF RETURN* Largest Name of Largest Peak-to- Commodity Monthly Valley 2001 Trading Draw- Draw- Closed Accounts (through Advisor Program Down(1) Down(2) Profitable Unprofitable 1/31) 2000 1999 1998 1997 1996 % % % % % % % % Bridgewater Aggressive Associates9. Pure (15.02) (28.97) Alpha3 8/98 7/00-10/00 0 0 (0.80) (11.64) 2.16 66.67 14.58 -- Bridgewater Pure Associates Alpha Futures (7.96) (20.57) Only3,6 10/00 8/99-10/00 3 3 (2.64) (9.80) (2.51) 19.71 -- -- Bridgewater Long Associates Duration Global (16.11) (27.48) 9.51 Bond3 2/96 12/98-12/99 2 0 -- (2 mos) (25.39) 50.31 34.74 11.85 Bridgewater Long- Associates Term Emerging (25.55) (24.48) 21.77 Markets3 8/98 5/98-8/98 0 0 6.46 16.46 18.62 (0.13) 17.41 (8 mos) Bridgewater Index (15.03) (23.27) (5.96) Associates Overlay7 8/98 3/00-11/00 0 0 2.67 (15.53) 16.37 (6 mos) -- -- Bridgewater Global Associates Tactical Asset (0.29) (0.75) (0.64) Allocation 9/99 7/99-12/99 0 0 0.01 0.75 (8 mos) -- -- -- Bridgewater Aggressive Associates Pure (7.11) (18.07) 0.05 Alpha 10/00 7/00-10/00 0 0 (0.47) (4.47) (1 mo) -- -- -- Bridgewater Aggressive Associates Pure Alpha Futures (6.82) (18.44) (1.46) Only-B 8/00 6/00-10/00 0 0 (1.60) (3.71) (4 mos) -- -- -- Bridgewater Aggressive Associates Pure Alpha Futures (9.49) (25.68) 0.44 Only-C 8/00 6/00-10/00 0 1 (2.63) (14.01) (1 mo) -- -- -- Bridgewater Pure Associates Alpha Futures (5.40) (16.24) (1.79) Only-B 8/00 8/99-10/00 0 1 (1.43) (6.96) (8 mos) -- -- -- Bridgewater Pure Associates Alpha Futures (5.53) (15.37) Only-C 8/00 6/00-10/00 2 2 (1.29) (3.40) 0.84 -- -- -- Bridgewater Pure Associates Alpha with Canadian Bond (5.77) (14.25) (1.19) Benchmark 10/00 7/00-10/00 0 0 (0.53) 0.57 (2 mos) -- -- -- Bridgewater Passive Associates9 International Bond (4.33) (13.40) (2.18) Account 4/00 11/99-10/00 0 0 0.12 (6.89) (2 mos) -- -- -- Bridgewater Pure Associates Alpha with a Passive U.S. Bond (7.98) (10.40) 31.28 Benchmark 9/00 8/00-10/00 0 0 (1.48) (11 mos) -- -- -- -- Bridgewater Passive (3.60) (3.81) 34.35 Associates U.S. Bond 9/00 3/00-4/00 0 0 (0.49) (11 mos) -- -- -- --
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Date Aggregate Dollars Name of Date CTA in All Programs Dollars in This Program Commodity CTA Began Number (in thousands) (in thousands) Trading Began Trading of (Excluding (Including (Excluding (Including Advisor Program Trading Program Accounts Notional) Notional) Notional) Notional) $ $ $ $ Bridgewater Constrained Associates Pure Alpha-B 6/85 2/00 1 14,400,000 15,800,000 228,000 228,000 Bridgewater Pure Associates Alpha with Customized UK Bond Benchmark 6/85 5/00 1 14,400,000 15,800,000 49,000 49,000 Bridgewater Pure Associates Alpha Futures Only-D 6/85 6/00 2 14,400,000 15,800,000 28,000 28,000 Bridgewater Constrained Associates Pure Alpha-C 6/85 8/00 1 14,400,000 15,800,000 360,000 360,000 Bridgewater Inflation Associates Linked Bonds 100% Hedged to Swiss Franc 6/85 10/00 1 14,400,000 15,800,000 57,000 57,000 Bridgewater Global Associates Bond and Currency-A (Unhedged) 6/85 2/90 13 14,400,000 15,800,000 5,800,000 6,300,000 Bridgewater Global Associates Bond and Currency-B (Hedged) 6/85 3/93 1 14,400,000 15,800,000 132,000 132,000 Bridgewater Global Associates Bond and Currency-C (25% Hedged) 6/85 5/00 1 14,00,000 15,800,000 215,000 215,000 Bridgewater Global Associates Bond and Currency-D (Non-U.S. Hedged) 6/85 7/94 2 14,400,000 15,800,000 343,000 343,000 Bridgewater Global Associates Bond and Currency-E (Non-U.S. Unhedged) 6/85 8/99 4 14,400,000 15,800,000 1,300,000 1,300,000 Bridgewater Global Associates Bond and Currency-F (Non-U.S. 50% Hedged) 6/85 4/99 1 14,400,000 15,800,000 549,000 549,000 Bridgewater Global Associates Bond and Currency-G (Excluding Yen, Unhedged) 6/85 8/92 1 14,400,000 15,800,000 132,000 132,000 ANNUAL RATES OF RETURN* Largest Name of Largest Peak-to- Commodity Monthly Valley 2001 Trading Draw- Draw- Closed Accounts (through Advisor Program Down(1) Down(2) Profitable Unprofitable 1/31) 2000 1999 1998 1997 1996 % % % % % % % % Bridgewater Constrained (5.32) (13.33) (0.93) Associates Pure Alpha-B 10/00 7/00-10/00 0 0 0.09 (11 mos) -- -- -- -- Bridgewater Pure Associates Alpha with Customized UK Bond (6.31) (15.65) 0.91 Benchmark 8/00 7/00-10/00 0 0 1.23 (8 mos) -- -- -- -- Bridgewater Pure Associates Alpha Futures (8.93) (24.70) (17.36) Only-D 8/00 6/00-10/00 0 0 (2.72) (7 mos) -- -- -- -- Bridgewater Constrained (4.74) (7.70) 2.61 Associates Pure Alpha-C 10/00 8/00-10/00 0 0 (1.05) (5 mos). -- -- -- -- Bridgewater Inflation Associates Linked Bonds 100% Hedged to 3.09 Swiss Franc -- -- 0 0 0.62 (3 mos)- -- -- -- -- Bridgewater Global Associates Bond and Currency-A (3.68) (8.42) (Unhedged) 4/00 10/99-10/00 3 1 (0.15) (2.95) (2.72) 16.98 6.47 8.68 Bridgewater Global Associates Bond and Currency-B (2.40) (3.95) (Hedged) 2/96 8/00-10/00 0 0 0.71 (6.33) (0.04) 16.93 13.16 14.79 Bridgewater Global Associates Bond and Currency-C (25% (2.34) (6.13) 4.58 Hedged) 10/00 7/00-10/00 0 0 0.03 (5 mos) -- -- -- -- Bridgewater Global Associates Bond and Currency-D (Non-U.S. (1.84) (3.42) Hedged) 2/96 8/00-10/00 0 0 1.31 7.03 3.08 17.88 14.75 18.12 Bridgewater Global Associates Bond and Currency-E (Non-U.S. (4.91) (13.52) (0.29) Unhedged) 4/00 10/00-10/00 0 0 (0.59) (2.52) (5 mos) -- -- -- Bridgewater Global Associates Bond and Currency-F (Non-U.S. (2.54) (5.25) (0.88) 50% Hedged) 4/00 8/00-10/00 1 0 0.41 2.66 (9 mos) -- -- -- Bridgewater Global Associates Bond and Currency-G (Excluding Yen, (3.22) (14.32) Unhedged) 4/00 1/99-10/00 0 0 (0.45) 5.13 (9.64) 24.85 5.84 12.10
46
Date Aggregate Dollars Name of Date CTA in All Programs Dollars in This Program Commodity CTA Began Number (in thousands) (in thousands) Trading Began Trading of (Excluding (Including (Excluding (Including Advisor Program Trading Program Accounts Notional) Notional) Notional) Notional) $ $ $ $ Bridgewater Global Associates Bond and Currency-H (Excluding Yen and U.S. Dollar, Hedged) 6/85 4/00 1 14,400,000 15,800,000 37,000 37,000 Bridgewater Global Associates Bond and Currency-I (Hedged to Australian Dollar) 6/85 5/98 1 14,400,000 15,800,000 61,000 61,000 Bridgewater Global Associates Bond and Currency-J 6/85 3/97 1 14,400,000 15,800,000 41,000 41,000 Bridgewater Global Associates Bond and Currency-K (U.S. Lehman Aggregate Benchmark) 6/85 1/99 1 14,400,000 15,800,000 380,000 380,000 Bridgewater Global Associates Bond and Currency-L (Hedged to Australian Dollar) 6/85 10/92 1 14,400,000 15,800,000 56,000 56,000 Bridgewater Global S.A., Inc.8 Bond and Currency-M 6/85 7/97 0 14,400,000 15,800,000 -- -- ANNUAL RATES OF RETURN* Largest Name of Largest Peak-to- Commodity Monthly Valley 2001 Trading Draw- Draw- Closed Accounts (through Advisor Program Down(1) Down(2) Profitable Unprofitable 1/31) 2000 1999 1998 1997 1996 % % % % % % % % Bridgewater Global Associates Bond and Currency-H (Excluding Yen and U.S. Dollar, (1.12) (3.09) 5.17 Hedged) 10/00 8/00-10/00 0 0 0.56 (9 mos) -- -- -- -- Bridgewater Global Associates Bond and Currency-I (Hedged to Australian (1.48) (3.08) 9.22 Dollar) 6/99 5/99-8/99 0 0 1.08 10.94 (1.20) (8 mos) -- -- Bridgewater Global Associates Bond and (1.88) (5.96) 11.16 Currency-J 8/00 1/99-1/00 0 0 0.23 6.46 (4.50) 23.17 (10 mos) -- Bridgewater Global Associates Bond and Currency-K (U.S. Lehman Aggregate (1.40) (2.79) Benchmark) 2/99 2/99-1/00 0 0 1.71 11.14 (1.79) -- -- -- Bridgewater Global Associates Bond and Currency-L (Hedged to Australian (2.59) (3.95) Dollar) 2/96 7/00-10/00 0 0 0.54 7.20 (1.73) 20.71 11.07 13.30 Bridgewater Global S.A., Inc.8 Bond and (0.76) (0.76) 1.51 7.11 Currency-M 2/99 2/99 1 0 -- (4 mos) 18.84 (6 mos) -- --
__________________ * The CFTC accepts three different methods of showing the composite rate of return achieved by accounts, some of which are traded at different degrees of leverage. These methods are: the fully funded subset method, the time-weighted method and the only accounts traded method. Although each method uses a different approach, all methods are intended to produce substantially the same rate of return. All annual rates of return are computed on a compounded monthly basis. Rates of return are calculated by dividing net performance by nominal account size of the account. 1. "Largest monthly draw-down" means the greatest decline in month-end net asset value due to losses sustained by the program on a composite basis for any particular month or any particular account for any particular month. 2. "Largest peak-to-valley draw-down" means the greatest cumulative percentage decline in month-end net asset value due to losses sustained by the program on a composite basis or an individual account during any period in which the initial month-end net asset value is not equaled or exceeded by a subsequent month-end net asset value. 3. Each of these programs represents a variation of Bridgewater Associates' Pure Alpha Strategy. There are three principal differences among these accounts: (a) the amount of leverage used to trade the account, (b) the nature of the products traded, e.g., emerging market bonds, 10 year bonds, currency only, etc. and (c) the manner in which cash in the account is invested, T-bills or stock indices. Certain programs are offered by both Bridgewater Associates and its affiliate Bridgewater Associates, S.A. 4. For period January 1994 to April 1998, there were no fully funded accounts, therefore, rates of return are based on the subset at nominal account size. 5. This is a program that had been offered to retain accounts that is no longer being offered. It was not based on the Pure Alpha Strategy. 6. Rates of return are calculated by dividing net performance by beginning equity. 7. This is a passive equity strategy that is not based on the Pure Alpha Strategy. 8. On November 2000 Bridgewater S.A., Inc. merged into its affiliate Bridgewater Associates. This program was previously offered by Bridgewater S.A., Inc. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS 47 The first seven programs listed in Capsule D(2) are based on the Fully Funded Subset method for computing the rate of return. The monthly rates of return for accounts excluded from the Fully Funded Subset, that is those which are partially funded, will often be different from the rate of return for the Fully Funded Subset. Accounts not included in the Fully Funded Subset for any particular period may include: accounts opened or closed during the period; accounts which have material additions or withdrawals during the period; and the accounts which are being phased into 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. The following chart is provided so that you can determine the rate of return which was received at different funding levels. This chart does not apply to Series D and the Aggressive Pure Alpha Futures System. ACTUAL RATE RATES OF RETURN BASED ON VARIOUS OF RETURN (1) FUNDING LEVELS (3) 20.00% 26.67% 40.00% 80.00% 15.00 20.00 30.00 60.00 10.00 13.33 20.00 40.00 5.00 6.67 10.00 20.00 3.00 4.00 6.00 12.00 1.00 1.33 2.00 4.00 (1.00) (1.33) (2.00) (4.00) (3.00) (4.00) (6.00) (12.00) (5.00) (6.67) (10.00) (20.00) (10.00) (13.33) (20.00) (40.00) 100.00% 75.00% 50.00% 25.00% LEVEL OF FUNDING (2) Footnotes to Rate Conversion Chart: (1) This column represents the range of actual rates of return for fully-funded accounts reflected in the accompanying performance table. (2) This represents the percentage of actual funds divided by the fully-funded trading level. (3) This represents the rate of return experienced by a customer at various levels of funding traded by the trading advisor. The rates of return for accounts that are not fully-funded are inversely proportional to the actual rates of return based on the percentage level of funding. 48 SERIES E Graham Capital has been allocated 100% of the Series E assets. In its trading for Series E, Graham Capital utilizes its Global Diversified Program trading strategy. Graham Capital And Its Principals Graham Capital was organized as a Delaware limited partnership in May 1994. The general partner of Graham Capital is KGT, Inc., a Delaware corporation of which Kenneth G. Tropin is the president and sole shareholder. The limited partner of Graham Capital is KGT Investment Partners, L.P., a Delaware limited partnership of which KGT, Inc. is also a general partner and in which Mr. Tropin is the principal investor. Graham Capital became registered as a commodity pool operator and commodity trading advisor under the Commodity Exchange Act on July 27, 1994, and it became a member of the National Futures Association on the same date. Graham Capital maintains its only business office at Stamford Harbor Park, 333 Ludlow Street, Stamford, CT 06902; telephone (203) 975-5700. Kenneth G. Tropin is the president, the founder and a principal of Graham Capital. As president of Graham Capital, Mr. Tropin is responsible for the investment management strategies of the organization. He has developed Graham Capital's core trading programs. Prior to organizing Graham Capital, Mr. Tropin served as the president, the chief executive officer and a Director of John W. Henry & Co. Inc. from March 1989 to September 1993. Mr. Tropin was formerly senior vice president and Director of Managed Futures and Precious Metals at Dean Witter Reynolds Inc. He joined Dean Witter Reynolds Inc. from Shearson in February 1982 to run the Managed Futures Department, and in October 1984 Mr. Tropin assumed responsibility for Dean Witter Precious Metals as well. In November 1984, Mr. Tropin was appointed president of Demeter Management Corporation, an affiliate of Morgan Stanley Dean Witter & Co., which functions as the general partner to and the manager of Morgan Stanley Dean Witter futures funds. In February 1986, Mr. Tropin was instrumental in the foundation of the Managed Futures Trade Association. Mr. Tropin was elected Chairman of the Managed Futures Trade Association in March 1986 and held this position until 1991. In June 1987, Mr. Tropin was appointed president of Dean Witter Futures and Currency Management Inc., an affiliate of Dean Witter Reynolds Inc. Thomas P. Schneider is an executive vice president, the chief trader and a principal of Graham Capital. He is responsible for managing Graham Capital's futures trading operations, including order execution, policies and procedures and maintaining relationships with independent executing brokers and futures commission merchants. Mr. Schneider graduated from the University of Notre Dame in 1983 with a B.B.A. in Finance, and he received his M.B.A. from the University of Texas at Austin in 1994. From June 1985 through September 1993, Mr. Schneider was employed by ELM Financial, Inc., a commodity trading advisor in Dallas, Texas. While employed at ELM Financial, Inc., Mr. Schneider held positions of increasing responsibility and was ultimately chief trader, vice president, and principal of ELM Financial, Inc., responsible for 24-hour trading execution, compliance, and accounting. In January 1994, Mr. Schneider began working as chief trader for Chang Crowell Management Corporation, a commodity trading advisor in Norwalk, Connecticut. He was responsible for streamlining operations for more efficient order execution and for maintaining and developing relationships with over 15 futures commission merchants on a global basis. In addition to his responsibilities as chief trader, Mr. Schneider has been a National Futures Association arbitrator since 1989 and served on the Managed Futures Association's Trading and Markets Committee. Robert G. Griffith is an executive vice president, the director of research, the chief technology officer and a principal of Graham Capital, and he is responsible for the management of all research activities and technology resources of Graham Capital, including portfolio management, asset allocation and trading system development. Mr. Griffith is in charge of the day-to-day administration of Graham Capital's trading systems and the management 49 of Graham Capital's database of price information on more than 100 markets. Mr. Griffith also assists Mr. Tropin in numerous research initiatives as well as various administrative responsibilities. Prior to joining Graham Capital, Mr. Griffith's company, Veridical Methods, Inc., provided computer programming and consulting services to such firms as GE Capital, Lehman Brothers and Morgan Guaranty Trust. He received his B.B.A. in Management Information systems from the University of Iowa in 1979. Anthony Bryla is the chief financial officer and a principal of Graham Capital, and is responsible for the management of all accounting and finance activities at Graham Capital. Mr. Bryla is in charge of the daily and monthly performance reporting, company accounting and treasury functions, as well as policies and procedures. Prior to joining Graham Capital in September 1995, Mr. Bryla was an assistant accounting manager at OMR Systems Corp. where he provided back- office and accounting services for such clients as Merrill Lynch and Chase Manhattan Bank and where he held positions of increasing responsibility since February 1989. Mr. Bryla is a C.P.A. and is a member of the New Jersey Society of C.P.A.s, and he graduated from Rutgers University with a B.A. in Business Administration in 1982. Paul Sedlack is the chief operating officer, the general counsel and a principal of Graham Capital. He oversees the operation of the marketing, finance and administration departments, and is responsible for legal and compliance matters. Mr. Sedlack began his career at the law firm of Coudert Brothers in New York in 1986 and was resident in Coudert Brothers' Singapore office from 1988 to 1989. Prior to joining Graham Capital in June 1998, Mr. Sedlack was a partner at the law firm of McDermott, Will & Emery in New York, focusing on securities and commodities laws pertaining to the investment management and related industries. Mr. Sedlack received a JD from Cornell Law School in 1986 and an M.B.A. in Finance in 1983 and a BS in Engineering in 1982, both from State University of New York at Buffalo. Kevin O'Connor is a senior vice president, senior trader and principal of Graham Capital. Mr. O'Connor is a senior member of the trading staff responsible for executing trades in accordance with Graham Capital's futures trading systems, and he works closely with Mr. Schneider in managing the firm's daily futures trading operations. Prior to joining Graham Capital, from June 1992 until June 1995, Mr. O'Connor was a vice president and controller for Luck Trading Company, a commodity trading advisor in New York City. From January 1981 until June 1992, Mr. O'Connor was a controller and senior trader for Futures Investment Company, a commodity trading advisor based in Greenwich, CT. Mr. O'Connor graduated from Providence College in 1980 with a BS in Accounting. Fred J. Levin is the chief economist, a senior discretionary trader and a principal of Graham Capital specializing in fixed income markets with particular emphasis on short-term interest rates. Prior to joining Graham Capital in March 1999, Mr. Levin was employed as director of research at Aubrey G. Lanston & Co. Inc. from 1998. From 1991 to 1998, Mr. Levin was the chief economist and a trader at Eastbridge Capital. From 1988 to 1991, Mr. Levin was the chief economist and a trader at Transworld Oil. From 1982 to 1988, Mr. Levin was the chief economist, North American Investment Bank at Citibank. From 1970 to 1982, Mr. Levin headed the domestic research department and helped manage the open market desk at the Federal Reserve Bank of New York. Mr. Levin received an M.A. in economics from the University of Chicago in 1968 and a B.S. from the University of Pennsylvania, Wharton School in 1964. 50 Graham Capital's Trading Strategy Graham Capital has both systematic and discretionary trading programs. Graham Capital uses systematic trading programs or models to produce trading signals on a largely automated basis when applied to market data. Graham Capital also uses a discretionary trading program for which trades are determined subjectively on the basis of its traders' assessments of market conditions, rather than through application of an automated system. The investment objective of each Graham Capital trading strategy is to provide clients with significant potential for capital appreciation in both rising and falling markets during expanding and recessionary economic cycles. Systematic Trading Graham Capital's trading systems rely primarily on technical rather than fundamental information as the basis for their trading decisions. Graham Capital's systems are based on the expectation that they can over time successfully anticipate market events using quantitative mathematical models to determine their trading activities, as opposed to attempting properly to forecast price trends using subjective analysis of supply and demand. Graham Capital's core trading systems are primarily very long term in nature and are designed to participate selectively in potential profit opportunities that can occur during periods of sustained price trends in a diverse number of U.S. and international markets. The primary objective of the core trading systems is to establish positions in markets where the price action of a particular market signals the computerized systems used by Graham Capital that a potential trend in prices is occurring. The systems are designed to analyze mathematically the recent trading characteristics of each market and statistically compare such characteristics to the long- term historical trading pattern of the particular market. As a result of this analysis, the systems will utilize proprietary risk management and trade filter strategies that are intended to benefit from sustained price trends while reducing risk and volatility exposure. Graham Capital utilizes discretion in connection with its systematic trading programs in determining which markets warrant participation in the programs, market weighting, leverage and timing of trades for new accounts. Graham Capital also may utilize discretion in establishing positions or liquidating positions in unusual market conditions where, in its sole discretion, Graham Capital believes that the risk- reward characteristics have become unfavorable. Discretionary Trading The Discretionary Trading Group (referred to as the DTG) was established at Graham Capital in February 1998. Unlike Graham Capital's systematic trading programs, which are based almost entirely on computerized mathematical models, the DTG determines its trades subjectively on the basis of personal assessment of trading data and trading experience. One of the significant advantages Graham Capital's traders benefit from is Graham Capital's experience in systematic trading and trend identification. This experience has proven helpful in enabling the DTG to take advantage of significant market trends when they occur and, equally important, the DTG has the potential to profit from trend reversals as well. Additionally, Graham Capital makes available extensive technical and fundamental research resources to the DTG in an effort to improve its competitive performance edge over time. The DTG's performance results generally are not correlated to the results of other discretionary traders or Graham Capital's systematic trading programs. Importantly, the DTG can generate successful performance results in trading range type markets where there are few long-term trends. Graham Capital's Trading Programs The various futures interests markets that are traded pursuant to each Graham Capital systematic trading program are identified on the following pages. Graham Capital conducts ongoing research regarding expanding the number of futures interests markets each program trades to further the objective of portfolio diversification. Particular futures interests markets may be added to or deleted from a program at any time without notice. Portfolios may be rebalanced with respect to the weighting of existing markets at any time without notice. Additions, deletions and rebalancing decisions with respect to each program are made based on a variety of factors, 51 including performance, risk, volatility, correlation, liquidity and price action, each of which factors may change at any time. Series E is currently traded pursuant to the Global Diversified Program described below. Global Diversified Program. The Global Diversified Program, the trading program which is used by Graham Capital, utilizes multiple computerized trading models which are designed to participate in the potential profit opportunities during sustained price trends in approximately 80 global markets. This program features broad diversification in both financial and non- financial markets. The strategies that are utilized are primarily long term in nature and are intended to generate significant returns over time with an acceptable degree of risk and volatility. On a daily basis, the computer models analyze the recent price action, the relative strength and the risk characteristics of each market and compare statistically the quantitative results of this data to years of historical data on each market. Graham Capital currently trade 100% of the Series E assets pursuant to its Global Diversified Program, as described above, at 1.5 times the leverage it normally applies for such program. Margin requirements over time normally are expected to average about 15% to 20% of equity for accounts traded pursuant to the Global Diversified Program; thus, margin requirements for Series E over time are expected to average about 20% to 30% of Series E's net assets. Increased leverage will alter risk exposure and may lead to greater profits and losses and trading volatility. See "RISK FACTORS- Futures, Forwards And Options Trading Is Volatile And Highly Leveraged." Subject to the prior approval of the managing owner, Graham Capital may, at any time, trade a portion of the Series E assets pursuant to one or more of Graham Capital's other systematic programs and/or its discretionary trading program, and at an increased or reduced rate of leverage. Graham Selective Trading Program. The Graham Selective Trading Program (referred to as the GST) was developed in 1997 and utilizes a completely different trading system than the other Graham Capital programs. The GST uses a mathematical model to identify certain price patterns that have very specific characteristics indicating that there is a high probability that a significant directional move will occur. Although the system does not trade against the market trend, it is not a true trend-following system inasmuch as it will only participate in very specific types of market moves that meet the very restrictive criteria of the model. In general, the GST will participate only in market moves that are characterized by a substantial increase in volatility. As a result, it frequently will not participate in market trends in which virtually all other trend-following systems would have a position. The program trades in approximately 55 markets with approximate weightings, as of February 28, 2001, of 29% in foreign exchange, 24% in global interest rates, 16% in agricultural futures, 11% in metal futures, 11% in stock index futures and 9% in energy futures. Due to the extremely selective criteria of the GST model, the program will normally maintain a neutral position in approximately 50% to 60% of the markets in the portfolio. Discretionary Trading Group Program. Unlike Graham Capital's systematic trading programs, which are based almost entirely on computerized mathematical models, Graham Capital's DTG (described above) determines trades for the Discretionary Trading Group Program subjectively on the basis of personal judgment and trading experience. The Discretionary Trading Group Program generally utilizes fundamental information as well as certain technical data as the basis for its trading strategies. Fundamental considerations relate to the underlying economic and political forces that ultimately determine the true value of a particular financial instrument or commodity. Fundamental analysis of the DTG may involve a short or long-term time horizon. Technical data considered by the DTG include price patterns, volatility, trading volumes and level of open interest. The Discretionary Trading Group Program trades global fixed income, foreign exchange and other futures and forward markets. The Discretionary Trading Program may trade call or put options in these markets. Non-Trend Based Program. Today's markets include many trend-following and counter-trend traders attempting to identify major trends and reversals thereof. Graham Capital's Non-Trend Program (NTB) utilizes multiple computerized trading models that for the most part do not rely on price trends. The NTB program forecasts market direction based on changes in fundamental data, such as supply and demand data, inflation rates, interest rates and shifts in the business cycle. By using non-trend-following methods it is possible to trade with considerable success in markets irrespective of the existence of price trends. As of February 28, 2001, the NTB had approximately 52 45% weighting in currency forwards, 22% weighting in energy futures, 11% weighting in futures contracts based on interest rates, 11% in metal futures and 11% stock index futures. The NTB program seeks to capture currency gains based on the momentum of interest rate expectations, absolute levels of the interest rate differentials and relative shapes of yield curves. The NTB program forecasts energy market direction from changes in supply/demand, the commitment of traders' report and other factors. For trading fixed income markets, the NTB program creates a macroeconomic index based on economic release data, inflation data and interest rate sensitive stocks. For base metal trading, the NTB program seeks to identify shifts in supply/demand that are consistent with the current business cycle to anticipate market direction relying on inputs such as cost of carry, supply/demand measures, inflation, currency movement and interest rate sensitive stocks. For equities, the NTB program creates a composite indicator that positions the system long or short the S&P 500 relying on stock market fundamental indicators such as price/earnings ratios, dividend yields, inflation, currency movement and interest rates. K4 Program. Similar to the GST program, the K4 program uses a mathematical model to identify certain price patterns that have very specific characteristics indicating that there is a high probability that a significant directional move will occur. The K4 program differs from the GST program in many respects, including a tendency to enter markets at different times and the use of other significantly different parameters. The K4 program will normally enter or exit a position only when a significant price and volatility spike takes place and is designed to have a high percentage of winning trades. K4 will normally maintain a neutral position in 50% of the markets in the portfolio. The K4 program trades in approximately 65 markets with weightings, as of February 28, 2001, of about 31% in foreign exchange, 27% in global interest rates, 14% in stock index futures, 11% in agricultural futures, 9% in metals and 8% in energy futures. 53 Allocation Among Markets Traded By Graham Capital Set forth below is a bar graph showing the market sectors that are traded by Graham Capital pursuant to its Global Diversified Program as of February 28, 2001. As of that date, investor funds are exposed to these sectors in approximately the percentage allocations stated; however, these percentage allocations are subject to change at Graham Capital's discretion. Actual allocations change as market conditions and trading opportunities change, and it is likely that the targeted risk allocations may vary for Series E during future periods, although the focus will remain on a diversified portfolio: Market Sector Percentage Currencies 26% Interest Rates 26 Stock Indices 16 Agricultural Products/Softs 15 Energy Products 9 Metals 8 Total 100% (GRAPH) 54 Graham Capital's Past Performance For All Of Its Clients Capsule summaries E(1), E(2), and E(3) contain actual performance information for the periods indicated. Global Diversified Program The following is a capsule summary of the past performance for Graham Capital's Global Diversified Program as of February 28, 2001, the trading strategy which currently is used to trade Series E (although at 150% leverage). Name of commodity trading advisor: Graham Capital Program: Global Diversified Program Start Date: February 2, 1995 (All trading by Graham Capital) February 2, 1995 (Global Diversified Program) No. Accounts: 5 Aggregate $$ In All Programs: $741,181,000 (All programs including notional) $$ in this Program: $152,489,000 (Global Diversified Program including notional) Largest monthly draw- down: (6.93)% February 1996 "Largest monthly draw-down" means the greatest decline in month-end net asset value due to losses sustained by the program on a composite basis for any particular month or an individual account for any particular month. Largest peak-to- valley draw-down: (13.74)% April 1998 to July 1998 "Largest peak-to-valley draw-down" means the greatest cumulative percentage decline in month-end net asset value due to losses sustained by the program on a composite basis or an individual account during any period in which the initial month-end net asset value is not equaled or exceeded by a subsequent month-end net asset value. Closed Accounts: Profitable = 9 Unprofitable = 2 RATE OF RETURN INFORMATION IS ON FOLLOWING PAGE 55 CAPSULE E(1) -- GRAHAM CAPITAL GLOBAL DIVERSIFIED PROGRAM MONTHLY/ANNUAL RATES OF RETURN* MONTH 2001 2000 1999 1998 1997 1996 January (1.40) 1.17% (0.08)% 1.65% 4.19% 7.43% February 1.56 (1.08) 0.95 1.41 (1.53) (5.69) March 0.51 (5.09) 4.56 0.90 1.25 April (2.91) 2.63 (3.02) (4.71) 3.47 May (2.52) (4.14) (0.82) (1.35) (0.31) June (3.32) 5.65 (5.95) (0.84) 1.26 July (0.63) (1.86) (3.49) 3.72 (0.45) August 4.29 3.37 11.01 (2.64) (1.62) September (1.16) 1.07 6.93 2.11 1.21 October 2.21 (3.61) 3.24 4.14 5.71 November 10.06 1.66 (2.80) 0.50 3.26 December 9.23 5.14 0.09 1.85 (1.05) Annual 0.14% 15.83% 5.12% 12.20% 6.04% 14.70% PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS *The rate of return percentage for each month is obtained by dividing the net income for the month by the net asset value as of the beginning of the month (including contributions made at the start of the month). In months where asset changes are made mid- month, rates of return are calculated for each segment of the month and compounded. For this purpose, "net income" represents the gross income for the month in question, net of all expenses and performance allocations. The rate of return percentage for each year is determined by calculating the percentage return on an investment made as of the beginning of each year. Specifically, a running index is calculated monthly, compounded by the rate of return, the annual percentage being the change in this index for the year divided by the year's initial index. Graham Capital advises exempt accounts for qualified eligible clients the performance of which is not included in the composite performance record. 56 The following is a capsule summary of the past performance for Graham Capital's Global Diversified Program Traded at 150% Leverage as of February 28, 2001, the trading strategy which currently is used to trade Series E. Name of commodity trading advisor: Graham Capital Program: Global Diversified Program Traded at 150% Leverage Start Date: February 2, 1995 (All trading by Graham Capital) May 1, 1997 (Global Diversified Program at 150% leverage) No. Accounts: 7 Aggregate $$ In All Programs: $741,181,000 (All programs including notional) $$ in this Program: $72,864,000 (Global Diversified Program including notional) Largest monthly draw- down: (9.84)% June 1998 "Largest monthly draw-down" means the greatest decline in month-end net asset value due to losses sustained by the program on a composite basis for any particular month or an individual account for any particular month. Largest peak-to- valley draw-down: (20.01)% April 1998 to July 1998 "Largest peak-to-valley draw-down" means the greatest cumulative percentage decline in month-end net asset value due to losses sustained by the program on a composite basis or an individual account during any period in which the initial month-end net asset value is not equaled or exceeded by a subsequent month-end net asset value. Closed Accounts: Profitable = 12 Unprofitable = 2 RATE OF RETURN INFORMATION IS ON FOLLOWING PAGE 57 CAPSULE E(2) -- GRAHAM CAPITAL GLOBAL DIVERSIFIED PROGRAM TRADED AT 150% LEVERAGE MONTHLY/ANNUAL RATES OF RETURN* MONTH 2001 2000 1999 1998 1997 January (1.93)% 2.38% (0.62)% 2.14% February 2.96 (1.83) 1.35 1.71 March 0.46 (7.79) 6.52 April (3.58) 4.02 (4.42) May (3.81) (6.25) (1.08) (1.62)% June (5.35) 8.05 (9.21) (1.12) July (1.05) (2.59) (5.22) 5.04 August 6.18 5.00 17.07 (3.79) September (0.97) 2.03 9.34 2.93 October 3.22 (5.46) 4.97 5.72 November 14.80 2.26 (3.40) 1.30 December 13.77 7.52 0.12 2.94 Annual 0.98% 24.33% 6.17% 17.00% 11.56% PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS *The rate of return percentage for each month is obtained by dividing the net income for the month by the net asset value as of the beginning of the month (including contributions made at the start of the month). In months where asset changes are made mid- month, rates of return are calculated for each segment of the month and compounded. For this purpose, "net income" represents the gross income for the month in question, net of all expenses and performance allocations. The rate of return percentage for each year is determined by calculating the percentage return on an investment made as of the beginning of each year. Specifically, a running index is calculated monthly, compounded by the rate of return, the annual percentage being the change in this index for the year divided by the year's initial index. Graham Capital advises exempt accounts for qualified eligible clients the performance of which is not included in the composite performance record. 58 CAPSULE E(3) PAST PERFORMANCE OF OTHER PROGRAMS OFFERED BY GRAHAM CAPITAL THAT WILL NOT INITIALLY BE USED TO TRADE SERIES E ASSETS
Date Name of Date CTA Commodity CTA Began Number Aggregate Dollars Trading Began Trading of In All Programs Dollars in This Program Advisor Program Trading Program Accounts (inlcuding Notional) (Including Notional) Graham Selective Capital Trading Program 2/2/95 1/7/98 2 $741,181,000 $87,765,000 Graham Non-Trend Capital Based Program 2/2/95 1/4/99 1 $741,181,000 $93,219,000 Graham Non-Trend Capital Based Program at 150% Leverage 2/2/95 6/1/99 3 $741,181,000 $32,105,000 Graham Discretionary Capital Trading Program 2/2/95 1/4/99 1 $741,181,000 $5,055,000 Graham Capital K4 Program 2/2/95 1/4/99 1 $741,181,000 $113,487,000 Graham Global FX Capital Program 2/2/95 5/21/97 3 $741,181,000 $34,909,000 Graham International Capital Financial Program 2/2/95 1/2/96 0 $741,181,000 $0 Graham Natural Capital Resource Program 2/2/95 9/27/96 0 $741,181,000 $0 ANNUAL RATE OF RETURN* Largest Name of Largest Peak-to- Commodity Monthly Valley 2001 Trading Draw- Draw- Closed Accounts (through Advisor Program Down(1) Down(2) Profitable Unprofitable 2/01) 2000 1999 1998 1997 1996 % % % % % % % % Graham Selective Capital Trading (3.00) (7.21) Program 6/98 2/00-6/00 0 0 5.44 7.07 0.91 25.86 -- -- Graham Non-Trend (5.01) (8.48) Capital Based Program 10/99 5/99-10/99 1 0 (2.02) 11.86 0.46 -- -- -- Graham Non-Trend Capital Based Program at 150% (8.42) (14.33) Leverage 10/99 6/99-10/99 1 1 (2.67) 21.01 (9.67) -- -- -- Graham Discretionary Capital Trading (2.22) (4.18) Program 8/99 6/99-8/99 0 0 4.63 8.20 (1.03) -- -- -- Graham (4.83) (8.00) Capital K4 Program 2/00 2/00-6/00 1 0 7.50 16.39 7.25 -- -- -- Graham Global FX (4.29) (9.79) Capital Program 10/99 4/98-7/99 1 3 (2.72) 3.62 (1.37) (3.52) 5.19 -- Graham International Capital Financial (8.41) (18.07) Program 6/98 4/98-6/98 -- -- -- -- -- 8.15 5.14 13.98 Graham Natural Capital Resource (6.68) (19.22) Program 10/97 2/97-11/97 -- -- -- -- -- 4.71 (15.22) 2.80 _________________ * The rate of return percentage for each month is obtained by dividing the net income for the month by the net asset value as of the beginning of the month (including contributions made at the start of the month). In months where asset changes are made mid-month, rates of return are calculated for each segment of the month and compounded. For this purpose, "net income" represents the gross income for the month in question, net of all expenses and performance allocations. The rate of return percentage for each year is determined by calculating the percentage return on an investment made as of the beginning of each year. Specifically, a running index is calculated monthly, compounded by the rate of return, the annual percentage being the change in this index for the year divided by the year's initial index. Graham Capital advises exempt accounts for qualified eligible clients the performance of which is not included in the composite performance record. 1 "Largest monthly draw-down" means the greatest decline in month-end net asset value due to losses sustained by the program on a composite basis for any particular month or an individual account for any particular month. 2 "Largest peak-to-valley draw-down" means the greatest cumulative percentage decline in month-end net asset value due to losses sustained by the program on a composite basis or an individual account during any period in which the initial month-end net asset value is not equaled or exceeded by a subsequent month-end net asset value
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS 59 SERIES F Campbell & Company has been allocated 100% of the Series F assets. In its trading for Series F, Campbell & Company currently utilizes the FME Small Portfolio, one of its systematic trading programs. Campbell & Company And Its Principals Campbell & Company is a Maryland corporation organized in April 1978 as a successor to a partnership originally formed in January 1974. Campbell & Company became registered as a commodity trading advisor in May 1978 and as a commodity pool operator in September 1982, and Campbell & Company is a member of the National Futures Association. Campbell & Company's main business office is located at 210 West Pennsylvania Avenue, Suite 770, Towson, Maryland 21204; telephone (410) 296-3301. D. Keith Campbell, born in 1942, has served as the Chairman of the Board of Directors of Campbell & Company since it began operations, was President until January 1, 1994, and Chief Executive Officer until January 1, 1998. Mr. Campbell is the majority stockholder. From 1971 through June 1978, he was a registered representative of a futures commission merchant. Mr. Campbell has acted as a commodity trading advisor since January 1972 when, as general partner of the Campbell Fund, a limited partnership engaged in commodity futures trading, he assumed sole responsibility for trading decisions made on behalf of the Fund. Since then, he has applied various technical trading models to numerous discretionary futures trading accounts. Mr. Campbell is registered with the CFTC and NFA as a commodity pool operator. Mr. Campbell is an Associated Person of Campbell & Company. Bruce L. Cleland, born in 1947, joined Campbell & Company in January 1993 and serves as President, Chief Executive Officer and a Director. Prior to 1994, he was Executive Vice President. From May 1986 through December 1992, Mr. Cleland served in various principal roles with the following firms: President, Institutional Brokerage Corp., a floor broker; President, Institutional Advisory Corp., a commodity trading advisor and commodity pool operator; President, F&G Management, Inc., a commodity trading advisor; President, Hewlett Trading Corporation, a commodity pool operator. Prior to this, Mr. Cleland was employed by Rudolf Wolff Futures Inc., a futures commission merchant, where he served as President until 1986. Mr. Cleland graduated in 1969 from Victoria University in Wellington, New Zealand where he received a Bachelor of Commerce and Administration degree. Mr. Cleland is an Associated Person of Campbell & Company. Theresa D. Becks, born in 1963, joined Campbell & Company in 1991 and serves as the Chief Financial Officer, Secretary, Treasurer, and a Director. In addition to her role as CFO, Ms. Becks also oversees administration and compliance. From December 1987 to June 1991, she was employed by Bank of Maryland Corp, a publicly held company, as a Vice President and Chief Financial Officer. Prior to that time, she worked with Ernst & Young. Ms. Becks is a C.P.A. and has a B.S. in Accounting from the University of Delaware. Ms. Becks is an Associated Person of Campbell & Company. Richard M. Bell, born in 1952, began his employment with Campbell & Company in May 1990 and serves as a Senior Vice President-Trading. His duties include managing daily trade execution for the assets under Campbell & Company's management. From September 1986 through May 1990, Mr. Bell was the managing general partner of several partnerships registered as broker- dealers involved in market making on the floor of the Philadelphia Stock Exchange ("PHLX") and Philadelphia Board of Trade ("PBOT"). From July 1975 through September 1986, Mr. Bell was a stockholder and Executive Vice-President of Tague Securities, Inc., a registered broker-dealer. Mr. Bell graduated from Lehigh University with a B.S. in Finance. Mr. Bell is an Associated Person of Campbell & Company. William C. Clarke, III, born in 1951, joined Campbell & Company in June 1977 and serves as an Executive Vice President and Director. Mr. Clarke holds a B.S. in Finance from Lehigh University where he graduated in 1973. Mr. Clarke currently oversees all aspects of research, which involves the development of proprietary trading models and portfolio management methods. Mr. Clarke is an Associated Person of Campbell & Company. Xiaohua Hu, born in 1963, serves as a Vice President-Research and has been employed by Campbell & Company since 1994. From 1992 to 1994, he was employed in Japan by Line System as a software engineer, where 60 he participated in the research and development of computer software, including programs for production systems control and software development. Mr. Hu received his B.A. in Manufacturing Engineering from Changsha University of Technology in China in 1982. He went on to receive an M.A. and Ph.D. in Systems and Information Engineering from the Toyohashi University of Technology in Japan, in 1987 and 1992 respectively. During his studies at Toyohashi, Mr. Hu was also a Visiting Researcher in Computer Science and Operations Research and published several research papers. Phil Lindner, born in 1954, serves as Vice President-Information Technology. He has been employed by Campbell & Company since October 1994. He was appointed the IT Director in March 1996 and Vice President in January 1998. Prior to joining Campbell & Company, Mr. Lindner worked as a programmer and manager for Amtote, a provider of race track computer systems. James M. Little, born in 1946, joined Campbell & Company in April 1990 and serves as Executive Vice President-Client Development and a Director. Mr. Little holds a B.S. in Economics and Psychology from Purdue University. From March 1989 through April 1990, Mr. Little was a registered representative of A.G. Edwards & Sons, Inc. From January 1984 through March 1989, he was the Chief Executive Officer of James Little & Associates, Inc., a commodity pool operator and broker-dealer. Mr. Little is the co-author of The Handbook of Financial Futures, and is a frequent contributor to investment industry publications. Mr. Little is an Associated Person of Campbell & Company. V. Todd Miller, born in 1962, serves as a Vice President-Research and has been employed by Campbell & Company since 1994. From 1993 to 1994, Mr. Miller was an assistant professor in the department of Computer Information Science at the University of Florida, where he taught classes in object oriented programming, numerical analysis and programming in C, C++ and LISP. Mr. Miller holds a variety of degrees from the University of Florida, including an Associates degree in architecture and a B.A. in Business with a concentration in computer science. In 1988, he received his M.A. in Engineering with a concentration in artificial intelligence. Mr. Miller completed his education in 1993 with a Ph.D. in Engineering with a concentration in computer simulation. Albert Nigrin, born in 1961, serves as a Vice President-Research and has been employed by Campbell & Company since 1995. From 1991 to 1995, Mr. Nigrin was an assistant professor in the department of Computer Science and Information Systems at American University in Washington D.C., where he taught classes in artificial intelligence, computer programming and algorithms to both graduate and undergraduate students. While teaching, he also wrote and published Neural Networks for Pattern Recognition. Mr. Nigrin received a B.A. in Electrical Engineering in 1984 from Drexel University. He then proceeded directly to a Ph.D. program and received his degree in Computer Science in 1990 from Duke University, where his doctoral studies concentrated in the areas of artificial intelligence and neural networks. Markus Rutishauser, born in 1961, serves as Vice President-Data Operations and has been employed by Campbell & Company since October 1993. Prior to joining Campbell, Mr. Rutishauser worked two years at Maryland National Bank in Baltimore as an Assistant Vice President in Foreign Exchange trading. Prior to that, he was employed by Union Bank of Switzerland, spending four years in their Zurich office and another four years in their New York office, in the Foreign Exchange Department. Mr. Rutishauser graduated from the University of Fairfield with a degree in Finance. He subsequently completed his M.B.A. at the University of Baltimore in January 1996. Mr. Rutishauser is an Associated Person of Campbell & Company. C. Douglas York, born in 1958, has been employed by Campbell & Company since November 1992 and serves as a Senior Vice President-Trading. His duties include managing daily trade execution for foreign exchange markets. From January 1991 to November 1992, Mr. York was the Global Foreign Exchange Manager for Black & Decker. He holds a B.A. in Government from Franklin and Marshall College. Mr. York is an Associated Person of Campbell & Company. Principals of Campbell & Company may trade futures interests for their own accounts. In addition, Campbell & Company manages proprietary accounts for its deferred compensation plan for certain principals. Campbell & Company and its principals reserve the right to trade for their own accounts. There are no written procedures that govern proprietary trading by principals. Trading records for all proprietary trading are available for review by the Trust upon reasonable notice. 61 Campbell & Company's Trading Strategy Campbell & Company makes trading decisions for all clients' accounts using proprietary technical trading models which analyze market statistics. Clients are cautioned that since the trading models are proprietary, it is not possible to determine whether Campbell & Company is following the models or not. There can be no assurance that the trading models currently being used will produce results similar to those produced in the past. Campbell & Company trades the following seven portfolios: (i) the Financial, Metal & Energy Large Portfolio (sometimes referred to as the FME Large Portfolio); (ii) the Financial, Metal & Energy Small Portfolio (sometimes referred to as the FME Small Portfolio); (iii) the Foreign Exchange Portfolio; (iv) the Global Diversified Large Portfolio; (v) the Global Diversified Small Portfolio; (vi) the Interest Rates, Stock Indices and Commodities Portfolio and (vii) the Ark Portfolio. The managing owner and Campbell & Company have agreed that Campbell & Company, for the present, trades on behalf of Series F utilizing only the FME Small Portfolio, which is described below. Campbell & Company trading models are designed to detect and exploit medium-term to long-term price changes, while also applying proven risk management and portfolio management principles. Campbell & Company believes that utilizing multiple trading models for the same client account provides an important level of diversification, and is most beneficial when multiple contracts of each market are traded. More or fewer trading models than are currently used may be used in the future. Every trading model may not trade every market. It is possible that one trading model may establish a long position while another trading model establishes a short position in the same market. Since it is unlikely that both positions would prove profitable, in retrospect, one or both trades will appear to have been unnecessary. It is Campbell & Company's policy to follow trades signaled by each trading model independent of what the other models may be recommending. Over the course of a long-term trend, there are times when the risk of the market may not appear to be justified by the potential reward. In such circumstances, some of Campbell & Company's trading models may exit a winning position prior to the end of a price trend. While there is some risk to this method (for example, being out of the market during a significant portion of a price trend), our research indicates that this is well compensated for by the decreased volatility of performance which may result. Campbell & Company's trading models may include trend-following trading models, counter-trend trading models and trading models that do not seek to identify or follow price trends at all. Campbell & Company expects to develop additional trading models and to modify models currently in use and to employ such models for Series F. The models currently in use by Campbell & Company may be eliminated from use if Campbell & Company believes such action is warranted. While Campbell & Company normally follows a disciplined systematic approach to trading, on occasion, it may override the signals generated by the trading models. Such action may not be beneficial to the results achieved. Campbell & Company applies risk management and portfolio management strategies to measure and manage overall portfolio risk. These strategies include portfolio structure, risk balance, capital allocation and risk limitation. One objective of risk and portfolio management is to determine periods of relatively high and low portfolio risk, and when such points are reached, Campbell & Company may reduce or increase position size accordingly. It is possible, however, that during periods of reduction in position size, the return that would have been realized had the account been fully invested would be reduced. Campbell & Company estimates that, based on the amount of margin required to maintain positions in the markets currently traded, aggregate margin for all positions held in a client's account will range between 20% and 40% of the account's net assets. From time to time, margin commitments may be above or below these ranges. The number of contracts that Campbell & Company believes can be bought or sold in a particular market without undue adverse price movement may at times be limited because of illiquidity. In such cases, a client's portfolio would be influenced by liquidity factors because its positions in such markets might be substantially 62 smaller than its positions in other markets that offer greater liquidity. Campbell & Company may, from time to time, add or delete contracts from Series F's portfolio, or increase or decrease the total number of contracts held, based on increases or decreases in the assets in an account, changes in market conditions, perceived changes in portfolio-wide risk factors or other factors that Campbell & Company deems relevant. Financial, Metal & Energy Portfolios Currently, two versions of the Financial Metal & Energy Portfolio are offered by Campbell & Company, the FME Small Portfolio and the FME Large Portfolio. The FME Small Portfolio trades in foreign currencies, precious and base metals, energy products, stock indices and interest rates. The FME Large Portfolio is the same as the FME Small Portfolio but adds certain contracts that trade in the forward foreign currency markets which do not have futures equivalents. The FME Large Portfolio is appropriate for accounts greater than $10 million. Prior to February 1995, all Financial, Metal & Energy accounts were traded together in the FME Large Portfolio. The FME Small Portfolio began in February 1995, when accounts smaller than $10 million were transferred from the FME Large Portfolio to the FME Small Portfolio. Since Series F commenced trading with $5 million, it has selected initially to trade the Series F assets pursuant to the FME Small Portfolio. The FME Large Portfolio may by utilized to trade Series F assets at a later date. 63 Allocation Among Markets Traded By Campbell & Company Set forth below is a bar graph showing the market sectors that are traded by the FME Small Portfolio, as of February 28, 2001. As of that date, investor funds are exposed to these sectors in approximately the percentage allocations stated; however, these percentage allocations are subject to change at Campbell & Company's discretion. Actual allocations change as market conditions and trading opportunities change, and it is likely that the targeted risk allocations may vary for Series F during future periods, although the focus will remain on a diversified portfolio: Market Sector Percentage Currencies 46% Interest Rates 19 Energy 18 Stock Indices 16 Precious and Base Metals 1 Total 100% (GRAPH) 64 Campbell & Company's Past Performance For All Of Its Clients Capsule summaries F(1), F(2) and F(3) contain actual performance information for the periods indicated. FME Small Portfolio The following is a capsule summary of the past performance for Campbell & Company's FME Small Portfolio as of February 28, 2001, the trading strategy which currently is used to trade Series F. Name of commodity trading advisor: Campbell & Company Program: FME Small Portfolio Start Date: January 1972 (All trading by Campbell & Company) February 1995 (FME Small Portfolio) No. Accounts: 30 Aggregate $$ In All Programs: $2,307,600,000 (All programs including notional) $$ in this Account: $155,200,000 (FME Small Portfolio including notional) Largest monthly draw- down: (5.99)% April 1998 "Largest monthly draw-down" means the greatest decline in month-end net asset value due to losses sustained by the program on a composite basis for any particular month or an individual account for any particular month. Largest peak-to- valley draw-down: (7.61)% February 1997 to May 1997 "Largest peak-to-valley draw-down" means the greatest cumulative percentage decline in month-end net asset value due to losses sustained by the program on a composite basis or an individual account during any period in which the initial month-end net asset value is not equaled or exceeded by a subsequent month-end net asset value. Closed accounts: Profitable = 61 Unprofitable = 6 RATE OF RETURN INFORMATION IS ON FOLLOWING PAGE 65 CAPSULE F(1) -- COMPOSITE OF ALL THE FME SMALL PORTFOLIO ACCOUNTS MONTHLY/ANNUAL RATES OF RETURN* MONTH 2001 2000 1999 1998 1997 1996 January (1.22) 3.23% (4.61)% 2.80% 3.85% 8.80% February 0.13 (0.52) 1.34 (2.34) 1.63 (5.20) March (2.03) 1.60 5.81 (1.75) 4.33 April (2.55) 5.20 (5.99) (3.03) 2.57 May 2.47 (3.15) 4.21 (3.01) (2.11) June 0.77 4.95 1.51 3.62 1.41 July (2.92) (0.64) (4.04) 8.81 (1.71) August 3.44 1.18 9.95 (5.94) 3.52 September (4.25) 1.55 3.68 4.53 1.92 October 2.90 (3.85) 5.52 2.32 12.85 November 5.50 0.78 (0.91) 0.59 12.11 December 4.17 2.80 1.10 5.41 (4.12) Annual (1.09)% 10.08% 6.80% 22.16% 17.30% 37.83% * Campbell & Company has adopted a method of computing "Rate of Return" and performance disclosure, referred to as the "Fully-Funded Subset" method, pursuant to an Advisory published by the CFTC. The Fully-Funded Subset refers to that subset of accounts included in the applicable composite which is funded entirely by Actual Funds (as defined in the Advisory). To qualify for the 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 the performance is so reported meet two tests which are designed to provide assurance that the Fully-Funded Subset and the resultant rates of return are representative of the trading program. The rate of return is calculated by dividing net performance of the Fully-Funded Subset by the beginning net assets (plus additions, less withdrawals for that month) of the Fully-Funded Subset, except in periods of significant additions or withdrawals to the accounts in the Fully-Funded Subset. In such instances, the Fully-Funded Subset is adjusted to exclude accounts with significant additions or withdrawals which would materially distort the rate of return pursuant to the Fully-Funded Subset method. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS 66 FME Large Portfolio The following is a capsule summary of the past performance for Campbell & Company's FME Large Portfolio as of February 28, 2001. Although series F is currently traded pursuant to the FME Small Portfolio strategy, the FME Large Portfolio strategy may be used in the future to trade Series F assets. Name of commodity trading advisor: Campbell & Company Program: FME Large Portfolio Start Date: January 1972 (All trading by Campbell & Company) April 1993 (FME Large Portfolio) No. Accounts: 17 Aggregate $$ In All Programs: $2,307,600,000 (All programs including notional) $$ in this Account: $2,068,400,000 (FME Large Portfolio including notional) Largest monthly draw- down: (5.88)% April 1998 "Largest monthly draw-down" means the greatest decline in month-end net asset value due to losses sustained by the program on a composite basis for any particular month or an individual account for any particular month. Largest peak-to- valley draw-down: (7.57)% February 1997 to May 1997 "Largest peak-to-valley draw-down" means the greatest cumulative percentage decline in month-end net asset value due to losses sustained by the program on a composite basis or an individual account during any period in which the initial month-end net asset value is not equaled or exceeded by a subsequent month-end net asset value. Closed accounts: Profitable = 3 Unprofitable = 0 RATE OF RETURN INFORMATION IS ON FOLLOWING PAGE 67 CAPSULE F(2) -- COMPOSITE OF ALL THE FME LARGE PORTFOLIO ACCOUNTS MONTHLY/ANNUAL RATES OF RETURN* MONTH 2001 2000 1999 1998 1997 1996 January (1.09) 3.70% (4.83)% 3.25% 5.26% 5.46% February 0.70 (0.35) 1.45 (2.38) 2.26 (5.63) March (1.96) 0.87 4.95 (2.08) 5.62 April (1.86) 5.60 (5.88) (3.84) 3.49 May 2.74 (3.25) 4.34 (1.84) (1.71) June 1.96 4.63 2.04 2.23 1.29 July (1.72) (0.15) (3.68) 9.27 0.01 August 3.08 1.22 9.23 (5.14) 1.78 September (3.23) 1.75 2.97 4.23 2.47 October 3.19 (4.25) 4.41 2.39 12.06 November 5.98 0.53 (0.50) 0.57 12.22 December 2.38 3.64 0.64 4.95 (4.29) Annual (0.40)% 14.32% 6.81% 20.07% 18.75% 35.96% * The "Rate of Return" for a period is calculated by dividing the net profit or loss by the assets at the beginning of such period. Additions and withdrawals occurring during the period are included as an addition to or deduction from beginning net assets in the calculations of "Rates of Return," except for accounts which close on the last day of a period in which case the withdrawal is not subtracted from beginning net assets for purposes of this calculation. The "Rate of Return" is calculated using the Only Accounts Traded (sometimes referred to as the OAT method) method of computation. This computation method is one of the methods approved by the CFTC to reduce the distortion caused by significant additions or withdrawals of capital during a month. The OAT method excludes from the calculation of rate of return those accounts which had material intra-month additions or withdrawals and accounts which were open for only part of the month. In this way, the composite rate of return is based on only those accounts whose rate of return is not distorted through intra-month capital changes. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULT 68 CAPSULE F(3) PAST PERFORMANCE OF OTHER PROGRAMS OFFERED BY CAMPBELL & COMPANY AND ITS AFFILIATES THAT WILL NOT BE USED TO TRADE SERIES F ASSETS
Date Aggregate Dollars Name of Date CTA in All Programs Dollars in This Program Commodity CTA Began Number (in thousands) (in thousands) Trading Began Trading of (Excluding (Including (Excluding (Including Advisor Program Trading Program Accounts Notional) Notional) Notional) Notional) $ $ $ $ Campbell Foreign & Company Exchange Portfolio 4/72 11/90 3 2,194,200 2,307,600 10,500 33,500 Campbell Global & Company Diversified Large Portfolio 4/72 2/86 1 2,194,200 2,307,600 35,000 35,000 Campbell Global & Company Diversified Small Portfolio 4/72 6/97 2 2,194,200 2,307,600 2,400 2,400 Campbell ARK & Company Portfolio 4/72 9/96 10 2,194,200 2,307,600 2,300 2,600 Campbell Interest & Company Rates, Stock Indices & Commodities Portfolio 4/72 2/96 1 2,194,200 2,307,600 10,500 10,500 ANNUAL RATES OF RETURN* Largest Name of Largest Peak-to- Commodity Monthly Valley 2001 Trading Draw- Draw- Closed Accounts through Advisor Program Down(1) Down(2) Profitable Unprofitable 2/01 2000 1999 1998 1997 1996 % % % % % % % % Campbell Foreign & Company Exchange (7.85) (12.39) Portfolio 2/98 12/97-2/98 1 1 (1.77) 11.38 7.19 4.25 18.19 43.04 Campbell Global & Company Diversified Large (7.22) (7.22) Portfolio 2/96 1/96-2/96 5 0 0.42 11.18 4.57 12.47 14.95 26.78 Campbell Global & Company Diversified Small (5.92) (9.73) Portfolio 4/98 1/00-9/00 8 0 (0.49) 17.59 2.51 17.51 13.85(3) -- Campbell ARK (11.86) (11.86) & Company Portfolio 7/98 6/98-7/98 10 2 (0.38) 28.86 28.27 2.48 20.49 19.94(4) Campbell Interest & Company Rates, Stock Indices & Commodities (6.75) (9.94) Portfolio 10/98 11/96-4/97 0 0 2.62 18.12 6.85 27.08 20.15 25.73(5) _________________________________ * The CFTC accepts three different methods of showing the composite rate of return achieved by accounts, some of which are traded at different degrees of leverage. These methods are: the fully-funded subset method, the time-weighted method and the only accounts traded method. Although each method uses a different approach, all methods are intended to produce substantially the same rate of return. All annual rates of return are computed on a compounded monthly basis. 1 "Largest monthly draw-down" means the greatest decline in month-end net asset value due to losses sustained by the program on a composite basis for any particular month or an individual account for any particular month. 2 "Largest peak-to-valley draw-down" means the greatest cumulative percentage decline in month-end net asset value due to losses sustained by the program on a composite basis or an individual account during any period in which the initial month-end net asset value is not equaled or exceeded by a subsequent month-end net asset value. 3 June 1997 to December 1997 4 September 1996 to December 1996 5 February 1996 to December 1996
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULT 69 TRADING LIMITATIONS AND POLICIES The following limitations and policies are applicable to each series. A trading advisor sometimes may be prohibited from taking positions for a series that it would otherwise prefer to acquire because of the need to comply with these limitations and policies. The managing owner monitors compliance with the trading limitations and policies set forth below, and it may impose additional restrictions upon the activities of any trading advisor (through modification of the limitations and policies) as it deems appropriate and in the best interests of each series. The managing owner: -Will not approve a material change in the following trading limitations and policies for any series without obtaining the prior written approval of limited owners holding interests representing at least a majority (over 50%) of the net asset value of that series (excluding interests owned by the managing owner and its affiliates). -May, without obtaining approval from the limited owners, impose additional limitations on the activities of each series or on the types of instruments in which a trading advisor can invest if the managing owner determines that additional limitations (i) would be necessary to assure that 90% of the series' income is qualifying income or (ii) would be in the best interests of a series. Trading Limitations A series will not: -Engage in pyramiding its commodities positions (i.e., use unrealized profits on existing positions to provide margin for the acquisition of additional positions in the same or a related commodity), but a series may take into account open trading equity on existing positions in determining whether to acquire additional commodities positions. -Borrow or loan money (except with respect to the initiation or maintenance of the series' commodities positions or obtaining lines of credit for the trading of forward currency contracts; provided, however, that each series is prohibited from incurring any indebtedness on a non-recourse basis). -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 that would circumvent the foregoing prohibition. -Permit any trading advisor to share in any portion of the commodity brokerage fees paid by a series. -Commingle its assets, except as permitted by law. -Permit the churning of its commodity accounts. 70 Trading Policies Subject to the foregoing limitations, each trading advisor has agreed to abide by the trading policies of the Trust, which currently are as follows: -Series funds generally will be invested in contracts that are traded in sufficient volume which, at the time such trades are initiated, are reasonably expected to permit entering and liquidating positions. -Stop or limit orders may, in a trading advisor's discretion, be given with respect to initiating or liquidating positions in order to attempt to limit losses or secure profits; if stop or limit orders are used, however, there can be no assurance 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. -A series 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. -A series may occasionally make or accept delivery of a commodity including, without limitation, currencies; a series also may engage in an exchange of futures for physicals transaction, as permitted on the relevant exchange, involving currencies and metals and other commodities. -A series may employ trading techniques such as spreads; an example of a spread position is when a series owns a futures contract which expires in one month and sells a futures contract for the same commodity in a later month. -A series 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 a series' net asset value for any one commodity, or in excess of 66.67% of a series' 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 daily price fluctuations, the managing owner may be required to commit as margin in excess of the foregoing limits, and in such a case the managing owner will cause the trading advisor to reduce its open futures and option positions to comply with these limits before initiating new commodities positions. -If a series engages in transactions in forward currency contracts other than with or through Prudential Securities and/or Prudential-Bache Global Markets, Inc., it will engage in such transactions only with or through a bank that has, as of the end of its last fiscal year, an aggregate balance in its capital, surplus and related accounts of at least $100 million and through other broker-dealer firms whose aggregate balance in their capital, surplus, and related accounts is at least $50 million; if transactions are effected for a series in the forward markets, the only forward markets that are permitted to be utilized without the managing owner's consent are the interbank foreign currency markets and the London Metal Exchange; the utilization of other forward markets requires the consent of the managing owner. 71 DESCRIPTION OF THE TRUST, TRUSTEE, MANAGING OWNER AND AFFILIATES (CHART) The Trust was formed on April 22, 1999 under the Delaware Business Trust Act. The sole trustee of the Trust is Wilmington Trust Company, which delegated its duty and authority for the management of the Trust to the managing owner. 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., an indirect wholly-owned subsidiary of The Prudential Insurance Company of America. Prudential Securities Group Inc., Prudential Securities and the managing owner may each be deemed to be, and the trustee is not deemed to be, a "promoter" of the Trust within the meaning of the Securities Act of 1933. None of the foregoing persons is an "affiliate" (as that term is used for purposes of the Securities Act of 1933) of any of the trading advisors. Prudential Securities Group Inc. 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, Prudential Securities Group Inc., Prudential Securities, the managing owner and the officers and directors of the managing owner follows. 72 The Trustee Wilmington Trust Company, a Delaware banking corporation, is the sole trustee of the Trust. Its principal offices are located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890- 0001. Wilmington Trust Company is not affiliated with Prudential Securities Group Inc., Prudential Securities, the managing owner, or the trading advisors. It has delegated its duty and authority for the management of the business and affairs of the Trust to the managing owner. Wilmington Trust Company will accept service of legal process upon the Trust in the State of Delaware. The managing owner will notify the limited owners of any change of the trustee. Prudential Securities Group Inc. Prudential Securities Group Inc. acts solely as a holding company. Its principal subsidiary is Prudential Securities, the Trust's selling agent, and commodity broker. Prudential Securities Group Inc. is an indirect wholly owned subsidiary of The Prudential Insurance Company of America, a major mutual insurance company. Prudential-Bache Global Markets Inc. Prudential-Bache Global Markets Inc. is a foreign exchange dealer which engages in over-the-counter, spot, forward and foreign exchange transactions with, among others, Prudential Securities. It is an affiliate of Prudential Securities, and it is wholly owned by Prudential Securities Group Inc. 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 under the Commodity Exchange Act as a commodity pool operator since June 1989 and as a commodity trading advisor since November 1990 and is a member of the National Futures Association. The managing owner's main business office is located at One New York Plaza, 13th floor, New York, New York 10292- 2013; phone (212) 778-7866. The most recent statement of financial condition of the managing owner and report of the independent accountants thereon is set forth under "FINANCIAL STATEMENTS -- The Managing Owner." Directors And Officers Of The Managing Owner The current officers and directors of the managing owner, described in alphabetical order, are as follows: Thomas T. Bales, born 1959, is a Vice President of the managing owner. He is also a First Vice President of Futures Administration in the Futures Division for Prudential Securities, and he 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 of 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. Barbara J. Brooks, born 1948, became the Treasurer and Chief Financial Officer of the managing owner in May 1990, at which time she also became the Treasurer and Chief Financial Officer of Seaport Futures Management, Inc. (referred to as Seaport Futures), an affiliate of the managing owner. In 1998, she relinquished her position as Treasurer of the managing owner and Seaport Futures. She is a Senior Vice President of Prudential Securities and is the Vice President-Finance and the Chief Financial Officer of various entities affiliated with Prudential Securities. She has been employed by Prudential Securities since 1983. Ms. Brooks is a certified public accountant. 73 David Buchalter, born 1958, has been the Secretary of both the managing owner and Seaport Futures since October 1996. Mr. Buchalter is a Senior Vice President and is Senior 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 & Co., Inc. 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 position with Seaport Futures since such date. In 1998, Mr. Carlino also assumed the office of Treasurer of the managing owner and Seaport Futures. Mr. Carlino is a First 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 employed by Ernst & Young LLP for six years. Mr. Carlino is a certified public accountant. 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 Futures 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 he is currently a First Vice President of the Futures Division. Eleanor L. Thomas, born 1954, has been President of the managing owner since September 2000 and a Director since April 1999. She has been President and Director of Seaport Futures since April 1999, and has held various positions of increasing responsibility in both Seaport Futures and the managing owner since joining Prudential Securities in 1993. Ms. Thomas is a First Vice President and the Director of the Futures and Hedge Fund Group at Prudential Securities. She is responsible for origination, asset allocation, due diligence, marketing and sales for the group's product offerings. Prior to joining Prudential Securities in March 1993, she was with MC Baldwin Financial Company from June 1990 through February 1993 and Arthur Anderson & Co. from 1986 through May 1990. She graduated from Long Island University with a B.A. in English Literature, and graduated from Baruch College in 1986 with an M.B.A. in Accounting. Ms. Thomas is a certified public accountant. Tamara B. Wright, born 1959, has been a Senior Vice President of the managing owner and Seaport Futures since October 1998 and a Director of the managing owner since December 1998. She is also a Senior Vice President and the Chief Administrative Officer for the International Division at Prudential Securities. In this capacity, her responsibilities include financial management, risk management, systems implementation, employment matters and internal control policies and procedures. Previously, Mrs. Wright served as Director of Consumer Markets Risk Management, where she led the Domestic and International Branch efforts in ensuring the timely resolution of audit, compliance and legal concerns. Prior to joining the firm, Mrs. Wright was a manager with PricewaterhouseCoopers LLP in its Management Consulting division in New York, New York. 74 Description And Past Performance Of Other Pools Sponsored By The Managing Owner And Its Affiliate Following is a description of the various funds sponsored by the managing owner and its affiliate, Seaport Futures. The January 1, 1996 through February 28, 2001 trading record for the various funds is provided in the performance table and the explanatory notes on the following pages. Type of Fund Name of Fund Public commodity funds for which the managing owner is the general partner (or managing owner) and the commodity pool operator: Prudential-Bache Capital Return Futures Fund 2, L.P. (PBCRFF2) Prudential Securities OptiMax Futures Fund 2, L.P. (PBOFF2) [e] Prudential Securities Aggressive Growth Fund, L.P. (PSAGF) [k] Diversified Futures Trust I (DFT) Prudential Securities Strategic Trust (PRUST) [f] World Monitor Trust -- Series A (WMTA) World Monitor Trust -- Series B (WMTB) World Monitor Trust -- Series C (WMTC) Non-public commodity funds for which the managing owner is the general partner (or the managing owner) and the commodity pool operator: Signet Partners II, L.P. (SPLP2) [d] Diversified Futures Trust II (DFTII) Prudential Securities Foreign Financials Fund, L.P. (PSFFF) [g] Offshore investment funds for which the managing owner is investment manager (j): Devonshire Multi-Strategy Fund [h, i] Prudential-Bache International Futures Fund A, PLC (PBIFFA) [h, n] Prudential-Bache International Futures Fund B, PLC (PBIFFB)[h] Prudential-Bache International Futures Fund C, PLC (PBIFFC)[h] Prudential-Bache International Futures Fund D, PLC (PBIFFD)[h] Prudential-Bache International Futures Fund E, PLC (PBIFFE)[h] Prudential-Bache International Futures Fund F, PLC (PBIFFF)[h] Global Equilibrium Fund[h] Public commodity funds for which Seaport Futures is general partner and commodity pool operator: Prudential-Bache Diversified Futures Fund L.P. (PBDFF) Prudential-Bache Capital Return Futures Fund L.P. (PBCRFF) [l] Prudential-Bache Capital Return Futures Fund 3, L.P. (PBCRFF3) [k] Prudential-Bache OptiMax Futures Fund L.P. (PBOFF) [m] 75 CAPSULE D PERFORMANCE OF OTHER POOLS OPERATED BY PRUDENTIAL SECURITIES FUTURES MANAGEMENT INC. AND AFFILIATE [a] (SEE ACCOMPANYING NOTES ON FOLLOWING TWO PAGES)
ANNUAL RATE OF RETURN (COMPUTED ON A COMPOUNDED DAILY BASIS)[j] WORST WORST MONTHLY PEAK TO AGGREGATE CURRENT PERCENT VALLEY TYPE INCEPTION SUB- TOTAL DRAW- DRAW- 2001 NAME OF OF OF CRIPTIONS NAV DOWN DOWN (through POOL POOL TRADING ($ X 1,000) ($ X 1,000) [b] [c] 1996 1997 1998 1999 2000 2/28) PRUDENTIAL- BACHE DIVERSIFIED FUTURES FUND L.P. -9.62% -40.96% (PBDFF) 3,5,6,8,10 10/88 29,747 8,776 10/99 7/99-9/00 24.81% 9.03% 1.96% -18.48% 0.06% -2.80% PRUDENTIAL- BACHE CAPITAL RETURN FUTURES FUND L.P.(1) 1a,3,5, -10.30% -20.27% (PBCRFF) 7,8,10 5/89 137,705 --- 11/98 11/98-4/00 8.58% 7.93% -1.09% -11.13% -6.29% -- PRUDENTIAL- BACHE CAPITAL RETURN FUTURES FUND 2 L.P. 1a,3,5, -8.72% -27.59% (PBCRFF2) 7,8,9 10/89 100,000 13,294 4/98 1/98-9/00 19.10% 11.40% -7.44% -5.14% -2.26% -2.87% PRUDENTIAL- BACHE CAPITAL RETURN FUTURES FUND 3 L.P. [k] 1a,3,5, -11.77% -23.66% (PBCRFF3) 7,8,10 5/90 64,863 --- 4/98 12/96-4/98 16.79% -7.97% -10.29% -1.70% --- -- PRUDENTIAL- BACHE OPTIMAX FUTURES FUND L.P. -OPTIMAX [m] 3,5,7, -7.82% -27.23% (PBOFF) 8,10,11 4/96 69,603 --- 10/99 5/99-6/00 11.68% 17.49% 17.54% -7.16% -17.91% -- PRUDENTIAL- BACHE OPTIMAX FUTURES FUND L.P. - 3,5,7, -2.53% -2.53% A (PBOFF) 10,11 2/91 63,356 --- 2/96 2/96 -0.41% --- --- --- --- -- PRUDENTIAL- BACHE OPTIMAX FUTURES FUND L.P. 3,5,7, -4.74% -20.28% -B (PBOFF) 8,10,11 2/91 6,247 --- 2/96 8/93-3/96 -1.59% --- --- --- --- -- PRUDENTIAL SECURITIES OPTIMAX FUTURES FUND 2, L.P. - OPTIMAX 2[e] 3,5,7, -9.08% -16.58% (PBOFF2) 8,9,12 4/97 17,416 --- 4/98 8/97-5/98 --- -3.67% -9.97% --- --- -- PRUDENTIAL SECURITIES OPTIMAX FUTURES FUND 2, L.P. - A 3,5,7, -4.68% -11.42% (PBOFF2) 9,12 1/92 15,197 --- 12/96 2/96-7/96 3.88% 0.86% --- --- --- -- PRUDENTIAL SECURITIES OPTIMAX FUTURES FUND 2, L.P. - B 3,5,7, -9.27% -20.94% (PBOFF2) 8,9,12 1/92 2,219 --- 2/96 6/95-7/96 5.24% 0.68% --- --- --- -- PRUDENTIAL SECURITIES FOREIGN FINANCIALS FUND L.P. [g] -9.96% -23.59% (PSFFF) 2,4,6,8,9 1/93 4,198 --- 2/99 12/96-5/97 6.65% -1.35% 36.68% -11.00% --- -- PRUDENTIAL SECURITIES AGGRESSIVE GROWTH FUND L.P. [k] 3,5a,7, -7.65% -20.42% (PSAGF) 8,9 8/93 20,335 --- 10/97 10/98-10/99 7.89% -2.31% 13.11% -17.54% --- -- DIVERSIFIED FUTURES TRUST I -9.38% -36.76% (DFT) 3,5a,6,8,9 1/95 65,908 28,508 11/98 7/99-9/00 23.49% 8.82% 4.80% -13.48% 9.87% -2.53% SIGNET PARTNERS II, LP [d] -6.37% -8.41% (SPLP2) 2,4,7,8,9 2/96 1,531 --- 8/97 8/97-1/98 9.70% 6.10% -0.70% --- --- -- PRUDENTIAL SECURITIES STRATEGIC TRUST [f] -15.84% -38.56 (PRUST) 3,5a,6,8,9 5/96 63,403 11,809 4/98 3/99-10/00 3.47% -0.49% 20.25% 3.35% -31.01% -5.06% PRUDENTIAL- BACHE INTERNATIONAL FUTURES FUND A PLC [h, n] -21.94% -46.41% (PBIFA) 2,4,6,9,13 6/96 38,707 --- 2/00 3/99-8/00 12.30% -0.36% 34.14% 3.33% -42.62% -- PRUDENTIAL- BACHE INTERNATIONAL FUTURES FUND C PLC [h] -9.30% -42.57% (PBIFC) 2,4,6,9,13 6/96 35,093 8,031 2/99 1/99-10/00 22.70% -3.59% 35.42% -18.91% -22.86% -6.29% PRUDENTIAL- BACHE INTERNATIONAL FUTURES FUND B PLC [h] -9.13% -46.09% (PBIFB) 2,4,6,9,13 7/96 104,964 34,484 6/00 7/99-9/00 28.50% 13.77% 3.49% -21.61% 9.95% 5.44% PRUDENTIAL- BACHE INTERNATIONAL FUTURES FUND D PLC [h] -10.22% -30.18% (PBIFD) 2,4,7,9,13 10/96 31,164 8,532 2/00 3/99-9/00 -1.10% 14.36% 23.87% -2.00% -14.71% -2.90% PRUDENTIAL- BACHE INTERNATIONAL FUTURES FUND E PLC [h] -9.41% -36.47% (PBIFE) 2,4,6,9,13 1/97 21,843 2,616 8/97 10/98-9/00 --- 2.20% 12.23% -17.26% -10.22% -8.45% PRUDENTIAL- BACHE INTERNATIONAL FUTURES FUND F PLC [h] -9.50% -27.51% (PBIFF) 2,4,6,9,13 9/97 41,850 19,090 10/97 10/98-9/00 --- -4.60% 47.90% -6.38% -2.80% 2.57% DIVERSIFIED FUTURES TRUST II -10.48% -39.93% (DFTII) 2,5,6,8,9 3/97 51,757 12,863 10/99 7/99-9/00 --- 6.26% 6.82% -17.76% 5.14% -1.50% DEVONSHIRE MULTI- STRATEGY FUND [h, i] -3.88% -8.55% (DEVON) 2,4,8,9,14 2/98 13,552 --- 4/98 4/98-8/98 --- --- -7.70% -1.19% --- -- GLOBAL EQUILIBRIUM FUND -8.29% -8.29% [h] (GEF) 2,4,7,8,9,15 12/99 29,451 18,791 1/00 1/00 --- --- --- 3.80% 0.67% -1.24% WORLD MONITOR TRUST - SERIES A -8.41% -38.99% (WMTA) 3,5a,6,8,9 6/98 33,979 9,016 3/00 5/99-9/00 --- --- -1.69% -21.42% -1.93% 2.69% WORLD MONITOR TRUST - SERIES B -7.08% -27.08% (WMTB) 3,4,6,8,9 6/98 29,234 16,872 9/00 10/99-10/00 --- --- 11.98% 8.62% 0.20% -1.34% WORLD MONITOR TRUST - SERIES C -14.56% -40.30% (WMTC) 3,4,6,8,9 6/98 23,214 8,936 2/00 7/99-6/00 --- --- 4.22% -7.91% -2.81% -5.32%
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS 76 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 Following the expiration of the principal-protected feature of the A Units on March 31, 1997, the A & B Units merged into OptiMax 2 Units on April 1, 1997 13 Offshore pool offered to Non-U.S. persons authorized and supervised by the Central Bank of Ireland 14 Offshore fund-of-funds offered to Non-U.S. persons. 15 Offshore fund offered to non-U.S. persons trading in both securities and commodities. [a] All performance is presented as of February 28, 2001 [b] "Worst monthly percent draw-down" means greatest percentage decline in net asset value since January 1, 1996 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 since January 1, 1996. "Draw- down" means losses experienced by the pool over a specified period. [d] Liquidated April 1998 [e] Liquidated May 1998 [f] Name change from Willowbridge Strategic Trust to Prudential Securities Strategic Trust during August 1998 [g] Liquidated March 1999 [h] These are non-U.S. investment funds, which are available only to non-U.S. residents. They are organized as investment companies incorporated in non-U.S. jurisdictions. Eligibility notices under CFTC Rule 4.7 have been filed in connection with these funds. [i] Liquidated May 1999 [j] Rate of return is calculated each day by dividing net performance by beginning equity. The daily returns are then compounded to arrive at the rate of return for the month, which is in turn compounded to arrive at the annual rate of return. [k] Liquidated October 1999 [l] Liquidated April 2000 [m] Liquidated July 2000 [n] Liquidated September 2000 NOTES TO PERFORMANCE TABLE CONTINUED ON FOLLOWING PAGE PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULT 77 Note To Performance Table Continued: Management Fees, Incentive Fees and Brokerage Commissions Name of Fund Management Fee Incentive Fee Brokerage Commission PBDFF 2 (8) 20 (8) 8 (1) PBCRFF 2 (8) 20 (8) 8 PBCRFF2 2-4 15-20 8 (2) PBCRFF3 2 17 7.5 (plus transaction costs) PBOFF 2-3 17-23 8 (plus transaction costs) PBOFF2 2-3 15-20 8 (plus transaction costs) PSFFF 1.9 20 (3) PSAGF 2 15-23 8 (plus transaction costs) DFT 2 (8) 20 (8) 7.75 DFTII 2 (8) 20 (8) 6.75 SPLP2 2.5 20 $10 per round-turn PBIFA 3 20 5.75 (plus transaction costs) PBIFB 2 (8) 20 (8) 5.75 (plus transaction costs) PBIFC 2 20 5.75 (plus transaction costs) PBIFD 2 20 5.75 (plus transaction costs) PBIFE 2 20 5.75 (plus transaction costs) PSIFF 2 25 5.75 (plus transaction costs) PRUST .9756-2(4) 20 7.5 (4) DEVON 1 (5) 3.75 (5) (5) GEF 2 20(6) (7) WMTA 2 23 7.75 WMTB 2 20 7.75 WMTC 2 20(9) 7.75 (1) Decreased from 9% to 8% during August 1998. (2) Decreased from 8.5% to 8% during August 1998. (3) Prior to April 1, 1994, PSFFF was charged on a per transaction basis at the rate of $35 per round-turn. From April 1, 1994 through July 25, 1997, PSFFF was charged a flat annual 8% fee, plus general and administrative costs. From July 26, 1997 until its liquidation, PSFFF was charged a flat annual 8.8% fee. (4) PRUST pays different management fees to each of its trading advisors. One of the advisors was replaced in October, resulting in a decrease from 3% to 2% of the highest management fee paid. The brokerage commission decreased from 7.75% to 7.5% during September 1998. (5) DEVON only invested in other funds. Accordingly, it did not have a direct brokerage commission expense. However, as an investor in other funds, DEVON paid its pro rata share of management and incentive fees and brokerage commissions paid by those funds. The management and incentive fees shown in this chart only represent the fees paid directly to the managing owner and do not reflect DEVON's pro rata portion of the management and incentive fees in the funds in which it invested. (6) Incentive fees applicable only to one of GEF's two advisors. (7) Flat fee equal to 2.25% (plus transaction costs). (8) Management fee decreased from 4% to 2% and incentive fees increased from 15% to 20%, in each case during October 2000. (9) Decreased from 23% to 20% when the trading advisor was replaced during 2000. 78 Prudential Securities Prudential Securities, a Delaware corporation formed in March 1981, is the selling agent and the commodity broker for the Trust. Prudential Securities, in its capacity as selling agent for the Trust, is registered as a broker-dealer with the SEC and is a member of the NASD. It is also registered as a futures commission merchant under the Commodity Exchange Act and is a member of the National Futures Association. Prudential Securities is a clearing member of the Chicago Board of Trade, Chicago Mercantile Exchange, Commodity Exchange, Inc. and all other major U.S. commodity exchanges. Prudential Securities' main business office is located at One Seaport Plaza, New York, New York 10292-2013; telephone (212) 214-1000. Prudential Securities Litigation And Settlements From time to time, Prudential Securities and its principals are involved in 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 has been no administrative, civil or criminal action against Prudential Securities or any of its principals which is material, in light of all the circumstances, to an investor's decision to invest in the Trust. 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: (i) 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; (ii) 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; (iii) 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 October 27, 1994, Prudential Securities and Prudential Securities Group Inc. entered into an agreement with the Office of the U.S. Attorney for the Southern District of New York 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 terms of the agreement were complied with in full, and accordingly, the complaint was dismissed without prejudice in October 1997. 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 allegations that Prudential Securities failed to supervise two former employees and a Branch Office Manager of its Phoenix branch. The allegations included misrepresentation, fraud, unsuitability, 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 as well as investigative fees in the amount of $2,000. Stemming from final settlement agreements and consent orders in a U.S. District Court for the Southern District of Florida, on December 10, 1996, the Department of Labor issued a final order imposing a statutory civil penalty against Prudential Securities in the amount of $61,250. The Department of Labor assessed the above referenced automatic penalty under section 502(l) of the Employee Retirement Income Security Act of 1974, as amended, referred to as ERISA, based upon allegations that Prudential Securities acted as a fiduciary under such Act with respect to the Metacor, Inc. Profit Sharing and Retirement Savings Plan and knowingly facilitated certain transfers of funds out of the Plan's account to a corporate account that Metacor, Inc. maintained in one or more banks. Prudential Securities neither admitted nor denied the Department of Labor's allegations. On May 20, 1997, the CFTC filed a complaint against Prudential Securities, Kevin Marshburn (a former Prudential Securities financial advisor) and two of Marshburn's sales assistants. The complaint alleges, in essence, that during the period from May 1993 through March 1994: (i) Marshburn fraudulently allocated trades among his personal account and certain customer accounts, (ii) Prudential Securities, by failing to have policies and procedures in place to 79 detect and deter the alleged allocation scheme, did not properly supervise Marshburn and (iii) Prudential Securities failed to maintain and produce records with respect to transactions during the period in issue. The complaint seeks several forms of relief against Prudential Securities, including a cease and desist order, suspension or revocation of registration, restitution and civil penalties of up to $100,000 for each alleged violation. Prudential Securities has denied the operative allegations against it and is vigorously defending the action. On December 23, 1998, Prudential Securities was one of twenty-eight market making firms that reached a settlement with the SEC in the matter titled In the Matter of Certain Market Making Activities on NASDAQ. As part of the global settlement of that matter, Prudential Securities, without admitting or denying the factual allegations, agreed to an order which requires that: (i) it cease and desist from committing or causing any violations of Sections 15(c)(1) and (2) of the Securities Exchange Act of 1934 and Rules 15C1-2 and 15C2-7 thereunder, (ii) pay a civil penalty of $1 million and disgorgement of $1,361 and (iii) submit certain policies and procedures to an independent consultant for review. In April 2000, Prudential Securities and nine other national and regional brokerage firms settled SEC civil administrative charges for overcharging municipalities for U.S. Treasury securities sold in connection with advance refundings of municipal bonds during the years 1990 to 1994. In conjunction with the SEC enforcement action, the U.S. Attorney for the Southern District of New York and the Department of the Treasury settled civil charges under the False Claims Act against all ten firms. Prudential Securities agreed to pay $5.88 million ($5.83 million to the Treasury and $55,000 to municipal issuers). These payments also resolved certain tax-related claims of the IRS. 80 DUTIES AND COMMITMENTS OF THE MANAGING OWNER Management Of The Trust The managing owner is responsible for the management of each series' business and affairs but does not (except in certain limited, and essentially emergency, situations) direct the trading activities for any series. This responsibility includes: -Renewing the advisory agreements with the trading advisors, as well as selecting additional and/or substitute trading advisors; provided, however, that in no event will the managing owner retain a commodity trading advisor affiliated with Prudential Securities. -Determining whether to retain or replace the trustee. -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. -Calculating the net asset value of each series and all fees and expenses, if any, to be paid by each series. -Providing suitable facilities and procedures for handling and executing redemptions, exchanges, transfers and distributions (if any) and the orderly liquidation of each series. -Selecting and monitoring the Trust's commodity clearing broker and its foreign exchange counter parties. Retention Of Affiliates The managing owner may retain affiliates to provide certain administrative services necessary to the prudent operation of the Trust and each series so long as the managing owner has made a good faith determination that: -The affiliate that it proposes to engage is qualified to perform such services. -The terms and conditions of the agreement with an affiliate are no less favorable than could be obtained from equally qualified, unaffiliated third parties. -The maximum period covered by any such agreement shall not exceed one year and shall be terminable without penalty upon 60 days' prior written notice by the Trust. The fees of any such affiliates are the responsibility of Prudential Securities or one of its other affiliates. Notification Of Decline In Net Asset Value If the estimated net asset value per interest of your investment in the Trust declines as of the end of any business day to less than 50% of the net asset value per interest of that series as of the end of the immediately preceding valuation point, the managing owner will notify you within seven business days of such decline. The notice will include a description of your voting and redemption rights. Maximum Contract Term The Trust or any series of the Trust is prohibited from entering into any contract with the managing owner or its affiliates which (i) has a term of more than one year and (ii) is not terminable by the Trust without penalty upon 60 days' prior written notice. 81 The managing owner participates in the income and losses of each series in the proportion which its ownership of general interests bears to the total number of interests of a series on the same basis as the limited owners, but the managing owner receives no fees or other remuneration from a series. Managing Owner's Financial Commitments Minimum Purchase Commitment The managing owner contributed funds to each series in order to have a 1% interest in the capital, profits and losses of each series, and in return it received general interests in each series. The managing owner is required to keep its investment in each series at an amount that gives the managing owner at least a 1% interest in the capital, profits and losses of each series so long as it is acting as the managing owner of the Trust. The managing owner may purchase limited interests in any series and thereby become a limited owner. All 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 Commitment The managing owner's net worth is set forth in its statement of financial condition on page 152 and is significantly in excess of the minimum net worth requirements under the NASAA guidelines. The managing owner and Prudential Securities Group, Inc., the company which owns Prudential Securities, 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 any regulatory-required amounts. 82 FIDUCIARY RESPONSIBILITIES Accountability Pursuant to the Delaware Business Trust Act, the trustee delegated to the managing owner responsibility for the management of the business and affairs of the Trust and each series, and it has neither a duty to supervise or monitor the managing owner's performance nor any liability for the acts or omissions of the managing owner. The trustee retains a statutory fiduciary duty to the Trust only for the performance of the express obligations it retains under the trust agreement, which are limited to the making of certain filings under the Delaware Business Trust Act and to the accepting of service of process on behalf of the Trust in the State of Delaware. It owes no other duties to the Trust, to any series or to you. The managing owner is accountable to you as a fiduciary and must exercise good faith and fairness in all dealings affecting the Trust. Under the Delaware Business Trust Act, if either of the trustee or the managing owner has duties to the Trust or to you and liabilities arise relating to those duties, 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 you believe that the managing owner has violated its obligations to you, you may bring a law suit against the managing owner. If a law suit is brought, you may look (i) to recover damages from the managing owner, (ii) to require "accounting" -- the right to specific and/or complete financial information concerning the series and (iii) to seek any other action from or by the managing owner as a court permits. A law suit can be based on various claims, including that the managing owner breached its fiduciary duties, that it violated the federal securities or commodity laws or that it committed fraud. Reparations And Arbitration Proceedings You 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 advisor of that series (a registered commodity trading advisor) under the Commodity Exchange Act and the rules promulgated thereunder, as well as the right to initiate arbitration proceedings in lieu thereof. Basis For Liability You should be aware, however, that certain provisions in the advisory agreements, the brokerage agreement and the trust agreement generally make it more difficult to establish a basis for liability against any trading advisor, Prudential Securities and the managing owner than it would be absent such provisions, including (i) each advisory agreement gives broad discretion to each trading advisor and (ii) each advisory agreement and the trust agreement contain provisions which will result in a trading advisor not being liable for certain conduct and/or another party indemnifying a trading advisor, which means that the other party is required to reimburse a trading advisor for money it has lost as the result of a law suit if the trading advisor is not responsible for the damage caused. Payment of any indemnity to any such person by the Trust or any series of the Trust pursuant to such provisions would reduce the assets of the series affected. The managing owner does not carry insurance covering such potential losses, and the Trust carries no liability insurance covering its potential indemnification exposure. 83 THE OFFERING Interests Sold to Date The initial offering of Series D, Series E and Series F ended on March 13, 2000, April 5, 2000 and March 1, 2000, respectively, when a sufficient number of subscriptions for the series were received and accepted by the managing owner to permit the Trust to commence trading. The total amount of subscriptions for each of Series D, Series E and Series F received through March 31, 2001 was as follows: From Investors From The Managing Owner Series D $8,187,244 $106,008 Series E $6,032,054 $75,000 Series F $9,794,830 $85,296 The Current Offering Period Currently, interests in each series are sold once each week until each series' subscription maximum has been issued, either through sale or exchange. For the purposes of describing the offering of interests during this continuous offering period, the dealing day means the first business day of each week. The valuation point means the close of business on Friday of each week. Each series' interests are sold at a price that equals its net asset value per interest as of the valuation point immediately preceding the dealing day on which a subscription is eligible to become effective. Your subscription agreement (Exhibit D) must be submitted to the managing owner at its principal office at least five business days before a given dealing day, and sufficient funds must be in your Prudential Securities account (or your account at an additional seller) on a timely basis. After the five business day waiting period (two business days if you are a limited owner purchasing additional interests, described below) and the managing owner's approval of a subscription, the net asset value per interest will be determined at the next occurring valuation point, and the subscription price per interest will be finalized. A subscription will become effective on the immediately following dealing day. Because of this waiting period, the purchase price of an interest will not be fixed on the date your subscription application is submitted, and the net asset value of an interest may fluctuate between the date of submission and the valuation date on which your subscription price is finalized. You will be admitted as a limited owner as of the same dealing day on which your subscription becomes effective. A confirmation of an accepted subscription will be sent to you. In the event that funds in your account are insufficient to cover the requested subscription amount, or for any other reason in the managing owner's sole discretion, the managing owner may reject your subscription in whole or in part. Funds from accepted subscriptions will be transferred from your Prudential Securities account (or from your account at an additional seller) and deposited in the applicable series' trading account. Purchases Of Additional Interests In A Series If you are an existing limited owner in a particular series and wish to purchase additional interests in the same series, you must submit a subscription agreement (Exhibit D) at least two business days before any given dealing day, and your subscription for additional interests must be approved by the managing owner. After the two business day waiting period and the managing owner's approval of your subscription for additional interests, the net asset value per interest will be determined at the next occurring valuation point, and the subscription price per interest will be finalized. Your subscription will become effective on the immediately following dealing day. Because of this waiting period, the purchase price of additional interests will not be fixed on the date you submit your subscription, and the net asset value of the interests may fluctuate between the date of your submission and the valuation date on which the subscription price is finalized. 84 Exchange Of Interests You may exchange interests in one series, without charge, for interests of equivalent value of any other series for as long as the interests of the series for which the exchange is being made are offered for sale. You must submit an exchange request (Exhibit C) at least five business days before any given dealing day, and the exchange must be approved by the managing owner. After the five business day waiting period and the managing owner's approval of the exchange request, the net asset value per interest for each applicable series (i.e., the series being exchanged from and the series being exchanged into) will be determined at the next occurring valuation point, and the subscription price per interest will then be finalized. Your exchange will become effective on the immediately following dealing day. Because of the five business day waiting period, the net asset value of the interests being exchanged will not be fixed on the date you submit your exchange request (Exhibit C), and the net asset value of the interests -- of both the series you are exchanging from and the series you are exchanging into -- may fluctuate between the date of your submission and the valuation date on which the net asset value per interest is finalized. An exchange will be treated as a redemption of interests in one series and a simultaneous purchase of interests in another series. Your exchange will be subject to satisfying the conditions governing redemption on the applicable dealing day (see the section entitled "Redemption Of Interests" in this section), as well as the requirement that interests of the series being exchanged into are then being offered for sale. Although an exchange will be treated, in part, as a redemption, you will not be subject to any redemption charges for the exchange. You may, however, realize a taxable gain or loss in connection with any exchange you make. Redemption Of Interests You may redeem all or any portion of your interests (including interests held by your assignees) on the first dealing day to occur at least two business days after the date the managing owner receives your Redemption Request (Exhibit B) in proper order (as noted above, each such dealing day is referred to as a redemption date). Redemptions generally are made at the net asset value per interest determined as of the valuation point immediately preceding the redemption date. Your redemption is subject to changes in net asset value between the date you submit your Redemption Request and the valuation point on which the redemption price is finalized. If you redeem an interest on or before the end of the first and second successive six- month periods after the effective dates of your purchase, you will be subject to a redemption fee of 4% and 3%, respectively, of the net asset value at which the interest is redeemed unless the redemption is (i) part of an exchange for interests in another series offered in the trust or (ii) invested concurrently in another fund sponsored by the managing owner. If at the time of redemption your aggregate interests in all series, when added to your aggregate interests in the various series of World Monitor Trust, another public futures fund sponsored by the managing owner, total at least $5 million, the redemption fee, if applicable, may be waived. See the section in this prospectus entitled "FEES AND EXPENSES -- Charges To Be Paid By Limited Owners -- Redemption Fees" for a more complete explanation of holding period requirements. All redemption fees are paid to the managing owner. If your redemption request is timely and in proper form, it will be honored and the applicable series' commodity positions will be liquidated to the extent necessary to effect your redemption. The managing owner may suspend temporarily redemptions if the effect of any redemption request, either alone or in conjunction with other redemption requests, would be to impair any series' ability to operate in pursuit of its objectives. Your right to obtain redemption also is contingent upon the series' having property sufficient to discharge its liabilities on the date of redemption. Redemption requests may be mailed or otherwise delivered by you to the managing owner. In the event that the estimated net asset value per interest of your series, 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 of that series as of the last valuation point (i.e., Friday of the immediately preceding week), you will be given notice of such event within seven business days of such occurrence, and the notice will include instructions on the redemption of interests. The net asset value per interest upon redemption of your interest on any date also reflects all accrued expenses for which the applicable series 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 is reduced by your interest's pro rata portion of any expenses or losses incurred by the series resulting from your actions, if unrelated to the series' business, as well as your liabilities for certain series taxes, if any, or for liabilities resulting from your violations of the transfer provisions in the trust agreement. You will be notified in writing within ten business days following the redemption 85 date whether or not your interests will be redeemed, unless payment for the redeemed interests is made within that ten-day period, in which case notice is be required or provided. Except as otherwise provided in the trust agreement, in the case of extraordinary circumstances, payment generally will be made within ten business days following the redemption date. You may revoke your intention to redeem before the redemption date by written instruction to the managing owner. The trust agreement provides that the managing owner also has the right mandatorily to redeem, upon ten days' prior notice, interests you hold if (i) the managing owner determines that your continued participation in the Trust might cause the Trust or you to be deemed to be managing "Plan Assets" under ERISA, (ii) there is an unauthorized assignment or transfer pursuant to the trust agreement or (iii) in the event that any transaction would or might violate any law or constitute a prohibited transaction under ERISA or the Internal Revenue 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 Department of Labor (or the managing owner determines not to seek such an exemption). Sale Of Interests The Trust does not, directly or indirectly, pay or award any finder's fees, commissions or other compensation as an inducement to any investment adviser to advise you to purchase interests in a series. Prudential Securities receives no selling commissions or concessions on the sale of interests. Prudential Securities has no present intention, but does reserve the right, to retain certain selected brokers or dealers that are members of the National Association of Securities Dealers, Inc. (sometimes referred to as NASD) (these brokers or dealers are sometimes referred to as additional sellers) and/or certain foreign securities firms, (collectively the domestic additional sellers and the foreign additional sellers are sometimes referred to simply as additional sellers). All sales by Prudential Securities and any additional sellers are made in compliance with Rule 2810 of the NASD Conduct Rules. No interests are sold to any account over which Prudential Securities has discretionary control without the prior written approval of the owner of the account. Except with respect to exchanging interests (as set out above), Prudential Securities will not assist you in connection with the transfer of your interests to any new subscribers. At no additional cost to the Trust, Prudential Securities grants, at the time of a sale, a per- interest sales credit to the Prudential Securities branch office that sells an interest to you (unless you are an employee of Prudential Securities purchasing interests for your IRA). From this sales credit, normally not more than 2% of the net asset value per interest is paid to the employees of Prudential Securities who have sold interests and who hold all the appropriate federal and state securities registrations. Any additional sellers retained by the Trust are paid by Prudential Securities, at no cost to the Trust, at rates that do not generally exceed 2% of the net asset value per interest. Beginning 12 months after the month in which the sale of each interest is effective, Prudential Securities, again at no additional cost to the Trust, compensates its employees who render certain on-going, additional services to limited owners (other than an IRA of an employee of Prudential Securities). Employees eligible for this compensation are those who have sold interests and who are registered under the Commodity Exchange 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 is paid periodically, on an interest-by-interest basis, and do not generally exceed 2% of the net asset value of the applicable series per annum. Prudential Securities will not compensate any individual with whom it no longer associates 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 needs to 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 will need to be registered and qualified in the same manner as Prudential Securities employees. Prudential Securities, as the selling agent for this offering of interests, is an "underwriter" within the meaning of the Securities Act of 1933. Trading advisors are not underwriters, promoters or organizers of the Trust. As disclosed on the previous page under the heading entitled "Redemption Of Interests," if you redeem an interest on or before the end of the first and second successive six-month periods after the effective dates of your 86 purchase, you will be subject to a redemption fee of 4% and 3%, respectively, of the net asset value at which the interest is redeemed, except in certain defined circumstances. See the section in this prospectus entitled "FEES AND EXPENSES -- Charges To Be Paid By Limited Owners -- Redemption Fees" for a more complete explanation of holding period requirements. All redemption fees are paid to the managing owner. The managing owner is not registered as a broker-dealer and is not a member of the NASD. Except as disclosed above, the Trust does not incur, and neither Prudential Securities nor any related persons receives, any compensation in connection with the sale of interests, including, but not limited to, sales commissions, retail salaries, expenses, reimbursements, sales seminars, bonus and sales incentives and bona fide due diligence. Expenses for sales seminars (estimated at $25,000 per series) are incurred, but they are paid for by Prudential Securities. Even if the compensation arrangements were to change, at no time will the maximum compensation paid to underwriters and related persons exceed 10% of the proceeds of this offering, plus 0.5% for bona fide due diligence. In addition, no bonus or sales incentive program is in effect. In the event the Trust or any underwriter determines in the future to implement a bonus or sales incentive program, any such program will be in compliance with Sections 5(E) and or 5(F) of Rules 2810(4)(E) and 4(F) of the NASD Conduct Rules. Moreover, the Trust does not incur any wholesaling fees or expenses in connection this offering. Use of Proceeds All of the proceeds of this offering are received in the name of each series, and are deposited and maintained in cash in separate trading accounts, called segregated trading accounts, for each series at Prudential Securities, unless they are used as margin to maintain a series' forward currency contract positions or a position on a non-U.S. exchange. Except for that portion of any series' assets that is deposited as margin to maintain forward currency contract positions, each series' assets are maintained as either segregated funds or secured accounts, as applicable, in accordance with requirements of the Commodity Exchange Act and the regulations thereunder, which means that assets are maintained either on deposit with Prudential Securities or, for margin purposes, with the various exchanges on which the series are permitted to trade. Assets also may be maintained on deposit in U.S. banks, although there is no present intention to do so. Assets are not maintained in foreign banks. Funds currently are maintained in cash, and that cash is used as margin. On the last day of each month, each series receives interest income on 100% of its average daily equity maintained in cash in the series' account with Prudential Securities during that month at a 13-week (91-day) Treasury bill rate. This rate is determined weekly by Prudential Securities and is the rate awarded to all bidders during that week based on the results of that week's auction of 13-week (91-day) Treasury bills. The weekly interest rate may be found on the Internet at www.publicdebt.treas.gov. While it is anticipated that funds will continue to be maintained in cash, in the event that funds are maintained in Treasury bills instead of cash, the series will receive the interest income paid on such Treasury bills. If you redeem or purchase interests of a series on a day other than the last day of a month, the interest income will be pro rated through the date of purchase or redemption for purposes of determining net asset value. The managing owner does not combine the property of any series with the property of another person, nor does the Trust combine the assets of one series with the assets of any other series. The Trust does not invest in or loan funds to any other person or entity, nor are assets from one series loaned to or given to another series. 87 WHO MAY SUBSCRIBE 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 you based on information you provide regarding your financial situation and investment objective. A purchase of the interests should be made only if your financial condition permits you to bear the risk of a total loss of your investment in the Trust. An investment in the interests should be considered only as a long-term investment. You should not purchase interests with the expectation of tax benefits in the form of losses or deductions. If losses accrue to a series, your 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 you have no capital gains, capital losses can be used only to a very limited extent as a deduction from ordinary income. If you are an IRA or other benefit plan investor, no one associated with the Trust is representing to you that this investment meets any or all of the relevant legal requirements for investments by you or that this investment is appropriate for you. You should consult with your attorney and financial advisors as to the propriety of this investment in light of your circumstances and in light of current tax law. Subscriptions for the purchase of the interests by you are subject to the following conditions: Fundamental Knowledge You should make sure that you understand, among other things, (i) the fundamental risks and possible financial hazards of the investment, (ii) the trading strategies to be followed in the series in which you will invest, (iii) that transferability of the interests is restricted, (iv) that the managing owner manages and controls each series' and the Trust's business operations, (v) the tax consequences of the investment, (vi) the liabilities you will assume, (vii) the redemption and exchange rights that apply to your purchase and (viii) the Trust's structure, including each series' fees. In addition, the managing owner must consent to your subscription, and the managing owner's consent may be withheld in whole or in part for any reason. Ineligible Investors If you are a benefit plan investor, you may not purchase interests in any series if the trustee, the managing owner, Prudential Securities, the trading advisors or any of their respective affiliates (i) is an employer maintaining or contributing to your plan or (ii) has investment discretion over the investment of the assets of your plan. An investment in any series of the Trust is not suitable for charitable remainder annuity trusts or charitable remainder unit trusts. 88 Net Worth, Income And Liquidity Requirements The following requirements may be higher under the securities laws of the state of your residency. The requirements of each state are set forth in the subscription agreement (Exhibit D) under the caption "State Suitability Requirements." The managing owner also may impose greater requirements on you if you propose to purchase more than the minimum number of interests in a series. Subscriber Category Requirements Individual, joint tenant Have a net worth (exclusive of home, or entities (such as home furnishings and automobiles) of at corporations or trusts) least $150,000 must: OR Have a net worth (similarly calculated) of $45,000 and an annual gross income of $45,000 AND Invest no more than 10% of Subscriber's liquid net worth in all series combined Beneficiaries of IRAs or Have a net worth (exclusive of home, Keogh plans covering no home furnishings and automobiles) of at common law employees least $150,000 must: OR Have a net worth (similarly calculated) of at least $45,000 and an annual gross income of at least $45,000 AND Have an aggregate investment in any series or in all series combined that does not exceed 10% of its assets Group retirement plans Have net assets of at least $150,000 (for example, qualified pension, profit sharing AND plans, stock bonus plans, welfare benefit plans, Have an aggregate investment in any such as group insurance series or in all series combined that plans, or other fringe does not exceed 10% of its assets benefit plans and government plans) must: The fiduciary of a retirement plan should consider, among other things, whether the investment is prudent, considering the nature of the Trust and the Trust's series. Employee Benefit Plan Considerations If you are a fiduciary of an "employee benefit plan" as defined in and subject to ERISA or of a "plan" as defined in of the Internal Revenue Code and you have investment discretion, you should consider the following consequences under ERISA and the Internal Revenue Code before deciding to invest the plan's assets in any series of the Trust. You must give appropriate consideration to the facts and circumstances that are relevant to an investment in a series of the Trust, including the role that an investment in a series of the Trust plays or would play in the plan's overall investment portfolio. You must also give appropriate consideration to the potential return on the proposed investment and the effect on that return if any portion of a series' income constitutes "unrelated business taxable income." In addition, before deciding to invest in the Trust, you must be satisfied that such investment is prudent for the plan, that the investments of the plan, including in a series of the Trust, are diversified so as to minimize the risk of large losses and that an investment in a series of the Trust complies with the terms of the plan and related trust. 89 You should understand that the acceptance of a subscription by the managing owner from your plan does not constitute a representation or judgment by the managing owner that an investment in any series of the Trust is an appropriate investment for that entity or that such an investment meets the legal requirements applicable to that entity. The Trust Should Not Be Deemed To Hold "Plan Assets" A regulation issued under ERISA (referred to as the ERISA regulation) contains rules for determining when an investment by a plan in a series of the Trust will result in the underlying assets of such series being assets of the plan for purposes of ERISA and the Internal Revenue Code (i.e., "plan assets"). Those rules provide in pertinent part that underlying assets of the series will not be plan assets of a plan which purchases an interest in the series if the interest purchased is a "publicly-offered security" (this is referred to as the publicly-offered security exception). If the underlying assets of a series of the Trust are considered to be assets of any plan for purposes of ERISA or the Internal Revenue Code, the operations of such series would be subject to and, in some cases, limited by, the provisions of ERISA and the Internal Revenue Code. The publicly-offered security exception applies if the interest to be purchased by a plan is an equity security that is: -"Freely transferable" (determined based on the applicable facts and circumstances). -Part of a class of securities that is owned by 100 or more investors independent of the issuer and of each other. -Either (i) part of a class of securities registered under the Securities Exchange Act of 1934 or (ii) sold to the plan as part of a public offering pursuant to an effective registration statement under the Securities Act of 1933 and the class of which such security is a part is registered under the Securities Exchange Act of 1934. It appears that all of the conditions described above are satisfied with respect to the interests and, therefore, the interests should constitute publicly- offered securities and the underlying assets of the series in the Trusts should not be considered to constitute assets of any plan which purchases interests in the series. In general, interests may not be purchased with the assets of your plan if Prudential Securities, any of its respective affiliates or any of their respective employees either: -Has investment discretion with respect to the investment of your plan's assets. -Has authority or responsibility to give or regularly gives investment advice with respect to your plan's 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 your plan's assets and that such advice will be based on the particular investment needs of your plan. -Is an employer maintaining or contributing to your plan. Neither Prudential Securities nor the trading advisor makes any representation that this investment meets the relevant legal requirements with respect to investments by your plan or that this investment is appropriate for your plan. The person with investment discretion for your plan should obtain appropriate legal and financial advice as to the propriety of an investment in the Trust in light of the circumstances of your plan. 90 HOW TO SUBSCRIBE FOR, EXCHANGE AND REDEEM INTERESTS To Subscribe For Interests, You Must: -Have an account at Prudential Securities (or an additional selling agent). -Complete a subscription agreement (Exhibit D) if you are a new or existing subscriber to the series being purchased. -Have cash in your Prudential Securities account (or account with an additional selling agent) to cover the entire subscription amount. -Send the subscription agreement to a Prudential Securities financial advisor (or an additional selling agent) in a timely manner. -Meet established suitability standards. -Subscribe for at least the subscription minimums. Minimum Purchases Minimum Initial Purchase $5,000 or $2,000 (for IRA accounts only) in one or more series Minimum Per Series $1,000 for any series Minimum Additional Purchase for existing limited owners $100 per series Special Purchases If you purchase an aggregate of at least $5 million of interests in one or more series, you may receive a discount on the purchase price. If you receive a discount on the purchase price of your interests, a dollar amount equal to the discount you receive will be paid to the Trust at the time of the sale by Prudential Securities and deducted from the compensation payable to the Prudential Securities employee responsible for the sale. You should consult with your tax advisors concerning the tax consequences to you of receiving a discount. In addition to, or instead of, the discount, if you redeem during the first twelve months following the effective date of your purchase, all or a portion of the redemption fees may be waived if, at the time of a redemption, your aggregate interests in all series, when added to your aggregate interests in the various series of World Monitor Trust, another public futures fund sponsored by the managing owner, total at least $5 million. For this purpose, the effective date of your purchase will be the applicable dealing day for the interests being redeemed. 91 Subscription Categories - Individual or joint tenant Individual accounts are owned by one person. Joint accounts can have two or more owners. -Gifts or transfers to a minor An individual can gift up to $10,000 per year per person without paying federal gift tax. Depending on state law, you can establish a custodial account under the Uniform Gift to Minors Act or the Uniform Transfers to Minors Act. -Trust The subscribing trust must be established before an account can be opened. -Business or other organization Corporations, partnerships, limited liability companies or partnerships, associations or other groups. -Benefit Plans Individual Retirement Funds, Non-ERISA Plans or ERISA Plans. When A Subscription Becomes Final -New subscribersto a series Your subscription is not final or binding until at least five business days after the date you submit your subscription agreement. You may revoke a subscription only within five business days after you submit a subscription agreement. Thereafter, all subscriptions are irrevocable. -Existing limited owners in a series purchasing additional interests in that same series Your subscription is not final or binding until at least two business days after the date you submit your subscription agreement (Exhibit D). You may revoke a subscription only within two business days after you submit a subscription agreement. Thereafter, all subscriptions are irrevocable. The managing owner may, at its discretion, reject any subscription in whole or in part. If your subscription is rejected by the managing owner, in whole or in part, for any reason, or if you determine to revoke your subscription within five business days, the subscription funds, or the applicable portion thereof, will be promptly returned to you, along with any interest earned thereon. If your subscription is accepted, you will receive written confirmation of acceptance into the applicable series of the Trust. 92 To Exchange Interests You Must: - Complete an exchange request (Exhibit C) if you are exchanging interests in one series for interests of one or more other series. - Send the exchange request to a Prudential Securities financial advisor (or an additional seller). When An Exchange Becomes Final -Existing limited owners exchanging interests in one series for interests in another series currently owned Your exchange is effective on the dealing date that occurs at least two business days after the date you submit your exchange request. -Existing limited owners exchanging interests in one series for interests in another series not currently owned. Your exchange is effective on the dealing date that occurs at least five days after the date you submit your exchange request. To Redeem Interests You Must: -Complete a redemption request (Exhibit B). -Submit the redemption request to a Prudential Securities financial advisor in a timely manner. When An Redemption Becomes Final -Existing limited owners redeeming their currently owned interests Your redemption is effective on the dealing date that occurs at least two business days after the date you submit your redemption request. 93 FEES AND EXPENSES Charges To Be Paid By The Trust Brokerage Fee To Prudential Securities For commodity brokerage and other administrative services, each series pays Prudential Securities a fixed brokerage fee and actual transaction costs, such as execution charges, exchange fees, National Futures Association fees, and other pit brokerage charges ("transaction costs"). The brokerage fee is determined at the close of business each Friday, and the sum of the amounts determined weekly are paid monthly. The brokerage fee equals, on an annual basis, 6% of each series' net asset value. Each series pays all transaction costs and give-up charges, as well as the National Futures Association fees, the exchange fees and the clearing fees incurred in connection with each series' futures trading activities. These costs equal the following percentages of each series' net asset value: -Series D: 1.13% per annum -Series E: 0.81% per annum -Series F: 0.50% per annum No material change related to the brokerage fee will be made except upon 20 business days' prior notice to limited owners, and no increase in the brokerage fees will take effect except at the beginning of a month. In no event will the brokerage fee paid by a series exceed any limitations imposed by the NASAA guidelines or be increased without the approval of at least a majority in interest (over 50%) of the limited owners of the affected series. The brokerage fee per round turn transaction varies with the volume and frequency of trading for a series. The fixed brokerage fee paid to Prudential Securities plus trading transaction costs discussed above is equates to the following historical and projected round-turn amounts: Actual for 2000 Expected average going forward Series D: $66 $28 Series E: $56 $38 Series F: $87 $72 From its fixed brokerage fee, Prudential Securities is responsible for the payment of the following: Trailing Compensation To Prudential Securities Employees Out of the 6% brokerage fee paid to Prudential Securities, Prudential Securities employees who hold all appropriate federal and state securities registrations are eligible for compensation of up to 2% of the net asset value per interest upon the sale of an interest. Beginning 12 months after the month in which the sale of an interest is effective, Prudential Securities employees who hold appropriate federal and state registrations and who provide on-going services to limited owners are eligible for compensation of up to 2% of the net asset value of an interest. This compensation is paid by Prudential Securities and is at no additional cost to the Trust. Forward Transactions Through Prudential-Bache Global Markets Inc. Any series, acting through its trading advisor, may execute over-the-counter, spot, forward and option foreign exchange transactions with Prudential Securities. Prudential Securities engages in back-to- back trading with an affiliate, Prudential Bache Global Markets, which attempts to earn a profit on such transactions. Prudential Bache Global Markets keeps its prices on foreign currency competitive with other interbank currency trading desks. All over-the-counter currency transactions are conducted between Prudential Securities and each series pursuant to a line of credit. Prudential Securities may require that collateral be posted against the current market value of any position of any series. 94 Management And Incentive Fees To The Trading Advisors Under the terms of the advisory agreements among the Trust, the managing owner and each trading advisor, each trading advisor receives an incentive fee (if it achieves new high net trading profits) and a management fee, in each instance based on the applicable series' net asset value. In no event do the management and incentive fees paid to the trading advisors exceed any limitations imposed by the NASAA guidelines. Management Fee The series pay their trading advisors a management fee at the annual rate of the series' net asset value as follows: - Series D -- 1.25% - Series E -- 2% - Series F -- 2% For each series, the management fees are determined at the close of business each Friday, and the sum of the amounts determined weekly is paid monthly. The amounts determined weekly reflect profits and losses from trading activities. The management fees are not reduced on account of any (i) distributions, redemptions or reallocations made as of the last Friday of a week, (ii) accrued management fees being calculated, (iii) accrued but unpaid incentive fees for the current quarter or (iv) accrued but unpaid extraordinary expenses made as of the end of any week for which the calculation is being made. Incentive Fee Each series pays its trading advisor an incentive fee equal to 22% on any new high net trading profits generated by it on that series' net asset value, including realized and unrealized gains and losses thereon as of the last Friday of each calendar quarter (these Fridays are referred to as the incentive measurement dates). The incentive fee is accrued weekly but paid quarterly. Basic Computation. New high net trading profits (for purposes of calculating the advisor's incentive fee only) are computed as of the incentive measurement date and include such profits (as outlined below) since the incentive measurement date of the most recent preceding quarter for which an incentive fee was earned (or, with respect to the first incentive fee, as of the commencement of operations) (this period is referred to as the incentive measurement period). New high net trading profits for any incentive measurement period are the net profits, if any, from a series' trading during such period (including (i) realized trading profit (loss) plus or minus (ii) the change in unrealized trading profit (loss) on open positions) and are calculated after the determination of a series' fixed brokerage fee, transaction charges, operating expenses for which the series is responsible and the advisor's management fee, but before deduction of any incentive fees payable during the incentive measurement period. New high net trading profits do not include interest earned or credited on a series assets and are reduced to reflect extraordinary expenses (e.g., litigation, costs or damages) paid during an incentive measurement period. Losses Must be Recouped. New high net trading profits are generated only to the extent that a trading advisor's cumulative new high net trading profits exceed the highest level of cumulative new high net trading profits achieved by the advisor as of a previous incentive measurement date. Except as set forth in the next sentence, any net losses from prior quarters must be recouped before new high net trading profits can again be generated. Losses, if any, associated with assets allocated away from an advisor through redemptions, reallocation or deleveraging, if applicable, by the Trust or the managing owner during the incentive measurement period and prior to the incentive measurement date do not have to be recouped. Effect Of Redemptions, Distributions and Capital Contributions. If a redemption occurs at any date that is not an incentive measurement date, the date of the redemption is treated as if it were an incentive measurement date, and any incentive fee accrued in respect of the withdrawn assets on such date is paid to the advisor at the next scheduled incentive measurement date. New high net trading profits for an 95 incentive measurement period is adjusted to exclude capital contributions to a series in an incentive measurement period, as well as distributions or redemptions payable by a series during an incentive measurement period. Prior Incentive Fees Paid. In calculating new high net trading profits, incentive fees paid for a previous incentive measurement period do not reduce cumulative new high net trading profits in subsequent periods. A trading advisor does not have to earn back any incentive fees previously paid to it before it can generate additional new high net trading profits. Once paid, all incentive fees paid to a trading advisor are retained by it despite any subsequent losses which are incurred. Timing of Payment Management and incentive fees are paid within 15 business days following the end of the period for which they are payable. 96 Example Of Incentive Fee Following is a simple numerical example with respect to the net asset value of the interests. This example illustrates how the quarterly incentive fee is calculated. A. Assumptions (1) A series commences trading activities at the beginning of a quarter with $10 million in interests and the trading advisor is allocated 100% of that amount. (2) No redemptions are made during the quarter. B. Quarterly Data (1) Beginning NAV $10,000,000 (2) Gross Realized & Unrealized Trading Profit (Loss) 1,200,000 ($600,000 realized and $600,000 unrealized) (3) Interest Income 125,000 (Assumes Annual Interest of 5.00%) (4) NAV Subtotal 11,325,000 (5) Fees for Brokerage Services, Transaction Fees and Routine Operating Expenses (235,277) (Brokerage Fee of 6% annually, Transaction Fees of 0.81% annually (e.g., for Series E) and Routine Operating Costs of 1.50% annually) (6) Advisory Management Fee (56,625) (Less the Management Fee: 2% Annually = 0.5% quarterly (e.g., for Series E)) (7) Ending NAV $11,033,098 (Item (4) less Items (5) and (6), before computation of advisory incentive fee) (8) Interest Income Adjustment (125,000) (9) NAV on which Incentive Fee is computed $10,908,098 (10) Net Trading Profit (Loss) $908,098 (Item (9) minus Item (1)) C. Incentive Fee Calculation $908,098 [Item (10)] X 22% = $199,782 If in the next quarter, the trading advisor were to experience 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). For example, if the net trading losses equal $500,000 (and assuming no subsequent redemptions), the trading advisor must achieve net trading profits in excess of $500,000 and then would be paid an incentive fee only on the excess -- that is, only on the new high net trading profits over $500,000. 97 Routine Operating Expenses. All of the Trust's routine operating expenses including, without limitation, legal, auditing, accounting, cash management, computer services, printing, mailing and duplication costs for each series, are paid by each series and may include payments to affiliated service providers at competitive (or below market) rates. These operating expenses are expected to be approximately $125,000 to $150,000 per series per year, but in no event is series be responsible to pay more than 1.50% of that series' net asset value each year. As the number of investors in a series increases, expenses of that series increase as well; however, as asset levels increase, costs as a percentage of the series assets are expected to decrease. 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 is responsible for such expenses. Charges 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: Organization And Offering Expenses Expenses incurred in connection with the organization of the Trust and the initial offering of interests in each series were approximately $250,000 per series. Ongoing offering expenses are estimated to be approximately $75,000 per series each year. Routine Operating Expenses If at any time the actual routine operating expenses exceed 1.50% of a series' net asset value (or if such expenses, excluding legal and audit charges, exceed 0.5% of Series E's or Series F's, and 1.25% of Series D's, net asset value), Prudential Securities or its affiliates pays such excess. For example if a series' net asset value is $8.5 million, then the maximum amount which that series will pay is $127,500 for that year. Prudential Securities or its affiliates will pay the difference between the $127,500 and actual expenses incurred. Based on the estimated expenses, Prudential Securities or its affiliates would pay between $0 and $22,500 for that series. Charges To Be Paid By Limited Owners Redemption Fees If you redeem an interest during the first 12 months following the effective date of its purchase you will be subject to the following redemption fees: (i) interests redeemed on or before the end of the first six months after their effective date are charged a redemption fee of 4% of the net asset value at which they are redeemed and (ii) interests redeemed after six months, but on or before the end of 12 months after their effective date are charged a redemption fee of 3% of the net asset value at which they are redeemed. These redemption fees are paid to the managing owner. Redemption fees will be waived if you exchange your interests for interests in another series or if your redemption proceeds are used to purchase interests in another fund sponsored by the managing owner. Redemption fees may be waived if your aggregate interests in all series, when added to your aggregate interests in the various series of World Monitor Trust, another futures fund sponsored by the managing owner, total at least $5 million. If you acquire your interests at more than one closing date and continue to hold them or an equivalent number of interests in other funds sponsored by the managing owner, each interest will be treated on a "first-in, first-out" basis for redemption purposes (i.e., determining the amount of any applicable redemption charge). In addition, if you redeem interests on or before the end of the 12th month from the effective date of purchase and you simultaneously purchase interests in the various series of World Monitor Trust, then, solely for the purpose of assessing any applicable redemption fees, the effective date of your initial purchase will carry over to your subsequent purchase. For example, assume you purchase an interest on January 1, 2001 and on June 30, 2001 you redeem that interest and simultaneously purchase interests in one or more of the various series of World Monitor Trust; assume further that you redeem those interests on February 1, 2002; since the effective date of your initial purchase carries forward for purposes of assessing any redemption fees, you will be deemed to have held the World 98 Monitor Trust interests for a period of 13 months, and you will not be charged any redemption fees. Redemption fees do not reduce net asset value or new high net trading profit for any purpose and only affect the amount you will receive upon your redemption of an interest. Projected Twelve-Month Break-Even Analysis Projected twelve-month break-even analyses for each series, taking into account all fees and expenses enumerated above (other than incentive fees and extraordinary expenses, which are impossible to predict), plus interest income, are set forth at page 15 and are expressed as a dollar amount and as a percentage of a minimum $5,000 initial subscription. 99 SUMMARY OF AGREEMENTS Advisory Agreements There is an advisory agreement among the Trust, the managing owner and each series' trading advisor by which the managing owner delegated to each trading advisor sole trading responsibility for a series. All trading is subject to the Trust's trading limitations and policies. Each trading advisor has been allocated 100% of the proceeds from the offering of interests for the series for which it has trading responsibility. The advisory agreements are not exclusive and, except for the initial term, are effective for one year terms, with the first term ending 15 months after trading commenced. They are renewable thereafter automatically for additional one-year terms unless terminated. After the end of the first term, each trading advisor has the right to terminate its respective advisory agreement upon 90 days' prior written notice. During subsequent terms, each trading advisor has the right, upon prior written notice, to terminate its respective advisory agreement as of the end of the then-current term. Each advisory agreement will terminate automatically (i) in the event that the series it manages is terminated or (ii) if, as of the end of any business day, the series' net asset value declines by 40% from the series' net asset value as of beginning of the first day of that calendar year, after appropriate adjustment for distributions, redemptions, reallocations and additional allocations. Each advisory agreement also may be terminated at the discretion of the managing owner at any time upon 30 days' prior written notice to a trading advisor, or for cause on less than 30 days' prior written notice, in the event that: (i) the managing owner determines in good faith that the trading advisor is unable to use its agreed upon trading approach to any material extent; (ii) the trading advisor's registration as a commodity trading advisor under the Commodity Exchange Act or membership as a commodity trading advisor with the National Futures Association is revoked, suspended, terminated or not renewed; (iii) the managing owner determines in good faith that the trading advisor has failed to conform and, after receipt of written notice, continues to fail to conform in any material respect, to (a) the trading limitations and policies or (b) the trading advisor's trading approach; (iv) there is an unauthorized assignment of the advisory agreement by the trading advisor; (v) the trading advisor dissolves, merges or consolidates with another entity or sells a substantial portion of its assets, any portion of its trading approach utilized by a series or its business goodwill, in each instance without the consent of the managing owner; (vi) the trading advisor becomes bankrupt or insolvent; or (vii) for any other reason if the managing owner determines in good faith that the termination is essential for the protection of the assets of a series, including, without limitation, a good faith determination by the managing owner that such trading advisor has breached a material obligation to the Trust under the advisory agreement. Each trading advisor also has the right to terminate its advisory agreement in its discretion at any time for cause on appropriate notice in the event: (i) of the receipt by the trading advisor of an opinion of counsel satisfactory to the trading advisor and the Trust that by reason of the trading advisor's activities with respect to the Trust, the trading advisor is required to register as an investment adviser under the Investment Advisers Act of 1940 and it is not so registered; (ii) that the registration of the managing owner as a commodity pool operator under the Commodity Exchange Act or membership as a commodity pool operator with the National Futures Association is revoked, suspended, terminated or not renewed; (iii) that the managing owner imposes additional trading limitation(s) which the trading advisor does not agree to follow in its trading of a series' assets or the managing owner overrides trading instructions; (iv) that the assets allocated to the trading advisor decrease, for any reason, to less than $4 million for each of Series D, Series E and Series F; (v) the managing owner elects to have the trading advisor use a different trading approach and the trading advisor 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 consent shall not unreasonably be withheld). It is anticipated that all three of the trading advisors will accept additional capital to trade for other clients. The managing owner does not anticipate that this will have a negative effect on any trading advisor's ability to implement its strategy. In the event that the acceptance of additional capital is anticipated to have or does have such negative affect, the managing owner has authority to replace the advisor. Each trading advisor will, upon reasonable request, permit the managing owner to review its personal trading records for the purpose of confirming that the Trust has been treated equitably with respect to advice rendered by the trading advisor to other accounts managed by the trading advisor. 100 None of the trading advisors nor their employees or affiliates will be liable to the managing owner, its employees or its affiliates, except by reason of acts or omissions in material breach of the advisory agreement 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, or not opposed to, the best interests of the Trust. Each of the trading advisors and their employees and affiliates will be indemnified by the managing owner against any losses, judgments, liabilities, expenses (including, without limitation, reasonable attorneys' fees) and amounts paid in settlement of any claims (collectively referred to as losses) sustained by any one of the trading advisors in connection with any acts or omissions of the trading advisors relating to their management of a series 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 advisor; (ii) the trading advisor and its officers, directors, shareholders and employees and each person controlling the trading advisor 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 series; and (iii) any such indemnification will only be recoverable from the assets of the series and the managing owner and not from the assets of any other series. Each trading advisor also represented to the managing owner that there would be no material interruption in their provision of advisory services due to the advent of the Year 2000 Problem. The managing owner has similarly represented to each trading advisor that there would be no material interruption in carrying out its obligations under the advisory agreements due to the advent of the Year 2000 Problem. The Year 2000 Problem was a potential computer calculation problem caused by software that processes years as only two digits, rather than four. A computer program that has time-sensitive software may recognize a date ending in "00" as the year 1900 rather than 2000, resulting in miscalculations and interruptions of service. Brokerage Agreement Prudential Securities and the Trust have entered into a brokerage agreement. As a result, Prudential Securities (i) acts as the Trust's executing and clearing broker, (ii) acts as custodian of the Trust's assets, (iii) assists with foreign currency, (iv) assists the managing owner in the performance of its administrative functions for the Trust and (v) performs such other services for the Trust as the managing owner may from time to time request. As executing and clearing broker for each of the Trust's series, Prudential Securities receives each trading advisor's orders for trades. Prudential-Bache Global Markets Inc., an affiliate of Prudential Securities, assists with each series' foreign currency forward transactions. Generally, when the trading advisor 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 affiliate, Prudential- Bache Global Markets Inc., in order to carry out the trading advisor's instructions. In back-to-back currency transactions, Prudential Securities, as principal, arranges bank lines of credit and contracts with Prudential-Bache Global Markets Inc. 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. Confirmations of all executed trades for each series are given to the Trust by Prudential Securities. The brokerage agreement incorporates Prudential Securities' standard customer agreement and related documents, which include provisions that: (i) all funds, commodities and open or cash positions carried for each series are held as security for that series' 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. 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 each series 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 each series of the Trust. 101 Administrative functions provided by Prudential Securities for each series include, but are 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 in a series. -Keeping limited owners apprised of developments affecting the series in which they are invested. -Communicating valuations of 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 U.S. and abroad. -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 financial advisors who are registered under the Commodity Exchange Act and who satisfy all applicable proficiency requirements (i.e., have passed the Series 3 or Series 31 examinations or are exempt therefrom) and who have all of the appropriate federal and state securities registrations. The brokerage agreement is exclusive and runs for successive one-year terms renewed automatically each year unless terminated. The brokerage agreement is terminable by a series (including by a vote of a majority-in-interest of the interest-holders of that series) or by Prudential Securities without penalty upon 60 days' prior written notice. Prudential Securities and its stockholder, directors, officers and employees will not be liable to the Trust or to you for errors in judgment or other acts or omissions except by reason of acts of or omissions due to misconduct or negligence or for not having acted in good faith in the reasonable belief that its actions were in the best interests of the Trust, or by reason of any material breach of the brokerage agreement. Prudential Securities represented to the Trust that there would be no material interruption in their provision of brokerage services due to the advent of the Year 2000 Problem. 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 key features of the trust agreement which are not discussed elsewhere in the prospectus are outlined below, but you should refer to the complete trust agreement for details of all of its terms and conditions. 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 is permitted to resign upon 60 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 is compensated by the managing owner or its affiliates, and the trustee will be indemnified by the managing owner against any expenses (as defined in the trust agreement) it incurs relating to or arising out of 102 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 the assets of the trustee are not 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 trust agreement, the trustee 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, and the trustee has no 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 Internal Revenue Code. The limited owners have no voice in the operations of the Trust, other than certain limited voting rights which are set forth in the trust agreement. 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 limited owners having interests representing at least a majority of the net asset value of each series have notified the managing owner that the managing owner 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. Notice Of Material Changes The managing owner is obligated to notify you within seven days from the date of any material change (i) in the series' advisory agreement, (ii) in the calculation of the incentive fee paid to the series' trading advisor and (iii) which affects the compensation of any party compensated by the series. Transfer Of Interests Your assignee may become a substituted limited owner only upon consent of the managing owner, which consent may be withheld by the managing owner only (i) if the proposed assignee does not meet the established suitability requirements, or (ii) to avoid adverse legal consequences to any series in the Trust. A permitted assignee who does not become a substituted limited owner will be entitled to receive your share of the profits or the return of capital to which you would otherwise be entitled, but will not be entitled to vote, to receive any information, on or an account of, the series' transactions or to inspect the books of the series. Under the agreement, as an assigning limited owner you will not be released from any liability you may have to the Trust for any amounts for which you may be liable under the trust agreement whether or not the assignee to whom you have assigned interests becomes a substituted limited owner. You also will be responsible for all costs relating to the assignment or transfer of your interests. Subject to compliance with suitability standards imposed by the Trust, applicable federal securities laws, state "blue sky" laws and the rules of other governmental authorities, your interests may be assigned by you upon notice to the managing owner on a form acceptable to the managing owner. The managing owner shall refuse to recognize an assignment if necessary, in its judgment, to maintain the treatment of any series as a partnership for U.S. federal income tax purposes or to preserve the characterization or treatment of series income or loss and upon receipt of an opinion of counsel supporting its conclusion. Notwithstanding the foregoing, and except for certain situations set forth in the trust agreement, no assignment may be made by you if such assignment would result in: -A contravention of the NASAA guidelines, as adopted in any state where the proposed assignor and assignee reside. -The aggregate total of interests transferred in a twelve-month period equaling 49% or more of the outstanding interests (taking into account applicable attribution rules and excluding transfers by gift, bequest, or inheritance); the trust 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. 103 Assignments by you to (i) your ancestors or descendants, (ii) your personal representative or heir, if you are deceased, (iii) the trustee of a trust for which you are a beneficiary or another person to whom a transfer could otherwise be made or (iv) the shareholders, partners or beneficiaries of a corporation, partnership, limited liability company or trust upon its termination or liquidation will be effective as of the dealing day immediately following the week in which the managing owner receives your written instrument of assignment. Assignments or transfers of interests by you to any other person will be effective on the dealing day of the next succeeding week, provided the managing owner shall have been in receipt of your written instrument of assignment for at least five business days. Termination The Trust or, as the case may be, any series, will dissolve upon the occurrence of any of the following events: -The filing of a certificate of dissolution or the revocation of the managing owner's charter (and the expiration of 90 days after the date of notice to the managing owner of revocation without a reinstatement of its charter) or the withdrawal, removal, adjudication of bankruptcy or insolvency of the managing owner (each of the foregoing is referred to as 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 series or (ii) within 90 days of an event of withdrawal, all the remaining interest-holders in each series 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 series are dissolved, limited owners of each series holding interests representing at least a majority (over 50%) of the net asset value of the series (without regard for interests held by the managing owner or its affiliates) may elect to continue the business of the Trust and each series by forming a new business trust (referred to as the reconstituted trust) on the same terms and provisions set forth in the trust 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. -The occurrence of any event that makes the continued existence of the Trust or any series in the Trust unlawful. -The suspension, revocation or termination of the managing owner's registration as a commodity pool operator under the Commodity Exchange Act or membership as a commodity pool operator with the National Futures Association, unless at the time there is at least one remaining managing owner whose registration or membership has not been suspended, revoked or terminated. -The Trust or any series becomes insolvent or bankrupt. -The limited owners of each series holding interests representing at least a majority (over 50%) of the net asset value of the series (excluding interests held by the managing owner or an affiliate) vote to dissolve the Trust with 90 days' prior written notice to the managing owner. -The limited owners of a series holding interests representing at least a majority (over 50%) of the net asset value of that series (excluding interests held by the managing owner or an affiliate) vote to dissolve that series with 90 days' prior written notice to the managing owner. -The decline of the net asset value of a series by 50% from the net asset value of the series (i) as of the commencement of the series' 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. 104 A series may also be dissolved, in the discretion of the managing owner, upon the determination of the managing owner that the series' aggregate net asset value in relation to the operating expenses of the series makes it unreasonable or imprudent to continue the business of the series. The managing owner is not required to, and should not be expected to, obtain an opinion of legal counsel or of any other third party prior to determining to dissolve any series in the Trust. Upon dissolution of a series, its affairs shall be wound up, its liabilities discharged, and its remaining assets distributed pro rata to the interest-holders. To the extent the series 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. If all series are terminated, the Trust will terminate. The trust agreement provides that your death, legal disability, bankruptcy or withdrawal will not terminate or dissolve the series (unless you happen to be the sole limited owner of the series) and that your legal representative will have no right to withdraw or value your interest except by redemption of interests pursuant to the trust agreement. Reports And Accounting The Trust maintains its books on the accrual basis in accordance with generally accepted accounting principles. The financial statements of each series in the Trust are audited at least annually in accordance with generally accepted auditing standards by independent accountants designated by the managing owner in its sole discretion. As a limited owner, you will be furnished with unaudited monthly and audited annual reports containing such information as the CFTC and National Futures Association requires. The CFTC requires that an annual report be provided to you not later than 90 days after the end of each fiscal year or the permanent cessation of the Trust's trading as defined in the Commodity Exchange Act, whichever is earlier, and the annual report must set forth, among other matters: -The net asset value of the series and the net asset value per interest per series or the total value of your interest in the Trust, in either case, as of the end of the year in question and the preceding year. -A statement of financial condition as of the close of the fiscal year and, if applicable, the preceding fiscal year. -Statements of income (loss) and changes in limited owners' capital during the fiscal year and, to the extent applicable, the previous fiscal year. -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 you within 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. Because the valuation point for the purposes of calculating net asset value, fees, subscriptions, redemptions and exchanges is the Friday of each week, each series makes its unaudited monthly report for a four- or five-week period ending on the last Friday of each calendar month. The statement of income (loss) must set forth, among other matters: -The total amount of realized net gain or loss on commodity interest positions liquidated during the month. -The change in unrealized net gain or loss on commodity interest positions during the month. -The total amount of net gain or loss from all other transactions in which a series is engaged. -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. 105 The statement of changes in net asset value must itemize the following: -The net asset value of the series as of the beginning and end of the month. -The total amount representing additions of interests during the month. -The total amount representing redemptions of interests during the month. -The total net income or loss of the series during the month. -The net asset value per interest or the total value of your 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 advisors, Prudential Securities or any affiliate of any of the foregoing. You also will be furnished with such additional information as the managing owner, in its sole 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 as required. Upon request, the managing owner will make available to you the net asset value per interest for a series. You will be notified of any decline in the net asset value per interest of a series you own to less than 50% of the net asset value per interest as of the last valuation point. This notification will contain a description of your voting and redemption rights. In addition, the managing owner will furnish you with tax information in a form which may be utilized by you in the preparation of your U.S. 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 at its principal office for eight fiscal years. Once you become a limited owner, you will have the right to obtain information about all matters affecting the Trust if it is for a purpose reasonably related to your interest as a beneficial owner of the Trust. You also will have access at all times during normal business hours to the Trust's books and records in person or by your authorized attorney or agent and to examine such books and records in compliance with CFTC rules and regulations. Information maintained will be made available to you at reasonable times and during ordinary business hours for inspection and copying by you or your representative for any purpose reasonably related to your interest as a beneficial owner of the Trust. The managing owner will furnish you with a copy of the list of limited owners within ten days of a request by you for any purpose reasonably related to your interest as a limited owner in the Trust and upon payment by you of the reasonable cost of reproduction and mailing. If you want such information, you must give written assurances that it will not be used for commercial purposes. Subject to applicable law, you must give the managing owner at least ten business days' prior written notice of an inspection or copying request. You will be notified of any material change in the advisory agreements or in the compensation of any party within seven business days thereof, and you will be provided with a description of any material effect on the interests such changes may have. Distributions Other than as limited by the trust agreement, the managing owner has sole discretion in determining the amount and frequency of distributions to you. In the event any type of distribution is declared, you will receive a distribution in proportion to your interest in the series held by you as of the record date of distribution. Sharing Of Profits And Losses Each interest in a series has a tax capital account and a book capital account. The initial balance of each is the amount paid for the interest in the series. At the end of each week, the amount of any increase or decrease in the net asset value per interest from the preceding week is credited or charged against the book capital account of each interest for that series. 106 At the end of each fiscal year of the Trust, all items of ordinary income and deduction of each series are allocated pro rata among the interests in such series outstanding on the last day of each week. After such allocation is made, each series' 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 week is 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 week is allocated among all interest-holders that were interest-holders during such week in proportion to their respective book capital account balances for such week. Each series' net capital loss, if any (including capital loss required to be recognized under certain mark-to-market rules provided in the Internal Revenue Code), realized during each week is 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 week is allocated among all interest- holders that were interest-holders during such week in proportion to their respective book capital account balances for such week. Notwithstanding the foregoing, loss is not allocated to an interest (and instead is 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 Liability Of Series The Trust is formed in a manner such that each series will be liable only for obligations attributable to such series. You, as a limited owner, will not be subject to the losses or liabilities of any series in which you have not invested. In the event that any creditor or you as a limited owner of interests in any particular series asserted against the Trust a valid claim with respect to its indebtedness or interests, the creditor or you would only be able to recover money from that particular series and its assets and from the managing owner and its assets. Accordingly, the debts, liabilities, obligations, claims and expenses (collectively referred to as claims) incurred, contracted for or otherwise existing solely with respect to a particular series are enforceable only against that particular series and the assets of that series and against the managing owner and its assets, but not against any other series or the Trust generally or any of their respective assets. The assets of any particular series include only those funds and other assets that are paid to, held by or distributed to the Trust on account of and for the benefit of that series, including, without limitation, funds delivered to the Trust for the purchase of interests in a series. This limitation on liability is referred to as the "inter- series limitation on liability." The inter-series limitation on liability is expressly provided for under the Delaware Business Trust Act, which provides that if a trust has one or more series, then the debts of any particular series are enforceable only against the assets of such series and not against the trust generally, provided that the trust meets certain requirements. In furtherance of the inter-series limitation on liability, every party, including you as a limited owner, the trustee and all parties providing goods or services to the Trust, any series or the managing owner on behalf of the Trust or any series will consent in writing to: (i) the inter-series limitation on liability with respect to such party's claims or interests, (ii) voluntarily reduce the priority of its claims against and interests in the Trust or any series or their respective assets, such that its claims and interests are junior in right of repayment to all other parties' claims against and interests in the Trust or any series or their respective assets, except that (a) interests in the particular series that such party purchased pursuant to a subscription agreement (Exhibit D) or similar agreement and (b) claims against the Trust where recourse for the payment of such claims was, by agreement, limited to the assets of a particular series, will not be junior in right of repayment, but will receive repayment from the assets of such particular series (but not from the assets of any other series or the Trust generally) equal to the treatment received by all other creditors and limited owners that dealt with such series and (iii) a waiver of certain rights that such party may have under the U.S. Bankruptcy Code, if such party held collateral for its claims, in the event that the Trust is a debtor in a chapter 11 case under the Bankruptcy Code, to have any deficiency claim (i.e., the difference, if any, between the amount of the claim and the value of the collateral) will be treated as an unsecured claim against the Trust generally or any other series. The Trust has obtained separate opinions of counsel regarding Delaware law and federal bankruptcy law concerning the effectiveness of the inter-series limitation on liability. Delaware state law counsel has opined that if the Trust complies with Section 3804(a) of the Delaware Business Trust Act, then the inter-series limitation on liability will be enforceable. Delaware counsel's opinion does not express any opinion concerning the enforceability of the inter-series limitation on liability if the Trust should become a debtor in a case under the Bankruptcy Code. Relying on Delaware counsel's opinion concerning the general enforceability under state law of the inter-series limitation on liability, federal bankruptcy law counsel has opined that, although the matter is not free from doubt, in a case under the Bankruptcy Code in which the Trust is a debtor, a court, properly applying the law, would not disregard the inter-series limitation on liability such that the assets of the other series or the Trust generally would 107 become available to satisfy the claims or interests of creditors or limited owners who agreed to look solely to the assets of a particular series with respect to those claims or interests. Both opinions are subject to various limitations, assumptions and exceptions that are frequently taken in opinions of this kind. Limited Owner Liability Your capital contribution is subject to the risks of each series' trading and business. The Delaware Business Trust Act provides that, except to the extent otherwise provided in the trust agreement, you will 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 you as a limited owner are subject to the jurisdiction of courts in those states, the courts may not apply Delaware law and may thereby subject you to liability. To guard against this risk, the trust agreement (i) provides for indemnification to the extent of the Trust's assets of you as a limited owner against claims of liability asserted against such limited owner solely because he or it is a beneficial owner of the Trust and (ii) requires that every written obligation of the Trust contain a statement that such obligation may only be enforced against the assets of the applicable series provided that the omission of such disclaimer is not intended to create personal liability for any interest- holder. Thus, subject to the exceptions set forth in the trust agreement and described below, the risk of you incurring financial loss beyond your 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 or the applicable series itself would be unable to meet its obligations. Moreover, and perhaps more importantly, the managing owner is 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 you, as a limited owner in the Trust, generally cannot lose more than your investment in any series, the trust agreement provides that you as a limited owner may incur liability (i) in the event the Trust is required to make payments to any federal, state, local or foreign taxing authority in respect of your allocable share of Trust income, in which case you would 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 your obligations or liabilities unrelated to the Trust's business, (iii) to indemnify the Trust against any losses or damages (including tax liabilities or loss of tax benefits) arising as a result of any transfer or purported transfer of your interest in violation of the trust agreement and (iv) if your subscription agreement delivered in connection with your 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 you as a limited owner with respect to amounts distributed to you or amounts received by you upon redemption of interests unless under Delaware law you are liable to repay such amounts. Except as set forth above, assessments of any kind shall not be made against you as a limited owner. Except as provided under Delaware law and by the trust agreement, each interest, once issued, is fully paid and non-assessable. Except as indicated above, losses in excess of the Trust's assets are 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 interests representing at least a majority (over 50%) of the net asset value of each series (not including interests held by the managing owner). The trust agreement provides that the managing owner may voluntarily withdraw as managing owner of the Trust if it gives the limited owners 120 days' prior written notice and if its withdrawal as managing owner is approved by limited owners holding interests representing at least a majority (over 50%) of the net asset value of each series (not including interests held by the managing owner). The trust agreement provides that if the managing owner elects to withdraw as managing owner to the Trust while it is the sole managing owner, limited owners holding interests representing at least a majority (over 50%) of the net asset value of each series (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 will pay all expenses incurred as a result of its withdrawal. The trust agreement also provides that in the event of the withdrawal of the managing owner, the managing owner is entitled to redeem its general interests in each series of the Trust at their net asset value as of the next permissible redemption date. Alternatively, the trust agreement provides that if the Trust is dissolved as a result of an event of withdrawal (as defined in Article XIII of the trust agreement) of a managing owner, then within 120 days of such 108 event of withdrawal, limited owners holding interests representing a majority (over 50%) of the net asset value of each series (not including interests held by the managing owner) may elect to form a new business trust on the same terms as set forth in the trust agreement and continue the business of the Trust and elect a new managing owner. Exercise Of Rights By Limited Owners Limited owners holding interests representing in excess of 50% of the net asset value of each series (excluding interests held by the managing owner and its affiliates) must approve any material change in a series' trading policies, and any such change will not be effective without such approval. In addition, limited owners holding interests representing in excess of 50% of the net asset value of each series (excluding interests held by the managing owner and its affiliates) may vote to adopt amendments to the trust agreement proposed by the managing owner or by limited owners holding interests representing at least ten percent of the net asset value of a series. Additionally, limited owners holding interests representing at least a majority (over 50%) of the net asset value of a series (excluding interests held by the managing owner and its affiliates) may vote to (i) terminate and dissolve the series upon 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 (on 60 days' prior written notice), (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, (v) approve the termination of any agreement between the Trust and the managing owner or its affiliates for any reason, without penalty (on 60 days' prior written notice) and (vi) approve a material change in the trading policies of the Trust or a series. Indemnification The trust agreement provides that with respect to any action in which the managing owner or any of its affiliates (including Prudential Securities only when it is 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 fullest 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 each series of 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 was not the result of negligence, misconduct or a breach of the trust agreement on the part of the managing owner or its affiliates and (ii) any such indemnification will only be recoverable from the assets of each series of the Trust. All rights to indemnification permitted by the trust agreement and payment of associated expenses will not be affected by the dissolution or other cessation to exist of the managing owner or by the withdrawal, adjudication of bankruptcy or insolvency of the managing owner. The trust agreement also provides that any such indemnification of the managing owner or any of its affiliates, 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 trust agreement. Expenses incurred in defending a threatened or pending action or proceeding against the managing owner may be paid by each series (on a pro rata basis, as the case may be) 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 each series (on a pro rata basis, as the case may be) 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 or expenses 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 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 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 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 such 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 109 securities law violations. The trust agreement also provides that with respect to any action taken by the managing owner as "tax matters partner," including consenting to an audit, the Trust will indemnify and hold harmless the managing owner. Amendments And Meetings The trust agreement may be amended in certain respects by a vote of the limited owners holding interests representing at least a majority (over 50%) of the net asset value of each series (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 interests equal to at least 10% of the net asset value of each series, unless the proposed amendment affects only certain series, in which case such amendment may be proposed by limited owners holding interests equal to 10% of the net asset value of each affected series. Limited owners will be supplied with a verbatim copy of any proposed amendment that 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 your consent, make amendments to the trust 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 trust agreement which may be inconsistent with any other provision of the trust agreement or this prospectus or (iv) make any other provisions with respect to matters or questions arising under the trust agreement that the managing owner deems advisable; provided, however, that no such amendment will be adopted unless the amendment is not adverse to the interests of the limited owners, is consistent with the managing owner's management of the Trust pursuant to Section 3806 of the Delaware Business Trust Act, 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 each series as a partnership for U.S. federal income tax purposes. The managing owner further may, without the consent of the limited owners, amend the provisions of the trust 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 U.S. 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 holding interests equal to at least 10% of the net asset value of a series. Thereafter, the managing owner shall give written notice to all limited owners, in person or by certified mail within 15 days after such receipt, of such meeting and its purpose. Such meeting must be held at least 30 but not more than 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 limited owners holding interests of the percentage required to approve any such action if a meeting were held. Fiscal Year The Trust's fiscal year begins on January 1 on each year and ends on December 31 of each year, except that (i) the first fiscal year of the Trust commenced on April 22, 1999, the date the Certificate of Trust was filed and (ii) the fiscal year in which the Trust terminates will end on the date of termination of the Trust. 110 U.S. FEDERAL INCOME TAX CONSEQUENCES The following summarizes the material U.S. federal income tax consequences to individual investors in the Trust. We have obtained an opinion of Rosenman & Colin LLP, tax counsel to the Trust, that the summary below correctly describes the material U.S. federal income tax consequences as of the date hereof to the Trust and to a U.S. individual who invests in the Trust. The summary is based on current U.S. federal income tax law, which is subject to change. Rosenman & Colin LLP's opinion is based on the facts described in this prospectus and on the accuracy of factual representations made by the managing owner. Rosenman & Colin LLP's opinion represents only its legal judgment and does not bind the Internal Revenue Service or the courts. The Partnership Tax Status Of A Series In The Trust Because it is expected that each series in the Trust will be classified as a partnership for U.S. federal income tax purposes, it is not anticipated that the Trust will pay any federal corporate income tax. It may be that the various series in the Trust (or the Trust itself) would constitute a so-called "publicly traded partnership." In that event, such series (or the Trust itself) generally would be subject to U.S. federal income tax as a corporation, and distributions to limited owners would be taxable as dividends, unless at least 90% of such series' (or the Trust's) annual gross income consists of "qualifying income" as defined in the Internal Revenue Code. The managing owner believes that each series currently satisfies the 90% test and that it is likely, but not certain, that each series will continue to do so. Taxation Of Limited Owners On Profits And Losses Of A Series Of The Trust Assuming that each series is treated as a partnership for U.S. federal income tax purposes, each limited owner must pay tax on his share of the series' annual income and gains as determined for income tax purposes, if any, even though the series does not intend to make current cash distributions. The income tax effects of a series' transactions may differ from the economic consequences of such transactions. Losses Allocated To Limited Owners A limited owner may deduct series' losses only to the extent of his tax basis in his interest. Generally, a limited owner's tax basis is the amount paid for the interest reduced (but not below zero) by his share of any series' distributions, losses and expenses and increased by his share of the series' income and gains. However, a limited owner who is subject to "at-risk" limitations (generally, non- corporate taxpayers and closely-held corporations) can only deduct losses to the extent he is at-risk. The at-risk amount is similar to tax basis, except that it does not include any amount borrowed on a nonrecourse basis by the series or from someone with an interest in the series. "Passive-Activity Loss Rules" And Its Effect On The Treatment Of Income And Loss The trading activities of each series are not "passive activities," and therefore the passive activity loss rules will not result in series' losses being nondeductible (but such losses may of course be subject to other deductibility limitations described in this summary). Similarly, a series' income and gains will not be treated as passive activity income and cannot be offset by a limited owner's passive activity losses from other investments. Cash Distributions And Partial Redemptions A limited owner who receives cash from the Trust, either through a distribution or a partial redemption, will not pay tax on that cash until distributions exceed his tax basis in his interest. A limited owner cannot recognize a loss with respect to a partial redemption until his entire interest is fully redeemed. An exchange of interests in one series for interests in another series will be treated as a redemption of the interests being exchanged. Gain Or Loss On Section 1256 Contracts And Non-Section 1256 Contracts "Section 1256 Contracts" include futures contracts, most options traded on U.S. commodity exchanges and certain foreign currency contracts. For tax purposes, Section 1256 Contracts that remain open at year-end are treated as if they were sold at year-end. The gain or loss on Section 1256 Contracts is characterized as 60% long-term capital gain or loss and 40% short-term capital gain or loss, regardless of how long the contracts are held. 111 "Non-Section 1256 Contracts" include, among other things, certain foreign currency transactions. A series' gain and loss from Non-Section 1256 Contracts generally would be short-term capital gain or loss, but certain of these transactions may generate ordinary income. Capital Gains And Losses For individuals, long-term capital gains (i.e., net gain on capital assets held more than one year and 60% of the gain on Section 1256 Contracts) are taxed at a maximum U.S. federal income tax rate of 20%, and short- term capital gains (i.e., net gain on capital assets held one year or less and 40% of the gain on Section 1256 Contracts) are subject to tax at the same rates as ordinary income, with a maximum U.S. federal income tax rate of 39.6%. Individual taxpayers can deduct capital losses only to the extent of their capital gains plus $3,000. Accordingly, a series could suffer significant capital losses, and a limited owner could still be required to pay taxes on, for example, his share of the series' interest income. An individual taxpayer can carry back net capital losses on Section 1256 Contracts three years to offset earlier gains on Section 1256 Contracts. To the extent the taxpayer cannot offset past Section 1256 Contract gains, he can carry forward such losses indefinitely. Limited Deduction For Certain Expenses The managing owner intends to cause each series to report management and trading advisory fees as trade or business expenses that are not subject to deductibility limitations applicable to investment advisory expenses. The Internal Revenue Service could contend otherwise. If expenses of a series are recharacterized as investment expenses, the deductible amount of these expenses would be reduced (and would not be deductible at all for alternative minimum tax purposes) to the extent allocable to limited owners who are individuals. The Internal Revenue Service could also take the position that a portion of the brokerage fees paid by a series is a non-deductible syndication expense. Interest Income Interest received by a series will be taxed as ordinary income and generally cannot be offset by capital losses. See the section above entitled "Capital Gains And Losses." Investment Interest Deductibility Limitations Individual taxpayers can deduct investment interest (i.e., interest on indebtedness allocable to property held for investment) only to the extent that it does not exceed their net investment income. Net investment income does not include net long-term capital gain absent an election by an individual taxpayer to pay tax on such gain at regular income tax rates but not at the lower 20% rate. Unrelated Business Taxable Income The managing owner anticipates that tax-exempt limited owners should not be required to pay tax on their share of income or gains of the Trust, provided that such limited owners do not purchase interests with borrowed funds. Foreign Individual Limited Owners The managing owner anticipates that a foreign individual limited owner who files with the Trust all requested certifications and documentation should not be required to pay or be subject to U.S. federal income or withholding tax with respect to his ownership of an interest. However, if such limited owner holds the interest at the time of his death, his estate may be subject to U.S. federal estate taxation with respect to such interest. 112 Internal Revenue Service Audits Of The Trust And Its Limited Owners Audits of series-related items are conducted at the Trust level rather than at the limited owner level. The managing owner acts as "tax matters partner" with the authority to determine the Trust's responses to an audit. If an audit results in an adjustment, all limited owners of one or more given series may be required to pay additional taxes, interest and penalties. Interest on tax deficiencies generally is not deductible by non-corporate limited owners. Foreign, State And Local And Other Taxes In addition to the U.S. federal income tax consequences described above, a series and the limited owners may be subject to various foreign, states, local and other taxes. Prospective investors should consult their tax advisors as to the state and local tax consequences of investing in the Trust. Importance Of Obtaining Professional Advice The foregoing analysis is not intended as a substitute for careful tax planning, particularly because the income tax consequences of an investment in the Trust and of a series' transactions are complex, and certain of these consequences would vary significantly with the particular situation of a limited owner. Accordingly, prospective investors are strongly urged to consult their own tax advisors regarding the possible federal, state and local tax consequences of an investment in the Trust, including, for example, the potential impact on an investor's liability for alternative minimum tax of deriving long- term capital gain from this investment. 113 LEGAL MATTERS Legal matters in connection with this offering have been passed upon for the Trust, the managing owner and Prudential Securities by 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, P.A., 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. Rosenman & Colin LLP also represents Prudential Securities and certain of its affiliates from time to time in various matters, and it is expected it will continue to do so in the future. ADDITIONAL INFORMATION The Trust has filed with the SEC a registration statement for each series of interests on Form S-1 (the three registration statements are referred to collectively as the registration statements) with respect to the securities offered hereby. This prospectus does not contain all of the information set forth in the registration statements, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits thereto (e.g., the selling agreement, the escrow agreement and the brokerage agreement). A copy of each registration statement has also been provided to the CFTC. The descriptions contained herein of agreements included as exhibits in the registration statement are necessarily summaries. Reference is made to the registration statements, including the exhibits thereto, for further information with respect to the Trust and each series' securities. Such information may be examined without charge at the public reference facilities of the SEC, 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 SEC. In addition, all of the SEC's public filings, including the public filings of each series, are available at the SEC's Web Site at www.sec.gov. EXPERTS The financial statements of Series D, Series E and Series F of World Monitor Trust II as of December 31, 2000 and for the period from the respective commencement of operations of each series to December 31, 2000 and the statement of financial condition of each of the managing owner and Diversified Futures Trust I as of December 31, 2000 included in this prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing. The statements referred to under "U.S. FEDERAL INCOME TAX CONSEQUENCES" have been reviewed by Rosenman & Colin LLP and are included in reliance upon its authority as experts in U.S. tax law. 114 PART TWO CFTC STATEMENT OF ADDITIONAL INFORMATION This is Part Two of a two-part CFTC disclosure document. This Statement of Additional Information should be read together with Part One. These two parts are bound together, and may not be distributed separately. THE FUTURES MARKETS To understand the nature of the investments each series makes, subscribers should familiarize themselves with the following information. Futures And Forward Contracts Futures contracts call for the future delivery of various commodities. These contractual obligations may be satisfied either by taking or making physical delivery or by making an offsetting sale or purchase of a futures contract on the same exchange. In certain instances, the S&P 500 contract for example, delivery is made through a cash settlement. Futures contracts in the U.S. can be traded on exchanges subject to varying levels of regulatory oversight (depending on the contracts traded and the market participants). Certain types of futures (primarily for non- agricultural commodities) may be traded directly between certain sophisticated investors, such as the series. Forward currency contracts are traded off-exchange through banks or dealers. In such instances, the bank or dealer generally acts as principal in the transaction and charges "bid-ask" spreads. Futures and forward trading is a "zero-sum" risk transfer economic activity. For every gain, there is an equal and offsetting loss. Options On Futures Contracts An option on a futures contract gives the purchaser of the option the right but not the obligation to take a position at a specified price (the "striking," "strike" or "exercise" price) in a futures contract. A "call" option gives the purchaser the right to buy the underlying futures contract, and the purchaser of a "put" option acquires the right to take a sell position in the underlying contract. The purchase price of an option is referred to as its "premium." The seller (or "writer") of an option is obligated to take a position at a specified price opposite to the option buyer if the option is exercised. Thus, in the case of a call option, the seller must be prepared to sell the underlying futures contract at the strike price if the buyer should exercise the option. A seller of a put option, on the other hand, stands ready to buy the underlying futures contract at the strike price. A call option on a futures contract is said to be "in-the-money" if the strike price is below current market levels and "out-of-the-money" if that price is above market. Similarly, a put option on a futures contract is said to be "in-the-money" if the strike price is above current market levels and "out-of-the-money" if the strike price is below current market levels. Hedgers And Speculators The two broad classifications of persons who trade futures are "hedgers" and "speculators." Hedging is designed to minimize the losses that may occur because of price changes, for example, between the time a producer contracts to sell a commodity and the time of delivery. The futures and forward markets enable the hedger to shift the risk of price changes to the speculator. The speculator risks capital with the hope of making profits from such changes. Speculators, such as the Trust, rarely take delivery of the physical commodity but rather close out their futures positions through offsetting futures contracts. 115 Exchanges; Position And Daily Limits; Margins Each of the commodity exchanges in the U.S. has an associated "clearinghouse." Once trades made between members of an exchange have been cleared, each clearing broker looks only to the clearinghouse for all payments in respect of such broker's open positions. The clearinghouse "guarantee" of performance on open positions does not run to customers. If a member firm goes bankrupt, customers could lose money. The CFTC and the U.S. exchanges have established "speculative position limits" on the maximum positions that each trading advisor may hold or control in futures contracts on certain commodities. Most U.S. exchanges limit the maximum change in futures prices during any single trading day. Once the "daily limit" has been reached, it becomes very difficult to execute trades. Because these limits apply on a day-to-day basis, they do not limit ultimate losses, but may reduce or eliminate liquidity. When a position is established, "initial margin" is deposited. On most exchanges, at the close of each trading day, "variation margin," representing the unrealized gain or loss on the open positions, is either credited to or debited from a trader's account. If variation margin payments cause a trader's initial margin to fall below "maintenance margin" levels, a "margin call" is made, requiring the trader to deposit additional margin or have his position closed out. Each series trades on a number of foreign commodity exchanges. Foreign commodity exchanges differ in certain respects from their U.S. counterparts. 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 any series engages in transactions on foreign exchanges, it is subject to the risk of fluctuations in the exchange rate between the native currencies of any foreign exchange on which it trades and the U.S. dollar (which risks may be hedged) and the possibility that exchange controls could be imposed in the future. No U.S. agency regulates trading outside of the U.S., which generally involves 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. 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. Trading Methods Managed futures strategies are generally classified as either (i) technical or fundamental and (ii) systematic or discretionary. Technical And Fundamental Analysis Technical analysis operates on the theory that market prices, momentum and patterns at any given point in time reflect all known factors affecting the supply and demand for a particular commodity. Consequently, technical analysis focuses on market data as the most effective means of attempting to predict future prices. Fundamental analysis, in contrast, focuses on the study of factors external to the markets, for example: weather, the economy of a particular country, government policies, domestic and foreign political and economic events and changing trade prospects. Fundamental analysis assumes that markets are imperfect and that market mispricings can be identified. 116 Systematic And Discretionary Trading Approaches A systematic trader relies on trading programs or models to generate trading signals. Discretionary traders make trading decisions on the basis of their own judgment. Each approach involves inherent risks. For example, systematic traders may incur substantial losses when fundamental or unexpected forces dominate the markets, while discretionary traders may overlook price trends that would have been signaled by a system. Trend Following Trend-following advisors try to take advantage of major price movements, while traders focus on making many small profits on short-term trades or through relative value positions. Trend-following traders assume that most of their trades will be unprofitable. They look for a few large profits from big trends. During periods with no major price movements, a trend- following trading manager is likely to have large losses. Risk Control Techniques Trading managers often adopt risk management principles. Such principles typically restrict the size or positions taken as well as establish stop-loss points at which losing positions must be liquidated. No risk control technique can assure that large losses will be avoided. The programs used by each series' trading advisors are technical, systematic and trend following. Regulation Of Markets Commodity Exchange Act The U.S. Congress enacted the Commodity Exchange 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 U.S. The Commodity Exchange Act was recently revised by the Commodity Futures Modernization Act of 2000. Commodity Futures Trading Commission The CFTC is an independent governmental agency that administers the Commodity Exchange Act and that is authorized to promulgate rules thereunder. Functions of the CFTC include the implementation of the objectives of the Commodity Exchange Act in preventing price manipulation and excessive speculation and the promotion of orderly and efficient commodity futures markets. The CFTC has adopted regulations covering, among other things, (i) the designation of contract markets; (ii) the monitoring of U.S. commodity exchange rules; (iii) the establishment of speculative position limits; (iv) the registration of commodity brokers and brokerage houses, floor brokers, introducing brokers, leverage transaction merchants, commodity trading advisors, commodity pool operators and their principal employees engaged in non-clerical commodities activities referred to as associated persons and (v) 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 Commodity Exchange 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 Commodity Exchange Act (reparations), (ii) seek injunctions and restraining orders, (iii) issue cease and desist orders, (iv) initiate disciplinary proceedings, (v) revoke, suspend or not renew registrations and (vi) levy substantial fines. The Commodity Exchange Act also provides for certain other private rights of action and the possibility of imprisonment for violations. 117 The recently enacted Commodity Futures Modernization Act of 2000, among other things, excludes from CFTC jurisdiction transactions in many commodities between "eligible contract participants," and provides for new types of exchanges with varying levels of regulatory oversight, depending on the products traded and the market participants. Designated contract markets are subject to the highest level of regulation. Each series qualifies as an "eligible contract participant" under the new legislation, and will therefore be eligible to engage in unregulated transactions directly with counterparties, and to effect transactions on exchanges which are subject to very little oversight by the CFTC. The new legislation also allows two significant changes in futures commission merchants' dealings with eligible contract participants, such as the series. Futures commission merchants may require such customers to waive their right to apply to the CFTC for reparations for violations of the Commodity Exchange Act. Prudential Securities has not required the series to do so. In addition, the CFTC has been instructed to adopt regulations which would allow futures commission merchants to offer their eligible contract participant customers the right not to have segregated their funds on deposit with the futures commission merchant for trading on certain types of exchanges. This would allow the funds to be held in a broader, and riskier, range of investments. The Commodity Futures Modernization Act of 2000 also authorizes trading of "security futures," which are defined as futures, and options on futures, on a single security or a narrow-based index of securities. Such trading was not permitted under prior legislation. Trading in these new products will be jointly regulated by the CFTC and the SEC, and futures commission merchants who offer them will have to register with the SEC. In order to provide sufficient time for the regulatory authorities to adopt rules governing such trading and other changes to current industry practices, trading in security futures cannot be conducted on U.S. trading facilities until the later of (i) one year after the effective date of the legislation or (ii) the date on which National Futures Association is registered as a limited purpose national securities association. Principal-to-principal transactions between eligible contract participants (such as the series) will be permitted eight months after the later of such events. The National Futures Association is currently taking steps to register as a limited purpose national securities association, but it is not clear exactly when this will occur, and consequently, exactly when trading in such products will begin. Options on security futures cannot be offered until December 2003. Under the terms of the advisory agreements with each advisor, new products such as security futures may be added to the trading program the advisor uses for a series without the managing owner's permission only if it is offered on a domestic exchange or a foreign exchange which the CFTC recognizes as having similar protections a domestic exchange. The CFTC has in place extensive regulations affecting commodity pool operators (such as the managing owner) and commodity trading advisors (such as the trading advisors) and their associated persons which, among other things, (i) require the giving of disclosure documents to new customers and the retention of current trading and other records, (ii) prohibit pool operators from commingling pool assets with those of the operators or their other customers and (iii) require pool operators to provide their customers with periodic account statements and an annual report. Upon the CFTC's request, 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 regulations currently in place provide for streamlined disclosure documents (such as this prospectus) that must be updated every nine months. U.S. Commodity Exchanges U.S. commodity exchanges (designated contract markets) 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. Rules and regulations relating to terms and conditions of contracts of sale or to other trading requirements, other than those of an exempt board of trade, currently must be reviewed and approved by the CFTC, although they may be put into practice before approval is granted. Only the terms of contracts traded on designated contract markets need prior CFTC approval. 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 National Futures Association. The National Futures Association'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 National Futures Association members, 118 (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. As a result of the Commodity Futures Modernization Act of 2000, the National Futures Association is attempting to register as a limited purpose national securities association, and assume responsibility for the oversight of futures commission merchants that register with the SEC for the purpose of effecting transactions in single and narrow-based index security futures. The National Futures Association currently is in the process of adopting appropriate suitability rules prior to registering as a national securities association. The regulation of commodities transactions in the U.S. is a rapidly changing area of law and the various regulatory procedures described herein are subject to modification by U.S. Congressional action, changes in CFTC rules and amendments to exchange regulations and National Futures Association regulations. The Commodity Futures Modernization Act of 2000 made significant changes in the way trading facilities are regulated. Because the legislation was only recently passed (December 2000) many of the changes have not yet been put into practice. It is therefore impossible to predict what, if any, impact these changes will have on the series trading and performance. 119 HOW MANAGED FUTURES FIT INTO A PORTFOLIO Systematic risk, also known as market risk, is the risk common to all securities in a particular asset class. Systematic risk cannot be eliminated through diversification among securities within the same class. However, an investor can diversify a portfolio's exposure to systematic risk by adding asset classes which have little or no correlation to each other. As an alternative asset class, managed futures exhibits low or non-correlation to traditional asset classes such as stocks and bonds, and as such make an excellent tool to help diversify a portfolio's exposure to systematic risk. Managed futures is a sector of the futures industry made up of professionals, known as commodity trading advisors who, on behalf of their clients, manage portfolios of futures and forward contracts traded on exchanges around the world. Utilizing extensive resources, markets can be monitored around the world 24 hours a day. For over 20 years, institutions and individuals have made managed futures part of their well diversified portfolios. In that time period, the industry has grown to nearly $44 billion in assets under management as of December 31, 1999. As the industry has grown, so has the number, liquidity and efficiency of the futures markets globally. Managed futures encompasses over 50 markets worldwide and, as a result, investors can gain global market exposure in their portfolios as well as add non- financial investments. Thus, investing in a managed futures fund can be an effective way to globally diversify a portfolio. A managed futures fund provides four benefits to an investor's overall portfolio: -Diversification. -Potential for both reduced portfolio volatility and enhanced returns. -Ability to profit in many economic environments. -Access to global markets. Diversification A managed futures fund may invest in more than 50 markets worldwide in both financial and non-financial futures contracts, thereby broadening a portfolio's scope of opportunity and lessening the impact of any single market. Potential For Both Reduced Portfolio Volatility And Enhanced Returns Modern Portfolio Theory asserts that a portfolio of investments which have positive returns and low to non- correlation with each other can improve the risk/reward characteristics of the combined holdings. Managed futures investments exhibit low to non-correlation to traditional asset classes such as stocks and bonds, and thus, managed futures investments can improve a portfolio's return-to-risk profile. Ability To Profit In Many Economic Environments With stocks and bonds, investors typically buy securities which they believe will increase in value, but may have no strategy when markets fall. Futures contracts, on the other hand, can be easily sold short on the prospect that the market will go down. As a result, both rising and declining markets represent opportunities for managed futures. Access To Global Markets As the futures markets matured, they have expanded to include global opportunities in stock and bond indices, currencies, precious and base metals, agricultural products and so forth. Investors can easily and inexpensively gain access to a variety of markets around the globe through an investment in managed futures. 120 Performance Comparisons The tables below compare actual returns and statistics for Series D, Series E and Series F with three asset classes, U.S. Stocks, U.S. Bonds and International Stocks, in order to highlight the particular performance characteristics of each series versus traditional asset classes. Of course, past performance is not necessarily indicative of future results. Series D -- Bridgewater Associates Aggressive Pure Alpha, Futures Only March 2000 through February 2001 Summary Performance Statistics U.S. U.S. Int'l. Stocks1 Bonds2 Stocks3 WMTD Value of $1000 $918 $1,135 $828 $820 Holding Period Return (8.20)% 13.52% (17.16)% (17.95)% Monthly Standard Deviation 5.55% 0.81% 3.89% 5.19% Maximum Draw-down (17.83)% (0.58)% (20.27)% (23.66)% Months to Recovery 6+ 3 11+ 9+ Correlation to U.S. Stocks 1.00 0.34 0.83 (0.20) Series E -- Graham Capital Global Diversified Program April 2000 through February 2001 Summary Performance Statistics U.S. U.S. Int'l. Stocks1 Bonds2 Stocks3 WMTE Value of $1000 $836 $1,119 $797 $1,208 Holding Period Return (16.38%) (11.90)% (20.27%) 20.77% Monthly Standard Deviation 4.71% 0.84% 3.68% 6.15% Maximum Draw-down (17.83%) (0.58%) (20.27%) (11.15%) Months to Recovery 6+ 3 11+ 8 Correlation to U.S. Stocks 1.00 0.38 0.78 (0.20) Series F -- Campbell & Company FME Small Portfolio March 2000 through February 2001 Summary Performance Statistics U.S. U.S. Int'l. Stocks1 Bonds2 Stocks3 WMTF Value of $1000 $918 $1,135 $828 $1,059 Holding Period Return (8.20)% 13.52% (17.16%) 5.88% Monthly Standard Deviation 5.55% 0.81% 3.89% 2.97% Maximum Draw-down (17.83%) (0.58%) (20.27%) (3.86%) Months to Recovery 6+ 3 12+ 9 Correlation to U.S. Stocks 1.00 0.34 0.83 (0.17) 1. U.S. Stocks -- Standard & Poor's 500 Stock Index (dividends reinvested) an unmanaged weighted index of 500 stocks. 2. International Stocks -- Morgan Stanley's EAFE Index (dividends reinvested). 3. U.S. Bonds -- Lehman Brothers' Government/Corporate Bond Index (coupons reinvested). (Sources: Standard & Poor's, Lehman Brothers and Lipper Analytical Associates.) THESE INDICES ARE REPRESENTATIVE OF EQUITY AND DEBT SECURITIES AND ARE NOT TO BE CONSTRUED AS AN ACTIVELY MANAGED PORTFOLIO. 121 GLOSSARY OF TERMS The following glossary may assist prospective investors in understanding certain terms used in this prospectus: Additional seller. Means certain selected additional U.S. sellers and/or certain foreign securities firms retained by the managing owner. Additional U.S. seller. Means certain selected brokers or dealers retained by the managing owner that are members of the NASD. 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. Aggregate $$: (All programs excluding notional). Means the aggregate amount of actual assets under the management of the trading advisor in all programs as of the end of the period covered by the capsule. This number excludes notional funds. Aggregate $$: (All programs including notional). Means the aggregate amount of total assets under the management of the trading advisor in all programs as of the end of the period covered by the capsule. This number includes notional funds. Aggregate $$ in this program (excluding notional). Means the aggregate amount of actual assets under the management of the trading advisor in the program shown as of the end of the period covered by the capsule. This number excludes notional funds. Aggregate $$ in this program (including notional). Means the aggregate amount of total assets under the management of the trading advisor in the program shown as of the end of the period covered by the capsule. This number includes notional funds. 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 broker. Means, under the NASAA guidelines, any person who engages in the business of effecting transactions in commodity contracts for the account of others or for his own account. Commodity contract. Means a 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. Commodity Futures Trading Commission ("CFTC"). An independent regulatory commission of the U.S. government empowered to regulate commodity futures transactions and other commodity transactions under the Commodity Exchange Act. 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 122 from time to time by the exchange. In the U.S., these limits, including changes thereto, are subject to CFTC approval. These limits generally are not imposed on option contracts or outside the U.S. Dealing day. Means the first business day after a valuation point occurs. Delivery. Means the process of satisfying a commodity futures contract, an option on a physical commodity or a forward contract by transferring ownership of a specified quantity and grade of a cash commodity to the purchaser thereof. Draw-down. Means losses experienced by the composite record over a specified period. Individual accounts may experience larger draw-downs than are reflected in the composite record of a particular trading portfolio. Where an individual account has experienced a draw-down that is greater than has been experienced on a composite basis, the largest draw-down experienced by such individual account is presented. Draw-downs are measured on the basis of month-end net asset values only. Eligible contract participant. A class of investor under the Commodity Futures Modernization Act of 2000 that is permitted to engage in certain unregulated principal-to-principal transactions in commodities and to trade on less regulated trading facilities. The class includes commodity pools that have assets of more than $5 million and are operated by an entity regulated under the Commodity Exchange Act. Each series qualifies as an eligible contract participant. Extraordinary expenses. Pursuant to Section 4.7(a) of the trust agreement, extraordinary expenses of the Trust and each series include, but are not limited to, legal claims and liabilities and litigation costs and any permitted indemnification associated therewith. ERISA. Means Employee Retirement Income Security Act of 1974, as amended. ERISA Plans. Means employee benefit plans governed by the Employee Retirement Income Security Act of 1974, as amended, usually referred to as ERISA. Forward contract. Means 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. Means 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 or a linked exchange prior to delivery. Individual Retirement Fund. Means an Individual Retirement Account (referred to as an IRA) or a Keogh Plan, both of which are vehicles to save money for use during retirement. IRA. Means Individual Retirement Account. Interests. Means the beneficial interest of each interest-holder 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 are not represented by certificates. Internal Revenue Code. Means the Internal Revenue Code of 1986, as amended. Largest monthly draw-down. Means the greatest decline in month-end net asset value due to losses sustained by a trading portfolio on a composite basis or an individual account for any particular month. 123 Largest peak-to-valley draw-down. Means the greatest cumulative percentage decline in month-end net asset value due to losses sustained by a trading portfolio on a composite basis or an individual account during any period in which the initial month-end net asset value is not equaled or exceeded by a subsequent month-end asset value. Limited owner. Means any person or entity acting in his, her or its capacity as an interest-holder in one or more series of the trust and may include the managing owner with respect to interests purchased by it. Limit order. Means 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 (i.e., to 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. Margin. Means 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. Means Prudential Securities Futures Management Inc. or any substitute therefor as provided in the trust agreement . 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. Means the North American Securities Administrators Association, Inc. NASAA Guidelines. Means the guidelines for the Registration of Commodity Pool Programs imposed by the NASAA. NASD. Means the National Association of Securities Dealers, Inc. NAV. Means net asset value. Net asset value. (sometimes referred to as NAV) See Section 1.1 of the trust agreement . New high net trading profits. See "FEE AND EXPENSES - Charges To Be Paid By The Trust - Management And Incentive Fees To The Trading Advisors." Net worth. See Section 4.3(i) of the trust agreement. Insofar as net worth relates to investor suitability, see the heading entitled "State Suitability Requirements" in the subscription agreement (Exhibit D). NFA. Means the National Futures Association. Notional funds. Means the amount by which the nominal account size exceeds the amount of actual funds. Open position. Means a contractual commitment arising under a long contract or a short contract that has not been extinguished by an offsetting trade or by delivery. 124 Organization and offering expenses. Means 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 for a more particular enumeration of such expenses, all of which are paid by Prudential Securities or an affiliate. Parent. Means a company that owns all or the majority of the outstanding equity of a trust, corporation, partnership, or a limited liability company. Parameters. Means a value that can be freely assigned in a trading system in order to vary the timing of signals. Pattern recognition. Means the ability to identify patterns that appeared to act as precursors of price advances or declines in the past. Promoter. Means any person who directly or indirectly organizes an investment opportunity in a trust, corporation, partnership, or limited liability company. Pyramiding. Means a method of using all or part of an unrealized profit in a commodity contract position to provide margin for any additional commodity contracts of the same or related commodities. Redemption date. Means the first dealing day to occur at least two business days after the date the managing owner has received a Redemption Request (Exhibit B) in proper order. Redemption price. Means the net asset value per interest on the valuation point immediately preceding the dealing day on which a redemption will become effective. Round-turn. The initial purchase of a long or short contract and the subsequent purchase of an offsetting contract. Series. Means a separate series of the Trust as provided in Sections 3806(b)(2) and 3804 of the Delaware Business Trust Act, the interests of which shall be beneficial interests in the Trust estate separately identified with and belonging to such series. Short contract. Means a contract to make delivery of (sell) a specified amount of a commodity at a future date at a specified price. Speculative position limit. Means the maximum number of speculative futures or option contracts in any one commodity (on one contract market), imposed by the CFTC or a U.S. 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 U.S. Spot contract. Means 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. Means 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 to earn profits from a widening or narrowing movement of the prices of the different contracts. Standard deviation. Means a measure of volatility of returns or a statistical measure of risk that represents the variability of returns around the mean (average) return. The lower the standard deviation, the closer the returns are to the mean (average) value. Conversely, the higher the standard deviation, the more widely dispersed the returns are around the mean (average). Stop-loss order. Means 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. 125 Stop order. Means 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. Means a previous low. A price level under the market where buying interest is sufficiently strong to overcome selling pressure. Systematic technical charting systems. Means a system that is technical in nature and based on chart patterns as opposed to pure mathematical calculations. Trading advisor. Means any entity or entities acting in its capacity as a commodity trading advisor to the Trust and any substitute(s) therefor as provided herein. Trustee. Means Wilmington Trust Company or any substitute therefor as provided in the trust agreement. Underwriter. Means a broker-dealer that attempts to sell interests issued directly by a trust, a corporation, a partnership, or a limited liability company in a public or private offering. Unrealized profit or loss. Means the profit or loss that 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 point. Means the close of business on Friday of each week or such other day as may be determined by the managing owner. 126 INDEX TO CERTAIN FINANCIAL INFORMATION Page WORLD MONITOR TRUST II-- Series D Report of Independent Accountants 128 Audited Financial Statements as of December 31, 2000 129 Notes to Financial Statements 131 WORLD MONITOR TRUST II--Series E Report of Independent Accountants 136 Audited Financial Statements as of December 31, 2000 137 Notes to Financial Statements 139 WORLD MONITOR TRUST II--Series F Report of Independent Accountants 144 Audited Financial Statements as of December 31, 2000 145 Notes to Financial Statements 147 PRUDENTIAL SECURITIES FUTURES MANAGEMENT INC. Report of Independent Accountants 152 Audited Statement of Financial Condition as of December 31, 2000 153 Notes to Statement of Financial Condition 154 DIVERSIFIED FUTURES TRUST I Report of Independent Accountants 157 Audited Statement of Financial Condition as of December 31, 2000 158 Notes to Statement of Financial Condition 159 127 PricewaterhouseCoopers (LOGO) PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, NY 10036 Telephone (212) 596 8000 Facsimile (212) 596 8910 Report of Independent Accountants To the Managing Owner and Limited Owners of World Monitor Trust II--Series D In our opinion, the accompanying statements of financial condition and the related statements of operations, and changes in trust capital present fairly, in all material respects, the financial position of World Monitor Trust II--Series D at December 31, 2000 and 1999 and the results of its operations for the period from March 13, 2000 (commencement of operations) to December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Managing Owner; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America 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 audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP January 26, 2001 128 WORLD MONITOR TRUST II--SERIES D (a Delaware Business Trust) STATEMENTS OF FINANCIAL CONDITION
December 31, ------------------------ 2000 1999 ---------------------------------------------------------------------------------------------------- ASSETS Cash $ 6,114,108 $ 1,000 Net unrealized gain on open futures contracts 61,961 -- ------------ -------- Total assets 6,176,069 $ 1,000 ------------ -------- ------------ -------- LIABILITIES AND TRUST CAPITAL Liabilities Accrued expenses $ 57,594 $ -- Commissions and other transaction fees payable 37,521 -- Redemptions payable 10,586 -- Unrealized loss on open forwards contracts 10,235 -- Management fees payable 7,506 -- ------------ -------- Total liabilities 123,442 -- ------------ -------- Commitments Trust capital Limited interests (68,491.311 and -0- interests outstanding) 5,992,086 -- General interests (692 and 10 interests outstanding) 60,541 1,000 ------------ -------- Total trust capital 6,052,627 1,000 ------------ -------- Total liabilities and trust capital 6,176,069 $ 1,000 ------------ -------- ------------ -------- Net asset value per limited and general interests ('Interests') $ 87.49 $ 100.00 ------------ -------- ------------ --------
-------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. 129 WORLD MONITOR TRUST II--SERIES D (a Delaware Business Trust) STATEMENT OF OPERATIONS
For the period from March 13, 2000 (commencement of operations) to December 31, 2000 ------------------------------------------------------------------------------------------------- REVENUES Net realized loss on commodity transactions $ (708,702) Net unrealized gain on open commodity positions 51,726 Interest income 281,858 ---------------- (375,118) ---------------- EXPENSES Commissions and other transaction fees 303,680 General and administrative 70,214 Management fees 58,273 Incentive fees 27,238 ---------------- 459,405 ---------------- Net loss $ (834,523) ---------------- ---------------- ALLOCATION OF NET LOSS Limited interests $ (824,648) ---------------- ---------------- General interests $ (9,875) ---------------- ---------------- NET LOSS PER WEIGHTED AVERAGE LIMITED AND GENERAL INTEREST Net loss per weighted average limited and general interest $ (13.32) ---------------- ---------------- Weighted average number of limited and general interests outstanding 62,661 ---------------- ---------------- -------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN TRUST CAPITAL
LIMITED GENERAL INTERESTS INTERESTS INTERESTS TOTAL ------------------------------------------------------------------------------------------------------- Trust capital--December 31, 1999 10.000 $ -- $ 1,000 $ 1,000 Contributions 82,667.756 8,123,644 105,008 8,228,652 Net loss (824,648) (9,875 ) (834,523) Redemptions (13,494.445) (1,306,910) (35,592 ) (1,342,502) ----------- ----------- --------- ----------- Trust capital--December 31, 2000 69,183.311 $ 5,992,086 $ 60,541 $ 6,052,627 ----------- ----------- --------- ----------- ----------- ----------- --------- ----------- ------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements.
130 WORLD MONITOR TRUST II--SERIES D (a Delaware Business Trust) NOTES TO FINANCIAL STATEMENTS A. General The Trust, Trustee, Managing Owner and Affiliates World Monitor Trust II (the 'Trust') is a business trust organized under the laws of Delaware on April 22, 1999. The Trust consists of three separate and distinct series ('Series'): Series D, E and F. Series D, E and F commenced trading operations on March 13, 2000, April 6, 2000 and March 1, 2000, respectively, and each Series will continue to exist until terminated pursuant to the provisions of Article XIII of the First Amended and Restated Declaration of Trust and Trust Agreement (the 'Trust Agreement'). The assets of each Series are segregated from those of the other Series, separately valued and independently managed. Each Series was formed to engage in the speculative trading of a diversified portfolio of futures, forward and options contracts, and may, from time to time, engage in cash and spot transactions. 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 selling agent for the Trust as well as its commodity broker ('Commodity Broker'). The Offering Up to $50,000,000 of limited interests in each Series ('Limited Interests') are being offered (totalling $150,000,000) ('Subscription Maximum'). Limited Interests are being offered to investors who meet certain established suitability standards, with a minimum initial subscription of $5,000 ($2,000 for an individual retirement account), although the minimum purchase for any single Series is $1,000. General interests are also being sold exclusively to the Managing Owner. Limited Interests and general interests are sometimes collectively referred to as 'Interests'. Initially, the Limited Interests for each Series were offered for a period of up to 180 days after the date of the Prospectus ('Initial Offering Period'). The price per Interest during the Initial Offering Period was $100. Each Series could commence operations at any time if the minimum amount of Limited Interests was sold before the Initial Offering Period expired ('Subscription Minimum'). The Subscription Minimum of $5,000,000 for each Series was reached and, as a result, Series D, E and F commenced trading operations. Series D completed its initial offering on March 13, 2000 with gross proceeds of $5,279,158, which was fully allocated to commodities trading. Until the Subscription Maximum for each Series is reached, each Series' Limited Interests will continue to be offered on a weekly basis at the then current net asset value per Interest ('Continuous Offering Period'). The Managing Owner is required to maintain at least a 1% interest in the capital, profits and losses of each Series so long as it is acting as the Managing Owner, and it will make such contributions (and in return will receive general interests) as are necessary to meet this requirement. The Trading Advisor Each Series has its own independent commodity trading advisor that makes that Series' trading decisions. The Managing Owner, on behalf of Series D, entered into an advisory agreement with Bridgewater Associates, Inc. (the 'Trading Advisor') to make the trading decisions for Series D. The advisory agreement may be terminated for various reasons, including at the discretion of the Managing Owner. The Managing Owner has allocated 100% of the proceeds from the initial and continuous offering of Series D to the Trading Advisor and it is currently contemplated that the Trading Advisor will continue to be allocated 100% of additional capital raised for Series D during the Continuous Offering Period. Exchanges, Redemptions and Termination Interests owned in one Series may be exchanged, without any charge, for Interests of one or more other Series on a weekly basis for as long as Limited Interests in those Series are being offered to the public. Exchanges are made at the applicable Series' then current net asset value per Interest as of the close of business on the Friday immediately preceding the week in which the exchange request is effected. The 131 exchange of Interests is treated as a redemption of Interests in one Series (with the related tax consequences) and the simultaneous purchase of Interests in the Series exchanged into. Redemptions are permitted on a weekly basis. Limited Interests redeemed on or before the end of the first and second successive six-month periods after their effective dates of purchase are subject to a redemption fee of 4% and 3%, respectively, of the net asset value at which they are redeemed. Redemption fees are paid to the Managing Owner. In the event that the estimated net asset value per Interest of a Series at the end of any business day, after adjustments for distributions, declines by 50% or more since the commencement of trading activities or the first day of a fiscal year, the Series will automatically terminate. B. Summary of Significant Accounting Policies Basis of accounting The financial statements of Series D are prepared in accordance with accounting principles generally accepted in the United States of America. Such principles require the Managing Owner to make estimates and assumptions that affect the reported amounts of liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from these estimates. 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. The weighted average number of Limited Interests and general interests outstanding was computed for purposes of disclosing net loss per weighted average Limited Interest and general interest. The weighted average Limited Interests 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. Series D 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 Series D is treated as a partnership for Federal income tax purposes. As such, Series D 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 including the Managing Owner. Series D may be subject to other state and local taxes in jurisdictions in which it operates. Profit and loss allocations and distributions Series D allocates profits and losses for both financial and tax reporting purposes to its Interest holders weekly on a pro rata basis based on each owner's Interests outstanding during the week. Distributions (other than redemptions of Interests) may be made at the sole discretion of the Managing Owner on a pro rata basis in accordance with the respective capital balances of the Interest holders; however, the Managing Owner does not presently intend to make any distributions. New Accounting Guidance In June 2000, the Financial Accounting Standards Board ('FASB') issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities--an amendment of FASB Statement No. 133 ('SFAS 138'), which became effective for Series D on July 1, 2000. SFAS 138 amends the accounting and reporting standards of FASB Statement No. 133 for certain derivative instruments and certain hedging activities. SFAS 138 has not had a material effect on the carrying value of assets and liabilities within the financial statements. 132 C. Fees Organizational and offering costs PSI or its affiliates paid the costs of organizing Series D-> and continue to pay the costs of offering its Limited Interests. General and administrative costs Routine legal, audit, postage, and other routine third party administrative costs are paid by Series D. Additionally, Series D pays the administrative costs incurred by the Managing Owner or its affiliates for services they perform for Series D which include, but are not limited to, those costs discussed in Note D below. However, all of these general and administrative costs incurred by Series D are limited to 1.5% annually of Series D's net asset value. Management and incentive fees Series D pays its Trading Advisor a management fee at an annual rate of 1.25% of the net asset value allocated to its management. The management fee is determined weekly and the sum of such weekly amounts is paid monthly. Series D also pays its Trading Advisor a quarterly incentive fee equal to 22% of such Trading Advisor's 'New High Net Trading Profits' (as defined in the advisory agreement). The incentive fee also accrues weekly. Commissions The Managing Owner and the Trust entered into a brokerage agreement with PSI to act as Commodity Broker for each Series whereby Series D pays a fixed fee for brokerage services rendered at an annual rate of 6% of Series D's net asset value. The fee is determined weekly and the sum of such weekly amounts is paid monthly. Series D is also obligated to pay all floor brokerage expenses, give-up charges and NFA, clearing and exchange fees incurred in connection with Series D's commodity trading activities. D. Related Parties Series D reimburses the Managing Owner or its affiliates for services they perform for Series D, 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. However, the amount of general and administrative expenses incurred by Series D is limited to 1.5% of its net asset value during the year. Because general and administrative expenses exceeded this limit, a portion of the expenses related to services the Managing Owner performed for Series D for the period from March 13, 2000 (commencement of operations) to December 31, 2000 have been borne by the Managing Owner and its affiliates. Additionally, PSI or its affiliates paid the costs of organizing Series D and continue to pay the costs of offering its Limited Interests. The costs incurred by Series D for the period from March 13, 2000 (commencement of operations) to December 31, 2000 for services performed by the Managing Owner and its affiliates for Series D were:
Commissions $ 279,774 General and administrative 27,237 ------------------- $ 307,011 ------------------- -------------------
Expenses payable to the Managing Owner and its affiliates (which are included in accrued expenses) as of December 31, 2000 were $13,916. All of the proceeds of the offering of Series D are received in the name of Series D and are deposited in trading or cash accounts at PSI. Series D's assets are maintained with PSI or, for margin purposes, with the various exchanges on which Series D is permitted to trade. Series D receives interest income on 100% of its average daily equity maintained in cash in its accounts with PSI during each month at the 13-week Treasury bill discount rate. This rate is determined weekly by PSI and represents the rate awarded to all bidders during each week's auction of 13-week Treasury bills. Series D, acting through its Trading Advisor, may execute over-the-counter, spot, forward and/or option foreign exchange transactions with PSI. PSI then engages in back-to-back trading with an affiliate, Prudential-Bache Global Markets Inc. ('PBGM'). PBGM attempts to earn a profit on such transactions. PBGM 133 keeps its prices on foreign currency competitive with other interbank currency trading desks. All over-the-counter currency transactions are conducted between PSI and Series D pursuant to a line of credit. PSI may require that collateral be posted against the marked-to-market positions of Series D. As of December 31, 2000, a non-U.S. affiliate of the Managing Owner owns 54.067 Limited Interests of Series D. E. Income Taxes There have been no differences between the tax basis and book basis of Interest holders' capital since inception of the Trust. F. Derivative Instruments and Associated Risks Series D is exposed to various types of risks associated with the derivative instruments and related markets in which it invests. These risks include, but are not limited to, risk of loss from fluctuations in the value of derivative instruments held (market risk) and the inability of counterparties to perform under the terms of Series D's investment activities (credit risk). Market risk Trading in futures and forward (including foreign exchange) contracts involves entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The gross or face amount of the contracts, which is typically many times that of Series D's net assets being traded, significantly exceeds Series D's future cash requirements since Series D intends to close out its open positions prior to settlement. As a result, Series D is generally subject only to the risk of loss arising from the change in the value of the contracts. As such, Series D considers the 'fair value' of its derivative instruments to be the net unrealized gain or loss on the contracts. The market risk associated with Series D's commitments to purchase commodities is limited to the gross or face amount of the contracts held. However, when Series D enters into a contractual commitment to sell commodities, it must make delivery of the underlying commodity at the contract price and then repurchase the contract at prevailing market prices. Since the repurchase price to which a commodity can rise is unlimited, entering into commitments to sell commodities exposes Series D to unlimited risk. Market risk is influenced by a wide variety of factors including government programs and policies, political and economic events, the level and volatility of interest rates, foreign currency exchange rates, the diversification effects among the derivative instruments Series D holds and the liquidity and inherent volatility of the markets in which Series D trades. Credit risk When entering into futures or forward contracts, Series D is exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded in the United States and on most foreign futures exchanges is the clearinghouse associated with such exchanges. In general, clearinghouses are backed by their corporate members who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members (i.e., some foreign exchanges), it is normally backed by a consortium of banks or other financial institutions. On the other hand, the sole counterparty to Series D's forward transactions is PSI, Series D's commodity broker. Series D has entered into a master netting agreement with PSI and, as a result, presents unrealized gains and losses on open forward positions as a net amount in the statements of financial condition. The amount at risk associated with counterparty non-performance of all of Series D's contracts is the net unrealized gain included in the statements of financial condition. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to Series D. The Managing Owner attempts to minimize both credit and market risks by requiring Series D and its Trading Advisor 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; 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. Additionally, pursuant to the advisory agreement among Series D, the Managing Owner and the Trading Advisor, Series D shall automatically 134 terminate the Trading Advisor if the net asset value allocated to the trading advisor declines by 40% from the value at the beginning of any year or since the commencement of trading activities. Furthermore, the Trust Agreement provides that Series D will liquidate its positions, and eventually dissolve, if Series D experiences a decline in the net asset value of 50% from the value at the beginning of any year or since the commencement of trading activities. In each case, the decline in net asset value is after giving effect for distributions, contributions and redemptions. The Managing Owner may impose additional restrictions (through modifications of trading limitations and policies) upon the trading activities of the Trading Advisor as it, in good faith, deems to be in the best interests of Series D. PSI, when acting as Series D's futures commission merchant in accepting orders for the purchase or sale of domestic futures contracts, is required by Commodity Futures Trading Commission ('CFTC') regulations to separately account for and segregate as belonging to Series D all assets of Series D relating to domestic futures trading and is not to commingle such assets with other assets of PSI. At December 31, 2000, such segregated assets totalled $5,000,399. Part 30.7 of the CFTC regulations also requires PSI to secure assets of Series D related to foreign futures trading which totalled $1,175,670 at December 31, 2000. There are no segregation requirements for assets related to forward trading. As of December 31, 2000, Series D's open futures and forward contracts mature within one year. The following table presents the fair value of futures and forward contracts at December 31, 2000:
Assets Liabilities -------- ----------- Futures Contracts: Domestic exchanges Interest rates $ 36,273 $ 151,533 Stock indices 17,350 -- Currencies 215,083 10,850 Commodities -- 2,813 Foreign exchanges Interest rates 4,281 42,656 Stock indices 16,034 15,045 Commodities -- 4,163 Forward Contracts: Currencies -- 10,235 -------- ----------- $289,021 $ 237,295 -------- ----------- -------- -----------
135 PricewaterhouseCoopers (LOGO) PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, NY 10036 Telephone (212) 596 8000 Facsimile (212) 596 8910 Report of Independent Accountants To the Managing Owner and Limited Owners of World Monitor Trust II--Series E In our opinion, the accompanying statements of financial condition and the related statements of operations and changes in trust capital present fairly, in all material respects, the financial position of World Monitor Trust II--Series E at December 31, 2000 and 1999, and the results of its operations for the period from April 6, 2000 (commencement of operations) to December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Managing Owner; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, 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 audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP January 26, 2001 136 WORLD MONITOR TRUST II--SERIES E (a Delaware Business Trust) STATEMENTS OF FINANCIAL CONDITION
December 31, ------------------------ 2000 1999 ---------------------------------------------------------------------------------------------------- ASSETS Cash $ 5,485,764 $ 1,000 Net unrealized gain on open futures contracts 958,857 -- ------------ -------- Total assets $ 6,444,621 $ 1,000 ------------ -------- ------------ -------- LIABILITIES AND TRUST CAPITAL Liabilities Incentive fees payable $ 238,625 $ -- Accrued expenses payable 47,623 -- Commissions and other transaction fees payable 36,522 -- Management fees payable 11,953 -- Net unrealized loss on open forward contracts 3,584 -- ------------ -------- Total liabilities 338,307 -- ------------ -------- Commitments Trust capital Limited interests (49,983.432 and -0- interests outstanding) 6,016,047 -- General interests (750 and 10 interests outstanding) 90,267 1,000 ------------ -------- Total trust capital 6,106,314 1,000 ------------ -------- Total liabilities and trust capital $ 6,444,621 $ 1,000 ------------ -------- ------------ -------- Net asset value per limited and general interest ('Interests') $ 120.36 $ 100.00 ------------ -------- ------------ --------
-------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. 137 WORLD MONITOR TRUST II--SERIES E (a Delaware Business Trust) STATEMENT OF OPERATIONS
For the period from April 6, 2000 (commencement of operations) to December 31, 2000 ------------------------------------------------------------------------------------------------- REVENUES Net realized gain on commodity transactions $ 474,366 Net unrealized gain/loss on open commodity positions 955,273 Interest income 230,425 ---------------- 1,660,064 ---------------- EXPENSES Commissions and other transaction fees 250,449 Management fees 76,878 Incentive fees 238,625 General and administrative 58,344 ---------------- 624,296 ---------------- Net income $ 1,035,768 ---------------- ---------------- ALLOCATION OF NET INCOME Limited interests $ 1,020,501 ---------------- ---------------- General interests $ 15,267 ---------------- ---------------- NET INCOME PER WEIGHTED AVERAGE LIMITED AND GENERAL INTEREST Net income per weighted average limited and general interest $ 19.41 ---------------- ---------------- Weighted average number of limited and general interests outstanding 53,350 ---------------- ---------------- -------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN TRUST CAPITAL
LIMITED GENERAL INTERESTS INTERESTS INTERESTS TOTAL ----------------------------------------------------------------------------------------------------- Trust capital--December 31, 1999 10.000 $ -- $ 1,000 $ 1,000 Contributions 59,172.609 5,797,957 74,000 5,871,957 Net income 1,020,501 15,267 1,035,768 Redemptions (8,449.177) (802,411) -- (802,411) ---------- ---------- --------- ---------- Trust capital--December 31, 2000 50,733.432 $6,016,047 $90,267 $6,106,314 ---------- ---------- --------- ---------- ---------- ---------- --------- ---------- ----------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements.
138 WORLD MONITOR TRUST II--SERIES E (a Delaware Business Trust) NOTES TO FINANCIAL STATEMENTS A. General The Trust, Trustee, Managing Owner and Affiliates World Monitor Trust II (the 'Trust') is a business trust organized under the laws of Delaware on April 22, 1999. The Trust consists of three separate and distinct series ('Series'): Series D, E and F. Series D, E and F commenced trading operations on March 13, 2000, April 6, 2000 and March 1, 2000, respectively, and each Series will continue to exist until terminated pursuant to the provisions of Article XIII of the First Amended and Restated Declaration of Trust and Trust Agreement (the 'Trust Agreement'). The assets of each Series are segregated from those of the other Series, separately valued and independently managed. Each Series was formed to engage in the speculative trading of a diversified portfolio of futures, forward and options contracts, and may, from time to time, engage in cash and spot transactions. 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 selling agent for the Trust as well as its commodity broker ('Commodity Broker'). The Offering Up to $50,000,000 of limited interests in each Series ('Limited Interests') are being offered (totalling $150,000,000) ('Subscription Maximum'). Interests are being offered to investors who meet certain established suitability standards, with a minimum initial subscription of $5,000 ($2,000 for an individual retirement account), although the minimum purchase for any single Series is $1,000. General interests are also being sold exclusively to the Managing Owner. Limited Interests and general interests are sometimes collectively referred to as 'Interests.' Initially, the Limited Interests for each Series were offered for a period of up to 180 days after the date of the Prospectus ('Initial Offering Period'). The price per Interest during the Initial Offering Period was $100. Each Series could commence operations at any time if the minimum amount of Limited Interests was sold before the Initial Offering Period expired ('Subscription Minimum'). The Subscription Minimum of $5,000,000 for each Series was reached and, as a result, Series D, E and F commenced trading operations. Series E completed its initial offering April 6, 2000 with gross proceeds of $5,157,459, which was fully allocated to commodities trading. Until the Subscription Maximum for each Series is reached, each Series' Limited Interests will continue to be offered on a weekly basis at the then current net asset value per Interest ('Continuous Offering Period'). The Managing Owner is required to maintain at least a 1% interest in the capital, profits and losses of each Series so long as it is acting as the Managing Owner, and it will make such contributions (and in return will receive general interests) as are necessary to meet this requirement. The Trading Advisor Each Series has its own independent commodity trading advisor that makes that Series' trading decisions. The Managing Owner, on behalf of Series E, entered into an advisory agreement with Graham Capital Management, L.P. (the 'Trading Advisor') to make the trading decisions for Series E. The advisory agreement may be terminated for various reasons, including at the discretion of the Managing Owner. The Managing Owner has allocated 100% of the proceeds from the initial and continuous offering of Series E to the Trading Advisor and it is currently contemplated that the Trading Advisor will continue to be allocated 100% of additional capital raised for Series E during the Continuous Offering Period. Exchanges, Redemptions and Termination Interests owned in one Series may be exchanged, without any charge, for Interests of one or more other Series on a weekly basis for as long as Limited Interests in those Series are being offered to the public. Exchanges are made at the applicable Series' then current net asset value per Interest as of the close of business on the Friday immediately preceding the week in which the exchange request is effected. The 139 exchange of Interests is treated as a redemption of Interests in one Series (with the related tax consequences) and the simultaneous purchase of Interests in the Series exchanged into. Redemptions are permitted on a weekly basis. Limited Interests redeemed on or before the end of the first and second successive six-month periods after their effective dates of purchase are subject to a redemption fee of 4% and 3%, respectively, of the net asset value at which they are redeemed. Redemption fees are paid to the Managing Owner. In the event that the estimated net asset value per Interest of a Series at the end of any business day, after adjustments for distributions, declines by 50% or more since the commencement of trading activities or the first day of a fiscal year, the Series will automatically terminate. B. Summary of Significant Accounting Policies Basis of accounting The financial statements of Series E are prepared in accordance with accounting principles generally accepted in the United States of America. Such principles require the Managing Owner to make estimates and assumptions that affect the reported amounts of liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. 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. The weighted average number of Limited Interests and general interests outstanding was computed for purposes of disclosing net income per weighted average Limited Interest and general interest. The weighted average Limited Interests 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. Series E 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 Series E is treated as a partnership for Federal income tax purposes. As such, Series E 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 including the Managing Owner. Series E may be subject to other state and local taxes in jurisdictions in which it operates. Profit and loss allocations and distributions Series E allocates profits and losses for both financial and tax reporting purposes to its Interest holders weekly on a pro rata basis based on each owner's Interests outstanding during the week. Distributions (other than redemptions of Interests) may be made at the sole discretion of the Managing Owner on a pro rata basis in accordance with the respective capital balances of the Interest holders; however, the Managing Owner does not presently intend to make any distributions. New Accounting Guidance In June 2000, the Financial Accounting Standards Board ('FASB') issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities--an amendment of FASB Statement No. 133 ('SFAS 138'), which became effective for Series E on July 1, 2000. SFAS 138 amends the accounting and reporting standards of FASB Statement No. 133 for certain derivative instruments and certain hedging activities. SFAS 138 has not had a material effect on the carrying value of assets and liabilities within the financial statements. 140 C. Fees Organizational and offering costs PSI or its affiliates paid the costs of organizing Series E, and continue to pay the costs of offering its Limited Interests. General and administrative costs Routine legal, audit, postage, and other routine third party administrative costs are paid by Series E. Additionally, Series E pays the administrative costs incurred by the Managing Owner or its affiliates for services they perform for Series E which include, but are not limited to, those costs discussed in Note D below. However, all of these general and administrative costs incurred by Series E are limited to 1.5% annually of Series E's net asset value. Management and incentive fees Series E pays its Trading Advisor a management fee at an annual rate of 2% of its net asset value allocated to its management. The management fee is determined weekly and the sum of such weekly amounts is paid monthly. Series E also pays its Trading Advisor a quarterly incentive fee equal to 22% of such Trading Advisor's 'New High Net Trading Profits' (as defined in the advisory agreement). The incentive fee also accrues weekly. Commissions The Managing Owner and the Trust entered into a brokerage agreement with PSI to act as Commodity Broker for each Series whereby Series E pays a fixed fee for brokerage services rendered at an annual rate of 6% of Series E's net asset value. The fee is determined weekly and the sum of such weekly amounts is paid monthly. Series E is also obligated to pay all floor brokerage expenses, give-up charges and NFA, clearing and exchange fees incurred in connection with Series E's commodity trading activities. D. Related Parties Series E reimburses the Managing Owner or its affiliates for services they perform for Series E 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. However, the amount of general and administrative expenses incurred by Series E is limited to 1.5% of its net asset value during the year. Because general and administrative expenses exceeded this limit, Series E did not incur any costs for services provided by the Managing Owner and its affiliates, other than brokerage services, during the period from April 6, 2000 (commencement of operations) to December 31, 2000 as these costs have been borne by the Managing Owner and its affiliates. Additionally, PSI or its affiliates paid the costs of organizing Series E and continue to pay the cost of offering its Limited Interests. The cost incurred by Series E for brokerage services performed by the Managing Owner and its affiliates for the period from April 6, 2000 (commencement of operations) to December 31, 2000 was $229,887. All of the proceeds of the offering of Series E are received in the name of Series E and are deposited in trading or cash accounts at PSI. Series E's assets are maintained with PSI or, for margin purposes, with the various exchanges on which Series E is permitted to trade. Series E receives interest income on 100% of its average daily equity maintained in cash in its accounts with PSI during each month at the 13-week Treasury bill discount rate. This rate is determined weekly by PSI, and represents the rate awarded to all bidders during each week's auction of 13-week Treasury bills. Series E, acting through its trading advisor, may execute over-the-counter, spot, forward and/or option foreign exchange transactions with PSI. PSI then engages in back-to-back trading with an affiliate, Prudential-Bache Global Markets Inc. ('PBGM'). PBGM attempts to earn a profit on such transactions. PBGM keeps its prices on foreign currency competitive with other interbank currency trading desks. All over-the-counter currency transactions are conducted between PSI and Series E pursuant to a line of credit. PSI may require that collateral be posted against the marked-to-market positions of Series E. As of December 31, 2000, a non-U.S. affiliate of the Managing Owner owns 54.284 Limited Interests of Series E. 141 E. Income Taxes There have been no differences between the tax basis and book basis of Interest holders' capital since inception of the Trust. F. Derivative Instruments and Associated Risks Series E is exposed to various types of risks associated with the derivative instruments and related markets in which it invests. These risks include, but are not limited to, risk of loss from fluctuations in the value of derivative instruments held (market risk) and the inability of counterparties to perform under the terms of Series E's investment activities (credit risk). Market risk Trading in futures and forward (including foreign exchange transactions) contracts involves entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The gross or face amount of the contracts, which is typically many times that of Series E's net assets being traded, significantly exceeds Series E's future cash requirements since Series E intends to close out its open positions prior to settlement. As a result, Series E is generally subject only to the risk of loss arising from the change in the value of the contracts. As such, Series E considers the 'fair value' of its derivative instruments to be the net unrealized gain or loss on the contracts. The market risk associated with Series E's commitments to purchase commodities is limited to the gross or face amount of the contracts held. However, when Series E enters into a contractual commitment to sell commodities, it must make delivery of the underlying commodity at the contract price and then repurchase the contract at prevailing market prices. Since the repurchase price to which a commodity can rise is unlimited, entering into commitments to sell commodities exposes Series E to unlimited risk. Market risk is influenced by a wide variety of factors including government programs and policies, political and economic events, the level and volatility of interest rates, foreign currency exchange rates, the diversification effects among the derivative instruments Series E holds and the liquidity and inherent volatility of the markets in which Series E trades. Credit risk When entering into futures or forward contracts, Series E is exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded in the United States and on most foreign futures exchanges is the clearinghouse associated with such exchanges. In general, clearinghouses are backed by their corporate members who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members (i.e., some foreign exchanges), it is normally backed by a consortium of banks or other financial institutions. On the other hand, the sole counterparty to Series E's forward transactions is PSI, Series E's commodity broker. Series E has entered into a master netting agreement with PSI and, as a result, presents unrealized gains and losses on open forward positions as a net amount in the statements of financial condition. The amount at risk associated with counterparty nonperformance of all of Series E's contracts is the net unrealized gain included in the statements of financial condition. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to Series E. The Managing Owner attempts to minimize both credit and market risks by requiring Series E and its Trading Advisor 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; 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. Additionally, pursuant to the Advisory Agreement among Series E, the Managing Owner and the Trading Advisor, Series E shall automatically terminate the Trading Advisor if the net asset value allocated to the Trading Advisor declines by 40% from the value at the beginning of any year or since the commencement of trading activities. Furthermore, the Trust Agreement provides that Series E will liquidate its positions, and eventually dissolve, if Series E experiences a decline in the net asset value of 50% from the value at the beginning of any year or since the commencement of trading activities. In each case, the decline in net asset value is after giving effect for distributions, contributions and redemptions. The Managing Owner may impose additional restrictions 142 (through modifications of trading limitations and policies) upon the trading activities of the Trading Advisor as it, in good faith, deems to be in the best interests of Series E. PSI, when acting as Series E's futures commission merchant in accepting orders for the purchase or sale of domestic futures contracts, is required by Commodity Futures Trading Commission ('CFTC') regulations to separately account for and segregate as belonging to Series E all assets of Series E relating to domestic futures trading and is not to commingle such assets with other assets of PSI. At December 31, 2000, such segregated assets totalled $5,089,390. Part 30.7 of the CFTC regulations also requires PSI to secure assets of Series E related to foreign futures trading which totalled $1,355,231 at December 31, 2000. There are no segregation requirements for assets related to forward trading. As of December 31, 2000, Series E's open futures and forward contracts generally mature within one year, although certain interest rate futures contracts have maturities as distant as June 2002. The following table presents the fair value of futures and forward contracts at December 31, 2000:
Assets Liabilities ---------- ----------- Futures Contracts: Domestic exchanges Interest rates $ 275,953 $ -- Currencies 260,258 28,675 Commodities 132,815 37,116 Foreign exchanges Interest rates 309,325 -- Stock indices 68,667 5,300 Commodities 20,396 37,466 Forward Contracts: Currencies 33,172 36,756 ---------- ----------- $1,100,586 $ 145,313 ---------- ----------- ---------- -----------
143 PricewaterhouseCoopers (LOGO) PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, NY 10036 Telephone (212) 596 8000 Facsimile (212) 596 8910 Report of Independent Accountants To the Managing Owner and Limited Owners of World Monitor Trust II--Series F In our opinion, the accompanying statements of financial condition and the related statement of operations, and changes in trust capital present fairly, in all material respects, the financial position of World Monitor Trust II--Series F at December 31, 2000 and 1999 and the results of its operations for the period from March 1, 2000 (commencement of operations) to December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Managing Owner; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America 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 audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP January 26, 2001 144 WORLD MONITOR TRUST II--SERIES F (a Delaware Business Trust) STATEMENTS OF FINANCIAL CONDITION
December 31, ------------------------ 2000 1999 ---------------------------------------------------------------------------------------------------- ASSETS Cash $ 7,697,248 $ 1,000 Net unrealized gain on open futures contracts 434,309 -- ------------ -------- Total assets $ 8,131,557 $ 1,000 ------------ -------- ------------ -------- LIABILITIES AND TRUST CAPITAL Liabilities Accrued expenses $ 71,749 $ -- Incentive fee payable 70,035 Commissions and other transaction fees payable 48,465 -- Management fee payable 15,976 -- ------------ -------- Total liabilities 206,225 -- ------------ -------- Commitments Trust capital Limited interests (73,387.895 and -0- interests outstanding) 7,845,159 -- General interests (750 and 10 interests outstanding) 80,173 1,000 ------------ -------- Total trust capital 7,925,332 1,000 ------------ -------- Total liabilities and trust capital 8,131,557 $ 1,000 ------------ -------- ------------ -------- Net asset value per limited and general interests ('Interests') $ 106.90 $ 100.00 ------------ -------- ------------ --------
-------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. 145 WORLD MONITOR TRUST II--SERIES F (a Delaware Business Trust) STATEMENT OF OPERATIONS
For the period from March 1, 2000 (commencement of operations) to December 31, 2000 ------------------------------------------------------------------------------------------------- REVENUES Net realized gain on commodity transactions $ 404,222 Net unrealized gain/loss on open commodity positions 434,309 Interest income 333,749 ---------------- 1,172,280 ---------------- EXPENSES Commissions and other transaction fees 350,702 Management fees 111,401 Incentive fee 70,035 General and administrative 83,849 ---------------- 615,987 ---------------- Net income $ 556,293 ---------------- ---------------- ALLOCATION OF NET INCOME Limited interests $ 551,120 ---------------- ---------------- General interests $ 5,173 ---------------- ---------------- NET INCOME PER WEIGHTED AVERAGE LIMITED AND GENERAL INTEREST Net income per weighted average limited and general interest $ 8.41 ---------------- ---------------- Weighted average number of limited and general interests outstanding 66,146 ---------------- ---------------- -------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN TRUST CAPITAL
LIMITED GENERAL INTERESTS INTERESTS INTERESTS TOTAL ----------------------------------------------------------------------------------------------------- Trust capital--December 31, 1999 10.000 $ -- $ 1,000 $ 1,000 Contributions 82,371.909 8,112,830 74,000 8,186,830 Net income 551,120 5,173 556,293 Redemptions (8,244.014) (818,791) -- (818,791) ---------- ---------- --------- ---------- Trust capital--December 31, 2000 74,137.895 7,845,159 80,173 7,925,332 ---------- ---------- --------- ---------- ---------- ---------- --------- ---------- ----------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements.
146 WORLD MONITOR TRUST II--SERIES F (a Delaware Business Trust) NOTES TO FINANCIAL STATEMENTS A. General The Trust, Trustee, Managing Owner and Affiliates World Monitor Trust II (the 'Trust') is a business trust organized under the laws of Delaware on April 22, 1999. The Trust consists of three separate and distinct series ('Series'): Series D, E and F. Series D, E and F commenced trading operations on March 13, 2000, April 6, 2000 and March 1, 2000, respectively, and each Series will continue to exist until terminated pursuant to the provisions of Article XIII of the First Amended and Restated Declaration of Trust and Trust Agreement (the 'Trust Agreement'). The assets of each Series are segregated from those of the other Series, separately valued and independently managed. Each Series was formed to engage in the speculative trading of a diversified portfolio of futures, forward and options contracts, and may, from time to time, engage in cash and spot transactions. 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 selling agent for the Trust as well as its commodity broker ('Commodity Broker'). The Offering Up to $50,000,000 of limited interests in each Series ('Limited Interests') are being offered (totalling $150,000,000) ('Subscription Maximum'). Interests are being offered to investors who meet certain established suitability standards, with a minimum initial subscription of $5,000 ($2,000 for an individual retirement account), although the minimum purchase for any single Series is $1,000. General Interests are also being sold exclusively to the Managing Owner. Limited Interests and general interests are sometimes referred to as 'Interests'. Initially, the Limited Interests for each Series were offered for a period of up to 180 days after the date of the Prospectus ('Initial Offering Period'). The price per Interest during the Initial Offering Period was $100. Each Series could commence operations at any time if the minimum amount of Limited Interests was sold before the Initial Offering Period expired ('Subscription Minimum'). The Subscription Minimum of $5,000,000 for each Series was reached and, as a result, Series D, E and F commenced trading operations. Series F completed its initial offering March 1, 2000 with gross proceeds of $5,185,012, which was fully allocated to commodities trading. Until the Subscription Maximum for each Series is reached, each Series' Limited Interests will continue to be offered on a weekly basis at the then current net asset value per Interest ('Continuous Offering Period'). The Managing Owner is required to maintain at least a 1% interest in the capital, profits and losses of each Series so long as it is acting as the Managing Owner, and it will make such contributions (and in return will receive general interests) as are necessary to meet this requirement. The Trading Advisor Each Series has its own independent commodity trading advisor that makes that Series' trading decisions. The Managing Owner, on behalf of Series F, entered into an advisory agreement with Campbell & Company, Inc. (the 'Trading Advisor') to make the trading decisions for Series F. The advisory agreement may be terminated for various reasons, including at the discretion of the Managing Owner. The Managing Owner has allocated 100% of the proceeds from the initial and continuous offering of Series F to the Trading Advisor and it is currently contemplated that the Trading Advisor will continue to be allocated 100% of additional capital raised for Series F during the Continuous Offering Period. Exchanges, Redemptions and Termination Interests owned in one Series may be exchanged, without any charge, for Interests of one or more other Series on a weekly basis for as long as Limited Interests in those Series are being offered to the public. Exchanges are made at the applicable Series' then current net asset value per Interest as of the close of business on the Friday immediately preceding the week in which the exchange request is effected. The 147 exchange of Interests is treated as a redemption of Interests in one Series (with the related tax consequences) and the simultaneous purchase of Interests in the Series exchanged into. Redemptions are permitted on a weekly basis. Limited Interests redeemed on or before the end of the first and second successive six-month periods after their effective dates of purchase are subject to a redemption fee of 4% and 3%, respectively, of the net asset value at which they are redeemed. Redemption fees are paid to the Managing Owner. In the event that the estimated net asset value per Interest of a Series at the end of any business day, after adjustments for distributions, declines by 50% or more since the commencement of trading activities or the first day of a fiscal year, the Series will automatically terminate. B. Summary of Significant Accounting Policies Basis of accounting The financial statements of Series F are prepared in accordance with accounting principles generally accepted in the United States of America. Such principles require the Managing Owner to make estimates and assumptions that affect the reported amounts of liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. 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. The weighted average number of Limited Interests and general interests outstanding was computed for purposes of disclosing net income per weighted average Limited Interests and general interest. The weighted average Limited Interests 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. Series F 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 Series F is treated as a partnership for Federal income tax purposes. As such, Series F 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 including the Managing Owner. Series F may be subject to other state and local taxes in jurisdictions in which it operates. Profit and loss allocations and distributions Series F allocates profits and losses for both financial and tax reporting purposes to its Interest holders weekly on a pro rata basis based on each owner's Interests outstanding during the week. Distributions (other than redemptions of Interests) may be made at the sole discretion of the Managing Owner on a pro rata basis in accordance with the respective capital balances of the Interest holders; however, the Managing Owner does not presently intend to make any distributions. New Accounting Guidance In June 2000, the Financial Accounting Standards Board ('FASB') issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities--an amendment of FASB Statement No. 133 ('SFAS 138'), which became effective for Series F on July 1, 2000. SFAS 138 amends the accounting and reporting standards of FASB Statement No. 133 for certain derivative instruments and certain hedging activities. SFAS 138 has not had a material effect on the carrying value of assets and liabilities within the financial statements. 148 C. Fees Organizational and offering costs PSI or its affiliates paid the costs of organizing Series F and continue to pay the costs of offering its Limited Interests. General and administrative costs Routine legal, audit, postage, and other routine third party administrative costs are paid by Series F. Additionally, Series F pays the administrative costs incurred by the Managing Owner or its affiliates for services they perform for Series F which include, but are not limited to, those costs discussed in Note D below. However, all of these general and administrative costs incurred by Series F are limited to 1.5% annually of Series F's net asset value. Management and incentive fees Series F pays its Trading Advisor a management fee at an annual rate of 2% of the net asset value allocated to its management. The management fee is determined weekly and the sum of such weekly amounts is paid monthly. Series F also pays its Trading Advisor a quarterly incentive fee equal to 22% of such Trading Advisor's 'New High Net Trading Profits' (as defined in the Advisory Agreement). The incentive fee also accrues weekly. Commissions The Managing Owner and the Trust entered into a Brokerage Agreement with PSI to act as Commodity Broker for each Series whereby Series F pays a fixed fee for brokerage services rendered at an annual rate of 6% of Series F's net asset value. The fee is determined weekly and the sum of such weekly amounts is paid monthly. Series F is also obligated to pay all floor brokerage expenses, give-up charges and NFA, clearing and exchange fees incurred in connection with Series F's commodity trading activities. D. Related Parties Series F reimburses the Managing Owner or its affiliates for services they perform for Series F 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. However, the amount of general and administrative expenses incurred by Series F is limited to 1.5% of its net asset value during the year. Because general and administrative expenses exceeded this limit, a portion of the expenses related to services the Managing Owner performs for Series F for the period from March 1, 2000 (commencement of operations) to December 31, 2000 have been borne by the Managing Owner and its affiliates. Additionally, PSI or its affiliates paid the costs of organizing Series F and continue to pay the cost of offering its Limited Interests. The costs incurred by Series F for the period from March 1, 2000 (commencement of operations) to December 31, 2000 for services performed by the Managing Owner and its affiliates for Series F were: Commissions $ 332,814 General and administrative 33,749 ------------------- $ 366,563 ------------------- ------------------- Expenses payable to the Managing Owner and its affiliates (which are included in accrued expenses) as of December 31, 2000 were $25,109. All of the proceeds of the offering of Series F are received in the name of Series F and are deposited in trading or cash accounts at PSI. Series F's assets are maintained with PSI or, for margin purposes, with the various exchanges on which Series F is permitted to trade. Series F receives interest income on 100% of its average daily equity maintained in cash in its accounts with PSI during each month at the 13-week Treasury bill discount rate. This rate is determined weekly by PSI and represents the rate awarded to all bidders during each week's auction of 13-week Treasury bills. Series F, acting through its trading advisor, may execute over-the-counter, spot, forward and/or option foreign exchange transactions with PSI. PSI then engages in back-to-back trading with an affiliate, Prudential-Bache Global Markets Inc. ('PBGM'). PBGM attempts to earn a profit on such transactions. PBGM 149 keeps its prices on foreign currency competitive with other interbank currency trading desks. All over-the-counter currency transactions are conducted between PSI and Series F pursuant to a line of credit. PSI may require that collateral be posted against the marked-to-market positions of Series F. As of December 31, 2000, a non-U.S. affiliate of the Managing Owner owns 54.037 Limited Interests of Series F. E. Income Taxes There have been no differences between the tax basis and book basis of Interest holders' capital since inception of the Trust. F. Derivative Instruments and Associated Risks Series F is exposed to various types of risks associated with the derivative instruments and related markets in which it invests. These risks include, but are not limited to, risk of loss from fluctuations in the value of derivative instruments held (market risk) and the inability of counterparties to perform under the terms of Series F's investment activities (credit risk). Market risk Trading in futures contracts involves entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The gross or face amount of the contracts, which is typically many times that of Series F's net assets being traded, significantly exceeds Series F's future cash requirements since Series F intends to close out its open positions prior to settlement. As a result, Series F is generally subject only to the risk of loss arising from the change in the value of the contracts. As such, Series F considers the 'fair value' of its derivative instruments to be the net unrealized gain or loss on the contracts. The market risk associated with Series F's commitments to purchase commodities is limited to the gross or face amount of the contracts held. However, when Series F enters into a contractual commitment to sell commodities, it must make delivery of the underlying commodity at the contract price and then repurchase the contract at prevailing market prices. Since the repurchase price to which a commodity can rise is unlimited, entering into commitments to sell commodities exposes Series F to unlimited risk. Market risk is influenced by a wide variety of factors including government programs and policies, political and economic events, the level and volatility of interest rates, foreign currency exchange rates, the diversification effects among the derivative instruments Series F holds and the liquidity and inherent volatility of the markets in which Series F trades. Credit risk When entering into futures contracts, Series F is exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded in the United States and on most foreign futures exchanges is the clearinghouse associated with such exchanges. In general, clearinghouses are backed by their corporate members who are required to share any financial burden resulting from the non-performance by one of their members and, as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members (i.e., some foreign exchanges), it is normally backed by a consortium of banks or other financial institutions. The amount at risk associated with counterparty non-performance of all of Series F's contracts is the net unrealized gain included in the statements of financial condition. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to Series F. The Managing Owner attempts to minimize both credit and market risks by requiring Series F and its Trading Advisor 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; 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. Additionally, pursuant to the Advisory Agreement among Series F, the Managing Owner and the Trading Advisor, Series F shall automatically terminate the Trading Advisor if the net asset value allocated to the trading advisor declines by 40% from the value at the beginning of any year or since the commencement of trading activities. Furthermore, the Trust Agreement provides that Series F will liquidate its positions, and eventually dissolve, if Series F experiences 150 a decline in the net asset value of 50% from the value at the beginning of any year or since the commencement of trading activities. In each case, the decline in net asset value is after giving effect for distributions, contributions and redemptions. The Managing Owner may impose additional restrictions (through modifications of trading limitations and policies) upon the trading activities of the Trading Advisor as it, in good faith, deems to be in the best interests of Series F. PSI, when acting as Series F's futures commission merchant in accepting orders for the purchase or sale of domestic futures contracts, is required by Commodity Futures Trading Commission ('CFTC') regulations to separately account for and segregate as belonging to Series F all assets of Series F relating to domestic futures trading and is not to commingle such assets with other assets of PSI. At December 31, 2000, such segregated assets totalled $6,104,355. Part 30.7 of the CFTC regulations also requires PSI to secure assets of Series F related to foreign futures trading which totalled $2,027,202 at December 31, 2000. As of December 31, 2000, Series F's open futures contracts mature within one year. The following table presents the fair value of futures contracts at December 31, 2000:
Assets Liabilities -------- ----------- Domestic exchanges Interest rates $203,341 $ -- Stock indices -- 84,350 Currencies 218,267 146,627 Commodities 34,780 26,412 Foreign exchanges Interest rates 148,143 1,654 Stock indices 45,570 7,278 Commodities 57,623 7,094 -------- ----------- $707,724 $ 273,415 -------- ----------- -------- -----------
151 PricewaterhouseCoopers (LOGO) PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, NY 10036 Telephone 212 596 8000 Facsimile 212 596 8910 Report of Independent Accountants February 16, 2001 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, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 auditing standards generally accepted in the United States of America, 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 provides a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP 152 Prudential Securities Futures Management Inc. (A wholly-owned subsidiary of Prudential Securities Incorporated) Statement of Financial Condition December 31, 2000 Assets Cash $ 1,036 Investments in partnerships 1,484,632 Receivables from partnerships 61,843 Other receivables 100 Total assets $1,547,611 Liabilities and Stockholder's Equity Liabilities Due to Parent and affiliates $1,943,348 Accrued expenses and other liabilities 13,500 Total liabilities 1,956,848 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 3,540,000 Accumulated deficit (409,337) 3,130,763 Less: Noninterest-bearing demand notes due from Prudential Securities Group Inc (3,540,000) Total stockholder's equity (409,237) Total liabilities and stockholder's equity $1,547,611 The accompanying notes are an integral part of this financial statement. 153 Prudential Securities Futures Management Inc. (A wholly-owned subsidiary of Prudential Securities Incorporated) Notes to Statement of Financial Condition 1. General Prudential Securities Futures Management Inc. (the "Company") is a wholly-owned subsidiary of Prudential Securities Incorporated ("PSI" or the "Parent") and an indirect subsidiary of the Prudential Insurance Company of America. The Company is a general partner or managing owner of commodity 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 options 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. 2. 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 accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statement. Actual results could differ from those estimates. 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. At December 31, 2000, the Company's federal and state income tax payables are $18,201 and $5,522, respectively, and are included in Due to Parent and affiliates. 154 Prudential Securities Futures Management Inc. (A wholly-owned subsidiary of Prudential Securities Incorporated) Notes to Statement of Financial Condition 3. 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 is required to keep its investment in each partnership at an amount that gives the Company at least a 1% interest in the capital, profits, and losses of each partnership so long as it is acting as the managing owner of the partnership. The Company's investments in partnerships and its percentage ownership in those partnerships at December 31, 2000 are as follows: Diversified Futures Trust I $ 322,357 1.1% Diversified Futures Trust II 259,052 1.9% Prudential-Bache Capital Return Futures Fund 2, L.P. 141,828 1.0% Prudential Securities Strategic Trust 141,264 1.1% World Monitor Trust - Series A 93,676 1.0% World Monitor Trust - Series B 181,965 1.0% World Monitor Trust - Series C 102,663 1.1% World Monitor Trust II - Series D 71,284 1.2% World Monitor Trust II - Series E 90,330 1.5% World Monitor Trust II - Series F 80,213 1.0% $1,484,632 The following represents combined condensed financial information for the Partnerships in which the Company has an investment as of December 31, 2000: Assets $131,271,531 Liabilities $ 5,048,476 Partners' Capital 126,223,055 Liabilities and Partners' Capital $131,271,531 4. Related Parties The Company has an interest-bearing loan payable to PSGI in the amount of $1,759,836 at December 31, 2000 which bears interest at PSGI's effective borrowing rate (7.0% at December 31, 2000) and is payable on demand. The loan is 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 Partnerships (the balance of which is $189,242 and is included in Due to Parent and affiliates). The amount due from the Partnerships related to these services ($61,843) is included in Receivable from partnerships. The Company's officers and directors are also officers of PSI. 155 Prudential Securities Futures Management Inc. (A wholly-owned subsidiary of Prudential Securities Incorporated) Notes to Statement of Financial Condition 5. 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 $3,540,000 at December 31, 2000. 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 for which contract amounts plus accrued interest approximate $2,900,000 at December 31, 2000. 6. Commitments and Contingencies As a general partner or managing owner, the Company may be contingently liable for costs and liabilities incurred by the Partnerships. 156 DIVERSIFIED FUTURES TRUST I PricewaterhouseCoopers (LOGO) PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, NY 10036 Telephone (212) 596 8000 Facsimile (212) 596 8910 Report of Independent Accountants To the 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 at December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. 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 statement in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial 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 the Managing Owner, and evaluating the overall statement of financial condition presentation. We believe that our audit provides a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP January 26, 2001 157 DIVERSIFIED FUTURES TRUST I (a Delaware Business Trust) STATEMENT OF FINANCIAL CONDITION December 31, 2000 -------------------------------------------------------------------------------------------------- ASSETS Cash $26,730,111 Net unrealized gain on open futures contracts 4,674,695 Net unrealized gain on open forward contracts 870,491 ------------- Net equity 32,275,297 Other receivable 7,523 ------------- Total assets $32,282,820 ------------- ------------- LIABILITIES AND TRUST CAPITAL Liabilities Redemptions payable $ 2,980,451 Management fees payable 53,805 ------------- Total liabilities 3,034,256 ------------- Commitments Trust capital Limited interests (151,627.034 interests outstanding) 28,956,000 General interests (1,532 interests outstanding) 292,564 ------------- Total trust capital 29,248,564 ------------- Total liabilities and trust capital $32,282,820 ------------- ------------- Net asset value per limited and general interests ('Interests') $ 190.97 ------------- ------------- -------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of this statement.
158 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'). 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 limited 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. 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'). Additional Interests were offered and sold monthly at the then current net asset value ('NAV') per Interest until the continuous offering period 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 & Company, Inc. (the 'Trading Manager'), an independent commodity trading manager. The Trading Manager trades the Trust's assets pursuant to four of its trading programs: the Financial and Metals Portfolio; the Global Financial Portfolio; the Original Investment Program; and the G-7 Currency Portfolio. The Managing Owner retains the authority to override trading instructions that violate the Trust's trading policies. B. Summary of Significant Accounting Policies Basis of accounting The statement of financial condition of the Trust is prepared in accordance with accounting principles generally accepted in the United States of America. Commodity futures and forward transactions are reflected in the accompanying statement 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, distributions and redemptions Net income or loss for both financial and tax reporting purposes is allocated monthly to all Interest holders on a pro rata basis based on each Interest holder's number of Interests outstanding during the month. Distributions (other than 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. The Trust Agreement provides that an Interest holder may redeem its Interests as of the last business day of any calendar quarter at the then current NAV per Interest. 159 New Accounting Guidance In June 2000, the Financial Accounting Standards Board ('FASB') issued Statement No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities--an amendment of FASB Statement No. 133 ('SFAS 138'), which became effective for the Trust on July 1, 2000. SFAS 138 amends the accounting and reporting standards of FASB Statement No. 133 for certain derivative instruments and certain hedging activities. SFAS 138 has not had a material effect on the carrying value of assets and liabilities within the financial statements. 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 of the Trust. Management and incentive fees The Trust pays the Trading Manager a monthly management fee and quarterly incentive fee. Effective on October 1, 2000, the Advisory Agreement among the Trust, the Managing Owner and the Trading Manager was amended (the 'Amended Advisory Agreement'). The Amended Advisory Agreement reduced the monthly management fee paid to the Trading Manager from 1/3 of 1% (a 4% annual rate) of the Trust's NAV as of the end of each month to 1/6 of 1% (a 2% annual rate). Additionally, if the Trading Manager achieves 'New High Net Trading Profits' (as defined in the Amended Advisory Agreement), the Trading Manager will earn a 20% incentive fee as compared to a 15% incentive fee previously paid. 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 (including 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 as well as the Trust's routine operational, administrative, legal and auditing costs. The Trust's assets are maintained either in trading or cash accounts at PSI, the Trust's commodity broker, or for margin purposes, with the various exchanges on which the Trust is permitted to trade. PSI credits the Trust monthly with 100% of the interest it earns on the average net assets in the Trust's accounts. The Trust, acting through its Trading Manager, executes over-the-counter, spot, forward and/or option foreign exchange transactions with PSI. PSI then engages in back-to-back trading with an affiliate, Prudential-Bache Global Markets, Inc. ('PBGM'). PBGM attempts to earn a profit on such transactions. PBGM keeps its prices on foreign currency competitive with other interbank currency trading desks. All over-the-counter currency transactions are conducted between PSI and the Trust pursuant to a line of credit. PSI may require that collateral be posted against the marked-to-market positions of the Trust. As of December 31, 2000, a non-U.S. affiliate of the Managing Owner owns 578.511 Limited Interests of the Trust. E. Income Taxes There have been no differences between the tax basis and book basis of Interest holders' capital since inception of the Trust. 160 F. Derivative Instruments and Associated Risks The Trust is exposed to various types of risks associated with the derivative instruments and related markets in which it invests. These risks include, but are not limited to, risk of loss from fluctuations in the value of derivative instruments held (market risk) and the inability of counterparties to perform under the terms of the Trust's investment activities (credit risk). Market Risk Trading in futures and forward (including foreign exchange transactions) contracts involves entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The gross or face amount of the contracts, which is typically many times that of the Trust's net assets being traded, significantly exceeds the Trust's future cash requirements since the Trust intends to close out its open positions prior to settlement. As a result, the Trust 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 derivative instruments to be the net unrealized gain or loss on the contracts. The market risk associated with the Trust's commitments to purchase commodities is limited to the gross or face amount of the contracts held. However, when the Trust enters into a contractual commitment to sell commodities, it must make delivery of the underlying commodity at the contract price and then repurchase the contract at prevailing market prices. Since the repurchase price to which a commodity can rise is unlimited, entering into commitments to sell commodities exposes the Trust to unlimited risk. Market risk is influenced by a wide variety of factors including government programs and policies, political and economic events, the level and volatility of interest rates, foreign currency exchange rates, the diversification effects among the derivative instruments the Trust holds and the liquidity and inherent volatility of the markets in which the Trust trades. Credit Risk When entering into futures or forward contracts, the Trust is exposed to credit risk that the counterparty to the contract will not meet its obligations. The counterparty for futures contracts traded in the United States and on most foreign futures exchanges is the clearinghouse associated with such exchanges. In general, clearinghouses are backed by its corporate members who are required to share any financial burden resulting from the non-performance by one of its members and, as such, should significantly reduce this credit risk. In cases where the clearinghouse is not backed by the clearing members (i.e., some foreign exchanges), it is normally backed by a consortium of banks or other financial institutions. On the other hand, the sole counterparty to the Trust's forward transactions is PSI, the Trust's commodity broker. The Trust has entered into a master netting agreement with PSI and, as a result, presents unrealized gains and losses on open forward positions as a net amount in the statements of financial condition. The amount at risk associated with counterparty non-performance of all of the Trust's contracts is the net unrealized gain included in the statements of financial condition. There can be no assurance that any counterparty, clearing member or clearinghouse will meet its obligations to the Trust. The Managing Owner attempts to minimize both credit and market risks by requiring the Trust and its 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; 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. Additionally, pursuant to the Amended Advisory Agreement among the Trust, the Managing Owner and the Trading Manager, the Trust shall automatically terminate the Trading Manager if the NAV allocated to the Trading Manager declines by 33 1/3% from the value at the beginning of any year or since the commencement of trading activities. Furthermore, the Amended and Restated Declaration of Trust and Trust Agreement provides that the Trust will liquidate its positions, and eventually dissolve, if the Trust experiences a decline in the NAV of 50% from the value at the beginning of any year or since the commencement of trading activities. In each case, the decline in NAV is after giving effect for distributions and redemptions. 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 contracts, is required by Commodity Futures Trading Commission ('CFTC') regulations 161 to separately account for and segregate as belonging to the Trust all assets of the Trust relating to domestic futures trading and is not to commingle such assets with other assets of PSI. At December 31, 2000, such segregated assets totalled $23,255,703. Part 30.7 of the CFTC regulations also requires PSI to secure assets of the Trust related to foreign futures trading which totalled $8,149,103 at December 31, 2000. There are no segregation requirements for assets related to forward trading. As of December 31, 2000, the Trust's open futures and forward contracts mature within one year. At December 31, 2000, the fair value of open futures and forward contracts was:
Assets Liabilities ----------------- ----------------- Futures Contracts: Domestic exchanges Interest rates $ 1,022,561 $ -- Stock indices 221,700 -- Currencies 1,479,050 111,600 Commodities 881,010 131,336 Foreign exchanges Interest rates 870,562 -- Stock indices 388,967 27,913 Commodities 127,439 45,745 Forward Contracts: Currencies 882,242 11,751 ----------------- ----------------- $ 5,873,531 $ 328,345 ----------------- ----------------- ----------------- -----------------
162 EXHIBIT A FIRST AMENDED AND RESTATED DECLARATION OF TRUST AND TRUST AGREEMENT OF WORLD MONITOR TRUST II Dated as of May 15, 1999 By and Among PRUDENTIAL SECURITIES FUTURES MANAGEMENT INC., WILMINGTON TRUST COMPANY and THE INTERESTHOLDERS from time to time hereunder 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. . . . . . . . . . . 7 SECTION 1.6 Tax Treatment. . . . . . . . . . . . . . 8 SECTION 1.7 General Liability of the Managing Owner. 8 SECTION 1.8 Legal Title. . . . . . . . . . . . . . . 9 SECTION 1.9 Series Trust. . . . . . . . . . . . . . 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. . . . . . . . . . . . 10 SECTION 2.6 Liability of Trustee . . . . . . . . . . 11 SECTION 2.7 Reliance; Advice of Counsel. . . . . . . 12 ARTICLE III INTERESTS; CAPITAL CONTRIBUTIONS . . . . . . . . . . . 13 SECTION 3.1 General. . . . . . . . . . . . . . . . 14 SECTION 3.2 Establishment of Series of Interests.. 14 SECTION 3.3 Establishment of Classes. . . . . . . 14 SECTION 3.4 Limited Interests. . . . . . . . . . . 14 SECTION 3.5 Assets of Series. . . . . . . . . . . 22 SECTION 3.6 Liabilities of Series. . . . . . . . . 22 SECTION 3.7 Dividends and Distributions. . . . . . . 24 SECTION 3.8 Voting Rights. . . . . . . . . . . . . . 25 SECTION 3.9 Equality . . . . . . . . . . . . . . . . 25 SECTION 3.10 Exchange of Interests . . . . . . . . . 25 (i) ARTICLE IV THE MANAGING OWNER . . . . . . . . . . . . . . . . . . 26 SECTION 4.1 Management of the Trust. . . . . . . . 26 SECTION 4.2 Authority of Managing Owner. . . . . . 29 SECTION 4.3 Obligations of the Managing Owner. . . 29 SECTION 4.4 General Prohibitions . . . . . . . . . 31 SECTION 4.5 Liability of Covered Persons . . . . . 32 SECTION 4.6 Indemnification of the Managing Owner. 32 SECTION 4.7 Expenses and Limitations Thereon . . . 34 SECTION 4.8 Compensation to the Managing Owner . . 35 SECTION 4.9 Other Business of Interestholders. . . 35 SECTION 4.10 Voluntary Withdrawal of the Managing Owner. . . . . . . . . . . . . . . . . . . 35 SECTION 4.11 Authorization of Registration Statements . . . . . . . . . . . . . . . . 35 SECTION 4.12 Litigation. . . . . . . . . . . . . . 36 ARTICLE V TRANSFERS OF INTERESTS . . . . . . . . . . . . . . . . 36 SECTION 5.1 General Prohibition. . . . . . . . . . 36 SECTION 5.2 Transfer of Managing Owner's General Interests. . . . . . . . . . . . . . . . . 36 SECTION 5.3 Transfer of Limited Interests. . . . . 37 ARTICLE VI DISTRIBUTION AND ALLOCATIONS . . . . . . . . . . . . . 40 SECTION 6.1 Capital Accounts . . . . . . . . . . . 40 SECTION 6.2 Weekly Allocations . . . . . . . . .. 40 SECTION 6.3 Allocation of Profit and Loss for United States Federal Income Tax Purposes. . . . . . . . . . . . . . . 41 SECTION 6.4 Allocation of Distributions. . . . . . 42 SECTION 6.5 Admissions of Interestholders; Transfers42 SECTION 6.6 Liability for State and Local and Other Taxes. . . . . . . . . . . . . . . . . . . 43 ARTICLE VII REDEMPTIONS. . . . . . . . . . . . . . . . . . . . . . 43 SECTION 7.1 Redemption of Interests. . . . . . . . 43 SECTION 7.2 Redemption by the Managing Owner . .. 45 SECTION 7.3 Redemption Fee . . . . . . . . . . . 45 SECTION 7.4 Exchange of Interests. . . . . . . . 45 (ii) ARTICLE VIII THE LIMITED OWNERS . . . . . . . . . . . . . . . . . . 45 SECTION 8.1 No Management or Control; Limited Liability. . . . . . . . . . . . . . . . . 45 SECTION 8.2 Rights and Duties. . . . . . . . . . . 46 SECTION 8.3 Limitation on Liability. . . . . . . . 47 ARTICLE IX BOOKS OF ACCOUNT AND REPORTS . . . . . . . . . . . . . 48 SECTION 9.1 Books of Account . . . . . . . . . . . 48 SECTION 9.2 Annual Reports and Monthly Statements. 48 SECTION 9.3 Tax Information. . . . . . . . . . . . 48 SECTION 9.4 Calculation of Net Asset Value of a Series . . . . . . . . . . . . . . . . . 48 SECTION 9.5 Other Reports. . . . . . . . . . . . . 48 SECTION 9.6 Maintenance of Records . . . . . . . . 49 SECTION 9.7 Certificate of Trust . . . . . . . . . 49 SECTION 9.8 Registration of Interests. . . . . . . 49 ARTICLE X FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . 49 SECTION 10.1 Fiscal Year . . . . . . . . . . . . . 49 ARTICLE XI AMENDMENT OF TRUST AGREEMENT; MEETINGS . . . . . . . . 50 SECTION 11.1 Amendments to the Trust Agreement . . 50 SECTION 11.2 Meetings of the Trust . . . . . . . . 51 SECTION 11.3 Action Without a Meeting. . . . . . . 52 ARTICLE XII TERM . . . . . . . . . . . . . . . . . . . . . . . . . 52 SECTION 12.1 Term. . . . . . . . . . . . . . . . . 52 ARTICLE XIII TERMINATION. . . . . . . . . . . . . . . . . . . . . . 52 SECTION 13.1 Events Requiring Dissolution of the Trust or any Series. . . . . . . . . . . . 52 SECTION 13.2 Distributions on Dissolution. . . . . 54 SECTION 13.3 Termination; Certificate of Cancellation . . . . . . . . . . . . . . 54 (iii) ARTICLE XIV POWER OF ATTORNEY. . . . . . . . . . . . . . . . . . . 55 SECTION 14.1 Power of Attorney Executed Concurrently55 SECTION 14.2 Effect of Power of Attorney . . . . . 55 SECTION 14.3 Limitation on Power of Attorney . . . 56 ARTICLE XV MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . 56 SECTION 15.1 Governing Law . . . . . . . . . . . . . 56 SECTION 15.2 Provisions In Conflict With Law or Regulations. . . . . . . . . . . . . . . . 57 SECTION 15.3 Construction. . . . . . . . . . . . . 57 SECTION 15.4 Notices . . . . . . . . . . . . . . . 57 SECTION 15.5 Counterparts. . . . . . . . . . . . . 57 SECTION 15.6 Binding Nature of Trust Agreement . . 57 SECTION 15.7 No Legal Title to Trust Estate. . . . 58 SECTION 15.8 Creditors . . . . . . . . . . . . . . 58 SECTION 15.9 Integration . . . . . . . . . . . . . 58 EXHIBIT A CERTIFICATE OF TRUST OF WORLD MONITOR TRUST II . . . . . . . . . . . . . . . 60 (iv) WORLD MONITOR TRUST II FIRST AMENDED AND RESTATED DECLARATION OF TRUST AND TRUST AGREEMENT This FIRST AMENDED AND RESTATED DECLARATION OF TRUST AND TRUST AGREEMENT of WORLD MONITOR TRUST II ("Trust Agreement") is made and entered into as of the 15th day of May, 1999, 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 parties entered into a Declaration of Trust and Trust Agreement dated April 22, 1999 (the "Initial Trust Agreement"); WHEREAS, the parties hereto desire to amend certain provisions of the Initial Trust Agreement related to the governance of the Trust and to restate in detail their respective rights and duties relating to the Trust. 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, except for minor exceptions, 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 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. "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 or any Series in 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 Contracts, forward contracts, foreign exchange positions and traded 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 physical 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 3.4(f) are sold. "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. "Dealing Day" shall have the meaning set forth in the Prospectus. "Disposition Gain" means, for each Fiscal Year of the Trust, the Series' aggregate recognized gain (including the portion thereof, if any, treated as ordinary income) resulting from each disposition of Series 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 Series 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 Series' aggregate recognized loss (including the portion thereof, if any, treated as ordinary loss) resulting from A-2 each disposition of Series 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 Series 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. "Incentive Fee" shall have the meaning set forth in the Prospectus. "Initial Offering Period" means the period with respect to a Series commencing with the initial effective date of the Prospectus and terminating no later than the one hundred and twentieth (120th) day following such date unless extended for up to an additional 60 days at the sole discretion of the Managing Owner. "Interestholders" means the Managing Owner and all Limited Owners, as holders of Interests of a Series, 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 a Series 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 purchased by it. "Losses" means, for each Fiscal Year of each Series of the Trust, losses of the Series 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 Series 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. A-3 "Management Fee" shall have the meaning set forth in the Prospectus. "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 of a Series" means the total assets in the Trust Estate of a Series 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 Series, 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 of a Series shall include any unrealized profit or loss on open Commodities positions, and any other credit or debit accruing to the Series but unpaid or not received by the Series. (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 of a Series 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 of a Series is being determined; provided, that if a commodity futures contract or option traded on a non-United 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 a Series 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 of a Series 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. A-4 (c) Interest earned on a Series' commodity brokerage account shall be accrued at least weekly. (d) The amount of any distribution made pursuant to Article VI hereof shall be a liability of the Series from the day when the distribution is declared until it is paid. "Net Asset Value of a Series per Interest" means the Net Asset Value of a Series divided by the number of Interests of a Series 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. "New High Net Trading Profits" shall have the meaining set forth in the Prospectus. "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, "Benefit Plan Investor" (as defined in the Prospectus) or other legal entity. "Profits" means, for each Fiscal Year of each Series 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 a Series for such Fiscal Year shall not enter into such computations. "Prospectus" means the final prospectus and disclosure document of the Trust and each Series thereof, constituting a part of each Registration Statement, as filed with the Securities and Exchange 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(s) of the Registration Statement(s). "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 Dealing Day upon which Interests held by the Interestholders may be redeemed in accordance with the provisions of Article VII hereof. "Registration Statement" means a registration statement on Form S-1, as amended, filed for a Series with the Securities and Exchange Commission pursuant to which the Trust registered A-5 the Limited Interests of a Series, as the same may at any time and from time to time be further amended or supplemented. "Series" means a separate series of the Trust as provided in Sections 3806(b)(2) and 3804 of the Business Trust Statute, the Interests of which shall be beneficial interests in the Trust Estate separately identified with and belonging to such Series. "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 Advisor" means initially Bridgewater Associates, Inc. for the Series D Interests, Graham Capital Management, Inc., for the Series E Interests, and Campbell & Company, Inc. for the Series F Interests, 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 a Series, and any substitute(s) therefor as provided herein. "Trust" means the World Monitor Trust II formed pursuant to this Trust Agreement. "Trust Agreement" means this 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. "Trust Estate" means, with respect to a Series, any cash, commodity futures, forward and option contracts, all funds on deposit in the Series' accounts, and any other property held by the Series, and all proceeds therefrom, including any rights of the Series pursuant to any Subscription Agreement and any other agreements to which the Trust or a Series thereof is a party. "Valuation Date" means the date as of which the Net Asset Value of a Series is determined. "Valuation Period" means a regular period of time between Valuation Dates. "Valuation Point" shall have the meaning set forth in the Prospectus. A-6 SECTION 1.2 Name. The name of the Trust is "World Monitor Trust II" 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. SECTION 1.3 Delaware Trustee; Business Offices. (a) The sole Trustee of the Trust 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 per Series in bank accounts in the name of each Series of the Trust 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 that each Series in such Trust is deemed to constitute a partnership under the Code and 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 of each Series for purposes of taxation under the Code and applicable state and local tax laws. Effective as of the date hereof, the Trustee and the Managing Owner 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 and each Series shall be (a) to trade, buy, sell, spread or otherwise acquire, hold or dispose of commodity futures, forward and option contracts, including foreign futures, forward contracts and foreign exchange positions worldwide; (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 A-7 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 of each Series will qualify under applicable tax law as interests in a partnership which holds the Trust Estate of each Series 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 each Series as a partnership in which each of the Interestholders thereof 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 of such Series 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) of each Series shall initially be the Managing Owner. The Tax Matters Partner, at the expense of each Series, (i) shall prepare or cause to be prepared and filed each Series' 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 Series' tax items; (B) the power to extend the statute of limitations for all Interestholders with respect to the Series' tax items; (C) the power to file a petition with an appropriate federal court for review of a final administrative adjustment of a Series; 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 Series, 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 by each Interestholder of a Series in this Section 1.6(b) is hereby approved by each Interestholder of such Series 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, each Series 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 each Series of the Trust, to the extent not paid out of the assets of the Series, to A-8 the same extent the Managing Owner would be so liable if each Series were a partnership under the Delaware Revised Uniform Limited Partnership Act and the Managing Owner were a general partner of such partnership. The foregoing provision shall not, however, limit the ability of the Managing Owner to limit its liability by contract. The obligations of the Managing Owner under this Section 1.7 shall be evidenced by its ownership of the General Interests which, solely for purposes of the Business Trust Statute, will be deemed to be a separate class of Interests in each Series. Without limiting or affecting the liability of the Managing Owner as set forth in this Section 1.7, notwithstanding anything in this Trust Agreement to the contrary, Persons having any claim against the Trust by reason of the transactions contemplated by this Trust Agreement and any other agreement, instrument, obligation or other undertaking to which the Trust is a party, shall look only to the Trust Estate in accordance with Section 3.6 hereof for payment or satisfaction thereof. (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 or any Series thereof. 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. SECTION 1.9 Series Trust. The Interests of the Trust shall be divided into Series as provided in Section 3806(b)(2) of the Business Trust Statute. Accordingly, it is the intent of the parties hereto that Articles IV, V, VI, VII, VIII, IX, X and XIII of this Trust Agreement shall apply also with respect to each such Series as if each such Series were a separate business trust under the Business Trust Act, and each reference to the term "Trust" in such Articles shall be deemed to be a reference to each Series to the extent necessary to give effect to the foregoing intent. The use of the terms "Trust" or "Series" in this Agreement shall in no event alter the intent of the parties hereto that the Trust receive the full benefit of the limitation on interseries liability as set forth in Section 3804 of the Business Trust Statute. 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 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 A-9 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 (other than the Trust) 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 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. The Indemnified Parties shall not be entitled to indemnification 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 A-10 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 in accordance with Section 3.6 hereof 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 Advisor(s); (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, A-11 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 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 Managing Owner or an Affiliate of the Managing Owner (other than 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. A-12 ARTICLE III INTERESTS; CAPITAL CONTRIBUTIONS SECTION 3.1 General. (a) The Managing Owner shall have the power and authority, without Limited Owner approval, to issue Interests in one or more Series from time to time as it deems necessary or desirable. Each Series shall be separate from all other Series in respect of the assets and liabilities allocated to that Series and shall represent a separate investment portfolio of the Trust. The Managing Owner shall have exclusive power without the requirement of Limited Owner approval to establish and designate such separate and distinct Series, as set forth in Section 3.2, and to fix and determine the relative rights and preferences as between the Interests of the separate Series as to right of redemption, special and relative rights as to dividends and other distributions and on liquidation, conversion rights, and conditions under which the Series shall have separate voting rights or no voting rights. (b) The Managing Owner may, without Limited Owner approval, divide Interests of any Series into two or more classes, Interests of each such class having such preferences and special or relative rights and privileges (including exchange rights, if any) as the Managing Owner may determine as provided in Section 3.3. The fact that a Series shall have been initially established and designated without any specific establishment or designation of classes, shall not limit the authority of the Managing Owner to divide a Series and establish and designate separate classes thereof. (c) The number of Interests authorized shall be unlimited, and the Interests so authorized may be represented in part by fractional Interests. From time to time, the Managing Owner may divide or combine the Interests of any Series or class into a greater or lesser number without thereby changing the proportionate beneficial interests in the Series or class. The Managing Owner may issue Interests of any Series or class thereof for such consideration and on such terms as it may determine (or for no consideration if pursuant to an Interest dividend or split-up), all without action or approval of the Limited Owners. All Interests when so issued on the terms determined by the Managing Owner shall be fully paid and non-assessable. The Managing Owner may classify or reclassify any unissued Interests or any Interests previously issued and reacquired of any Series or class thereof into one or more Series or classes thereof that may be established and designated from time to time. The Managing Owner may hold as treasury Interests, reissue for such consideration and on such terms as it may determine, or cancel, at its discretion from time to time, any Interests of any Series or class thereof reacquired by the Trust. The Interests of each Series shall initially be divided into two classes: General Interests and Limited Interests. (d) Upon the initial contribution by the Managing Owner to each initial Series of the Trust, the Managing Owner became the holder of the General Interests of each such Series. Upon the termination of the Initial Offering Period pursuant to Section 3.4, the Managing Owner shall receive additional General Interests (or fractions thereof) in each Series in consideration for the required contributions made to each Series as of such time by the Managing Owner pursuant to Section 3.4. During the Continuous Offering Period, if any, the Managing A-13 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 3.4 in any week during the Continuous Offering Period in an amount equal to such contributions divided by the Net Asset Value of a Series per Interest calculated as of the Valuation Point of the week in which such contributions were made. (e) No certificates or other evidence of beneficial ownership of the Interests will be issued. (f) 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 Establishment of Series of Interests. (a) Without limiting the authority of the Managing Owner set forth in Section 3.2(b) to establish and designate any further Series, the Managing Owner hereby establishes and designates three initial Series, as follows: Series D, Series E, and Series F The provisions of this Article III shall be applicable to the above designated Series and any further Series that may from time to time be established and designated by the Managing Owner as provided in Section 3.2(b). (b) The establishment and designation of any Series of Interest other than those set forth above shall be effective upon the execution by the Managing Owner of an instrument setting forth such establishment and designation and the relative rights and preferences of such Series, or as otherwise provided in such instrument. At any time that there are no Interests outstanding of any particular Series previously established and designated, the Managing Owner may by an instrument executed by it abolish that Series and the establishment and designation thereof. Each instrument referred to in this paragraph shall have the status of an amendment to this Trust Agreement. SECTION 3.3 Establishment of Classes. The division of any Series into two or more classes and the establishment and designation of such classes shall be effective upon the execution by the Managing Owner of an instrument setting forth such division, and the establishment, designation, and relative rights and preferences of such classes, or as otherwise provided in such instrument. The relative rights and preferences of the classes of any Series may differ in such respects as the Managing Owner may determine to be appropriate, provided that such differences are set forth in the aforementioned instrument. At any time that there are no Interests outstanding of any particular class previously established and designated, the Managing Owner may by an instrument executed by it abolish that class and the establishment and designation thereof. Each instrument referred to in this paragraph shall have the status of an amendment to this Trust Agreement. SECTION 3.4 Limited Interests. A-14 (a) Offer of Series D Limited Interests. (i) Series D Initial Offering Period. During the Initial Offering Period, the Trust shall offer pursuant to Securities and Exchange Commission Rule 415, at an offering price of $100 per Series D Limited Interest, a maximum of 500,000 Limited Interests ($50,000,000). 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. (ii) Effect of the Sale of at least 50,000 Series D Interests. In the event that at least 50,000 Series D Limited Interests are sold to at least 150 subscribers during the Initial Offering Period for the Series D Interests (including both Limited Interests offered pursuant to the Prospectus and Limited 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 Series D 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 Series D of the Trust reflecting that such subscribers have been admitted as Limited Owners of Series D Interests, as soon as practicable after the termination of the Series D Initial Offering Period. Such accepted subscribers will be deemed Series D Limited Owners at such time as such admission is reflected on the books and records of Series D of the Trust. (iii) Paid-In Capital if at least 50,000 Series D Interests Are Sold. In the event that at least 50,000 Series D Limited Interests are sold during the Initial Offering Period, Series D shall have paid-in capital of not less than $5,050,500 (including the Managing Owner's contribution for the General Interests as provided in Section 3.1(d) and in Section 3.4(a)(v) hereof). (iv) Effect of the Sale of Less than 50,000 Series D Interests. In the event that at least 50,000 Series D Limited Interests are not sold during the Initial Offering Period for the Series D Interests, all proceeds of the sale of Series D 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 for the Series D Interests (or as soon thereafter as practicable if payment cannot be made in such time period). Such action will not terminate Series D. (v) Managing Owner's Required Contribution. In the event that 50,000 or more of the Series D Limited Interests offered pursuant to the Prospectus are sold during the Initial Offering Period for the Series D Interests, the Managing Owner shall be required to contribute in cash to the capital of Series D an amount, which, when added to the total contributions to Series D by all Series D Interestholders, will be not less than one percent (1%) of such total contributions, and in no event shall such contribution be less than $50,500 (including the Managing Owner's Capital Contribution pursuant to Section 3.1(d)). Thereafter, the Managing Owner shall contribute in cash to the capital of Series D an amount not less than 1.01% of any additional Capital A-15 Contributions received from the Series D Limited Owners. The Managing Owner may, but is not obligated to, make additional Capital Contributions at any time during the Series D Initial or Continuous Offering Periods. The Managing Owner will receive Series D General Interests as provided in Section 3.1(d). The Managing Owner shall, with respect to any Series D Interests owned by it, enjoy all of the rights and privileges and be subject to all of the obligations and duties of a Series D 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 Series D) in each material item of Series D 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. (vi) Offer of Series D Limited Interests After Initial Offering Period. In the event that 50,000 or more of the Series D Limited Interests are sold during the Initial Offering Period for the Series D Interests, the Trust may continue to offer Series D Limited Interests and admit additional Series D Limited Owners and/or accept additional contributions from existing Series D Limited Owners pursuant to the Prospectus. Each additional Capital Contribution to Series D during the Series D Continuous Offering Period by an existing Series D Limited Owner must be in a denomination which is an even multiple of $100. During the Series D Continuous Offering Period, each newly admitted Series D Limited Owner, and each existing Series D Limited Owner that makes an additional Capital Contribution to Series D, shall receive Series D Limited Interests in an amount equal to such Capital Contribution or additional Capital Contribution, as the case may be, divided by the Series D Net Asset Value per Series per Interest calculated as of the Valuation Point immediately prior to the Dealing Day on which such Capital Contribution will become effective. A Subscriber (including existing Series D Limited Owners contributing additional sums) whose subscription is received and accepted by the Managing Owner after the termination of the Initial Offering Period for Series D Interests shall be admitted to the Trust and deemed a Series D Limited Owner with respect to that subscription on the Dealing Day which occurs at least five (5) Business Days after the Subscriber's Subscription Agreement or Exchange Request is received by the Trust's selling agent, counting the day of receipt by such selling agent as one Business Day. (vii) Subscription Agreement. Each Series D Limited Owner who purchases any Limited Interests offered pursuant to the Prospectus shall contribute to the capital of Series D 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. If the Managing Owner determines to A-16 accept subscription funds by check, such funds shall be subject to prompt collection. All subscriptions are subject to acceptance by the Managing Owner. (viii) Escrow Agreement. All proceeds from the sale of Series D Limited Interests offered pursuant to the Prospectus shall be deposited in an interest bearing escrow account at The Chase Manhattan Bank, in New York, N.Y. until the conclusion of the Initial Offering Period for the Series D Interests. In the event subscriptions for at least 50,000 of the Series D Interests are received and accepted during the Initial Offering for the Series D Interests, all interest earned on the proceeds of subscriptions from accepted subscribers for Series D Limited Interests during its Initial Offering Period will be contributed to Series D, for which the Series D Limited Owners will receive additional Series D Interests on a pro rata basis (taking into account time and amount of deposit). (ix) Optional Purchase of Series D Limited Interests by Managing Owner and Trading Advisor. Subject to approval by the Managing Owner, any commodity broker (including, but not limited to, PSI), any Trading Advisor, any principals, stockholders, directors, officers, employees and affiliates of the Managing Owner, any commodity broker, and any Trading Advisor, may purchase any number of Series D Limited Interests and will be treated as Series D Limited Owners with respect to such Interests. In addition to the Series D Interests required to be purchased by the Managing Owner under Section 3.4(a)(v), the Managing Owner also may purchase any number of Series D Limited Interests as it determines in its discretion. (b) Offer of Series E Limited Interests. (i) Series E Initial Offering Period. During the Initial Offering Period, the Trust shall offer pursuant to Securities and Exchange Commission Rule 415, at an offering price of $100 per Series E Limited Interest, a maximum of 500,000 Series E Limited Interests ($50,000,000). 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 Series E Limited Interests as it deems appropriate. (ii) Effect of the Sale of at least 50,000 Series E Interests. In the event that at least 50,000 Series E Limited Interests are sold to at least 150 subscribers during the Initial Offering Period for the Series E Interests (including both Limited Interests offered pursuant to the Prospectus and Limited 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 Series E 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 Series E of the Trust reflecting that such subscribers have been admitted as Limited Owners of Series E Interests, as soon as practicable after the termination of the Series E Initial Offering Period. Such accepted subscribers will be deemed Series E Limited Owners at such time as such admission is reflected on the books and records of Series E of the Trust. A-17 (iii) Paid-In Capital if at least 50,000 Series E Interests Are Sold. In the event that at least 50,000 Series E Limited Interests are sold during the Initial Offering Period, Series E shall have paid-in capital of not less than $5,050,500 (including the Managing Owner's contribution for the General Interests as provided in Section 3.1(d) and in Section 3.4(b)(v) hereof). (iv) Effect of the Sale of Less than 50,000 Series E Interests. In the event that at least 50,000 Series E Limited Interests are not sold during the Initial Offering Period for the Series E Interests, all proceeds of the sale of Series E 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 for the Series E Interests (or as soon thereafter as practicable if payment cannot be made in such time period). Such action will not terminate Series E. (v) Managing Owner's Required Contribution. In the event that 50,000 or more of the Series E Limited Interests offered pursuant to the Prospectus are sold during the Initial Offering Period for the Series E Interests, the Managing Owner shall be required to contribute in cash to the capital of Series E an amount, which, when added to the total contributions to Series E by all Series E Interestholders, will be not less than one percent (1%) of such total contributions, and in no event shall such contribution be less than $50,500 (including the Managing Owner's Capital Contribution pursuant to Section 3.1(d)). Thereafter, the Managing Owner shall contribute in cash to the capital of Series E an amount not less than 1.01% of any additional Capital Contributions received from the Series E Limited Owners. The Managing Owner may, but is not obligated to, make additional Capital Contributions at any time during the Series E Initial or Continuous Offering Periods. The Managing Owner will receive Series E General Interests as provided in Section 3.1(b). The Managing Owner shall, with respect to any Series E Interests owned by it, enjoy all of the rights and privileges and be subject to all of the obligations and duties of a Series E 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 Series E) in each material item of Series E 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. (vi) Offer of Series E Limited Interests After Initial Offering Period. In the event that 50,000 or more of the Series E Limited Interests are sold during the Initial Offering Period for the Series E Interests, the Trust may continue to offer Series E Limited Interests and admit additional Series E Limited Owners and/or accept additional contributions from existing Series E Limited Owners pursuant to the Prospectus as amended or supplemented from time to time. Each additional Capital Contribution to Series E during the Series E Continuous Offering Period by an existing Series E Limited Owner must be in a denomination which is an even multiple of $100. During Series E Continuous Offering A-18 Period, each newly admitted Series E Limited Owner, and each existing Series E Limited Owner that makes an additional Capital Contribution to Series E, shall receive Series E Limited Interests in an amount equal to such Capital Contribution or additional Capital Contribution, as the case may be, divided by the Series E Net Asset Value per Interest calculated as of the Valuation Point immediately prior to the Dealing Day on which such Capital Contribution will become effective. A Subscriber (including existing Series E Limited Owners contributing additional sums) whose subscription is received and accepted by the Managing Owner after the termination of the Initial Offering Period for Series E Interests shall be admitted to the Trust and deemed a Series E Limited Owner with respect to that subscription on the first Dealing Day which occurs at least five (5) Business Days after the Subscriber's Subscription Agreement or Exchange Request is received by the Trust's selling agent, counting the day of receipt by such selling agent as one Business Day. (vii) Subscription Agreement. Each Series E Limited Owner who purchases any Limited Interests offered pursuant to the Prospectus shall contribute to the capital of Series E 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. (viii) Escrow Agreement. All proceeds from the sale of Series E Limited Interests offered pursuant to the Prospectus shall be deposited in an interest bearing escrow account at The Chase Manhattan Bank, in New York, N.Y. until the conclusion of the Initial Offering Period for the Series E Interests. In the event subscriptions for at least 50,000 of the Series E Interests are received and accepted during the Initial Offering for the Series E Interests, all interest earned on the proceeds of subscriptions from accepted subscribers for Series E Limited Interests during its Initial Offering Period will be contributed to Series E, for which the Series E Limited Owners will receive additional Series E Interests on a pro rata basis (taking into account time and amount of deposit) . (ix) Optional Purchase of Series E Limited Interests by Managing Owner and Trading Advisor. Subject to approval by the Managing Owner, any commodity broker (including, but not limited to, PSI), any Trading Advisor, any principals, stockholders, directors, officers, employees and affiliates of the Managing Owner, any commodity broker, and any Trading Advisor, may purchase any number of Series E Limited Interests and will be treated as Series E Limited Owners with respect to such Interests. In addition to the Series E Interests required to be purchased by the Managing Owner under Section 3.4(b)(v), the Managing Owner also may purchase any number of Series E Limited Interests as it determines in its discretion. A-19 (c) Offer of Series F Limited Interests. (i) Series F Initial Offering Period. During the Initial Offering Period, the Trust shall offer pursuant to Securities and Exchange Commission Rule 415, at an offering price of $100 per Series F Limited Interest, a maximum of 500,000 Series F Limited Interests ($50,000,000). No fractional Limited Interests shall be issued during the Initial Offering Period. 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. (ii) Effect of the Sale of at least 50,000 Series F Interests. In the event that at least 50,000 Series F Limited Interests are sold to at least 150 subscribers during the Initial Offering Period for the Series F Interests (including both Limited Interests offered pursuant to the Prospectus and Limited 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 Series F 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 Series F of the Trust reflecting that such subscribers have been admitted as Limited Owners of Series F Interests, as soon as practicable after the termination of the Series F Initial Offering Period. Such accepted subscribers will be deemed Series F Limited Owners at such time as such admission is reflected on the books and records of Series F of the Trust. (iii) Paid-In Capital if at least 50,000 Series F Interests Are Sold. In the event that at least 50,000 Series F Limited Interests are sold during the Initial Offering Period, Series F shall have paid-in capital of not less than $5,050,500 (including the Managing Owner's contribution for the General Interests as provided in Section 3.1(d) and in Section 3.4(c)(v) hereof). (iv) Effect of the Sale of Less than 50,000 Series F Interests. In the event that at least 50,000 Series F Limited Interests are not sold during the Initial Offering Period for the Series F Interests, all proceeds of the sale of Series F 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 for the Series F Interests (or as soon thereafter as practicable if payment cannot be made in such time period). Such action will not terminate Series F. (v) Managing Owner's Required Contribution. In the event that 50,000 or more of the Series F Limited Interests offered pursuant to the Prospectus are sold during the Initial Offering Period for the Series F Interests, the Managing Owner shall be required to contribute in cash to the capital of A-20 Series F an amount, which, when added to the total contributions to Series F by all Series F Interestholders, will be not less than one percent (1%) of such total contributions, and in no event shall such contribution be less than $50,500 (including the Managing Owner's Capital Contribution pursuant to Section 3.1(d)). Thereafter, the Managing Owner shall contribute in cash to the capital of Series F an amount not less than 1.01% of any additional Capital Contributions received from the Series F Limited Owners. The Managing Owner may, but is not obligated to, make additional Capital Contributions at any time during the Series F Initial or Continuous Offering Periods. The Managing Owner will receive Series F General Interests as provided in Section 3.1(d). The Managing Owner shall, with respect to any Series F Interests owned by it, enjoy all of the rights and privileges and be subject to all of the obligations and duties of a Series F 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 Series F) in each material item of Series F 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. (vi) Offer of Series F Limited Interests After Initial Offering Period. In the event that 50,000 or more of the Series F Limited Interests are sold during the Initial Offering Period for the Series F Interests, the Trust may continue to offer Series F Limited Interests and admit additional Series F Limited Owners and/or accept additional contributions from existing Series F Limited Owners pursuant to the Prospectus as amended or supplemented from time to time. Each additional Capital Contribution to Series F during the Series F Continuous Offering Period by an existing Series F Limited Owner must be in a denomination which is an even multiple of $100. During Series F Continuous Offering Period, each newly admitted Series F Limited Owner, and each existing Series F Limited Owner that makes an additional Capital Contribution to Series F, shall receive Series F Limited Interests in an amount equal to such Capital Contribution or additional Capital Contribution, as the case may be, divided by the Series F Net Asset Value per Interest calculated as of the Valuation Point immediately prior to the Dealing Day on which such Capital Contribution will become effective. A Subscriber (including existing Series F Limited Owners contributing additional sums) whose subscription is received and accepted by the Managing Owner after the termination of the Initial Offering Period for Series F Interests shall be admitted to the Trust and deemed a Series F Limited Owner with respect to that subscription on the first Dealing Day which occurs at least five (5) Business Days after the Subscriber's Subscription Agreement or Exchange Request is received by the Trust's selling agent, counting the day of receipt by such selling agent as one Business Day. (vii) Subscription Agreement. Each Series F Limited Owner who purchases any Limited Interests offered pursuant to the Prospectus shall contribute to the capital of Series F 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 A-21 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. (viii) Escrow Agreement. All proceeds from the sale of Series F Limited Interests offered pursuant to the Prospectus shall be deposited in an interest bearing escrow account at The Chase Manhattan Bank, in New York, N.Y. until the conclusion of the Initial Offering Period for the Series F Interests. In the event subscriptions for at least 50,000 of the Series F Interests are received and accepted during the Initial Offering for the Series F Interests, all interest earned on the proceeds of subscriptions from accepted subscribers for Series F Limited Interests during its Initial Offering Period will be contributed to the Series F, for which the Series F Limited Owners will receive additional Series F Interests on a pro rata basis (taking into account time and amount of deposit) . (ix) Optional Purchase of Series F Limited Interests by Managing Owner and Trading Advisor. Subject to approval by the Managing Owner, any commodity broker (including, but not limited to, PSI), any Trading Advisor, any principals, stockholders, directors, officers, employees and affiliates of the Managing Owner, any commodity broker, and any Trading Advisor, may purchase any number of Series F Limited Interests and will be treated as Series F Limited Owners with respect to such Interests. In addition to the Series F Interests required to be purchased by the Managing Owner under Section 3.4(c)(v), the Managing Owner also may purchase any number of Series F Limited Interests as it determines in its discretion. (d) Termination of the Trust. If the minimum number of Interests in each Series being offered are not sold during the Initial Offering Period for each Series, then the Trust shall be terminated, and the Managing Owner shall cause the certificate of cancellation required by Section 3810 of the Business Trust Statute to be filed. SECTION 3.5 Assets of Series. All consideration received by the Trust for the issue or sale of Interests of a particular Series together with all of the Trust Estate in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably belong to that Series for all purposes, subject only to the rights of creditors of such Series and except as may otherwise be required by applicable tax laws, and shall be so recorded upon the books of account of the Trust. Separate and distinct records shall be maintained for each Series and the assets associated with a Series shall be held and accounted for separately from the other assets of the Trust, or any other Series. In the event that there is any Trust Estate, or any income, earnings, profits, and proceeds thereof, funds, or payments which are not readily identifiable as belonging to any particular Series, the Managing Owner shall allocate them among any one or more of the Series established and designated from time to time in such manner and on such basis as the Managing Owner, in its sole discretion, deems fair and equitable. Each such allocation by the Managing Owner shall be conclusive and binding upon all Interestholders for all purposes. SECTION 3.6 Liabilities of Series. A-22 (a) The Trust Estate belonging to each particular Series shall be charged with the liabilities of the Trust in respect of that Series and only that Series; and all expenses, costs, charges and reserves attributable to that Series, and any general liabilities, expenses, costs, charges or reserves of the Trust which are not readily identifiable as belonging to any particular Series, shall be allocated and charged by the Managing Owner to and among any one or more of the Series Established and designated from time to time in such manner and on such basis as the Managing Owner in its sole discretion deems fair and equitable. Each allocation of liabilities, expenses, costs, charges and reserves by the Managing Owner shall be conclusive and binding upon all Interestholders for all purposes. The Managing Owner shall have full discretion, to the extent not inconsistent with applicable law, to determine which items shall be treated as income and which items as capital, and each such determination and allocation shall be conclusive and binding upon the Interestholders. Every written agreement, instrument or other undertaking made or issued by or on behalf of a particular Series shall include a recitation limiting the obligation or claim represented thereby to that Series and its assets. (b) Without limitation of the foregoing provisions of this Section, but subject to the right of the Managing Owner in its discretion to allocate general liabilities, expenses, costs, charges or reserves as herein provided, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular Series shall be enforceable against the assets of such Series only and against the Managing Owner, and not against the assets (i) of the Trust generally or (ii) of any other Series. Notice of this limitation on interseries liabilities shall be set forth in the Certificate of Trust of the Trust (whether originally or by amendment) as filed or to be filed in the Office of the Secretary of State of the State of Delaware pursuant to the Business Trust Statute, and upon the giving of such notice in the Certificate of Trust, the statutory provisions of Section 3804 of the Business Trust Statute relating to limitations on interseries liabilities (and the statutory effect under Section 3804 of setting forth such notice in the Certificate of Trust) shall become applicable to the Trust and each Series. Every Interest, note, bond, contract, instrument, certificate or other undertaking made or issued by or on behalf of a particular Series shall include a recitation limiting the obligation on Interests represented thereby to that Series and its assets. (c) (1) Except as set forth below, any debts, liabilities, obligations, indebtedness, expenses, interests and claims of any nature and all kinds and descriptions (collectively, "Claims and Interests"), if any, of the Managing Owner and the Trustee (the "Subordinated Claims") incurred, contracted for or otherwise existing, arising from, related to or in connection with all Series, any combination of Series or one particular Series and their respective assets (the "Applicable Series") and the assets of the Trust shall be expressly subordinate and junior in right of payment to any and all other Claims against the Trust and any Series thereof, and any of their respective assets, which may arise as a matter of law or pursuant to any contract, provided, however, that the Claims of each of the Managing Owner and the Trustee (if any) against the Applicable Series shall not be considered Subordinated Claims with respect to enforcement against and distribution and repayment from the Applicable Series, the Applicable Series' assets and the Managing Owner and its assets; and provided further that the valid Claims of either the Managing Owner or the Trustee, if any, against the Applicable Series shall be pari passu and equal in right of repayment and distribution with all other valid Claims against the Applicable Series and (ii) the Managing Owner and the Trustee will not take, demand A-23 or receive from any Series or the Trust or any of their respective assets (other than the Applicable Series, the Applicable Series' assets and the Managing Owner and its assets) any payment for the Subordinated Claims; (i) The Claims of each of the Managing Owner and the Trustee with respect to the Applicable Series shall only be asserted and enforceable against the Applicable Series, the Applicable Series' assets and the Managing Owner and its assets; and such Claims shall not be asserted or enforceable for any reason whatsoever against any other Series, the Trust generally, or any of their respective assets; (ii) If the Claims of the Managing Owner or the Trustee against the Applicable Series or the Trust are secured in whole or in part, each of the Managing Owner and the Trustee hereby waives (under section 1111(b) of the Bankruptcy Code (11 U.S.C. S 1111(b)) any right to have any deficiency Claims (which deficiency Claims may arise in the event such security is inadequate to satisfy such Claims) treated as unsecured Claims against the Trust or any Series (other than the Applicable Series), as the case may be; (iii) In furtherance of the foregoing, if and to the extent that the Managing Owner and the Trustee receive monies in connection with the Subordinated Claims from a Series or the Trust (or their respective assets), other than the Applicable Series, the Applicable Series' assets and the Managing Owner and its assets, the Managing Owner and the Trustee shall be deemed to hold such monies in trust and shall promptly remit such monies to the Series or the Trust that paid such amounts for distribution by the Series or the Trust in accordance with the terms hereof; and (iv) The foregoing Consent shall apply at all times notwithstanding that the Claims are satisfied, and notwithstanding that the agreements in respect of such Claims are terminated, rescinded or canceled. (d) Any agreement entered into by the Trust, any Series, or the Managing Owner, on behalf of the Trust generally or any Series, including, without limitation, the Subscription Agreement entered into with each Interestholder, will include language substantially similar to the language set forth in Section 3.6(c). SECTION 3.7 Dividends and Distributions. (a) Dividends and distributions on Interests of a particular Series or any class thereof may be paid with such frequency as the Managing Owner may determine, which may be daily or otherwise, to the Interestholders in that Series or class, from such of the income and capital gains, accrued or realized, from the Trust Estate belonging to that Series, or in the case of a class, belonging to that Series and allocable to that class, as the Managing Owner may determine, after providing for actual and accrued liabilities belonging to that Series. All dividends and distributions on Interests in a particular Series or class thereof shall be distributed pro rata to the Interestholders in that Series or class in proportion to the total outstanding Interests in that Series or class held by such Interestholders at the date and time of record established for the payment of such dividends or distribution, except to the extent otherwise A-24 required or permitted by the preferences and special or relative rights and privileges of any Series or class. Such dividends and distributions may be made in cash or Interests of that Series or class or a combination thereof as determined by the Managing Owner or pursuant to any program that the Managing Owner may have in effect at the time for the election by each Interestholder of the mode of the making of such dividend or distribution to that Interestholder. (b) The Interests in a Series or a class of the Trust shall represent beneficial interests in the Trust Estate belonging to such Series or in the case of a class, belonging to such Series and allocable to such class. Each Interestholder in a Series or a class shall be entitled to receive its pro rata share of distributions of income and capital gains made with respect to such Series or such class. Upon reduction or withdrawal of its Interests or indemnification for liabilities incurred by reason of being or having been a holder of Interests in a Series or a class, such Interestholder shall be paid solely out of the funds and property of such Series or in the case of a class, the funds and property of such Series and allocable to such class of the Trust. Upon liquidation or termination of a Series of the Trust, Interestholders in such Series or class shall be entitled to receive a pro rata share of the Trust Estate belonging to such Series or in the case of a class, belonging to such Series and allocable to such class. SECTION 3.8 Voting Rights. Notwithstanding any other provision hereof, on each matter submitted to a vote of the Interestholders of a Series, each Interestholder shall be entitled to a proportionate vote based upon the product of the Net Asset Value of a Series per Interest multiplied by the number of Interests, or fraction thereof, standing in its name on the books of such Series. As to any matter which affects the Interests of more than one Series, the Interestholders of each affected Series shall be entitled to vote, and each such Series shall vote as a separate class. SECTION 3.9 Equality. Except as provided herein or in the instrument designating and establishing any class or Series, all Interests of each particular Series shall represent an equal proportionate beneficial interest in the assets belonging to that Series subject to the liabilities belonging to that Series, and each Interest of any particular Series or classes shall be equal to each other Interest of that Series or class; but the provisions of this sentence shall not restrict any distinctions permissible under Section 3.7 that may exist with respect to dividends and distributions on Interests of the same Series or class. The Managing Owner may from time to time divide or combine the Interests of any particular Series or class into a greater or lesser number of Interests of that Series or class without thereby changing the proportionate beneficial interest in the assets belonging to that Series or in any way affecting the rights of Interestholders of any other Series or class. SECTION 3.10 Exchange of Interests. Subject to compliance with the requirements of applicable law, the Managing Owner shall have the authority to provide that Interestholders of any Series shall have the right to exchange said Interests into one or more other Series in accordance with such requirements and procedures as may be established by the Managing Owner. The Managing Owner shall also have the authority to provide that Interestholders of any class of a particular Series shall have the right to exchange said Interests into one or more other classes of that particular Series or any other Series in accordance with such requirements and procedures as may be established by the Managing Owner. A-25 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 or any Series in 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, provided, however, that in no event shall the fees payable by the Trust for such services exceed 14% annually of the average Net Asset Value of each Series, excluding the Series' assets not directly related to trading activity, which fees shall include fees related to out-of-pocket brokerage expenses, in accordance with limitations imposed by Section IV of the NASAA Guidelines on May 15, 1999; and provided further, to the extent that such limitations are amended to become more restrictive, 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) (A) commodity trading advisory services relating to the purchase and sale of all Commodities positions on behalf of each Series, which services may not be performed by the Managing Owner or an Affiliate(s) of the Managing Owner, provided, however, that in no event shall the Management Fees and Incentive Fees payable by the Trust for such services exceed 6% of a Series' Net Asset Value and 15% of a Series' New High Net Trading Profits, respectively, except that for each 1% reduction in Management Fees plus administrative expenses set forth in the first proviso to (B) below below 6% of a Series' Net Asset Value, Incentive Fees A-26 may be increased by an additional 2% of Net High Net Trading Profits; and (B) administrative services necessary to the prudent operation of the Trust, provided, however, that notwithstanding any other provision of this Agreement, in no event shall the fees payable by the Trust for administrative services (which do not include Management Fees, Incentive Fees, or commodity brokerage services, third party legal and audit charges or extraordinary expenses), when combined with Management Fees, exceed 6% annually of the Net Asset Value of each Series, each in accordance with the limitations set forth in Section IV of the NASAA Guidelines on May 15, 1999; provided, however, that to the extent that such limitations are amended to become more restrictive, 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 each Series 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 each Series; (f) To invest or direct the investment of funds of any Series not then delegated to a Trading Advisor(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 each Series 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 Series; (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, a Series in 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 A-27 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). 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, and if the concurrence of at least a majority in interest (over 50%) of the outstanding Interests of all Series (not including Interests owned by the Managing Owner) is not obtained; (j) To 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 Advisor 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 Advisors or to pay the expenses of any Series in the Trust; and provided further, that the Managing Owner may make Commodities trading decisions at any time at which any Trading Advisor shall become incapacitated or some other emergency shall arise as a result of which such Trading Advisor shall be unable or unwilling to act and a successor Trading Advisor has not yet been retained; (k) Monitor the trading activities of the Trading Advisor so that: (i) Any Series 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 of a Series. (ii) Any Series 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 of a Series. 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, a Series may be required to commit as margin in excess of the foregoing limit. In such event the Managing Owner will cause each Trading Advisor to reduce its open futures or options positions to comply with the foregoing limit before initiating new Commodities positions. A-28 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 each Series of the Trust and for the conduct of its business in all appropriate jurisdictions; (c) Retain independent public accountants to audit the accounts of each Series in the Trust; (d) Employ attorneys to represent the Trust or a Series thereof; (e) Use its best efforts to maintain the status of the Trust as a "business trust" for state law purposes, and of each Series of the Trust as a "partnership" for federal income tax purposes; (f) Monitor the trading policies and limitations of each Series, as set forth in the Prospectus, and the activities of the Trust's Trading Advisor(s) in carrying out those policies in compliance with the Prospectus; (g) Monitor the brokerage fees charged to each Series, and the services rendered by futures commission merchants to each Series, to determine whether the fees paid by, and the services rendered to, each Series 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 each Series. 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 (i) 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 a description of the Limited Owners' redemption rights as set forth in Section 7.1 hereof, and (ii) consent of the Limited Owners holding Interests representing at least a majority (over 50%) in Net Asset Value of the Series affected (excluding Interests held by the Managing Owner). No increase in such fees shall take effect except at the beginning of a Fiscal Quarter following consent of the Limited Owners as provided in this subparagraph (g). (h) Have fiduciary responsibility for the safekeeping and use of the Trust Estate of each Series, 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 each Series (including any interest earned thereon as provided for in the Prospectus) in any manner except as and to the extent permitted by the NASAA Guidelines for the benefit of each Series in the Trust, including, among other things, the utilization of any portion of the Trust Estate as compensating balances for the exclusive benefit of the Managing Owner. The A-29 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 each Series 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 any Series, any other Interestholder or Covered Person or the Trustee, such Covered Person acting under the Trust Agreement shall not be liable to the Series, 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 the Subscription Minimum (as defined in the Prospectus), for so long as it remains a Managing Owner of the Trust, it shall have a minimum "net worth" (as defined below) of, and not take any affirmative action to reduce its "net worth" below, $1,000,000, or such higher amount as may be required under the NASAA Guidelines as they may be amended from time to time. The NASAA Guidelines define "net worth" as the excess of total assets over total liabilities determined by generally accepted accounting principles; (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 3.4 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 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. A-30 (m) Notify the Interestholders within seven (7) days from the date of: (i) any material change in contracts with any Series' Trading Advisor; (ii) any material modification made in the calculation of the Incentive Fee paid to any Trading Advisor; and (iii) any material change affecting the compensation of any person compensated by a Series. SECTION 4.4 General Prohibitions. The Trust or any Series shall not: (a) Borrow money from or loan money to any Interestholder or other Person or any other Series, except that the foregoing is not intended to prohibit (i) the deposit on margin with respect to the initiation and maintenance of each Series' Commodities positions or (ii) obtaining lines of credit for the trading of forward contracts; provided, however, that each Series 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 each Series so as to restore the Series' account to proper margin status in the event that the Series 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, or with those of any other Series; (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; (e) Engage in Pyramiding of its Commodities positions; provided, however, that a Trading Advisor(s) may take into account the Series' open trade equity on existing positions in determining generally whether to acquire additional Commodities positions on behalf of the Series; A-31 (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 Advisor(s) to share in any portion of brokerage fees related to commodity brokerage services paid by a Series 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; (j) Enter into any exclusive brokerage contract; and (k) Operate the Trust in any manner so as to contravene section 3804 of the Business Trust Statute. 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 or a Series thereof against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by it in connection with its activities for a particular Series of the Trust, provided that (i) the Managing Owner was acting on behalf of or performing services for the relevant Series and has determined, in good faith, that such course of conduct was in the best interests of the Series and such liability or loss 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, or the filing of a voluntary or involuntary petition in bankruptcy under Title 11 of the A-32 U.S. Code by or against 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, it being understood that the source of payments made in respect of indemnification under this Trust Agreement shall be the assets of each Series on a pro rata basis, as the case may be. (b) Notwithstanding the provisions of Section 4.6(a) above, the Managing Owner and any Person acting as broker-dealer for each Series 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 or a particular Series 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 advance; 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. (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 or any Series thereof and acting within the scope of the Managing Owner's authority as set forth in this Trust Agreement. (g) In the event the Trust or any Series is made a party to any claim, dispute, demand or litigation or otherwise incurs any loss, liability, damage, cost or expense as a result A-33 of or in connection with any Limited Owner's (or assignee's) obligations or liabilities unrelated to 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. (h) The payment of any amount pursuant to this Section shall be subject to Section 3.6 with respect to the allocation of liabilities and other amounts, as appropriate, among the Series of the Trust. SECTION 4.7 Expenses and Limitations Thereon. (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 each Series thereof 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) Subject to Section 4.2(a), 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) routine services of the Trustee, legal counsel and independent accountants; (v) routine accounting and bookkeeping services, whether performed by an outside service provider or by Affiliates of the Managing Owner; (vi) postage and insurance; (vii) client relations and services; (viii) computer equipment and system maintenance; (ix) the fixed fee to be paid to Prudential Securities Incorporated, the Trust's Commodity Broker; (x) required payments to the Trust's Trading Advisors; and (xi) extraordinary expenses (including, but not limited to, legal claims and liabilities and litigation costs and any indemnification related thereto) shall be billed to and/or paid by the appropriate Series of the Trust, subject to such other limitations as are set forth herein concerning the limitations on the Series' liability for the liabilities of another Series. provided, however, the aggregate annual expenses set forth in subsections 4.7(b)(i), (ii), (iii), (iv), (v), (vi), (vii), and (viii), above incurred by each Series, shall in no event exceed, 1.5% annually of A-34 the Net Asset Value of that Series. Any expenses incurred by a Series in excess of this amount is not the responsibility of that Series. (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 or any series thereof for which payment one or more Series of the Trust is responsible. In addition, payment to the Managing Owner or such Affiliate for indirect expenses incurred in performing services for the Trust or any Series thereof, 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 as described in the Prospectus. 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 Interests equal to at least a majority (over 50%) of the Net Asset Value of each Series (excluding Interests held by the withdrawing Managing Owner). If the withdrawing Managing Owner is the last remaining Managing Owner, Limited Owners holding Interests equal to at least a majority (over 50%) of the Net Asset Value of each Series (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 of a Series thereof on the next Redemption Date following the date of removal or withdrawal. SECTION 4.11 Authorization of Registration Statements . Each Limited Owner (or any permitted assignee thereof) hereby agrees that the Managing Owner is authorized to execute, deliver and perform the agreements, acts, transactions and matters contemplated hereby or described in or contemplated by the Registration Statements on behalf of the Trust without any A-35 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 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 (to the extent that it is permitted to do so under the various other provisions of this Agreement) 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 any Series in 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 statute, 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 or 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. (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 A-36 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 by the Managing Owner (x) if the proposed assignee does not meet the established suitability requirements, or (y) to avoid adverse legal consequences to any Series in the Trust. (i) A substituted Limited Owner is a permitted assignee that has been admitted to any Series 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 Series 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 Series. (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 Series' transactions or to inspect the Series' 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 extraordinary costs (including attorneys' and accountants' fees), if any, 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 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; A-37 (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, acknowledgment 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 (A) the assignment will not jeopardize the Series' tax classification as a partnership and (B) the assignment does not violate this Trust Agreement or the Business Trust Statute. (c) Any Person admitted to any Series 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 each Series of the Trust as a partnership for federal income tax purposes or to preserve the characterization or treatment of any Series' income or loss; or (B) 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 Series 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 Dealing Day of the next succeeding week, provided the Managing Owner shall have been in receipt of the written instrument of assignment for at least five (5) Business 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 A-38 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 week immediately following the week 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 Series 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 any Series may be 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, intra family assignment, family dissolutions and transfers to affiliates), which would result in either the assignee or the assignor holding Interests in any combination of Series valued at less than $5,000 (or $2,000 in the case of IRAs), provided, however, that this limitation shall not apply in respect of a Limited Owner wishing to assign its or his entire interest in all Series of 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 of any Series. 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 a Series 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. A-39 (f) The Managing Owner, in its sole discretion, may cause any Series 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 any Series 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. ARTICLE VI DISTRIBUTION AND ALLOCATIONS SECTION 6.1 Capital Accounts. A capital account shall be established for each Interestholder on the books of the Series in which an Interest is owned (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 a Series. SECTION 6.2 Weekly Allocations. As of the close of business (as determined by the Managing Owner) on the Valuation Point of each week 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 of a Series as of such date as compared to the next previous determination of Net Asset Value of a Series 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. A-40 SECTION 6.3 Allocation of Profit and Loss for United States Federal Income Tax Purposes. As of the end of each Fiscal Year of each Series, the Series' 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 Series shall be allocated pro rata among the Interestholders based on their respective book capital accounts as of the last day of each week in which such Profits or Losses accrued. (b) Next, Disposition Gain or Disposition Loss from the Series' 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 Series 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 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 week 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 week, 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 week that remains after the allocation pursuant to Section 6.3(b)(ii) above shall be allocated to those Interestholders who were Interestholders during such week in the ratio that each such Interestholder's book capital account bears to all such Interestholders' book capital accounts for such week. (iv) Disposition Loss realized during any week 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 week, A-41 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 week that remains after the allocation pursuant to Section 6.3(b)(iv) above shall be allocated to those Interestholders who were Interestholders during such week in the ratio that each such Interestholder's book capital account bears to all such Interestholders' book capital accounts for such calendar week. (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. (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 a Series shall make with respect to the Interests; provided, however, that a Series 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 Dealing Day following the week in which such Interestholder's Subscription Agreement or Exchange Request, as the case may be, is received, provided the Managing Owner shall have been in receipt of such Subscription A-42 Agreement or Exchange Request for at least five (5) Business Days, or in which the transfer of Interests to such Interestholder is recognized, except that persons accepted as subscribers to the Trust pursuant to Section 3.4(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 any Series shall be separately subject to taxation by any state or local or by any foreign taxing authority, the Series shall be obligated to pay such taxes to such jurisdiction. In the event that the Series 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 Series income, the amount of such taxes shall be considered a loan by the Series to such Interestholder, and such Interestholder shall be liable for, and shall pay to the Series, any taxes so required to be withheld and paid over by the Series 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 Series 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 Series to the Interestholder in respect of its Interests so redeemed, or in respect of any other actual distribution by the Series to such Interestholder, shall be reduced by any obligations owed to the Series by the Interestholder, including, without limitation, the amount of any taxes required to be paid over by the Series to the IRS or other taxing authority and interest thereon as aforesaid. Amounts, if any, deducted by the Series 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 any Series depends upon long-term and uninterrupted investment of capital. It is agreed, therefore, that Series 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 a Series. 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 a Limited Interest or portion thereof on the first Dealing Day following the date the Managing Owner is in receipt of an acceptable form of written notice of redemption for at least five (5) Business Days (a "Redemption Date"). Interests will be redeemed on a "first in, first out" basis based on time of receipt of redemption requests at a redemption price equal to the Net Asset Value of a Series per A-43 Interest calculated as of the Valuation Point immediately preceding the applicable Redemption Date. 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) The value of an Interest for purposes of redemption shall be the book capital account balance of such Interest at the Valuation Point immediately preceding 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. 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 a Series of such Interests upon redemption. (c) The effective date of redemption shall be the Redemption Date, and payment of the value of the redeemed Interests (except for Interests redeemed as part of an Exchange as provided in Section 7.4) generally shall be made within ten (10) Business Days following the Redemption Date; provided, that all liabilities, contingent or otherwise, of the Trust or any Series in the Trust, except any liability to Interestholders on account of their Capital Contributions, have been paid or there remains property of the Series 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(d) and will 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 five (5) Business Days. (d) 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. A-44 Limited Owners requesting redemption shall be notified in writing within five (5) Business Days following the Redemption Date whether or not their Interests will be redeemed, unless payment for the redeeming Interests is made within that five (5) Business Day period, in which case the notice of acceptance of the redemption shall not be required. (e) 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). (f) Interests that are redeemed shall be extinguished and shall not be retained or reissued by the Trust or any Series. (g) Except as discussed above, all requests for redemption in proper form will be honored, and the Series' 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. SECTION 7.3 Redemption Fee. The Managing Owner will receive a redemption fee, as provided in the Prospectus, of the Net Asset Value of an Interest of any Series redeemed during the first and second successive six-month periods following the effective date of its purchase. This redemption fee will not be charged if you simultaneously (i) exchange the redeemed Interest or portion thereof for an Interest of equal value in another Series, or (ii) invest your redemption proceeds in another futures fund sponsored by Prudential Securities. The redemption fees may be waived by the Managing Owner in other circumstances as set forth in the Prospectus. SECTION 7.4 Exchange of Interests. Interests in one Series may be exchanged, without applicability of redemption fees, for Interests of equivalent value of any other Series (an "Exchange") on any Dealing Day, subject to the conditions on Redemptions in this Article VII, except that an Exchange will be made on the first Dealing Day following the date the Managing Owner is in receipt of an Exchange Request for at least five (5) Business Days. 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 transact any business for the Trust or any Series thereof or have the power to sign for or bind the Trust or any Series thereof, 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 of any Series in which such Limited Owners own A-45 an Interest and profits remaining in the Series, if any. Except as provided in Section 8.3 hereof, 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 (or any Series thereof in which it holds an Interest), 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 Series in which they hold Interests, 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 Series in which they hold Interests 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. Except with respect to Series or class differences, 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 Interests representing at least a majority (over 50%) in Net Asset Value of each affected Series (not including Interests held by the Managing Owner and its Affiliates, including the commodity broker) voting separately as a class may vote to (i) continue the Series 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 a Series, or the brokerage fees paid by a Series, as set forth in the Prospectus, A-46 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 Series 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 any Series of the Trust in excess of his Capital Contribution to that Series 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, on a pro rata basis among Series, to the full extent permitted by law and the other provisions of this Agreement, and 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 one or more Series' Interests (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 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. Nothing A-47 contained in this Section 8.3 shall diminish the limitation on the liability of each Series to the extent set forth in Section 3.5 and 3.6 hereof. ARTICLE IX BOOKS OF ACCOUNT AND REPORTS SECTION 9.1 Books of Account. Proper books of account for each Series 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 Series' 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 any Series, including such access as is required under CFTC rules and regulations. Such books of account shall be kept, and each Series 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 of a Series. Net Asset Value of a Series will be estimated as required. Upon request, on any Business Day, the Managing Owner shall make available to any Limited Owner the estimated Net Asset Value of a Series per Interest. Each Limited Owner shall be notified of any decline in the estimated Net Asset Value of a Series per Interest to less than 50% of the Net Asset Value of a Series 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 . 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 Advisor or any modification in connection with A-48 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 Series' 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. The Certificate of Trust shall not be amended in any respect if the effect of such amendment is to diminish the limitation on interseries liability under Section 3804 of the Business Trust Statute. 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. 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 Trust shall commence on the date of filing of the Certificate of Trust and end on the 31st day of December 1999. The Fiscal Year in which any Series in the Trust shall terminate shall end on the date of termination of the Series. A-49 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 Interests equal to at least ten percent (10%) of the Net Asset Value of each Series of the Trust, unless the proposed amendment affects only certain Series, in which case such amendment may be proposed by Limited Owners holding Interests equal to at least ten percent (10%) of Net Asset Value of a Series of each affected Series. Following such proposal, the Managing Owner shall submit to the Limited Owners of each affected Series 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 Interests equal to at least a majority (over 50%) of the Net Asset Value of a Series (excluding Interests held by the Managing Owner and its Affiliates) of the Trust or, if the proposed amendment affects only certain Series, of each affected Series, 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 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 A-50 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 each Series 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. (f) No provision of this Agreement may be amended, waived or otherwise modified orally but only by a written instrument adopted in accordance with this Section. SECTION 11.2 Meetings of the Trust. Meetings of the Interestholders of the Trust or any Series thereof may be called by the Managing Owner and will be called by it upon the written request of Limited Owners holding Interests equal to at least ten percent (10%) of the Net Asset Value of a Series of the Trust or any Series thereof. 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 Trust or any Series thereof 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. A-51 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 by written consent setting forth the actions so taken. Such written consents shall be treated for all purposes as votes at a meeting. If the vote or consent of any Interestholder to any action of the Trust or any Interestholder, as contemplated by this Agreement, is solicited by the Managing Owner, the solicitation shall be effected by notice to each Interestholder given in the manner provided in Section 15.4. The vote or consent of each Interestholder so solicited shall be deemed conclusively to have been cast or granted as requested in the notice of solicitation, whether or not the notice of solicitation is actually received by that Interestholder, unless the Interestholder expresses written objection to the vote or consent by notice given in the manner provided in Section 15.4 below and actually received by the Trust within 20 days after the notice of solicitation is effected. The Managing Owner and all persons dealing with the Trust shall be entitled to act in reliance on any vote or consent which is deemed cast or granted pursuant to this Section and shall be fully indemnified by the Trust in so doing. Any action taken or omitted in reliance on any such deemed vote or consent of one or more Interestholders shall not be void or voidable by reason of timely communication made by or on behalf of all or any of such Interestholders in any manner other than as expressly provided in Section 15.4. ARTICLE XII TERM SECTION 12.1 Term. The term for which the Trust and each Series is to exist shall commence on the date of the filing of the Certificate of Trust, and shall terminate pursuant to the provisions of Article XIII hereof or as otherwise provided by law. ARTICLE XIII TERMINATION SECTION 13.1 Events Requiring Dissolution of the Trust or any Series. The Trust or, as the case may be, any Series thereof shall dissolve at any time upon the happening of any of the following events: (a) The filing of a certificate of dissolution or revocation of the Managing Owner's charter (and the expiration of 90 days after the date of notice to the Managing Owner of revocation without a reinstatement of its charter) or upon the withdrawal, removal, adjudication or admission 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 and each Series or (ii) within ninety (90) days of such Event of Withdrawal all the remaining Interestholders agree in writing to continue the business of the Trust and each Series 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 and a failure of all remaining Interestholders to continue the business of the Trust and to appoint a successor Managing Owner as provided in clause (b)(ii) above, A-52 within one hundred and twenty (120) days of such Event of Withdrawal, Limited Owners holding Interests representing at least a majority (over 50%) of the Net Asset Value of each Series (not including Interests held by the Managing Owner and its Affiliates) may elect to continue the business of the Trust and each Series thereof 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. (b) The occurrence of any event which would make unlawful the continued existence of the Trust or any Series thereof, as the case may be. (c) The failure to sell the Subscription Minimums (as defined in the Prospectus) of all Series or any number of Series to at least 150 subscribers during the Initial Offering Period. (d) 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. (e) The Trust or, as the case may be, any Series becomes insolvent or bankrupt. (f) The Limited Owners holding Interests representing at least a majority (over 50%) of the Net Asset Value of a Series (which excludes the Interests of the Managing Owner) vote to dissolve the Series, notice of which is sent to the Managing Owner not less than ninety (90) Business Days prior to the effective date of such Series' termination. (g) The Limited Owners of each Series holding Interests representing at least a majority (over 50%) of the Net Asset Value of the Series (which excludes the Interests of the Managing Owner) vote to dissolve 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 terminations. (h) The decline of the Net Asset Value of a Series of the Trust Estate by fifty percent (50%) from the Net Asset Value of a Series of the Trust Estate (i) at the commencement of the Series' 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 Series' aggregate net assets in relation to the operating expenses of the Series make it unreasonable or imprudent to continue the business of the Series. 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) shall not result in the termination of the or any Series thereof, and such Limited Owner, his estate, A-53 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 Series in which they own an Interest and any right to an audit or examination of the books of the Series in which they own an Interest, except for such rights as are set forth in Article IX hereof relating to the Books of Account and reports of the Series. SECTION 13.2 Distributions on Dissolution. Upon the dissolution of the Trust or any Series, 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 Series 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 or Series 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 Series 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 Series, 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 Series, the Managing Owner will contribute to the Series 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 Series to its creditors, and the balance, if any, shall be distributed to those Interestholders in the Series 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 all Series 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, the existence of the Trust as a separate legal entity shall continue until the filing of such certificate of cancellation. A-54 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; (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 A-55 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 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 A-56 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 sent electronically, by facsimile or by overnight courier; and addressed, in each such case, to the address set forth in the books and records of the Trust or such other 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, upon transmission and electronic confirmation thereof or upon deposit with a representative of an overnight courier, as the case may be. 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 A-57 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-58 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: Eleanor L. Thomas Title: Executive Vice President 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: PRUDENTIAL SECURITIES FUTURES MANAGEMENT INC., as Managing Owner By:________________________ Name: Eleanor L. Thomas Title: Executive Vice President A-59 EXHIBIT A RESTATED CERTIFICATE OF TRUST OF WORLD MONITOR TRUST II This Restated Certificate of Trust of World Monitor Trust II (the "Trust") is being duly executed and filed on behalf of the Trust by the undersigned, as trustee, to amend and restate the original Certificate of Trust of the Trust which was filed on April 22, 1999 under the Delaware Business Trust Act (12 Del. C. Section 3801 et seq.) (the "Act"). The Certificate of Trust is hereby amended and restated in its entirety to read as follows: 1. Name. The name of the trust formed hereby is World Monitor Trust II. 2. Delaware Trustee. The name and the 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 19890-0001, Attention: Corporate Trust Administration. 3. Series. Pursuant to Section 3806(b)(2) of the Act, the Trust shall issue one or more series of beneficial interests having the rights, powers and duties as set forth in the governing instrument of the Trust, as the same may be amended from time to time (each a "Series"). 4. Notice of Limitation of Liability of each Series. Pursuant to Section 3804 of the Act, there shall be a limitation on liability of each particular Series such that the debts, liabilities, claims, obligations and expenses incurred, contracted for or otherwise existing with respect to , in connection with or arising under a particular Series shall be enforceable against the assets of that Series only, and not against the assets of the Trust generally or the assets of any other Series. 5. Effective Date. This Restated Certificate of Trust shall be effective upon filing. WILMINGTON TRUST COMPANY, as Trustee By_______________________________ Name: Title: A-60 EXHIBIT B WORLD MONITOR TRUST II REDEMPTION REQUEST (Please date) PRUDENTIAL SECURITIES FUTURES MANAGEMENT INC. c/o Prudential Securities Incorporated One New York Plaza, 12th Floor Specialty Finance Operations New York, New York 10292 Dear Sirs: I hereby request redemption of the number of limited liability beneficial interests ("Interests") specified below, in the Series of the Trust indicated below, subject to all of the conditions set forth in the Trust Agreement, as described in the Prospectus: Series D: Series E: Series F: (specify number of Interests to be redeemed in each Series) Redemption will be effective as of the dealing day (Monday of each week) at the Series, Net Asset Value (as such term is defined in Section 1.1 of the Trust Agreement) on the Friday immediately preceding the dealing day, assuming that this Redemption Request is received by the managing owner on at least two (2) business days' prior written notice ("Redemption Date"). The first permissible Redemption Date shall be the end of the first full week of trading activity by the Series in which the Interests are owned. I understand that Interests in each Series redeemed on or prior to the end of the first and second successive six-month periods after the effective date of purchase will pay a redemption charge of 4% and 3%, respectively of the Series' Net Asset Value at which they are redeemed. I understand that the effective date of purchase means the date on which the applicable Series broke escrow if subscription was made during the initial offering period and means the applicable dealing date for subscriptions made during the continuous offering period. 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 Interests to which this Redemption Request 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 Redemption Request 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 Number or Taxpayer ID Number -------------------------------------------------------------------------- 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 REDEMPTION REQUEST MUST BE RECEIVED BY THE MANAGING OWNER AT LEAST TWO (2) BUSINESS DAYS PRIOR TO THE DEALING DAY ON WHICH YOUR REDEMPTION IS TO BECOME EFFECTIVE. B-2 EXHIBIT C EXCHANGE REQUEST To: WORLD MONITOR TRUST II Prudential Securities Futures Management Inc. One New York Plaza, 12th Floor Specialty Finance Operations New York, New York 10292 I hereby request the following exchange of Interests as of the Dealing Date which first occurs two (2) business days after your receipt of this Exchange Request, upon the terms and conditions described in the Prospectus for the World Monitor Trust II dated April 3, 2001. I certify that all of the statements, including all representations and warranties, made in my original Subscription Agreement remain accurate. 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 Interests to which this Exchange Request relates, with full power and authority to request an Exchange 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. Amount to be Redeemed Upon Exchange Totals in each column must be equal. Series D $____________ or All Interests Series E $____________ or All Interests Series F $____________ or All Interests C-1 Amount to be Purchased Upon Exchange Series D $____________ Series E $____________ Series F $____________ Total $_______________ Total $_______________ 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 Number or Taxpayer ID Number Street City State Zip Code Account # Type FA This Exchange Request is intended to be used for an even-value exchange of Interests from one or more Series into one or more different Series. This Exchange Request is not to be used to redeem Interests or to purchase additional Interests of a Series in which you are currently a Limited Owner. C-2 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) IF SUBMITTED IN ACCORDANCE WITH REQUIRED PROCEDURES, THE EXCHANGE REQUESTED HEREIN WILL BE EFFECTIVE AS OF THE DEALING DAY (USUALLY MONDAY) OF THE WEEK FOLLOWING A WEEK AFTER WHICH THIS EXCHANGE REQUEST WAS RECEIVED. FOR USE BY PSI-FA ONLY C-3 Ledger Code Account Number FA# Phone Order - - Client Account Number at PSI FA Name FA Telephone No. Branch Name and Wire Code of Branch Signature of FA and Date Signature of Branch Manager and Date FOR USE BY TRUST ONLY Interests to be Redeemed: Series D Interests: Amount $ Series E Interests: Amount $ Series F Interests: Amount $ Total $ Interests to be Purchased: Series D Interests: Amount $ Series E Interests: Amount $ Series F Interests: Amount $ Total $ C-4 EXHIBIT D WORLD MONITOR TRUST II SUBSCRIPTION AGREEMENTS FOR LIMITED LIABILITY BENEFICIAL INTERESTS INSTRUCTIONS (Please read carefully) A. Using a typewriter or printing in ink, check the appropriate box or fill in the blanks on Pages D-3 through D-4 as directed herein: CHECK THE APPROPRIATE BOX Boxes (i) NEW SUBSCRIBER(S) (ii) EXISTING OWNER(S) OF SERIES D, SERIES E AND/OR SERIES F INTERESTS 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 AND SERIES. MINIMUM SUBSCRIPTION FOR ALL SERIES IN THE AGGREGATE IS $5,000 FOR INDIVIDUALS, INSTITUTIONS OR ERISA PLANS (EXCEPT IRAs), $2,000 FOR IRAs AND OTHER QUALIFIED ACCOUNTS. THE MINIMUM INITIAL SUBSCRIPTION PER SERIES IS $1,000. ONCE THE MINIMUM IS MET, ADDITIONAL PURCHASES 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 D-13. Number 2 SOCIAL SECURITY NUMBER AND/OR TAXPAYER I.D. NUMBER. BACK UP WITHHOLDING BOX CHECKED (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 CHECK BOX TO INDICATE ACCOUNT TYPE (CHECK ONLY ONE BOX). D-1 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 (SOMETIMES REFERRED TO AS THE "FA"). 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 PLAN 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. Number 12 SUBSCRIBER(S) MUST INITIAL THE SUBORDINATION AGREEMENT IN THE SPACE PROVIDED IN THE LEFT MARGIN. B. Subscriber's admission as a limited owner of a Series will be determined based on the date on which a fully completed, dated, and signed Subscription Agreement is delivered to Prudential Securities or an additional seller during the initial and continuous offering period. 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 on file with Prudential Securities and non-U.S. subscribers must have W-8s on file with Prudential Securities. WORLD MONITOR TRUST II SUBSCRIPTION AGREEMENT and POWER OF ATTORNEY 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 or (b) if information has changed, follow instructions for new subscriber(s). D-2 1. Total Dollar Amount of Subscription: Series D Interests.....................$ Series E Interests.....................$ Series F Interests.....................$ 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 (we) 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 (all tenants' signatures required) common law employees) // Tenants in Common (all tenants' signatures required) // Community Property (both signatures // Other Employee Benefit required) Plan (e.g., Custodian, // Custodian Partnership Pension, Profit Sharing, Keogh plan with 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 D-3 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 overall 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 for the applicable Series, once it commences trading, has been furnished to the person(s) named above. ------------------------------------------------------------------ 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 I acknowledge the suitability of the subscriber and the amount of the subscription for each Series. 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 BRANCH MANAGER'S TELEPHONE NUMBER FOR ALL ACCOUNTS D-4 SUBSCRIBERS -- DO NOT SIGN WITHOUT READING THE "REPRESENTATIONS AND WARRANTIES" AT PARAGRAPH 11, THE "SUBSCRIBER(S) CONSENT AND SUBORDINATION AGREEMENT AT PARAGRAPH 12 AND THE "RISKS" AT PARAGRAPH 13 OR WITHOUT 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) THE FACT THAT LIMITED OWNERS MAY NOT TAKE PART IN THE MANAGEMENT OF A SERIES; (IV) THE EXISTENCE OF ACTUAL AND POTENTIAL CONFLICTS OF INTEREST IN THE STRUCTURE AND OPERATION OF A SERIES; (V) THE SERIES' FEE STRUCTURE; (VI) THE FACT THAT ANY PERFORMANCE AND PROFORMA TABLES, IF ANY, INCLUDED IN THE PROSPECTUS MUST BE READ ONLY IN CONJUNCTION WITH THE NOTES THERETO, IF ANY, (VII) THE TAX CONSEQUENCES OF AN INVESTMENT IN THE TRUST; (VIII) THE LIMITATIONS ON LIMITED LIABILITY; (IX) THE FACT THAT THERE ARE SUBSTANTIAL RESTRICTIONS ON THE TRANSFERABILITY OF INTERESTS; AND (X) THE SERIES' STRUCTURE AND PROPOSED 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. D-5 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 in this subscription agreement will be deemed to have been made by each owner of the account ---------------------- ---------------------------------------------- (Signature of Subscriber) (Signature of Joint Owner, if any) Date ---------------------- ---------------------------------------------- (Print or Type Name (Print or Type Name of Signatory) Date of Signatory) 9. IRA AND KEOGH PLAN (WITHOUT COMMON LAW EMPLOYEES) SUBSCRIPTION -------------------------------------------------------------------- (Signature of IRA beneficiary or plan participants) Date -------------------------------------------------------------------- (Print or Type Name of Signatory) 10. ENTITY (CUSTODIAN, CORPORATION, PARTNERSHIP, TRUST OR EMPLOYEE BENEFIT PLAN) SUBSCRIPTION The undersigned corporate officer, partner or trustee custodian or fiduciary hereby certifies and warrants that he or she 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 participant 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) -------------------------------------------------------------------- (Signature of Authorized Corporate Date Officer, Partner, Trustee Custodian or Fiduciary) -------------------------------------------------------------------- (Print or Type Name of Signatory) D-6 11. REPRESENTATIONS AND WARRANTIES I(we) hereby represent and warrant to Prudential Securities Futures Management Inc. (sometimes referred to as the managing owner) and the Trust as follows (please initial each applicable representation and warranty): ____ (1) I (we) satisfy one or more of the following financial standards outlined below for subscription in the Trust (initial in the space provided only those requirements that apply): ____ (A) I (we) am (are) not acting on behalf of an Employee Benefit Plan and I (we) have either ____ (i) a net worth (exclusive of home, home furnishings, and automobiles) of at least $150,000 or ____ (ii) 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 or ____ (iii) if I (we) am (are) a resident(s) of one of those states listed under "State Suitability Requirements on page D-13, 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. ____ (B) 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 the IRA or Keogh Plan meets the net worth and gross income requirement in (i), (ii) or (iii) 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. ____ (C) 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 Plan meets the net worth and suitability requirements in (i) or (iii) above, and its investment in the Trust does not exceed 10% of the assets of the Plan at the time of investment. ____ (2) The address set forth above in Items 5 and 6 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 in those Items 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 I (we) 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 advisors, 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. D-7 ____ (5) I (we) have received a prospectus of each Series which constitutes its Commodity Futures Trading Commission Disclosure Document. ____ (6) I (we) am (are) purchasing the limited interests for our own account. ____ (7) I (we) acknowledge that as a holder or holders of any interests in, or claims of any kind against, any Series, I (we) will seek to recover any debts, liabilities, obligations and expenses incurred or otherwise existing with respect to that Series solely from, or to assert such claims solely against, (i) the assets of that Series (and not the assets of any other Series or the Trust generally) or (ii) the managing owner. 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. SUBSCRIBERS CONSENT AND SUBORDINATION AGREEMENT ____ I(we), a Subscriber(s) who is(are) purchasing Interests in the Series that is the subject of this agreement (Series ___) (the "Contracting Series"), agrees and consents (the "Consent") to look solely to the assets (the "Contracting Series Assets") of the Contracting Series and to the Managing Owner and its assets for payment. The Contracting Series Assets include only those funds and other assets that are paid, held or distributed to the Trust on account of and for the benefit of the Contracting Series, including, without limitation, funds delivered to the Trust for the purchase of Interests in a Series. In furtherance of the Consent, I (we) agree that (i) any debts, liabilities, obligations, indebtedness, expenses and claims of any nature and of all kinds and descriptions (collectively, "Claims") incurred, contracted for or otherwise existing and (ii) any Limited Interests, and any other interests, beneficial interests or equity ownership of any kind (collectively, "Equity Ownership"), arising from, related to or in connection with the Trust and its assets and the Contracting Series and the Contracting Series Assets, shall be subject to the following limitations: (a) subordination of certain claims and rights. (i) except as set forth below, the Claims and Equity Ownership, if any, of the subscriber (collectively, the "Subordinated Claims and Equity Ownership") shall be expressly subordinate and junior in right of payment to any and all other Claims against and Equity Ownership in the Trust and any Series thereof, and any of their respective assets, which may arise as a matter of law or pursuant to any contract; provided, however, that the subscriber's Claims (if any) against and Equity Ownership (if any) in the Contracting Series shall not be considered Subordinated Claims and Equity Ownership with respect to enforcement against and distribution and repayment from the Contracting Series, the Contracting Series Assets and the Managing Owner and its assets; and provided further that (1) the subscriber's valid Claims, if any, against the Contracting Series shall be pari passu and equal in right of repayment and distribution with all other valid Claims against the Contracting Series and (2) the subscriber's Equity Ownership, if any, in the Contracting Series shall be pari passu and equal in right of repayment and distribution with all other Equity Ownership in the Contracting Series; and (ii) the subscriber will not take, demand or receive from any Series or the Trust or any of their respective assets (other than the Contracting Series, the Contracting Series Assets and the Managing Owner and its assets) any payment for the Subordinated Claims and Equity Ownership; (b) the Claims and Equity Ownership of the subscriber with respect to the Contracting Series shall only be asserted and enforceable against the Contracting Series, the Contracting Series Assets and the Managing Owner and its assets; and such Claims and Equity Ownership shall not be asserted or enforceable for any reason whatsoever against any other Series, the Trust generally or any of their respective assets; D-8 (c) if the Claims of the subscriber against the Contracting Series or the Trust are secured in whole or in part, the subscriber hereby waives (under section 1111(b) of the U.S. Bankruptcy Code (11 U.S.C. S 1111(b))) any right to have any deficiency Claims (which deficiency Claims may arise in the event such security is inadequate to satisfy such Claims) treated as unsecured Claims against the Trust or any Series (other than the Contracting Series), as the case may be; (d) in furtherance of the foregoing, if and to the extent that the subscriber receives monies in connection with the Subordinated Claims and Equity Ownership from a Series or the Trust (or their respective assets), other than the Contracting Series, the Contracting Series Assets and the Managing Owner and its assets, the subscriber shall be deemed to hold such monies in trust and shall promptly remit such monies to the Series or the Trust that paid such amounts for distribution by the Series or the Trust in accordance with the terms hereof; and (e) the foregoing Consent shall apply at all times notwithstanding that the Claims are satisfied or that the Equity Ownership is sold, transferred, redeemed or in any way disposed of and notwithstanding that the agreements in respect of such Claims and Interests are terminated, rescinded or canceled. NOTICES TO SUBSCRIBERS 13. RISKS These securities are speculative and their purchase involves a high degree of risk. Risk Factors relating to the Interests in each Series which are more fully described in the prospectus include the following: (i) futures, forward and options trading is speculative, volatile and highly leveraged; (ii) each Series is largely reliant on the trading advisor for success; (iii) past performance of the trading advisor for each Series is not necessarily indicative of future results; (iv) a limited owner's tax liability is likely to exceed his or its cash distributions; (v) substantial charges will be imposed on each Series and each Series' break-even point is described in the Prospectus; (vi) limited owners will have limited voting rights and no control over the Trust's business or the business of each Series; (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 in a Series because transferability is restricted, interests are not listed on an exchange and no trading market exists; (ix) actual and potential conflicts of interests exist. See the section entitled "Risk Factors" in the prospectus. D-9 14. SUBSCRIPTIONS The minimum subscription amount is $5,000 or ($2,000 for IRAs), except in the case of certain states (see State Suitability Requirements on page D-13). The purchase price per limited interest is $100 during the initial offering period and is Series net asset value during the continuous offering period. Incremental subscriptions in excess of the above minimums are permitted in multiples of $100. Existing limited owners in the subscribed Series (except in certain states) may subscribe for additional limited interests in that Series 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 prospectus. 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 as set forth in the prospectus. 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 SUBMITS SUBSCRIPTION DOCUMENTS TO PRUDENTIAL SECURITIES OR AN ADDITIONAL SELLER. Thereafter, all subscriptions are irrevocable. Due to the above rescission right, subscribers will not be admitted as limited owners until the Monday first following five business days after the subscription documents have been submitted to Prudential Securities or an additional seller. 15. SUITABILITY If the 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 to the trust. D-10 THE EXECUTION COPY OF THE SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY ACCOMPANIES THIS PROSPECTUS AS A SEPARATE DOCUMENT WORLD MONITOR TRUST II UNITS OF BENEFICIAL INTEREST BY SERIES 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 World Monitor Trust II Prudential Securities Futures Management Inc. One New York Plaza, 12th Floor Specialty Finance Operations 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 Series D, Series E and/or Series F of World Monitor Trust II (the "Trust") as set forth in the Subscription Agreement and Power of Attorney signature page attached hereto. I have authorized my selling agent to debit my customer securities account in the amount of my subscription. 2. Representations and Warranties of Subscriber. I have received the prospectus together with the most recent monthly report of the Trust, if trading has commenced for the Series in which I am investing. 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 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 Prudential Securities Futures Management Inc. (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, (i) to file, prosecute, defend, settle or compromise litigation, claims or arbitrations on behalf of the Trust and Series and (ii) to 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 First Amended and Restated 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 and shall survive and shall not be affected by, my subsequent death, incapacity, D-11 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. I hereby acknowledge and agree that this Subscription Agreement and Power of Attorney shall be governed by and shall be interpreted in accordance with the laws of the State of Delaware, without regard to principles of conflicts of laws. PLEASE CAREFULLY COMPLETE THE SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE WHICH ACCOMPANIES THIS PROSPECTUS. D-12 STATE SUITABILITY REQUIREMENTS All states except as listed below. The general suitability requirement for subscribers to the Series of 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 ($2,000 for IRAs). 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 U.S. 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. Iowa . . . . . . . (a) $225,000 NW, or (b) $60,000 NW and $60,000 TI. Minimum subscription for IRAs is $3,000. Maine. . . . . . . (a) $225,000 NW, or (b) $100,000 NW and $100,000 AI. 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) $60,000 NW and $60,000 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) $250,000 NW, or (b) $125,000 NW and $50,000 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 D-13 WORLD MONITOR TRUST II The date of this prospectus is April 3, 2001. The Trust files annual, quarterly and current reports and other information with the SEC concerning each series. 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's internet site at www.sec.gov. (LOGO)