<PAGE> 1
As filed with the Securities and Exchange Commission on April , 1997
------
REGISTRATION No. 33-
----------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------------------------------------------
REGISTRATION STATEMENT
ON FORM SB-2
UNDER THE SECURITIES ACT OF 1933
-------------------------------------------------
MAXIMUS FUND I, L.L.C.
Delaware 6793 (Applied For)
-------- ---- -------------
(State or Other (Primary Standard (IRS Employer
Jurisdiction of Industrial Classification Identification
Incorporation or Number) Number)
Organization)
------------------------------------------------
8218 North University
Peoria, Illinois 61615
(309) 691-5706
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive office)
-------------------------------------------------
COPY TO:
Andrew M. Allamian, Esq.
2500 E. Devon Ave.
Suite 300
DesPlaines, IL 60018
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of the Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box.
[x].
<PAGE> 2
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------
Title of Each Proposed Proposed
Class of Maximum Maximum Amount of
Securities to be Amount to be Offering Price Aggregate Registration
Registered Registered* per Interest Offering price Fee
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Membership 25,000 $1,000.00 $25,000,000 $7,575.75
Interests Interests
</TABLE>
* Estimated for purposes of calculation of the registration fee only and
assuming that the $25,000,000 maximum is sold during the Initial Offering
Period at the initial offering price of $1,000 per Interest.
---------------------------
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file an amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
<PAGE> 3
PROSPECTUS
MAXIMUS FUND I, L.L.C.
(A DELAWARE LIMITED LIABILITY COMPANY)
$25,000,000 IN MEMBERSHIP INTERESTS
MINIMUM PURCHASE $20,000
MAXIMUS FUND I, L.L.C. (the "Fund") is a limited liability company organized
in Delaware to engage in the speculative trading of futures and option contracts
and other commodity interests on U.S. exchanges. The Fund is a commodity pool
subject to the jurisdiction of the Commodity Futures Trading Commission (the
"CFTC"), not a mutual fund or any other type of investment company within the
meaning of the Investment Act of 1940 and is not subject to regulation
thereunder. The Fund will be administered by Maximus Capital Management, Inc.
(the "Manager"), its Commodity Pool Operator and Managing Member. The Manager
will initially serve as the Fund's sole trading advisor to make commodity
interest trading decisions. In addition, the Manager has primary responsibility
for monitoring the performance of any additional commodity trading advisor(s),
allocating the Fund's assets among such advisor(s) and selecting additional or
replacement advisor(s). The Manager has selected Iowa Grain Company as the
Fund's initial Futures Commission Merchant.
POTENTIAL INVESTORS IN THE FUND ARE ADVISED THAT AN INVESTMENT IN ITS
MEMBERSHIP INTERESTS ARE SUBJECT TO THE FOLLOWING CONSIDERATIONS, AMONG OTHERS:
- Futures trading is speculative, can be volatile and involves significant
risks including those discussed in "Risk Factors".
- The operation of the Fund may be subject to certain conflicts of interest.
(See "Conflicts of Interest.")
- There are significant income tax aspects associated with this offering.
- Transferability of the Interests is restricted; there is no public market
for these securities and none is expected to develop. For a full
discussion of the significant restrictions on the transferability and
redemption of the Interests, see sec.14 -- "Redemptions, Distribution and
Transferability" on page 36.
Unless earlier terminated, the Initial Offering Period will be up to two (2)
months from the date hereof unless, in the sole discretion of the Manager, it is
extended for periods up to a total of seven (7) additional months. The Fund is
offering on a best-efforts, self underwritten (meaning no broker dealer) basis,
a minimum of $1,000,000 up to a maximum of $25,000,000 in Membership Interests
("Interests"). (See "Risk Factors -- Self-underwritten Offering.") The date that
(1) subscriptions for a minimum of $1,000,000 in Interests have been received
and (2) the Fund has commenced trading will mark the end of the Initial Offering
Period. During the Initial Offering Period, Interests are offered at $1,000 per
Interest; during the balance of this up to nine (9) month Offering Period,
purchasers will be issued Interests (and fractions thereof, calculated to three
(3) significant decimals) at their Net Asset Value per Interest as of the close
of business on the last business day of the month in which the subscriptions are
received by the Fund plus a pro-rata portion of the unamortized organization and
offering expenses previously incurred or accrued by the Fund plus, if sold by
broker-dealer Selling Agents, any selling commissions. (the "Selling Price").
(See "Notes to the Cover Page"). If a minimum of $1,000,000 in Interests is not
sold during the Initial Offering Period (as it may be extended), investor funds
will be promptly returned, together with any interest. The minimum purchase is
$20,000 or, in its sole discretion, the Manager may accept smaller subscriptions
($2,000 in the case of Individual Retirement Accounts); additional purchases by
existing Members may be made in the amount of $5,000 or more.
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF
PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS DISCLOSURE DOCUMENT.
THESE ARE SPECULATIVE SECURITIES AND INVOLVE A HIGH DEGREE OF RISK. THESE
SECURITIES ARE SUITABLE FOR INVESTMENT ONLY BY A PERSON WHO CAN AFFORD TO LOSE
HIS ENTIRE INVESTMENT. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OR AGENCY OF
ANY STATE, NOR HAVE SUCH COMMISSIONS OR AGENCIES PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================
OFFERING SELLING PROCEEDS TO
PRICE(1)(2) COMMISSION(1) FUND(1)(2)(3)(4)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
Per Interest........................... $1,000 $0 $1,000
- ------------------------------------------------------------------------------------------------------------------
Total Minimum.......................... $1,000,000 $0 $1,000,000
- ------------------------------------------------------------------------------------------------------------------
Total Maximum.......................... $25,000,000 $0 $25,000,000
==================================================================================================================
</TABLE>
(Footnotes are on page ii)
MANAGER
MAXIMUS CAPITAL MANAGEMENT, INC.
8218 N. UNIVERSITY
PEORIA, ILLINOIS 61615
TELEPHONE (309) 691-5706
FACSIMILE (309) 691-5778
The Date of this Prospectus is April , 1997
<PAGE> 4
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, 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 PAGE 21 AND A
STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER
THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 23.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS
NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE,
BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY
STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK
FACTORS OF THIS INVESTMENT AT PAGE 7.
PROSPECTIVE PURCHASERS OF INTERESTS ARE NOT TO RELY ON THE CONTENTS OF THIS
DISCLOSURE DOCUMENT AS LEGAL OR TAX ADVICE. EACH PROSPECTIVE PURCHASER SHOULD
CONSULT HIS OWN PROFESSIONAL ADVISORS AS TO LEGAL, TAX AND RELATED MATTERS
CONCERNING HIS INVESTMENT.
THE INFORMATION CONTAINED IN THIS DISCLOSURE DOCUMENT HAS BEEN PRESENTED AND
IS ACCEPTED WITH THE EXPRESS AGREEMENT AND UNDERSTANDING THAT IT IS CONFIDENTIAL
AND THAT IT WILL NOT BE REPRODUCED IN WHOLE OR IN PART, NOR WILL IT BE
DISTRIBUTED OR DISCLOSED TO ANY OTHER PERSON, FIRM OR CORPORATION WITHOUT PRIOR
WRITTEN PERMISSION. ANY PERSON ACTING CONTRARY TO THE FOREGOING RESTRICTIONS MAY
PLACE HIMSELF AND THE FUND IN VIOLATION OF FEDERAL OR STATE SECURITIES LAWS.
EXCEPT AS OTHERWISE INDICATED, THIS DISCLOSURE DOCUMENT SPEAKS AS OF THE
DATE OF ITS ISSUANCE AND NEITHER THE DELIVERY HEREOF NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF ISSUANCE.
-------------------------
NOTES TO COVER PAGE:
1. The Interests are being offered initially by the Fund through its Manager on
a best efforts basis without any registered broker-dealer(s). There can be no
assurance that any or all of the Interests being offered will be sold.
2. Unless earlier terminated, the Initial Offering Period will be up to two (2)
months from the date hereof unless, in the sole discretion of the Fund, it is
extended up to seven (7) additional months from the date of this Prospectus.
3. These figures assume a uniform sales price of $1,000 per Interest and do not
reflect the organization and offering expenses, the later estimated at
$115,000 -- only a portion of which have been paid as of the date of this
Prospectus -- during the Initial Offering Period, to be advanced by the
Manager. The organization and offering expenses will be reimbursed out of
interest income from the proceeds. (See sec.11 "Compensation and Expenses")
4. Fund assets at least sufficient to cover margin requirements will be
deposited in the Fund's account(s) with the Clearing Broker. If the Fund
trades commodity interests on foreign exchanges, a portion of its assets may
be transferred to commodity brokers which are clearing members of such
foreign exchanges to meet initial and variation margin requirements. The Fund
may invest its assets in excess of margin requirements (maintained in
customer segregated account(s) at the Clearing Broker) in other
interest-earning obligations. Until fully reimbursed, the Manager will
receive the interest in lieu of charging the Fund Organizational Costs; once
the Manager has been reimbursed for Organizational Costs (estimated at
$115,000), the Fund will receive 80% of the interest income and the Manager
will receive 20%.
ii
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION TITLE PAGE
- ------- ----- ----
<C> <S> <C>
1. SUMMARY..................................................... 1
2. THE FUND.................................................... 3
3. THE OFFERING................................................ 5
4. THE MANAGER................................................. 6
5. RISK FACTORS................................................ 9
6. CONFLICTS OF INTEREST....................................... 14
7. CLEARING AND INTRODUCING BROKERS............................ 16
8. TRADING STRATEGY............................................ 16
9. USE OF PROCEEDS............................................. 17
10. PERFORMANCE RECORD.......................................... 18
11. COMPENSATION AND EXPENSES................................... 20
12. TAX CONSIDERATIONS.......................................... 22
13. REPORTS AND ACCOUNTING...................................... 32
14. REDEMPTIONS, DISTRIBUTION AND TRANSFERABILITY............... 32
15. GLOSSARY.................................................... 33
16. FUTURES TRADING............................................. 35
17. MISCELLANEOUS............................................... 37
OPERATING AGREEMENT.................................................... EXHIBIT A
SUBSCRIPTION AGREEMENT/POWER OF ATTORNEY............................... EXHIBIT B
REQUEST FOR REDEMPTION................................................. EXHIBIT C
AUDITED FINANCIALS..................................................... EXHIBIT D
</TABLE>
iii
<PAGE> 6
SEC.1. SUMMARY
This summary is intended as a highlight of more detailed information
contained in the body of this Prospectus. This Summary is qualified in its
entirety by the information appearing elsewhere in this Prospectus and the
attached exhibits.
THE FUND................... MAXIMUS FUND I, L.L.C. (the "Fund") is a limited
liability company organized under the Delaware
Limited Liability Company Act on January 17, 1997.
The Fund will initially offer two separate classes
("A" and "B" Interests) and, in the future, may
offer additional classes.
MANAGER, ADMINISTRATION AND
TRADING.................... The Manager of the Fund is Maximus Capital
Management, Inc. The principal office of the
Manager and the Fund is located at 8218 N.
University, Peoria, Illinois 61615. Initially, the
Manager, Maximus Capital Management, Inc., will
also serve as the Fund's trading advisor. The
telephone number is (309) 691-5706. The facsimile
number is (309) 691-5778.
INVESTMENT................. The Fund seeks substantial capital growth by
engaging in the speculative trading of futures and
options on futures in U.S. markets.
INTERESTS OFFERED.......... Interests in the Fund are offered to the public at
an initial price of $1,000 per Interest.
Thereafter, Interests will be available for
purchase at the month-end Net Asset Value per
Interest. The minimum required investment is
$20,000.00 subject to the discretion of the Manager
to accept less.
FUND'S BROKERAGE........... The Fund's Clearing Broker is Iowa Grain Company.
The Introducing Broker is D&R Commodities, Inc.
REDEMPTION OF INTERESTS.... The Interests are redeemable, with 10 days prior
written notice to the Fund, by Investors at the Net
Asset value per Interest as of the end of any
month. (See "Operating Agreement -- Redemptions"
with regard to redemption penalties if Interests
are redeemed within 18 months of being accepted.)
COMPENSATION............... Class "A" Interests will be charged a monthly
management fee equal to 1/12 of 1% (approximately
1% annually) of the Net Asset Value. Class "B"
Interests will be charged both the monthly 1/2 of
1% management fee and a quarterly incentive fee by
the Manager equal to 25% of Trading Profits, both
as defined in sec.11 -- "Compensation and
Expenses". For both classes, brokerage fees are
$65.00 per round turn. (See "Compensation and
Expenses" as to details and defined terms.)
EXPENSES................... The Fund will pay for on-going operating expenses
which include accounting, legal and auditing,
estimated at $25,000 during its first full year of
operation.
BREAK-EVEN................. Given the Fund's contemplated expenses, Class "A"
Interests must earn profits of $2,000.00 (or 10%)
in order for a $1,000.00 investment to break-even
and Class "B" Interests must earn profits of
$2,666.60 (or 13.33%) for an investment of $1,000
to break-even. (See the Break-Even Illustrations on
Pages 23 and 24.)
MONTHLY REPORT............. Each Member will receive a monthly account
statement showing their portion of the month-end
Net Asset Value in the Fund. Additionally,
1
<PAGE> 7
each Member will receive a year-end set of
financial statements audited by an independent
certified public accountant.
TAX TREATMENT.............. See sec.12 -- "Tax Considerations" for a discussion
of tax consequences to investors in the Fund.
FISCAL YEAR-END............ December 31.
RISKS AND CONFLICTS OF
INTEREST................... An investment in Interests is speculative and
involves a high degree of risk, reflecting (among
other things) the highly leveraged and frequently
volatile markets in which the Fund will trade. In
addition to trading risks, the Fund will be subject
to substantial fees and expenses which must be less
than its revenues to prevent depletion of its
trading assets. Potential conflicts of interest are
described in Section 6.
HOW TO SUBSCRIBE........... See Subscription Procedures contained in Exhibit B.
U.S. DOLLAR DENOMINATION... The Fund will report its results and transact
subscriptions and redemptions in United States
Dollars.
2
<PAGE> 8
SEC.2. THE FUND
MAXIMUS FUND I, L.L.C. (the "Fund") is a limited liability company organized
under the laws of the State of Delaware to engage in the speculative trading of
commodity interests. The principal office of the Fund is located at 8218 N.
University, Peoria, Illinois 61615.
LIMITED LIABILITY COMPANY
The Fund has been formed as a limited liability company under the laws of
Delaware. A limited liability company is a form of business entity which is
separate and distinct from the familiar corporation and partnership forms. The
limited liability company has some corporate attributes and some partnership
attributes. The owners (called "Members") of a limited liability company, like
the shareholders of a corporation, are not generally liable for business
liabilities While limited liability companies have been a standard form of doing
business in Europe and Latin America for many years, the limited liability
company has only been permitted in the United States in recent years. The
limited liability company is run by manager(s), in the same manner that the
board of directors runs a corporation. The Manager of the Fund is Maximus
Capital Management, Inc. (See "The Manager") However, a limited liability
company is taxed as a limited partnership. (See "Tax Considerations") Also, the
operating agreement of the limited liability company, like the partnership
agreement of a partnership, can specify the manner in which distributions are
made among members which permits much more flexibility than a corporation which
must make distributions to shareholders in accordance with their stock
ownership.
CAPITALIZATION
The Fund was formed on January 17, 1997. The table below shows the
capitalization of the Fund as of the date of this Prospectus and as adjusted for
the sale of the maximum amount of Interests registered (having an aggregate
Selling Price of $25,000,000):
<TABLE>
<CAPTION>
OUTSTANDING AS ADJUSTED
AS OF (1)(2)
TITLE AND CLASS MARCH 18, 1997 SALE OF MAXIMUM
--------------- -------------- ---------------
<S> <C> <C>
Manager
"A" Interests......................................... 1 1
"B" Interests......................................... 0 0
Members
"A" Interests......................................... 0 Total of 25,000 between
"B" Interests......................................... 0 the two classes
--------- -----------------------
Total Capital.................................... $1,000.00 $25,000,000
========= =======================
</TABLE>
- -------------------------
(1) This calculation assumes that the sale of all Interests is made during this
Offering Period at the $1,000 per Interest initial offering price. The
maximum amount will vary, depending on the respective Net Asset Value per
Interest (and associated Selling Price) and the number of Interests sold
during this Offering Period.
(2) To effect the organization of the Fund, one (1) Interest was purchased by
the Manager. THE MANAGER HAS AGREED TO MAKE SUCH CAPITAL CONTRIBUTIONS TO
THE FUND AS ARE NECESSARY TO MAINTAIN AN AGGREGATE INVESTMENT EQUAL TO THE
GREATER OF 1% OF THE AGGREGATE CAPITAL CONTRIBUTIONS OF ALL MEMBERS OR
$25,000.
3
<PAGE> 9
CERTAIN INVESTMENT ADVANTAGES TO BE CONSIDERED
Members in the Fund will be able to obtain certain potential advantages
which may otherwise be unavailable to them if they were to engage individually
in commodity transactions. Among these are the following:
LIMITED LIABILITY. Unlike an individual who invests in futures through an
individual account, a Member cannot lose more than the amount of his Fund
investment, plus his share of any undistributed Fund profit.
ADMINISTRATIVE CONVENIENCE. The Fund provides the Members with many
services designed to reduce the administrative details involved in engaging
in commodity interest trading. An investor who is not prepared to spend
substantial time trading futures or managing other investment vehicles may
nevertheless participate in these markets through the Fund.
REDUCED BROKERAGE COMMISSIONS. As described in sec.11 -- "Compensation and
Expenses", the Fund initially will pay the Clearing Broker $65 per
round-turn futures or option trades. To the extent an investor may be
charged higher commissions were he to trade directly, he will benefit by
the Fund's lower rate. No assurance can be given that the brokerage rates
paid by the Fund are the lowest rates charged by the Clearing or
Introducing Brokers.
PROFIT POTENTIAL IN DECLINING MARKETS. Unlike the market in stocks, bonds
or real estate, the potential profitability of the Fund is not dependent
upon favorable economic conditions. In fact, unfavorable conditions such as
inflation can increase the profit potential of managed futures trading by
generating sustained commodity price trends.
ACCESS TO ADVISORS. Initially, the Manager will serve as the Advisor.
However, in the future, the Manager may utilize the services of on or more
advisors. By pooling investors' capital, the Fund can retain Advisors that
an individual investor could not ordinarily utilize due to the individual
or collective minimum account size requirements of the Advisor(s) to the
Fund.
4
<PAGE> 10
SEC.3. THE OFFERING
PURCHASE OF THE INTERESTS OFFERED HEREBY SHOULD BE MADE ONLY BY THOSE PERSONS
WHO CAN AFFORD TO BEAR THE RISK OF A TOTAL LOSS OF THEIR INVESTMENT. THE FUND
RESERVES THE RIGHT TO REJECT ANY SUBSCRIPTION IN WHOLE OR IN PART.
Maximus Fund I, L.L.C. is currently offering two classes of membership
Interests. Class "A" shares will be made available only to clients currently
holding managed accounts with the Manager, Maximus Capital Management, Inc.
Class "B" Interests will be offered to all other prospective investors. Each
Member, regardless of class, will share expenses of the Fund in a pro rata
fashion. Both classes pay a monthly management fee of 1/2 of 1% of month-end Net
Asset Value. However, Members with Class "B" Interests will also pay an
Incentive Fee based on Trading Profits. (See sec. 11 -- "Compensation and
Expenses.")
INVESTMENT REQUIREMENTS
Subscriptions for the purchase of the Interests offered hereby are subject
to the following conditions:
(1) The minimum purchase is $20,000. The Manager in its discretion may
accept smaller subscriptions. ($2,000 in the case of Individual Retirement
Accounts) There is generally no limit on the maximum number of Interests
that may be purchased by any one investor, except as limited by applicable
regulatory considerations.
(2) Each purchaser must represent in the Subscription Agreement and
Power of Attorney that he has (a) a net worth of at least $250,000
(exclusive of home, furnishings and automobiles) or (b) a net worth of at
least $100,000 (similarly calculated) and an annual gross income of not
less than $60,000. The Administrators of securities laws of certain states
have imposed additional suitability requirements for investments by
residents of such states. (See Annex to the Subscription Agreement and
Power of Attorney.)
(3) In the case of a pension, profit sharing plan or trust or any
tax-deferred or tax-exempt entity, including retirement plans, the trustee
or custodian must represent that he or she is authorized to execute such
subscription on behalf of the plan and that such investment is not
prohibited by law or the plan's governing documents.
(4) The Manager may reject any subscription. All subscriptions
accepted are irrevocable.
(5) Each purchaser must represent in the Subscription Agreement and
Power of Attorney that he or she is a U.S. citizen or resident or it is a
domestic corporation, partnership or trust, as defined in the Internal
Revenue Code of 1986, as amended.
(6) The Manager and any Selling Agents must have reasonable grounds to
believe, on the basis of information obtained from the purchaser concerning
his financial situation and needs and any other information known by the
Manager and/or any Selling Agent, that: (a) the purchaser is or will be in
a financial position appropriate to enable him to realize to a significant
extent the benefits described in the Prospectus; (b) the purchaser has a
net worth sufficient to sustain the risks inherent in the Fund, including
losses of investment and lack of liquidity; and (c) the Fund is otherwise a
suitable investment for the purchaser.
5
<PAGE> 11
SEC.4. THE MANAGER
Maximus Capital Management, Inc. (the "Manager") is an Illinois corporation
that was formed in December 1996. It is currently registered with the Commodity
Futures Trading Commission (the "CFTC") as a commodity trading advisor and
commodity pool operator. Prior to its December 1996 incorporation, the Manager
operated as follows: between December 1995 and May 1996, the Manager was a sole
proprietorship doing business as (d/b/a) Maximus Capital Management. In May
1996, the sole proprietorship was incorporated as D&R Commodities, Inc. ("D&R");
however, it continued doing business as Maximus Capital Management from May
through November 1996. Darren R. Frye is the sole shareholder of D&R and the
Manager.
DARREN R. FRYE
Darren R. Frye is the President and sole shareholder of the Manager,
Maximus Capital Management, Inc. Mr. Frye has run D&R Enterprises, a fertilizer
dealership, from October 1987 to date. At D&R Enterprises, Mr. Frye's main
duties and responsibilities consist of managing the company's day-to-day
operations. He has also run his own soil-testing and consulting business,
Midwest Soil Services, since September 1991. In response to demand from his
clients for grain marketing advice, he started D&R Marketing in December 1994.
D&R Marketing is primarily engaged in, and Mr. Frye's main duties and
responsibilities consist of, providing marketing advice to grain producers in
connection with cash grain market transactions. In February 1995, Mr. Frye
founded D&R Commodities, a sole proprietorship which operated as an introducing
broker. In May 1996, this sole proprietorship was incorporated as D&R
Commodities, Inc. and Mr. Frye became the sole shareholder. In addition to his
involvement with the above referenced companies, Mr. Frye has traded commodities
for his own account for 12 years. The trading performance of D&R Commodities
d/b/a Maximus Capital Management is located on page 18.
ERIC SAMPSON
Eric Sampson graduated from Bradley University in December 1992 with a
degree in Finance. He worked as a part-time bookkeeper for Dunlap State Bank
from 1991 until graduation in 1992. In August 1992, Mr. Sampson entered the
securities industry as a registered broker with Walnut Street Securities. As a
broker, he serviced customer trading accounts. In January 1994, Mr. Sampson left
Walnut Street Securities to begin his involvement in the commodities industry.
He became an Associated Person of Bates Commodities, an introducing broker, in
February 1994. As an AP of Bates Commodities, Mr. Sampson functioned as a
commodity broker servicing customer accounts until January 1995. He left Bates
Commodities in order to accept a position with D&R Commodities in February 1995.
As an AP, his duties and responsibilities include the solicitation and handling
of customer accounts. Mr. Sampson's affiliation with D&R Commodities has
afforded him with other opportunities as well. He has also served as a
representative of D&R Marketing, a cash grain consulting business, and he
participated with Mr. Frye in the formation of the Manager. Mr. Sampson became
registered with D&R Commodities as an AP in May 1995 and as a principal in
December 1995. He currently serves as the Director of Operations of both the
Manager and D&R Commodities, Inc.
MINIMUM NET WORTH AND PURCHASE REQUIREMENTS
The Operating Agreement provides that the Manager (and/or its affiliates)
will contribute to the Fund an amount mandated under the North American
Securities Administrators Association ("NASAA") Commodity Pool Guidelines. (the
"Guidelines") (Those Guidelines currently provide that the promoter of a
commodity pool such as the Fund must purchase Interests equal to the greater of
1% of the aggregate initial capital contributions of all Members or $25,000.)
The Manager has agreed to contribute capital in amounts sufficient to satisfy
such minimum investment requirement. The Manager will share Fund profits and
losses with the Members pro rata to the extent of its investment. The Manager
may not redeem or transfer any Interests, so long as it is acting as Manager, in
excess of its minimum purchase requirements. While they do not currently intend
to do so, the Manager and its officers, directors, shareholders and employees
may subscribe for Interests of the Fund offered which purchases, if any, would
count toward the $1,000,000
6
<PAGE> 12
minimum offering; any Interests so acquired (including the Manager's minimum
purchase as required by NASAA Guidelines) will be for investment purposes and
with no intention to distribute through subsequent transfers.
Under the Operating Agreement, the Manager is obliged, for as long as it
continues to serve as Manager of the Fund, to maintain a net worth not less than
mandated under the NASAA Guidelines. (Those Guidelines currently provide that
the promoter of a commodity pool such as the Fund must maintain a net worth of
not less than 5% of the aggregate capital contributions to the Fund and any
other entity for which it acts as sponsor, manager and/or general partner -- but
in no case is less than $50,000 or more than $1,000,000 required). For these
purposes, "net worth" reflects the carrying of all assets at fair market value
and excludes capital contributions of the Manager to the Fund or to any other
entity for which it acts as sponsor, manager and/or general partner. Net worth
will be calculated in accordance with generally accepted accounting principles
provided that all current assets shall be based on then current market value and
may include any notes receivable, letters of credit or stock subscriptions from
adequately capitalized principals of the Manager and/or other parties involved
in the offering, including the Clearing Broker.
FIDUCIARY RESPONSIBILITY OF THE MANAGER
Counsel has advised the Manager it has a fiduciary responsibility for the
safekeeping and use of all assets of the Fund, whether or not such assets are in
its possession. The Manager is accountable to each Member and required to
exercise good faith and integrity with respect to Fund affairs. (For example,
whether under SEC, CFTC and/or general fiduciary principles, a commodity pool
operator cannot commingle property of the Fund with the property of any other
person, including the Manager.) Such responsibilities are in addition to the
several duties, obligations and limitations of the Manager set forth in the
Agreement.
Cases have been decided under the common or statutory law of partnership in
certain jurisdictions to the effect that a limited partner may institute legal
action on behalf of himself and all other similarly situated limited partners (a
class action) to recover damages from a manager for violations of fiduciary
duties, or on behalf of a partnership (a partnership derivative action), to
recover damages from a third party where a manager has failed or refused to
institute proceedings to recover such damages. On the basis of federal and/or
state statutes, including most critically the Delaware Limited Liability Act,
and rules and decisions by pertinent federal and/or state courts, accordingly,
it appears that: (a) Members in a limited liability company have the right,
subject to the provisions of the Federal Rules of Civil Procedure and
jurisdictional requirements, to bring class actions in federal court to enforce
their rights under federal securities laws; and (b) Members who have suffered
losses in connection with the purchase or sale of their interests may be able to
recover such losses from a manager where the losses result from a violation by
the manager of Rule 10b-5, promulgated under the Securities Exchange Act of
1934, as amended. In addition, Members may be afforded certain rights for
reparations against the Manager (a registered commodity pool operator and
commodity trading advisor), the Clearing and Introducing Brokers (respectively a
registered futures commission merchant and introducing broker) under the
Commodity Exchange Act, as amended, and rules promulgated thereunder. It should
be noted, however, that in endeavoring to recover damages in such actions, it
would be generally difficult to establish as a basis for liability that
commodity trading has been excessive. This is due to the broad discretion given
to the Manager by the Agreement, as well as to the exculpatory provisions
contained in such Operating Agreement. The Agreement vests in the Manager the
sole responsibility for managing the Fund, including the discretion to choose
the commodity trading advisors, determine distributions (if any) and determine
whether to admit additional Members. Moreover, the Operating Agreement's
exculpatory provisions may render ineffective any legal remedies available to
Members as a result of breaches of the Manager's fiduciary responsibility.
Indemnification is provided by the Fund if the Manager acted within the scope of
its authority in good faith and in a manner it reasonably believed to be in the
best interests of the Fund. (See "Operating Agreement -- Indemnification" and
Exhibit A attached hereto).
The SEC has stated that, to the extent any such exculpatory or
indemnification provision purports to include indemnification for liabilities
arising under the Securities Act of 1933, as amended, it is the opinion of the
SEC that such indemnification is contrary to public policy and, therefore,
unenforceable. Members who
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<PAGE> 13
believe that the Manager may have violated applicable law regarding fiduciary
duties should consult with their own counsel as to their evaluation of the
status of the law at such time.
PROPRIETARY TRADING BY THE MANAGER AND ITS PRINCIPALS
The Manager and its principals currently trade commodity interests for
their own proprietary accounts and intend to continue to do so. The proprietary
trading strategy utilized by the Manager or its principals may not be the same
as the strategy as used on behalf of the Fund. Neither the Fund nor the Members
will be permitted to inspect the proprietary trading records of Mr. Frye, Mr.
Sampson or the Manager due to the confidential nature of such records.
SEC.5. RISK FACTORS
The Fund is a new venture in a high risk business. Investment in Interests
of the Fund should be made by persons and entities able to assume the risk of
losing their entire investment and only after consulting with independent
qualified sources of investment and tax advice. Among the risks involved are the
following:
RISKS RELATED TO COMMODITY TRADING
- - PRICE FLUCTUATION. A principal risk in trading commodity interests as the Fund
proposes to do is the volatility in the market prices, which fluctuate rapidly
and over wide ranges. The profitability of the Fund will depend on predicting
fluctuations in market prices. Prices of commodity futures contracts are
affected by a wide variety of complex and hard to predict factors, such as
supply and demand of a particular commodity, weather and climate conditions,
governmental activities and regulations, political and economic events and
prevailing psychological characteristics of the marketplace.
- - SUBSTANTIAL LEVERAGE. The lack of (or low) margin deposits normally required
in commodity interest trading permits an extremely high degree of leverage.
Thus a relatively small price movement in a commodity futures contract may
result in immediate and substantial profit or loss to the investor. Like other
leveraged investments, a commodity interest transaction may result in losses
in excess of the amount invested. If the Fund invests a substantial amount of
its net assets in such commodities, a substantial change, up or down, in the
value of an Interest would result. Although the Fund may lose more than its
initial margin on a trade, the Fund (and not the shareholders personally) will
be subject to margin calls.
- - ILLIQUIDITY OF TRADING. It is not always possible to execute a buy or sell
order at the desired price, or to close out an open position, due to market
conditions, limits on open positions and/or daily price fluctuation limits
imposed by exchanges and approved by the Commodity Futures Trading Commission
(the "CFTC"). Once the market price of a commodity futures contract reaches
its daily price fluctuation limit, positions in the commodity can be neither
taken nor liquidated unless traders are willing to effect trades at or within
the limit. The holder of a commodity futures contract (including the Fund) may
therefore be locked into an adverse price movement for several days or more
and lose considerably more than the initial margin. Another instance of
difficult or impossible execution occurs in markets which lack sufficient
trading liquidity. Although the Fund intends to purchase and sell actively
traded commodities, no assurance can be given that Fund orders will be
executed at or near the desired price.
- - POSITION LIMITS. The CFTC and domestic exchanges have established speculative
position limits (referred to as "position limits") on the maximum net long or
short futures position which any person, or group of persons acting in concert
(other than a hedger), may hold or control in futures contracts or options on
particular commodities. Any commodity accounts owned or managed by the Advisor
or the principals thereof, including the Fund's account, must be combined for
position limit purposes. The Manager believes (but cannot assure) that the
current limits will not adversely affect the Fund's trading.
- - OPTIONS, WHICH ARE HIGHLY LEVERAGED, MAY BE EMPLOYED. The Fund may engage in
the trading of options (both puts and calls). Because option premiums paid or
received by the Fund can be small in relation to the market value of the
investments underlying the options, buying and selling put and call options
can result in large amounts of leverage. No assurance can be given that a
liquid market will exist for any particular
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<PAGE> 14
commodity option or at any particular time. If there is insufficient liquidity
in the option market at the time, the Fund may not be able to effect an
offsetting transaction in a particular option. (See sec.17 -- "Futures
Trading".)
- - COMPETITION. Commodity futures trading is by its very nature highly
competitive. The Fund will be competing with others who may have greater
experience, more extensive information about developments affecting the
futures markets, more sophisticated means of analyzing and interpreting
futures markets and greater financial resources. The Fund will be competing
with, among others: commodity warehousemen and representatives of foreign
governments, users of commodities and other commodity pools, any of whom may
have certain advantages over the Fund.
RISKS RELATED TO THE PARTIES
- - RELIANCE ON THE ADVISOR(S) AND ITS (THEIR) TRADING TECHNIQUES. The success of
the Fund depends largely on the ability of the Manager ( or, in the future,
Advisors). There can be no assurance that the trading techniques utilized will
produce profits (or not generate losses). Moreover, their past performance is
not necessarily indicative of future results.
- - CONFLICTS OF INTEREST. Certain inherent and potential conflicts of interest
exist with respect to the operation of the Fund's business. These include (i)
the relationship between the Manager and the Introducing Broker, (ii) possible
competition with the Fund by the Clearing Broker(s), the Manager or any
additional trading advisors and their customers when trading for their own
accounts and (iii) the Manager's reservation not only of the right to name
itself as an Advisor to the Fund but also initially naming itself as the sole
advisor. (See "Conflicts of Interest" and "Fiduciary Responsibility of the
Manager".) Moreover, while not currently contemplated, the Manager and its
principals may become involved in other business endeavors during the term of
the Fund and manage other commodity pools and, accordingly, make it possible
for conflicts of interest to exist with respect to the amount of time to be
devoted to Fund affairs. For example, other commodity pools organized by the
Manager, Clearing Broker and/or additional trading advisor(s) may also compete
with the Fund for the same commodity interest positions.
- - MULTIPLE TRADING ADVISORS. Initially, the Manager will direct the trading of
the Fund. The Fund may in the future retain the services of one or more
advisors. (See "Conflicts of Interest -- Selection of Advisors".) There is no
assurance that the use of multiple trading approaches will actually result in
diversification of Fund assets or will not actually result in losses by one
advisor which offset or exceed any profits achieved by the other advisors.
Thus, it is possible that incentive fees (see "Compensation and Expenses")
could be payable to one or more Advisors during a period in which the Net
Asset Value per Interest actually has declined due to losses incurred by
another advisor(s). Because the advisors will trade independently of each
other, the Fund could simultaneously buy and sell the same futures contract,
thereby incurring commission and transaction fee costs with no net change in
its holdings as to those commodity interest positions and could have a
disproportionate (and possibly adverse) affect on the Fund's assets if margin
calls were to occur. (See sec.16 -- "Futures Trading".) Conversely, the
advisors may at times enter identical orders and therefore compete for the
same trades. This competition could prevent the orders from being executed at
the desired price or, under extraordinary circumstances, prevent execution
altogether.
- - RELIANCE ON THE MANAGER. Members will be relying entirely on the ability of
the Manager direct the commodity trading activity of the Fund, including
selecting additional trading advisors that may be retained in the future.
However, the Manager was only recently organized (December 1996) and neither
it -- nor its principals -- has any prior commodity pool operating experience.
(See "The Manager -- Past Performance".) In addition, while the Manager is
required to maintain a minimum net worth as described under the caption "The
Manager -- Minimum Net Worth and Purchase Requirements" and as set forth in
the Operating Agreement (Exhibit A) for as long as it serves as a Manager of
the Fund, there can be no assurance that such required net worth will be
maintained in conformity with pertinent regulations.
- - ABSENCE OF CERTAIN STATUTORY REGISTRATION. Neither the Manager nor the Fund is
(nor does the Manager believe they are required to be) registered under the
Investment Company Act of 1940 or the Investment
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<PAGE> 15
Advisers Act of 1940, each as amended; therefore, purchasers of the Interests
will not be afforded any protection provided by those Acts.
- - DISTRIBUTIONS AT DISCRETION OF THE MANAGER. Distributions, if any, to Members
are at the discretion of the Manager which does not presently intend to
declare dividends. (See "Conflicts of Interest -- Distributions Would Decrease
Compensation to the Manager" and "Operating Agreement -- Redemptions" and
"Operating Agreement -- Distributions"). In mitigation, investors should note,
redemptions may be made on a monthly basis under specified conditions.
Moreover, any distributions may not be recalled in any way to cover later Fund
losses (or charged in calculating Net Asset Value per Interest).
- - SELF-UNDERWRITTEN OFFERING. Because there is no firm commitment for the
purchase of Interests, there can be no assurance that the Fund will sell the
required $1,000,000 minimum. In fact, such risk factor is greater in this
offering since Interests (principally or exclusively) will be
self-underwritten -- meaning without the use of securities brokers -- by the
Fund through the Manager which has not previously conducted a self-
underwritten offering. (See "Plan of Distribution" and "The Manager".)
Subscriber's funds may thus be retained in the corporate client account for up
to approximately nine(9) months following the date of this Prospectus.
RISK RELATED TO FUND OPERATIONS
- - SUBSTANTIAL FEES AND COMMISSIONS. The Fund will pay the management and/or
incentive fees described in "Compensation and Expenses". It should be noted
that since all of these fees are calculated on a periodic basis, the Fund may
have a net loss for the year even though substantial management and incentive
fees may have been paid during interim periods. Such fees will be retained by
these parties and will not be repaid to the Fund. Management fees will be paid
monthly, whether or not the Fund is profitable; however, with respect to
incentive fees, if a particular advisor sustains a net loss for any month or
quarter on the Fund's assets it manages, no further incentive fees will be
paid to that Advisor until the Fund's assets managed by that advisor again has
the requisite Trading Profits, as defined, on a cumulative basis. In the
future, if multiple trading advisors are used, Trading Profits will be
calculated separately for each advisor. The Fund will also pay substantial
brokerage commissions. (See sec.11 -- "Compensation and Expenses".) Brokerage
expenses are expected initially to be between 5% and 8% per year of the
average annualized Net Asset Value, although such percentage could be
significantly higher and may be lower depending on the trading activity and
the type of trades executed by the advisor. The brokerage commission will be
paid regardless of the Fund's trading performance. Offerees are advised that
other trading vehicles similar to the Fund may provide for management and
incentive fees and brokerage commissions different from and, in certain cases,
lower than those which the Fund will pay. Therefore, the Fund must make
substantial trading profits in order to avoid depletion of its assets and for
the investors to realize appreciation in the value of their Interests. There
is no way to predict accurately the amount of brokerage commissions that will
be incurred since they will be entirely dependent on the volume of trading by
the Fund.
- - SPECIAL CHARACTERISTICS OF START-UP PERIOD. The Fund will encounter a start-up
period during which it will incur certain risks relating to the initial
investment of its assets. The Fund, for example, may commence trading
operations at a disadvantageous time, such as after sustained price movement
in a number of markets. Moreover, the start-up period also represents a
special risk in that the level of diversification in the Fund's account may be
lower than in a fully committed portfolio. Such risks may be particularly
relevant for the Fund if it commences trading with only the $1,000,000
minimum, an amount which may require limiting trading. No assurance can be
given that the approach chosen as a means of moving toward full portfolio
diversification will be successful, in doing so without substantial losses
which might have been avoided by other means of initiating investment in the
markets. Similar risks will develop if and when new advisors are added or
substituted, or Fund assets are reallocated among advisors.
- - LIMITED RIGHTS OF INVESTORS. Purchasers of the Interests will become Members
in the Fund. They will be unable to exercise any management functions with
respect to its operations. The rights and obligations of the Members are
governed by the provisions of the Delaware Limited Liability Act and by the
Operating Agreement.
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<PAGE> 16
- - LIMITED LIABILITY OF MANAGEMENT. Under pertinent statutory provisions of the
Delaware Limited Liability Act and the Operating Agreement of the Fund, the
liability of the Manager is limited. As a result, although it may be possible
to obtain injunctive or other equitable relief with respect to some conduct,
Members may be unable to recover monetary damages against any persons for
actions taken by them which constitute negligence or which would violate any
applicable fiduciary duties. Members may not have any effective remedy in
cases where equitable relief is unavailable. These provisions could operate to
reduce the likelihood of an action against the Manager which might, if
brought, benefit the Fund. Nonetheless, the Manager is subject to the duties
outline in "Fiduciary Responsibility of the Manager."
- - FAILURE OF COMMODITY BROKERS OR BANKS. Under the Commodity Exchange Act, as
amended, (the "CEA"), commodity brokers are required to maintain customers'
assets in segregated accounts. To the extent that the Clearing Broker does not
do so, however, the Fund will be subject to a risk of loss in the event of the
bankruptcy of such broker. In addition, irrespective of adequate segregation
of accounts by the Clearing Broker, the Fund will be able to recover (even in
respect to property specifically traceable to the Fund) only a pro rata share
of the property available for distribution to all of the customers of the
Clearing Broker, due to CFTC regulations classifying customers' property held
as margin as not constituting property specifically identifiable as belonging
to a particular customer. While rare, commodity broker bankruptcies have
occurred in which customers were not able to recover from the broker's estate
the full amount of their funds on deposit with the broker and owed to them.
Similarly, those funds deposited in the Fund's account at a U.S. bank (if any)
will be insured only up to $100,000 under existing federal regulations;
amounts on deposit in excess of that amount would be subject to the risk of
bank failure.
- - PAST RESULTS NO ASSURANCE OF FUTURE RESULTS. Although the Manager has in the
past achieved significant success trading customer funds in the futures
markets, the Manager cautions prospective investors to take seriously the
warning required by both the CFTC and the National Futures Association: PAST
RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS; AN INVESTMENT IN THE
FUND IS SPECULATIVE AND INVOLVES A SUBSTANTIAL RISK OF LOSS. Moreover, both
the CFTC and SEC in February 1989 requested public comments on possible
changes in the manner in which advisors' and sponsors' past performance is
presented in commodity pool prospectuses (as well as on the suggestion that
such performance not be permitted to be included in such prospectuses) due to
the disparity which certain academic studies identified between the actual
performance of public commodity pools and the historical performance of such
public pools' advisors as set forth in such public pools' prospectuses. This
has lead to regulatory concern over the years over the potentially misleading
character of the performance records included in commodity pool(s)
prospectuses. In fact, several academic studies have reached the conclusion
that public commodity pools typically significantly underperform the prior
performance records of their selected trading advisors included in their
prospectuses. New commodity pool(s) are typically offered following periods of
successful trading by an advisor or manager. No assurance can be given that
the Fund will perform successfully in the future inasmuch as past results are
not necessarily indicative of future performance.
- - POSSIBLE EFFECT OF REDEMPTIONS ON VALUE OF INTERESTS. Substantial redemptions
of Interests could require the Fund to liquidate positions more rapidly than
otherwise desirable in order to raise the necessary cash to fund the
redemptions and, at the same time, achieve a market position appropriately
reflecting a smaller equity base. Illiquidity in the market could make it
difficult to liquidate positions on favorable terms, and may result in losses
to the Fund which decrease the Net Asset Value of outstanding Interests.
- - MANDATORY REDEMPTION. The Fund's Operating Agreement permits the Manager to
limit the total equity in the Fund owned by employee benefit plans subject to
ERISA, IRAs and other employee benefit plans not subject to ERISA (for
example, government plans) by permitting the Fund to force redemptions of
Interests held by such plans if, in the unlikely event (as a result of
redemptions by non-benefit plan investors), the Manager determines that Fund
assets are or will become plan assets as defined by the Department of Labor or
otherwise. (See "Operating Agreement -- Redemptions" and discussion below
relating to the authority of the Manager to require employee benefit plans,
IRAs and similar tax-exempt or tax-deferred investors to withdraw from the
Fund under certain conditions.)
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<PAGE> 17
- - NO PUBLIC MARKET FOR INTERESTS. Although a Member may transfer his Interests,
no market exists for the Interests and none is likely to develop. (As a
redeemable security, this means the Fund will neither be listed on an exchange
nor traded in the over-the-counter market; nonetheless, as described in
"Operating Agreement -- Redemptions", Members may make monthly redemptions
upon appropriate notice at the month-end Net Asset Value per Interest.) In
addition, a transferee of an Interest can only become a substituted Member
with the Manager's consent. (See "Operating Agreement".) While the Interests
are generally noncallable, the Manager has the authority under the Agreement
to require Members that are employee benefit plans, IRAs and similar
tax-exempt or tax-deferred investors to withdraw from the Fund under certain
conditions. (See "Risk Factors -- Purchases by Employee Benefit Plans -- ERISA
Considerations".) Finally, unlike investors in certain types of investments,
investors in the Fund will generally be able to make monthly withdrawals of
all or any portion of their capital and undistributed profits in the Fund at
the month-end Net Asset Value per Interest, subject to a penalty on
redemptions made within 18 months of purchase. (See "Operating Agreement --
Redemptions".)
TAX RELATED RISKS
- - PARTNER'S TAX LIABILITY MAY EXCEED DISTRIBUTIONS. The distribution to Members
of the Fund's profits (if any) for a fiscal year is in the discretion of the
Manager. Partners are taxed on Fund income regardless of whether distributed
to them; accordingly, Members could incur tax liabilities (from their share of
Fund profits) but not receive distributions of cash to pay those taxes.
- - POSSIBILITY OF TAXATION AS A CORPORATION. The Fund has been organized as a
limited liability company so that, under current federal income tax law, it
should be classified as a limited partnership for federal income tax purposes
and not as an association taxable as a corporation. No ruling from the IRS in
this regard has been obtained, and the Fund does not intend to seek any such
ruling. However, counsel for the Fund is of the opinion that the Fund will be
so treated. If the Fund were treated as a corporation for federal income tax
purposes, income or loss of the Fund would not be passed through to Members,
and the Fund would be subject to tax on its income at the rate of tax
applicable to corporations. In addition, all or a portion of distributions of
Fund income would generally be taxable to Members as corporate dividends, and
any such Member's tax on such distributions would be in addition to the
corporate tax paid by the Fund on the same income. (See "Summary of Income Tax
Consequences -- Classification as a Partnership for Income Tax Purposes".)
- -CLASSIFICATION AS A "PUBLICLY TRADED PARTNERSHIP". The Revenue Act of 1987
changed the tax treatment of "public traded partnerships" considering them
(with limited exceptions) corporations subject to corporate level tax and
subject to certain other adverse tax consequences. (See "Summary of Income Tax
Consequences -- Classification as a Partnership for Income Tax Purposes")
Counsel believes that the Fund will not be subject to the corporate level tax
as a "publicly traded partnership" until after 1997, and probably not
thereafter, if (as expected) it receives its income from interest, dividends
and income from futures, options or forward contracts on commodities. However,
particularly important to ERISA plans and IRAs, the Manager believes (based on
regulations published by the Internal Revenue Service), the Fund would be
deemed to be a "publicly traded partnership" for purposes of the passive loss
rules and the unrelated business income tax. Accordingly, the Manager will
operate the Fund and file tax returns for the Fund as if it is a "publicly
traded partnership" and as if the Fund will not be able to ensure compliance
with the applicable safe harbors. Additionally, future regulations could amend
or eliminate such safe harbors. Given these "publicly traded partnership"
issues, tax-deferred or tax-exempt investors (including corporate pension and
profit-sharing plans, simplified employee pension plans, self-employed plans,
Keogh plans and IRAs) may be subject to tax on Fund income from Fund years
prior to January 1, 1994 as unrelated business income. However, on August 10,
1993, HR 2264, the Omnibus Budget Reconciliation Act of 1993, became law. This
legislation repealed IRC sec.512(c)(2) which provided that profits generated by
publicly-traded partnerships are treated as unrelated business income for
tax-deferred or tax-exempt entities. This new legislation is effective for
partnership (Fund) years beginning on or after January 1, 1994. Thus, the Fund
is unlikely to generate profits that would be treated as unrelated business
income. However, before investing in the Fund, tax-deferred or tax-exempt
entities are advised to seek counsel from their tax advisors
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<PAGE> 18
regarding the "publicly traded partnership" issues, the effect and effective
date of new legislation and/or taxation of any associated unrelated business
income. Additionally, under the regulatory authority granted the IRS in the
areas of "publicly traded partnerships" and the passive loss rules, it is
possible that the Fund could be subjected to the passive loss rules. If this
happened, losses incurred by the Fund would only be deductible to the extent
of Fund income.
- -POSSIBILITY OF AUDIT. The Fund's tax return could be audited by the IRS and
adjustments to the return could be made as a result of such an audit. In that
case, Members may be required to file amended returns and their returns may be
audited. The IRS is authorized to impose interest and penalties on any tax
deficiencies established. Interest is compounded daily and, since 1989, is no
longer deductible.
- -POSSIBLE LEGISLATIVE TAX CHANGES. All of the statements contained in this
Prospectus as to federal tax aspects are based upon the existing provisions of
the Code and existing administrative and judicial interpretations thereunder.
It is emphasized that no assurance can be given that legislative,
administrative or judicial changes will not occur which would modify those
statements.
- -PURCHASES BY RETIREMENT PLANS -- ERISA CONSIDERATIONS. An ERISA employee
pension benefit plan (an "ERISA Plan") is a pension, profit-sharing, stock
bonus or other employee plan usually otherwise qualified under Section 401(a)
of the Internal Revenue Code. The fiduciary provisions under the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), are highly
complex. Accordingly, when considering an investment of the assets of an ERISA
plan in the Fund, a fiduciary with respect to such plan should consider among
other things: (a) the definition of "plan assets" under ERISA and the final
regulations issued by the Department of Labor ("DOL") regarding the definition
of "plan assets"; (b) whether the investment satisfies the diversification
requirements of sec.404(a)(1) of ERISA; (c) whether the investment satisfies
the prudence requirements of sec.404(a)(1) of ERISA; (d) whether income derived
from the Fund could constitute "unrelated business income" subject to federal
income taxation in the ERISA plan; and (e) that there may be no market in which
such fiduciary can sell or otherwise dispose of the Interests (other than
through redemptions, permitted monthly). Consequently, the Manager recommends
that each investor and his financial and legal advisors consider the foregoing,
among any other pertinent factors, before making any purchase of Interests.
Although the Fund will become registered pursuant to Section 15(d) and/or
Section 12(g) of the Securities Exchange Act of 1934, as amended, it is not
expected to meet other pertinent DOL standards relating to what constitutes a
"public offered security" within the meaning of DOL's plan assets regulations;
accordingly, "benefit plan investors" as defined will be limited to less than
25% of the Net Asset Value of the Fund if acceptance would violate the
foregoing regulations. Moreover, the Manager also has the right to require
ERISA plans to redeem their Interests at any time to avoid application of the
"plan asset" rules, including the remote possibility that the Fund does not
continue to be a reporting company. (See "Operating Agreement -- Redemptions".)
THE FOREGOING LIST OF RISK FACTORS DOES NOT PURPORT TO BE A COMPLETE EXPLANATION
OF THE RISKS INVOLVED IN THIS OFFERING. POTENTIAL INVESTORS SHOULD READ THE
ENTIRE PROSPECTUS BEFORE DECIDING TO INVEST IN INTERESTS OF THE FUND.
SEC.6. CONFLICTS OF INTEREST
The following inherent or potential conflicts of interest should be
considered by prospective investors before subscribing for Interests. All
descriptions of conflicts addressed respectively as to the Manager, Clearing
Broker and Introducing Broker also extend to the respective principal(s) of such
entities.
- -RELATIONSHIP BETWEEN THE MANAGER AND INTRODUCING BROKER. The Fund will pay
brokerage fees of $65 per round turn on futures and options contracts, a
portion of which will be paid to the Introducing Broker, D&R Commodities, Inc.
Darren Frye is the principal of the Manager and the Introducing Broker and, as
such, he will receive compensation from the Fund through both entities.
- -OTHER COMMODITY POOLS. The Manager may in the future solicit or manage other
commodity pools which could compete with the Fund. Certain trading advisors for
these commodity pools could be the same as
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<PAGE> 19
those for the Fund. Additionally, the Manager may also be engaged by other
commodity pools to select trading advisors to direct trading for such other
pools, certain of whose trading advisors are or may be the same as the
Advisor(s). However, the Manager will waive the management fee or incentive fee
payable to it from the Fund to the extent that Fund assets are invested in
commodity pools in which it receives a management or incentive fee .
- -THE MANAGER, THE CLEARING BROKER AND THE ADVISOR(S) MAY TRADE COMMODITY
INTERESTS FOR THEIR OWN ACCOUNTS. The Manager, the Clearing Broker and the
Advisor(s) may trade commodity interests for their own accounts. Any positions
taken by such persons will occur independently and may be the same as, similar
or opposite to those taken by the Fund. Such persons may have a conflict of
interest concerning the sequence in which orders for transactions will be
transmitted to commodity brokers for execution. Additionally, a potential
conflict may occur when an Advisor and its principals, as a result of a neutral
allocation system, testing a new trading system, trading their own proprietary
account(s) more aggressively or any other actions that would not constitute a
violation of fiduciary duties, take position in their own proprietary
account(s) which are opposite, or ahead of, the position(s) taken for a client.
The trading records of any such trading by the Manager, Trading Advisor or any
principal will not be available for inspection to participants.
- -DISTRIBUTION WOULD DECREASE COMPENSATION TO THE MANAGER. The Operating
Agreement provides that the amount and frequency of distributions to the
Members (other than redemptions) is solely within the discretion of the Fund.
Since the Manager's management fees are directly related to the size of the
Fund, it would suffer an economic disadvantage if the Fund reduces its assets
through such distributions to the Members. However, partial or complete
redemptions are permitted on a monthly basis if properly requested pursuant to
the Operating Agreement.
- -CONFIDENTIAL TREATMENT. The Fund's orders will be treated confidentially.
Applicable commodities (and, if pertinent, securities) laws prohibit brokers
and dealers from utilizing the knowledge of the Fund's trades for their own or
for their other customers' benefit.
- -MANAGEMENT OF OTHER ACCOUNTS BY THE MANAGER (OR IN THE FUTURE, ADVISORS). In
the future, any advisor(s) and/or their affiliates may advise other commodity
trading accounts, whether proprietary to themselves and their affiliates or to
their clients. All open positions of accounts managed by each Advisor will be
aggregated for the purpose of determining futures position limits (subject to
coordination under the advisory contracts which are intended to preclude
violations of such applicable limits). (See "Glossary")
- -DUTIES TO CONTRACT MARKETS AND THE NFA. Certain officers, directors, employees
and principals of the Manager, the Clearing Brokers and/or the advisor(s) may
serve on various committees and boards of U.S. commodity exchanges, the CFTC
and the NFA, and thereby assist in establishing their rules and policies. In
those capacities, such persons have a fiduciary duty to the exchanges, the CFTC
and NFA and are required to act in such body's best interests, even if such
acts are adverse to the Fund.
- -NO INDEPENDENT REVIEW. Investors should note that the Manager and the Fund are
represented by the same counsel. Therefore, to the extent the Fund and this
offering would benefit by an independent review, such benefit will not be
available in this case.
- -RELATIONSHIP OF THE MANAGER AND THE CLEARING BROKER. The Fund will open
commodity trading accounts pursuant to customers agreements with the clearing
broker selected by the Manager. The Manager has selected the Iowa Grain Company
as the initial clearing broker pursuant to arrangements terminable by either
upon notice. In such capacity, the Clearing Broker will maintain sufficient
(estimated to be 20% - 40% of the) assets of the Fund in customer segregated
accounts to meet pertinent margin requirements. Under the brokerage agreement
between the Clearing Broker and the Fund: all funds and credits carried for the
Fund will be subject to a general lien to discharge its trading obligations;
the margins required to initiate or maintain open positions may be increased or
decreased at any time at the discretion of such broker; open positions may be
liquidated or new positions rejected if, in the sole discretion of such broker,
the margin is deemed insufficient or if required by emergency rules of any
exchange; reports of trading become conclusive if no written objection thereto
is made within stated times; and the Fund will indemnify and defend such
14
<PAGE> 20
broker, its employees, partners, officers, directors and affiliates against
certain liabilities incurred by them by reason of its serving as the Clearing
Broker for the Fund. Since the agreements with the Clearing Broker are not
exclusive, the Manager may terminate the brokerage relationship with the
Clearing Broker and transfer the Fund's commodity account(s) to other
clearing broker(s). Similarly, the Clearing Broker(s) may also terminate the
brokerage agreement upon notice to the Manager.
- - SELECTION OF ADVISORS. Initially, the Manager will direct the Fund's trading.
However, in the future, while not currently contemplated, the Manager may
select a different advisor or advisors. Because the Manager will act as both
Manager and an Advisor to the Fund, such dual capacities may create a
disincentive on the Manager's part to remove itself as Advisor to the Fund
even if its advisory performance were poor. Accordingly, a potential conflict
exists in that the advisory fees are not be the consequence of arm's-length
negotiations. Additionally, if the Manager's services were to become
unavailable to the Fund or the services of the Manager/Advisor were
terminated, it may select other commodity trading advisor(s) to manage all or
part of the Fund's commodity account formerly managed by the Manager/Advisor.
- - RELATED TRANSACTIONS. The Manager owns one Interest in the Fund. (See
"Capitalization" and "The Manager -- Generally".) In addition, the Agreement
requires the Manager to purchase a minimum number of Interests, specifically,
an amount equal to the greater of $25,000 or 1% of the aggregate initial
contributions of all Members. (See "The Manager -- Minimum Net Worth and
Purchase Requirements")
SEC.7. CLEARING AND INTRODUCING BROKERS
The Fund will use the services of Iowa Grain Company (the "Clearing
Broker") as its Futures Commission Merchant. The Clearing Broker will execute
and clear the Fund's transactions in commodity interests and provide other
brokerage-related services including, but not limited to, record keeping,
transmittal of confirmations and statements to the Manager and interested
parties, and the calculation of equity and margin requirements. D&R Commodities
Inc. will serve as the Fund's Introducing Broker.
DESCRIPTION OF THE CLEARING BROKER
The Clearing Broker is a privately held corporation incorporated under the
laws of the state of Illinois, is a Futures Commission Merchant (FCM) registered
with the Commodities Futures Trading Commission (CFTC) and the National Futures
Association (NFA). The Clearing Broker is a clearing member of the Chicago Board
of Trade (CBOT), the Chicago Mercantile Exchange (CME), the MidAmerica
Commodities Exchange (MACE), and is a member of the NFA. It has clearing
relationships which facilitate omnibus clearing of futures and options on other
select domestic and foreign commodity exchanges.
DESCRIPTION OF THE INTRODUCING BROKER
D&R Commodities Inc. is an Illinois corporation which was formed in May
1996. It is registered as an Introducing Broker with the CFTC and NFA and has
been since February 1995. The sole principal of D&R Commodities is Darren Frye,
who is also the principal of the Manager (See "Conflicts of Interest")
SEC.8. TRADING STRATEGY
The trading program that will be used by Maximus Capital Management, Inc.
in trading the proceeds of the Fund is based on analysis of fundamental factors
affecting agricultural commodities. The core of the program utilizes the
seasonal pattern of price movement in the grain and soybean markets tempered
with information regarding events or situations which will affect this pattern.
Information which will be analyzed includes, but is not limited to, yield
estimates, crop condition and progress reports, export demand, and domestic feed
usage. Sources of this information include various news reporting services,
farmers and ranchers, crop scouts, and government reporting offices.
15
<PAGE> 21
Additionally, entry and exit points for individual trades will be selected
with the aid of technical analysis. Technical analysis uses historical price
action to indicate areas of support and resistance, price trends and trend
changes, volatility, and potential price moves.
The focus of the program will be the grain and soybean markets, but
positions will be taken in related agricultural commodities, such as the hog or
cattle markets, as opportunities arise.
The program will involve primarily position trading, not day trading. This
means that the Manager will have very few, if any, trades which are offset the
same day they are entered. It is the Manager's view that day trading
unnecessarily results in higher commission costs without adding to profit
potential.
The Manager will select the number of contracts to be purchased or sold for
the Fund, taking into consideration the amount of equity currently available.
The Manager will select the appropriate type of order to be placed given current
market conditions and the types of orders accepted by the exchange on which the
contract is trading.
TRADING POLICIES
Using the above strategies, the objective of the Fund is to achieve
appreciation of its assets. In its trading activities, the Fund requires its
Manager and any futures Advisors to use their best efforts to adhere to the
following policies:
(1) The Fund will not purchase, sell or trade in securities to such
extent as to be required to be registered as an investment company under
the Investment Company Act of 1940, as amended.
(2) The Fund may trade in spreads or straddles (see "Glossary") in
order to take advantage of potential profit in spread relationships and to
limit risks. Uncertainties regarding the tax aspects of such trading are
described under "Summary Of Income Tax Consequences -- Gains And Losses
From Commodity Transactions".
(3) The Fund does not intend to ordinarily make or take delivery of
commodities or to trade in cash commodities. Open positions in futures
contracts are expected to be closed prior to the delivery date and, as far
as practicable, no new positions will be opened during the delivery month.
(4) The Fund will not employ the trading technique, commonly known as
pyramiding, in which the speculator uses unrealized profits on existing
positions as margin for the purchase or sale of additional positions in the
same or a related commodity. However, the Manager or in the future an
Advisor may take into account the Fund's open trade equity in assets of the
Fund in determining whether to acquire additional commodity futures
contracts on behalf of the Fund.
(5) No loans may be made by the Fund to any person, including the
Manager and its affiliates.
(6) The Fund's assets will not be commingled with the assets of any
other person; funds used to satisfy margin requirements will not be
considered commingled for this purpose.
(7) No rebates or give-ups may be paid to or received by the Manager,
nor may the Manager participate in any reciprocal business arrangements
which could circumvent this prohibition.
(8) No agreement with any future advisor, the Clearing Broker(s) or
the Manager shall exceed one year and any such agreements are terminable
without penalty upon respectively 30 days (or less), 60 days and 120 days
written notice by the Fund. Material changes in the trading policies
described above must be approved by a vote of a majority of the outstanding
Interests (excluding Interests held by the Manager or its affiliates). The
Manager does not believe that action by the members to authorize material
changes in the Fund's trading policies would constitute participation in
the control of the management of the Fund sufficient to cause the members
to lose their limited liability for Fund obligations. (See "Operating
Agreement".)
SEC.9. USE OF PROCEEDS
The proceeds of this offering will be used for speculative trading of
commodity futures contracts, forward contracts, physical commodities and options
on the foregoing. See sec.15 -- "Glossary" and sec.16 -- "Futures
16
<PAGE> 22
Trading" for a basic outline of how commodity futures and options are traded and
sec.5 -- "Risk Factors" for a description of the primary risks involved.
Initially, the proceeds of this Offering will be held in an interest
bearing account at First of America Bank in Peoria Illinois. Once the minimum
investment of $1,000,000 is reached, approximately 90% of the proceeds of the
offering will be deposited into a segregated account with the Fund's Clearing
Broker, Iowa Grain Company. The Clearing Broker is regulated by the CFTC and
NFA. These cash deposits will be held in segregation pursuant to the
Commission's regulations and used for margin requirements. A small amount
(approximately 10%) of the Fund's assets will be held in the Fund's checking
account at First of America Bank for payment of Fund expenses. No part of the
proceeds will be commingled in any account with any funds belonging to the
Manager and no loans in any form will be made to any affiliate of the Manager.
SEC.10. PERFORMANCE RECORDS
THE FUND
THIS POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY.
THE MANAGER AS COMMODITY TRADING ADVISOR
The capsules on the following pages depict the trading performance of D & R
Commodities d/b/a Maximus Capital Management. The trading program and strategies
used for these accounts will be used to trade the Fund. HOWEVER, THERE IS NO
ASSURANCE THAT SIMILAR RETURNS WILL BE ACHIEVED IN THE FUTURE.
CAPSULE A
<TABLE>
<S> <C>
Name of CTA:................................. D & R Commodities d/b/a/ Maximus Capital
Management
Trading program:............................. Diversified Program, Account Size Over
$25,000
Start Date:
All Trading:............................... April 1996
This Program:.............................. August 1996
Number of Accounts as of December 31, 1996:
All Trading................................ 69
This Program............................... 8
Total Assets Under Management and Traded as
of December 31, 1996:
Total Programs:............................ $863,522
This Program............................... $461,649
Largest Monthly Draw-Down:................... 12.34% -- October 1996*
Worst Peak to Valley Draw Down:.............. 12.34% -- October 1996**
Closed Accounts.............................. 0
</TABLE>
17
<PAGE> 23
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS MONTHLY/ANNUAL
RATE OF RETURN***
<TABLE>
<CAPTION>
MONTH 1996
- ----- ----
<S> <C>
January.....................................................
February....................................................
March.......................................................
April.......................................................
May.........................................................
June........................................................
July........................................................
August...................................................... -8.49%
September................................................... 61.24%
October..................................................... -1.35%
November.................................................... 42.23%
December.................................................... 2.96%
Year-to-Date................................................ 113.15%
</TABLE>
- -------------------------
* Largest Monthly Drawdown is the largest monthly loss experienced by a single
account in this Trading Program in any calendar month expressed as a
percentage of total assets under management.
** Worst Peak-To-valley Drawdown is the largest cumulative percentage decline
in month-end net asset value in a single account in this Trading Program due
to losses sustained by the Trading Program during a period in which the
initial month-end asset value is not equaled or exceeded by a subsequent
month-end net asset value and includes the time period in which such
drawdown occurred.
*** Rate of Return is calculated by taking the net performance divided by the
beginning equity. Beginning equity would also include any time-weighted
additions or withdraws. Year-to-date rate of return is calculated by taking
the ending $1,000 Index minus the previous year's ending $1,000 Index
divided by the previous year's ending $1,000 Index.
CAPSULE B
<TABLE>
<S> <C>
Name of CTA:................................. D & R Commodities d/b/a/ Maximus Capital
Management
Trading program:............................. Diversified Program, Account Size Under
$25,000
Start Date:
All Trading:............................... April 1996
This Program:.............................. April 1996
Number of Accounts as of December 31, 1996:
All Programs............................... 69
This Program............................... 61
Total Assets Under Management and Traded as
of December 31, 1996:
Total Programs:............................ $863,522
This Program:.............................. $431,873
Largest Monthly Draw-Down:................... 87.95% -- August 1996*
Worst Peak to Valley Draw Down:.............. 92.00% -- July to August 1996**
Closed Accounts.............................. 5, with gains
</TABLE>
18
<PAGE> 24
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
MONTHLY/ANNUAL RATE OF RETURN***
<TABLE>
<CAPTION>
MONTH 1996
- ----- ----
<S> <C>
January.....................................................
February....................................................
March.......................................................
April....................................................... 0.0%
May......................................................... 0.0%
June........................................................ 4.28%
July........................................................ 2.12%
August...................................................... -20.86%
September................................................... 37.84%
October..................................................... 44.59%
November.................................................... 34.29%
December.................................................... 0.76%
Year-to-Date................................................ 127.31%
</TABLE>
- -------------------------
* Largest Monthly Drawdown is the largest monthly loss experienced by a single
account in this Trading Program in any calendar month expressed as a
percentage of total assets under management.
** Worst Peak-To-valley Drawdown is the largest cumulative percentage decline
in month-end net asset value in a single account in this Trading Program due
to losses sustained by the Trading Program during a period in which the
initial month-end asset value is not equaled or exceeded by a subsequent
month-end net asset value and includes the time period in which such
drawdown occurred.
*** Rate of Return is calculated by taking the net performance divided by the
beginning equity. Beginning equity would also include any time-weighted
additions or withdraws. Year-to-date rate of return is calculated by taking
the ending $1,000 Index minus the previous year's ending $1,000 Index
divided by the previous year's ending $1,000 Index.
SEC.11. COMPENSATION AND EXPENSES
CLASS "A" AND "B" INTERESTS -- FEES PAID BY BOTH CLASSES
Manager Fees
The Manager will receive a monthly management fee equal to 1/12 of 1%
(approximately 1% per annum) of the Fund's Net Asset Value as of the last
business day of each month. Net Asset Value is the Fund's total assets,
including all cash and cash equivalents, accrued interest and the market value
of all open positions maintained in the Fund, less total liabilities plus the
current month's capital additions less the current month's capital withdrawals.
The Manager's management fee will be calculated after the performance fees have
been calculated.
Operating Expenses
The Fund will pay its operating and administrative expenses during its
first full year of operation estimated to be approximately $25,000.
Brokerage Commission
The Fund will pay $65 per round-turn futures and option contract traded.
The Clearing Broker will receive $15.00 and Introducing Broker will receive
$50.00 per round-turn futures and option contract traded.
19
<PAGE> 25
Interest Income and Organizational Costs
Initially, all interest income earned will be paid to the Manager to
reimburse it for organizational and offering costs incurred on behalf of the
Fund. Once the Manager has been reimbursed for organizational costs
(approximately $115,000) the Fund will receive 80% of interest income and the
Manager will receive 20%.
CLASS "B" INTERESTS -- ADDITIONAL FEES PAID BY "B" INTERESTS
Trading Advisor Fees
The Manager, Maximus Capital Management, Inc., will receive a monthly
incentive fee equal to 25% of Trading Profits. Trading Profits are equal to the
sum of gain/(loss) realized from closure of trade positions during the period
minus commissions and fees charged on those transactions, plus the change in
unrealized profits/(loss), minus the change in accrued commissions and plus
cumulative net realized losses, if any carried forward from preceding periods
(carryforward loss). For purposes of computing Trading Profits, interest earned
shall be included.
No incentive fee shall be payable to the Manager until future Trading
Profits for the ensuing periods exceed any carryforward loss. With regard to the
carryforward loss, if funds are withdrawn during a period by reason of
decreasing the trading level or withdrawal of account equity when there is such
a carryforward loss, the loss shall be reduced at the time of the withdrawal, by
the percentage obtained by dividing the amount of the withdrawal by the
account's equity immediately before the withdrawal.
<TABLE>
<CAPTION>
ENTITY CLASS FORM OF COMPENSATION AMOUNT OF COMPENSATION
------ ----- -------------------- ----------------------
<S> <C> <C> <C>
Maximus Capital
Management, Inc.
(the "Manager")........ "B" only Quarterly incentive fee, in its 25% of Trading Profits as
capacity as trading advisor defined above.
"A" and "B" Monthly management fee. 1/12 of 1% of month-end Net
Asset Value.
"A" and "B" Organizational Fees shared Estimated at $90,000
pro-rata.
Iowa Grain Company (the
"FCM")................. "A" and "B" Brokerage Commissions paid $15.00 per round-turn fees
from Fund assets (estimated for futures contracts;
at 1.5%)
D&R Commodities Inc.
(the "IB")............. "A" and "B" Brokerage Commission paid $50.00 per round turn on
from Fund assets (Estimated at futures contracts
5.0%)
Others................. "A" and "B" Operational expenses, including Estimated at $25,000 during
continuing legal and accounting first full year of
operations
charges
</TABLE>
BREAK-EVEN ILLUSTRATIONS
The Fund has only recently organized and it has only a limited financial
history. Audited financial information concerning the Fund is attached as
Exhibit D.
The following tabulation illustrates the application of the costs described
above. The illustration is designed to show how a hypothetical single Interest
of investment by a Member would have to increase by the end of its first year
for its redemption value, net of expenses attributable to the Fund, to equal the
purchase price originally paid for such Interest (exclusive of the redemption
penalty if, in fact, redeemed within 18 months of acceptance of the
subscription).
20
<PAGE> 26
CLASS "A" INTERESTS
BASED ON MINIMUM PROCEEDS OF $1,000,000
<TABLE>
<CAPTION>
MINIMUM
PER SHARE PURCHASE
--------- --------
<S> <C> <C>
(1) Selling Price Per Share................................. $1,000.00 $20,000.00
(2) Management Fee (1%)..................................... 10.00 200.00
(3) Operating Expenses (2.5%)............................... 25.00 500.00
(4) Organizational Expense.................................. 30.00 600.00
(5) Brokerage Commission (6.5%)............................. 65.00 1,300.00
(6) Less Interest Income.................................... (30.00) (600.00)
Income required at the end of one year to equal selling
price..................................................... $ 100.00 $ 2,000.00
PERCENTAGE OF INITIAL SELLING PRICE PER SHARE............... 10.00% 10.00%
</TABLE>
(1) Initially, the Fund will sell Interests at $1,000.00 per Interest
with a minimum purchase price of $20,000.00
(2 and 5) The break even illustration is predicated on the specific
rates or fees contracted by the Fund with the Manager, and the
Clearing and Introducing Brokers as described in "Fees, Compensation
and Expenses."
(3) Operating Expenses are anticipated to be approximately $25,000 per
year.
(4 and 6) The Fund will earn interest on margin deposits with the
clearing broker based on current interest rates estimated at 3%.
Initially, all interest income earned will be paid to the Manager in
lieu of organizational costs. Once the Manager has been reimbursed for
organizational and offering costs (approximately $115,000) the Fund
(and its Members) will receive 80% of interest income and the Manager
will receive 20%.
CLASS "B" INTERESTS
BASED ON MINIMUM PROCEED OF $1,000,000
<TABLE>
<CAPTION>
MINIMUM
PER SHARE PURCHASE
--------- --------
<S> <C> <C>
(1) Selling Price Per Share................................. $1,000.00 $20,000.00
(2) Management Fee (1%)..................................... 10.00 200.00
(3) Operating Expenses (2.5%)............................... 25.00 500.00
(4) Incentive Fee (33.33%).................................. 33.33 666.60
(5) Organizational Expense.................................. 30.00 600.00
(6) Brokerage Commission (6.5%)............................. 65.00 1,300.00
(7) Less Interest Income.................................... (30.00) (600.00)
Income required at the end of one year to equal selling
price..................................................... $ 133.33 $ 2,666.60
PERCENTAGE OF INITIAL SELLING PRICE PER SHARE............... 13.33% 13.33%
</TABLE>
(1) Initially, the Fund will sell Interests at $1,000.00 per Interest
with a minimum purchase price of $20,000.00
(2 and 6) The break even illustration is predicated on the specific
rates or fees contracted by the Fund with the Manager, the Clearing
and Introducing Brokers as described in "Fees, Compensation and
Expenses."
(3) Operating Expenses are anticipated to be approximately $25,000.00
per year.
21
<PAGE> 27
(4) The Manager will receive an Incentive Fee based on 25% of Trading
Gains. The $33.33 represents 25% of Trading Gains required.
(5 and 7) The Fund will earn interest on margin deposits with the
clearing broker based on current interest rates estimated at 3%.
Initially, all interest income earned will be paid to the Manager in
lieu of organizational costs. Once the Manager has been reimbursed for
organizational and offering costs (approximately $115,000) the Fund
(and its Members) will receive 80% of interest income and the Manager
will receive 20%.
SEC.12. TAX CONSIDERATIONS
The following is a summary of certain U.S. federal income tax consequences
as of the date of this Prospectus relating to an investment in the Fund, by a
United States taxpayer. It is based upon the Internal Revenue Code of 1986, as
amended to the date hereof (the "Code"), and upon judicial decisions and
administrative regulations, rulings and practice, all of which are subject to
change at any time, including retroactive changes. The analysis contained herein
does not include all aspects of applicable federal and state tax law, and is not
intended as a substitute for careful tax planning by Members. Therefore, each
prospective Member should consult his own tax advisor to satisfy himself as to
the tax consequences of this investment.
CLASSIFICATION OF THE FUND AS A PARTNERSHIP FOR INCOME TAX PURPOSES.
Andrew M. Allamian, counsel for the Manager and the Fund ("Counsel"), is of
the opinion that under current federal income tax law, the Fund will be
classified as a partnership and not as an association taxable as a corporation.
However, a private letter ruling has not been requested or obtained from the
Internal Revenue Service ("IRS") confirming this treatment (or confirming other
tax consequences discussed herein) and the Fund does not intend to request a
ruling. Unlike a private letter ruling, an opinion of counsel has no binding
effect or official status of any kind, and no assurance can be given that the
conclusions reached by Counsel would be sustained by a court if contested by the
IRS.
Counsel's opinion is based, in part, on present Treasury Regulations issued
by the IRS which are subject to change, on certain representations by the
Manager and on the assumption that the Fund will be organized and operated in
substantial compliance with applicable state statutes concerning limited
liability companies and with the Operating Agreement (the "Agreement")
As a partnership, for tax purposes, the Fund will not be subject to tax
itself; the Members will be subject to tax individually on their share of the
Fund income. If the Fund were treated as a corporation, income, deductions,
gains and losses of the Fund itself would be reflected only on its own tax
return rather than passed through to the Members. In such an event the Fund
itself would be required to pay federal income tax at corporate tax rates,
currently at a top rate of 35%, thereby substantially reducing the amount of
cash available for distributions to the Members. In addition, distributions made
to the Members would be taxable to them as ordinary dividend income to the
extent of current and/or accumulated earnings and profits of the Fund,
regardless of the source from which they were generated, and losses realized
from the Fund would not be available as deductions for Members on their
individual tax returns.
The discussion which follows assumes that the Fund will be classified as a
Partnership for federal income tax purposes.
CLASSIFICATION AS A PUBLICLY TRADED PARTNERSHIP
The Manager believes that not less than 90% of the income expected to be
generated by the Fund will constitute "qualifying income" (interest, dividends
and income from futures, options or forward contracts on commodities) since a
principal activity of the Fund is the buying and selling of commodities.
Accordingly, the Fund should not be a publicly traded partnership subject to a
corporate level tax.
22
<PAGE> 28
APPLICATION OF PASSIVE LOSS AND UNRELATED BUSINESS INCOME TAXES RULES
Special rules apply to publicly traded partnerships in regard to the
application of the passive loss and unrelated business income tax rules. (See
"Treatment of the Fund under the Passive Loss Rules" and "Investment by
Tax-Exempt Plans".) In order to avoid the adverse tax consequences of the Fund's
being treated as a publicly traded partnership for purposes of these provisions,
the Fund must meet one of the prescribed safe harbors or receive a favorable
ruling from the IRS.
In Notice 88-75 issued on June 17, 1988 (the "Notice"), the IRS (a)
provided guidance as to the definition of what readily tradable on a secondary
market or the substantial equivalent thereof means for purposes of defining a
publicly traded partnership for the Code provisions applicable to the Fund, (b)
provided some guidance as to the treatment of publicly traded partnerships under
the passive loss rule and (c) clarified to some extent the treatment of publicly
traded partnerships under the unrelated business income rules. (See "Treatment
of the Fund under the Passive Loss Rules" and "Investment by Tax-Exempt Plans".)
The Notice stated that new regulations, when issued, will provide that
interests in a partnership will not be treated as readily tradable on a
secondary market or the substantial equivalent thereof under the circumstances,
or by reason of the transactions, described in such regulations (essentially
consisting of five safe harbors and a transition rule). However, the failure of
a partnership to satisfy any of the safe harbors described below will not
establish or give rise to a presumption that the interests in the partnership
will be treated as readily tradable on the substantial equivalent of a secondary
market. In general, the safe harbors relate to (a) private placements, (b)
transfers not involving trading (the "Excluded Transactions Safe Harbor") (c)
other circumstances involving no actual trading (the "Five or Two Percent Safe
Harbor"), (d) redemptions or repurchases, and (e) matching services. Counsel
believes that under the Fund's Operating Agreement and the facts and
circumstances which the Manager expects will exist after the offering, the only
safe harbors which may be available to the Fund is the Five (or Two) Percent
Safe Harbor. However, their applicability to the Fund will depend upon the facts
and circumstances present in each taxable year and no assurance can be given
that the Fund will meet this safe harbor for any given year.
LACK OF ACTUAL TRADING FIVE (OR TWO) PERCENT SAFE HARBOR
The Notice provided that partnerships such as the Fund will not be publicly
traded for a taxable year if the sum of all interests in partnership capital or
profits sold, redeemed or otherwise transferred (including redemptions but
excluding certain transfers which are disregarded for purposes of this safe
harbor) during the taxable year does not exceed five percent (5%) of the total
interests in partnership capital or profits (the "Five Percent Safe Harbor"). A
Two Percent Safe Harbor is also available if: (a) certain other specified
transfers are also disregarded; (b) 2 percent (2%) is substituted for 5 percent
(5%) as the maximum permitted sum of interests sold or otherwise transferred;
and (c) the Five Percent Safe Harbor is otherwise satisfied.
Since the applicability of this safe harbor is determined on an annual
basis no assurance can be given that the Fund will be able to satisfy this safe
harbor in any year and, therefore, it is possible (if not likely) that the IRS
will contend that the Fund is a publicly traded partnership for purposes of the
passive loss rules. Accordingly, Members (such as tax-deferred or tax-exempt
plans) who could be adversely affected by the application of the special rules
imposed on publicly traded partnerships are encouraged to consult with their own
tax advisor before investing in the Fund. (See also "Risk Factors --
Classification as a 'Publicly Traded Partnership'.")
TAXATION OF MEMBERS AS LIMITED PARTNERS
Assuming the Fund is not subject to the corporate level tax imposed on
publicly traded partnerships, the Fund will pay no entity level federal income
tax, but will report its operations for tax purposes on the accrual method of
accounting for each year and will file an informational income tax return. In
computing his own federal income tax liability for a taxable year, each Member
will be required to take into account his distributive share of each item of
Fund income, gain, loss, deduction, credit and tax preference for each taxable
year of the Fund ending within or with such taxable year of the Member,
regardless of whether the Member has received any distributions from the Fund.
Therefore, a Member's share of taxable income from
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the Fund may exceed cash actually distributed to him. Deduction by a Member of
his distributive share of Fund losses may be subject to limitation by other tax
provisions, some of which are described herein.
LIMITATIONS ON THE DEDUCTIBILITY OF FUND LOSSES
The amount of Fund loss which a Member will be entitled to include on its
federal income tax return is limited by (i) his basis in his Fund interest; (ii)
his amount "at risk"; and (iii) the passive loss rules, if applicable (see
discussion below). A Member's initial basis and "at risk" amount is the cash and
the adjusted basis of other property he contributed to the Fund. A Member's
basis and "at risk" amount are reduced by his share of Fund distributions,
losses and expenses separately allocated to him and increased by his share of
Fund income, including gains. A Member will also be considered "at risk" with
respect to money borrowed for the purchase of Fund interests unless he is not
personally liable for repayment or unless it was borrowed from another person
with an interest in the Fund or its activities. Based on its current
expectations concerning the operations of the Fund, the Manager anticipates that
the Members will not be adversely affected by the "at risk" rules.
TREATMENT OF THE FUND UNDER THE PASSIVE LOSS RULES
There is a limitation imposed on the ability of taxpayers to offset net
losses from passive activities against other income either within or outside a
partnership such as salary, portfolio income (such as interest, dividends and
gains from the sale of property held for investment which is not a passive
activity) and active business income. Net losses from passive activities can,
however, be used to offset income from other passive activities. A "passive"
activity is generally defined as any activity involving the conduct of a trade
or business in which the taxpayer does not materially participate. In the case
of a limited liability company such as the Fund, which is treated as a limited
partnership for federal income tax purposes, the Members might assume they are
engaged in a passive activity.
However, temporary Treasury regulations provide that certain activities
such as commodities trading engaged in by the Fund are not passive activities.
Accordingly, under these rules a Member's share of the Fund's income may
generally not be offset by losses from passive activities.
On the other hand, if the Fund is a publicly traded partnership because it
fails to meet the above-described safe harbor, the definition of passive
activity discussed above which excluded the Fund may not apply because the
regulations under publicly traded partnerships include the authority to redefine
what activities constitute passive activities. In the event the Fund's
activities are deemed passive, then the income will probably be treated as
investment income for purposes of the investment interest limitation (see
"Deduction of Investment Interest") and any losses will only be deductible to
the extent of income generated solely by the Fund.
DEDUCTION OF FUND EXPENSES
Expenses incurred by a non-corporate taxpayer in the production of income,
including investment advisory expenses, are deductible only to the extent they
exceed 2% of such taxpayer's adjusted gross income. The deduction of such
expenses together with most other itemized deductions must be reduced by an
amount equal to the lesser of 80% of allowable itemized deductions or 3% of an
individual's adjusted gross income in excess of the "applicable amount"
($108,450 for married individuals for 1993). (Because such amount is determined
at the end of each calendar year based on a cost of living adjustment applied to
the prior year amount, the "applicable amount" for 1994 is not available as of
the date of this Prospectus.) If the Fund is considered to be in a trade or
business, then the Fund's expenses should not be subject to this limitation.
Under current law, it is unclear whether Fund expenses such as the
management and incentive fees and other ordinary fees and expenses should be
treated as investment advisory expenses (and thus subject to the 2% and 3%
limitations) or as ordinary and necessary expenses incurred by the Fund in its
trade or business (and thus deductible under Section 162 of the Code in
determining the Fund's taxable income or loss that is not otherwise required to
be separately reported by the Fund.) In the absence of contrary guidance from
the
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IRS, the Manager currently intends not to treat any of the foregoing expenses as
subject to the 2% and 3% limitation.
GAINS AND LOSSES FROM COMMODITY TRANSACTIONS
The taxation of commodity transactions is primarily governed by Section
1256 of the Code. The term Section 1256 contract (hereinafter a "1256 Contract")
is used to refer to the following four financial products now taxed under the
commodity tax rules: (a) any regulated futures contract; (b) any foreign
currency contract; (c) any non-equity option; and (d) any dealer equity option.
These general rules are subject to precise and limiting requirements. The Fund
expects to trade in all these contracts except dealer equity options.
Any termination or transfer of a 1256 Contract results in the recognition
of gain or loss. In addition, any 1256 Contract held by a taxpayer at the close
of a taxable year is treated as if it were sold at its fair market value on the
last business day of the year (the "mark-to-market" rule). Thus, all 1256
Contracts are subject to taxation on unrealized gains and losses as well as
realized gains and losses under the mark-to-market rule. Members may have a tax
liability for unrealized Fund gains on open positions at year-end which may not
result in a gain on the eventual termination or transfer of the 1256 Contract.
Each Member's distributive share of the Fund's gain or loss from
transactions in 1256 Contracts (including gain or loss resulting from the
mark-to-market rule) will be characterized as follows, regardless of the period
of time the contracts were held: 40% as short-term capital gain or loss and 60%
as long-term capital gain or loss. Currently, Net Capital Gains (i.e., the
excess of net long-term capital gain over net short-term capital loss) are taxed
to non-corporate taxpayers at a maximum tax rate of 28% and for corporate
taxpayers at the same rate as other income as discussed below. Such gain or loss
will be combined with each Member's other capital gains and losses in
determining his federal income tax liability.
Gain or loss from non-1256 Contracts will be taken into account only when
realized and will be subject to the general holding period rules in determining
whether gain or loss is long-term or short-term. Such assets will qualify for
long-term capital gain treatment only if they have been held for more than one
year.
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 (the
"1993 Act") became law. This Act did not affect the 28% rate on Net Capital
Gains, but did increase the maximum tax rate on all other income from 31% to
39.6%. Capital losses can only be deducted against other income to a maximum of
$3,000 and are subject to other restrictions. Under certain circumstances,
however, taxpayers other than corporations may elect to carryback capital losses
from 1256 Contracts up to three years and apply them against capital gains from
1256 Contracts. To the extent such losses are not used to offset gains in
Section 1256 Contracts in a carryback year, they will carry forward indefinitely
as losses on Section 1256 Contracts in future years. Therefore, a prospective
Member should consult his own tax advisor to determine the potential effect of
capital gains and losses on his own tax situation.
In addition, there are special tax rules applicable to straddles, depending
in part upon whether the straddle is composed entirely of 1256 Contracts,
partially 1256 Contracts ("mixed straddles") or entirely non-1256 Contracts. In
addition, 1256 Contracts that are part of a mixed straddle are also subject to
taxation under the mark-to-market rule unless the taxpayer makes certain
elections.
In general, any loss with respect to one or more positions in a straddle is
taken into account for a taxable year only to the extent that the amount of the
loss exceeds any unrecognized gain with respect to offsetting positions making
up the straddle. In addition, temporary Treasury regulations provide for
application of the wash sale and short sale rules to straddle positions. The
effect of these rules is generally to provide for deferral of losses and
limitation of deductions, and certain elections between different treatments for
mixed straddles. The Fund has not yet determined what elections, if any, it will
make with regard to the taxation of any mixed straddles should it trade in same.
The Fund may trade in options or contracts which are not subject to the
mark-to-market rule under Section 1256 of the Code and are denominated in or
determined by reference to the value of foreign currency; such contracts may be
affected by Section 988 of the Code. Section 988 generally provides that gains
or losses
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<PAGE> 31
relating to the fluctuation of foreign currency exchange rates will be computed
separately and treated as ordinary gain or loss. Section 988 provides the
ability for a taxpayer to make certain elections including an election to be
treated as a qualified fund provided the Fund meets certain ownership, activity
and income tests. In the case of a qualified fund, special rules are provided
for transactions in forward contracts, future contracts, options and similar
instruments. This generally results in 60/40 long-term/short-term capital gain
or loss treatment for mark-to-market instruments falling within this expanded
definition of 1256 Contracts without regard to Section 988 and 100% short-term
gain or loss treatment for instruments falling within the expanded definition of
1256 Contracts under Section 988 of the Code.
It is unclear to what extent the loss deferral, short sale, capitalization
and wash sale rules would apply to straddles consisting of Fund transactions and
transactions by a Member in his individual capacity. Each prospective Member
should review the application of these rules to his own particular tax
situation, with special regard to the potential interaction between the Fund
operations and commodities transactions entered into by the prospective Member
in his individual capacity.
CONVERSION TRANSACTIONS
The Omnibus Budget Reconciliation Act of 1993 contains provisions intended
to prevent a taxpayer from converting the income from transactions ("conversion
transactions") in which substantially all of his expected return is attributable
to the time value of his investment in the transaction (i.e., transactions that
are the functional equivalents of loans) into capital gains. If a transaction is
characterized as a conversion transaction, a portion of the gain that would
otherwise be treated as capital gain will be treated as ordinary income. The
portion so treated will be based upon the product of 120% of the applicable
federal rate and the amount of the net investment in the transaction. Among the
types of transactions that will be subject to the new rules (which apply to
transactions entered into after April 30, 1993) are certain straddles and
transactions in which an investor acquires property and on a substantially
simultaneous basis enters into a contract to sell such property (or
substantially identical property) at a future date for a specified price. In
addition, the 1993 Act grants the Treasury Department authority to promulgate
regulations that specify other types of transactions that will be subject to
these rules. It is expected that the trading activities of the Fund will involve
risks other than those undertaken by a lender and that the Fund's income will
not be the functional equivalent of interest. If so, the Fund's transactions
should not be characterized as conversion transactions. However, because of the
broad scope of the Treasury Department's regulatory authority and the broad
powers of the Manager and the Advisors, certain transactions entered into by the
Fund might be considered to be conversion transactions that are subject to the
new rules.
ALLOCATION OF REALIZED PROFIT OR LOSS
The rules relating to tax and financial accounting for partnerships are
complex with respect to allocations to Members of a partnership like the Fund
that trades in commodities. The Code and the Treasury Regulations promulgated
thereunder, provide that in order for an allocation by a partnership of its
income, gain, loss or deduction (or items thereof) to be respected for federal
income tax purposes, such allocation must (1) have substantial economic effect,
as defined in the Treasury Regulations under Section 704(b) of the Code (the
"Section 704(b) Regulations"), (2) taking into account all facts and
circumstances, be in accordance with the partner's interest in the partnership
or (3) be deemed to be in accordance with the Member's interest in the
partnership pursuant to certain special rules set forth in the Section 704(b)
Regulations.
The Section 704(b) Regulations set forth specific requirements which a
partnership (operating) agreement must meet in order for the allocations
thereunder to have substantial economic effect. Among these requirements are (1)
that partners' (Member's) capital accounts must be required to be maintained in
accordance with the rules of the Section 704(b) Regulations, (2) upon
liquidation of the partnership (or any partner's interest in the partnership),
liquidating distributions must be required to be made in accordance with
positive capital account balances of the partners and (3) either (a) there must
be a requirement that a partner having a deficit balance in their capital
account following the liquidation of such partners partnership interest must be
obligated to restore such deficit balance to the partnership or (b) in the
alternative, the partnership
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<PAGE> 32
agreement must contain a qualified income offset provision as defined in such
Regulations. The Operating Agreement does not meet the requirements of the
Section 704(b) Regulations in order for the allocations thereunder to have
substantial economic effect. In addition, the allocations do not meet the
special rules set forth under the Section 704(b) Regulations so as to be deemed
to be in accordance with the partner's interest in the partnership. Accordingly,
the allocations of income, gain, loss and deduction contained in the Operating
Agreement will be respected for federal income tax purposes only, if, under all
facts and circumstances, such allocations are determined to be in accordance
with the Member's interests in the Fund. Because of the factual nature of this
determination, Counsel is unable to render any opinion with respect to whether
or not the allocations contained in the Operating Agreement will be respected
for federal income tax purposes.
Notwithstanding the foregoing, the Manager believes that the allocations
under the Operating Agreement will be respected for federal income tax purposes
as being in accordance with the Member's interests in the Fund. This belief is
based, in part, upon the requirements contained in the Operating Agreement that
(1) each Member's capital account be adjusted at the end of each year in
accordance with generally accepted accounting principles by the portion of the
Fund's profit and loss for such year in the same ratio as each Member's capital
account bears to the capital accounts of all Members and (2) each Member's
capital account be adjusted by his pro rata share of any increase or decrease
during such fiscal year in the Fund's Net Asset Value. In addition, the Manager
believes that such a determination is supported by the requirements under the
Operating Agreement that any Interests purchased after trading activity
commences be purchased at a price of not less than the Net Asset Value per
Interest and that all distributions to Members be made pro rata in accordance
with the number of Interests held by each of them.
In the event that the allocations contained in the Operating Agreement were
found not to be in accordance with the Members' interests in the Fund, then the
IRS could reallocate items of income, gain, loss and deductions for federal
income taxes in the manner found necessary to meet that standard in light of all
of the relevant facts and circumstances existing at such time. The Manager will
contest any effort by the IRS to make any such reallocation.
CASH DISTRIBUTIONS AND GAIN OR LOSS ON SALE OR REDEMPTION OF INTERESTS IN THE
FUND
Cash distributions made to Members, including partial redemptions, will
generally not result in the recognition of any gain or loss for federal income
tax purposes until and unless the distributions exceed a Member's adjusted tax
basis in his Fund interest. Distributions in excess of a Member's adjusted basis
in the Fund will generally result in taxable gain which will be taxed at capital
gains rates. Ordinarily, however, distribution by the Fund will not exceed a
Member's adjusted basis in the Fund unless its entire interest in the Fund is
redeemed.
ORGANIZATION AND OFFERING EXPENSES
Neither the Fund nor any Member will be entitled to any deduction for
organization and offering expenses -- i.e., amounts paid or incurred in
connection with issuing and marketing the Interests. The IRS might also contend
that certain fees and other expenses paid and deducted by the Fund constitute
organization and offering expenses, in which case the Fund could be required to
capitalize such amounts.
TAX ELECTIONS
The Code provides for optional adjustments to the basis of Fund property
which generally may be beneficial to Members upon distributions of Fund property
to a Member and transfers of Interests, provided that a Fund election has been
made pursuant to Section 754. Any such election is irrevocable without the
consent of the IRS. However, as a result of the complexities and added expense
of the tax accounting required to implement such an election, although the
Manager has the power to make the election, it does not anticipate doing so.
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<PAGE> 33
TAX AUDITS
Fund audit procedures applied by the IRS generally require that tax
treatment of Fund items be determined at the Fund level rather than at the
partner level. Thus, Fund tax audits will be handled administratively as though
the Fund were a separate taxpayer. The Fund is required to notify the IRS and
all Members of their respective items of Fund income and Members are required to
use such amounts in preparing their tax returns. A Member who files a return
using information inconsistent with that provided by the Fund must file a
statement with the IRS identifying the inconsistency. Penalties are provided for
intentional disregard of this requirement. If items are consistently reported by
a Member, the IRS cannot assess additional tax against the Member based on Fund
items without first conducting an audit of the Fund to determine whether the
Fund has treated the item correctly. If the Fund is audited and the IRS is
successful in adjusting Fund items, such adjustments would change the federal
income tax liability of the Members. Any such audit could result in an audit of
any Member's tax return and also an adjustment in non-Fund items on the Member's
tax return.
Members are generally entitled to participate in and receive notice of the
Fund audit and any resulting adjustments. The Manager will be the tax matters
partner for the Fund, with authority to enter into binding agreements with the
IRS and to determine in which court to conduct tax litigation. (However, a
Member can file a statement with the IRS that the tax matters partner does not
have authority to enter a settlement on his behalf and then will not be bound by
such settlement authority.) The tax matters partner may also consent for all
Members to an extension of the three-year limitation period for assessing tax
against a Member attributable to a Fund item.
DEDUCTION OF INVESTMENT INTEREST
Generally, investment interest will be deductible only up to the amount of
net investment income. Any investment interest expense which is not currently
deductible may generally be carried over to subsequent tax years until deducted.
In addition, Section 265 of the Code disallows any interest deductions by a
taxpayer on indebtedness incurred for the purpose of purchasing or carrying (a)
tax-exempt obligations or (b) shares of stock in a regulated investment company
which distributes exempt-Interest dividends during the taxable year.
Accordingly, deductions of interest paid by the Fund or by any Member could be
limited if the Fund or such Member or a related party to such Member owns any
obligations listed in clause (a) or (b) above.
If the Fund is determined to be engaged in a passive activity, interest
expense may be subject to the passive loss rules. In this event, interest
deductions attributable to (a process called "tracing") the passive activity
will be treated as a deduction subject to passive loss limitations.
DEDUCTIBILITY AND CHARACTERIZATION OF FEES TO THE MANAGER
The Fund Agreement provides for a payment to the Manager of a monthly
administrative fee equal to a percentage of Net Asset Value and a quarterly
performance fee equal to a percentage of Trading Profits, as defined. Under the
Code, such fees are deductible to the extent that they are ordinary and
necessary business expenses and are not of a capital nature. The determination
of whether the fees are ordinary and necessary is a factual determination. The
Manager believes that the Fees, are ordinary, necessary and represent reasonable
compensation for the services provided to the Fund. No assurance can be given
that the IRS would not seek to challenge the deductibility of some portion of
such fees or that such challenge, if made, would not be successful.
The IRS also may assert that, under the terms of the Operating Agreement,
these fees may be treated as an additional allocation of profit to the Manager.
If this assertion is sustained by a court, the portion of the fees that would
deductible would be limited and the Members' allocable shares of any losses
might be reduced. It is likely that the Management Fee provided by the Operating
Agreement will be respected as such.
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<PAGE> 34
INVESTMENT BY TAX-EXEMPT PLANS
Tax-exempt retirement plans including corporate pension and profit sharing
plans, simplified employee pension plans, self employed plans and IRAs should
consider the special tax rules relating to such retirement plans before
investing in the Fund. Such plans are taxed on their unrelated business income
to the extent it exceeds $1,000 per year. In particular, plans should note that
if the Fund is deemed to be engaged in a "trade or business", the net income
from the Fund will be taxable as "unrelated business income." Prospective plan
investors should consult with their own legal and financial advisors regarding
these and other considerations involved in an investment in the Fund by a
particular plan.
Notwithstanding, the exclusion of any specific type of income from
unrelated business income, a tax exempt Member will be taxed on its distributive
share of any income from the Fund to the extent that either the tax exempt
Member's investment in the Fund, or the Fund's investment in the assets from
which the income is derived, is debt financed. Such an investment will be debt
financed if the investment is made with the use of borrowed funds or if it is
reasonably foreseeable that as a result of such investment, future borrowing
would be necessary to meet anticipated cash requirements.
STATE AND LOCAL TAXES
The Fund and the Members may be subject to various state and local taxes as
well as federal tax. A Member's distributive share of taxable income from the
Fund may be required to be included in determining his reportable income for
state tax purposes. However, each prospective investor is urged to consult with
his own tax advisor for advice on these matters.
POSSIBLE CHANGES IN FEDERAL TAX LAW
The Code is subject to change by Congress, and interpretations of the Code
may be modified or affected by judicial decisions, by the Treasury Department
through changes in its regulation and by the IRS through its examination policy,
announcements and published and private rulings. Such changes may be
retroactive. Accordingly, the ultimate effect on an investor's tax situation may
be governed by laws and regulations, or the interpretation of laws or
regulations, that have not yet been proposed, passed or promulgated, as the case
may be. No assurance can be given that any legislative changes made in the tax
law affecting an investment in the Fund would be limited to prospective effect,
and it is possible that such legislative changes, if enacted, might increase the
tax costs of investing in the Fund. Administrative changes generally are
retroactive in nature and judicial interpretations almost always are
retroactive.
There is uncertainty with respect to many changes made in the Code in
recent years, particularly with respect to the Tax Reform Act of 1986. The
Treasury Department's and the IRS's positions regarding many of these changes
must await publication of interpretive and legislative regulations, some of
which may not be forthcoming for some time. Generally, those interpretations
then will be subject to review by the courts if taxpayers and their
representatives believe that those interpretations do not conform to the Code.
However, some regulations adopted by the Treasury Department may have the force
and effect of the law and as a result may be beyond the judicial review powers,
although not the interpretive powers, of federal courts. For these reasons, some
of the tax positions taken by the Manager may be subject to question.
The foregoing analysis is not intended as a substitute for careful tax
planning, particularly because certain income tax consequences of an investment
in the Fund may not be the same for all taxpayers, and because critical
characterizations of the Fund's activities may vary from year to year and for
different purposes. In addition, the foregoing does not discuss state and local
taxes, estate tax, gift tax or other estate planning aspects of this investment.
Accordingly, prospective Members are urged to consult with their own tax
advisors with specific reference to the effects of this investment on their own
tax situation.
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<PAGE> 35
ERISA CONSIDERATIONS
QUALIFIED PLAN INVESTORS
PLAN FIDUCIARIES. A fiduciary of a Qualified Plan is subject to certain
requirements under the Employee Retirement Income Security Act of 1974
("ERISA"), including the discharge of duties solely in the interest of, and for
the exclusive purpose of providing benefits to, the Qualified Plan's
participants and beneficiaries. A fiduciary is required to perform the
fiduciary's duties with the skill, prudence and diligence of a prudent person
acting in like capacity, to diversify investments so as to minimize the risk of
large losses, and to act in accordance with the Qualified Plan's governing
documents.
The "named" fiduciaries of a Qualified Plan are the persons to whom
discretionary authority over the Qualified Plan's administration and investments
if given in the Qualified Plan's governing documents. However, the fiduciaries
of a Qualified Plan also include any persons who have any power of control,
management or disposition over the funds or other property of the Qualified
Plan, including persons who obtain such power as the result of formal or
informal delegation by the "named" fiduciaries. For example, an investment
professional who knows or ought to know that his or her advise will serve as one
of the primary bases for a Qualified Plan's investment decisions may be a
fiduciary of the Qualified Plan, as a may any other person with special
influence with respect to the Qualified Plan's investments.
It should be noted that, while for purposes of the Code's prohibited
transaction rules (explained below) the owner "beneficiary" or "depositor" of an
individual retirement account ("IRA") is treated as fiduciary of the IRA under
the Code. IRAs generally are not subject to ERISA's fiduciary duty rules. Also,
if a participant in a Qualified Plan exercises control over the participant's
individual account in the Qualified Plan in a "self-directed account"
arrangement meeting the requirements of Section 404(c) of ERISA, the participant
is not deemed to be fiduciary and, generally, no person who would otherwise be a
fiduciary of the Qualified Plan may be held responsible for the consequences of
the participant's investment decisions. Finally, certain Qualified Plans of sold
proprietors or participants in which at all times (before and after the
investment) the only participants is/are the sole proprietor and his or her
spouse, or the partners and their spouses, and certain Qualified Plans or
corporations in which at all times (before and after the investment) the only
participant(s) is/are an individual and/or his or her spouse who owns(s) 100% of
the corporation's stock are generally not subject to ERISA's fiduciary
standards, although they are subject to the Code's prohibited transaction rules.
"Plan Assets". If the Company's assets were determined under ERISA or the
Code to be "plan assets" of a Member that is a Qualified Plan or an IRA, the
fiduciaries of the Qualified Plan or IRA might, under certain circumstances, be
subject to liability for actions taken by the Manager, on the theory that they
had improperly delegated fiduciary responsibility to the Manager. Under
Department of Labor regulations governing the determination of what constitutes
assets of a Qualified Plan in the context of investment securities such as the
Interests, an undivided interest in the underlying assets of a collective
investment entity such as the Fund will be treated as "plan assets" of Qualified
Plan investors (that is, a so-called "look-through" rule will be applied) unless
(i) the Units of the Qualified Plan investors constitute "debt" and not
"equity"; (ii) the securities are publicly offered; (iii) less than 25% by value
of any class of equity securities of the entity is owned by Qualified Plans; or
(iv) the entity is an "operating company." The Manager believes that Interests
should be treated as "equity" for purposes of the Department of Labor's
regulations.
In order for securities to qualify as "publicly offered" under the
Department of Labor's regulations, the securities must be "freely transferable."
In the Manager's view, the effect of certain restrictions on transferability of
Interests (see "Transferability of Units") on the determination of whether
Interests are "freely transferable" for purposes of the Department of Labor's
regulations is unclear. Therefore, it cannot be predicted whether the Fund will
qualify for the "publicly offered" exception to the "look-through" rule.
The Fund should, however, qualify for the "less than 25%" exception to the
"look-through" rule since the Operating Agreement provides that no more than 25%
of the Interests may be held by a Qualified Plan. In addition, the Operating
Agreement provides that in the event redemption of the Fund in jeopardy of
violating this rule, the Manager shall liquidate, pro rata, a sufficient amount
of Interests held by Qualified Plans to stay
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<PAGE> 36
within the parameters of the rule and such liquidation of Qualified Plan
Interests shall occur prior to effecting any redemption.
Since the Fund should qualify for the "less than 25%" exception under the
Department of Labor's regulations, the assets of the Fund should not constitute
"plan assets" of Qualified Plan Members, whether or not Interests are treated as
"publicly offered" under the Department of Labor's regulations.
Prohibited Transactions Under ERISA and the Code. Section 4975 of the Code
(which applies to all Qualified Plans) and Section 406 of ERISA (which does not
apply to IRAs or to those Qualified Plans that, under the rules explained above,
are not subject to ERISA's fiduciary rules), both prohibit Qualified Plans from
engaging in certain transactions involving the "plan assets" with parties that
are "disqualified persons" under the Code. "Disqualified persons" include
fiduciaries of a Qualified Plan; the company that sponsors or is one of the
sponsors of a Qualified Plan; officers, directors, shareholders and other owners
of the company that sponsors or is one of the sponsors of the Qualified Plan;
and natural persons and legal entities sharing certain family or ownership
relationships with other "disqualified persons" including, in the case of
Section 406 of ERISA (but not Section 4975 of the Code), an employee of the
company that sponsors or is one of the sponsors of the Qualified Plan.
"Prohibited transactions" include any direct or indirect transfer or use of
a Qualified Plan assets to or for the benefit of a disqualified person, a
fiduciary's dealing with the assets of a Qualified Plan in the fiduciary's
individual interest or for the fiduciary's own account, any receipt by a
fiduciary of consideration for the fiduciary's personal account from any party
dealing with a Qualified Plan and, in the case of ERISA, a fiduciary's
representing any person in any transaction involving a Qualified Plan if that
person's interests may be adverse to those of the Qualified Plan or its
participants or beneficiaries.
Under ERISA, a disqualified person that engages in a prohibited transaction
will be made to disgorge any profits made in connection with the transaction,
and will be required to compensate any Qualified Plan that was a party to the
prohibited transaction for any losses sustained by the Qualified Plan. Section
4975 of the Code imposes excise taxes on a disqualified person that engages in a
prohibited transaction with a Qualified Plan.
In order to avoid the occurrence of a prohibited transaction under Section
4975 of the Code and/or Section 406 of ERISA, Interests may not be purchased by
a Qualified Plan as to which the Manager or any affiliates have investment
discretion with respect to the assets used to purchase the Interests or with
respect to which they regularly give individualized investment advice that
serves as the primary basis for the investment decisions made with respect to
such assets.
Other ERISA Conditions. In addition to the above considerations in
connection with the "plan assets" issue, a decision to cause a Qualified Plan to
acquire Interests should involve, among other factors, the consideration of
whether (i) the investment is in accordance with the documents and instruments
governing the Qualified Plan; (ii) the purchase is prudent in light of the
potential difficulties that may exist in the liquidating Interests; (iii) the
investment will provide sufficient cash distributions in light of the Qualified
Plan's required benefit payments; (iv) evaluation of the investment has properly
taken into account the potential costs of determining and paying any amounts of
federal income tax that may be owed on unrelated business taxable income derived
from the Fund (see "Summary of Income Tax Consequences -- Investment by
Tax-Exempt Plans"); (v) in the case of a Qualified Plan, the investment is made
solely in the interests of plan participants; and (vi) fair market value of
Interests will be sufficiently ascertainable, and ascertained with sufficient
frequency, to enable the Qualified Plan to value its assets in accordance with
the Qualified Plan's rules and policies.
INVESTOR CONSULTATION WITH COUNSEL
Persons who contemplate purchasing Interests on behalf of Qualified Plans
are urged to consult with tax and ERISA counsel regarding the effect of such
purchase and, further, to determine that such a purchase will not result in a
prohibited transaction under ERISA, the Code or a violation of some other
provision of ERISA, the Code or other applicable law. The Manager and the Fund
necessarily will rely on such determinations
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made by such persons, although no Interests will be sold to any Qualified Plans
if the Manager believes that such sale will result in a prohibited transaction
under ERISA or the Code.
SEC.13. REPORTS AND ACCOUNTING
Books and records of the Fund required by the CFTC will be maintained at
the principal office of the Fund. Each investor has the right upon reasonable
notice and at mutually agreeable times to inspect and copy (upon payment of
reasonable reproduction costs) such books and records, in person or by his
authorized representative. Upon request, copies of such books and records shall
be sent to any investor by mail after reasonable reproduction and distribution
costs are paid by such investor.
The Fund will keep its books on an accrual basis. The books of the Fund
will by audited at least annually at the Fund's expense by independent public
accountants to be designated by the Fund. Each investor will be furnished with a
certified annual report of financial condition examined by an independent public
accountant.
In addition to the annual report, CFTC rules require that the Fund furnish
each investor, within thirty (30) days after the end of each month, with an
unaudited account statement covering such period, which statement will be
presented in the form of a Statement of Income (Loss) and a Statement of Changes
in Net Asset Value.
SEC.14. REDEMPTIONS, DISTRIBUTION AND TRANSFERABILITY
While the Fund may, at its discretion, distribute any portion of the
capital or profits of the Fund, it does not expect to do so. Nonetheless, an
investor has the right to redeem a portion or all of his Interests in accordance
with the redemption procedures described in the Operating Agreement. Any
distribution shall become a liability of the Fund for purposes of calculating
Net Asset Value as of the date of it declaration.
REDEMPTIONS
If Interests redeemed during the first 13-18 months after subscriptions are
accepted, a 2% redemption penalty (payable to the Fund) will be deducted from
the amount calculated in (a) above; if Interests are redeemed within 12 months
after their acceptance, a similar redemption penalty will be deducted but in the
amount of 3%. No redemption penalty will be paid or any Interests redeemed by
the Manager or its affiliates.
Redemptions are permitted at the end of any month upon written notice of
Member(s)' intent to redeem which notice shall specify the name and address of
the redeeming Member and the amount of whole Interests sought to be redeemed.
The notice of redemption shall be in the form of Exhibit C or any form
acceptable to the Manager, and may be mailed or delivered to the principal
office of the Manager.
MANDATORY REDEMPTION
If the Manager in its discretion deems it to be in the best interest of the
Fund to do so, the Manager may require any participant to retire from the Fund
at any time by giving the participant written notice by U.S. mail and promptly
distributing payment of the participant's Interests at the net asset value per
unit less accrued expenses.
DISTRIBUTIONS
The Manager does not anticipate a distribution of profits, if any, to
members. Rather, the Manager anticipates that to the extent that the Fund's
trading generates profits, these profits will remain Fund assets and will be
used to further margin positions in the commodity futures markets. Of course,
participants will be able to redeem any or all of their interest in the Fund on
a monthly basis. (See "Redemptions" above.)
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TRANSFERABILITY
THERE IS NO LIQUID MARKET FOR INTERESTS AND THEY MAY NOT BE RESOLD. The
Interests may be assigned at the election of the Member and upon notice to and
consent of the Manager which consent may be withheld or granted in its sole and
absolute discretion. However, the assignee shall become a substituted member in
the Fund only upon execution and delivery to the Manager of the subscription
documents
SEC.15. GLOSSARY
Knowledge of various terms and concepts relating to the trading and the
regulation of interests is necessary for a prospective investor to determine
whether to participate in the Fund. The following glossary may assist the
prospective investor in understanding the terms and concepts used in this
Offering Prospectus.
AFFILIATE. A person that directly or indirectly controls, or is controlled
by, or under common control with, another person.
ARBITRAGE. The simultaneous purchase or sale in one market against the sale
or purchase of the same or related property in a different market in an effort
to profit from a disparity in prices. As used herein for the Fund's business,
arbitrage refers to balanced cash market transactions on one side against
futures market transactions in the same or related financial instruments on the
other side.
CASH MARKET, CASH CONTRACT OR CASH POSITIONS. These terms refer to
transactions in actual financial instruments or physical commodities, as
contrasted with transactions in futures contracts or options no futures
contracts in such instruments or other commodities.
COMMISSION. The fee charged for executing a trade in a commodity for the
account of a customer.
COMMODITY. The term commodity refers to 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 subjects of
trading of various national and international exchanges located in principal
marketing and commercial areas. Traded commodities include: grains such as
wheat, corn and oats; soybeans and soybean products (meal and oil); foods such
as livestock and meat, poultry and poultry products, frozen concentrated orange
juice, sugar, cocoa and coffee; fibers such as cotton, lumber and plywood;
metals such as copper, silver, gold, platinum, tin and zinc; financial
instruments such as obligations issued by the Government National Mortgage
Association ("GNMAs"), United States Treasury Bills and Treasury Bonds; foreign
currencies such as British pounds, Canadian dollars, Deutsche marks, Dutch
guilders, French francs, Japanese yen and Swiss francs; and energy supplies such
as petroleum and petroleum products. Traded physical commodities generally are
sold according to uniform, established grade standards, in convenient
predetermined lots and quantities such as bushels, pounds or bales, are fungible
(permit free substitution of one lot for another to satisfy a contract) and
often are storable over a period of time.
DAILY PRICE FLUCTUATION LIMIT. The maximum permitted fluctuation (imposed
by an exchange and approved by the CFTC) in the price of a commodity future
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. The maximum permitted
fluctuation is subject to change from time to time by the exchange.
DELIVERY. The process of satisfying a commodity futures contract by
transferring ownership of a specified quantity and grade of a particular
commodity to the purchaser thereof.
FUTURES CONTRACT. Contract made on or through a commodity exchange which
provide for future delivery of agricultural, industrial or other commodities
(such as financial instruments).
LIMIT ORDER. A trading order which sets a limit on either price or time of
execution of both. Limit orders (as contrasted with stop orders) do not become
market order.
MARKET ORDER. A trading order to execute a trade at the most favorable
available price as soon as possible.
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MARGIN. With respect to commodity futures, good faith deposits with a
broker to assure fulfillment of a purchase of sale of a commodity futures
contract.
MARGIN CALL. A demand for additional funds after the initial good faith
deposit required to maintain a customer's account in compliance with the
requirements of a particular commodity exchange or of a futures broker.
OPEN POSITION. A contractual commitment arising under a long contract or
short contract that has not been extinguished by an offsetting trade or
delivery.
OPTION. The right (but not the obligation) to assume a long (a call option)
or short (a put option) position in a commodity futures contract at a specified
price (the exercise or strike price) at any time during the life of the option.
Upon exercise, the holder of a call option becomes long a futures contract
whereas the writer becomes short a futures contract. The holder of a put option
becomes short and its writer becomes long.
POSITION LIMIT. The maximum number of commodity futures contracts in one
commodity (or one contract month of a commodity) that can be held or controlled
on a contract market at one time by one person or a group of persons acting
together. Position limits are imposed by the CFTC or the various commodity
exchanges. There are no position limits imposed by law on cash market
transactions, although the Fund may establish such limits as a matter of prudent
operation.
SETTLEMENT PRICE. The price for commodity futures contracts in a particular
commodity established by a clearinghouse or exchange after the close of each
day's trading.
SPREADS OR STRADDLES. The taking of both a long and a short position with
respect to the same or related commodities but in different delivery months or
on different exchanges.
STOP ORDER. An order given to a broker to execute a trade in a commodity
futures contract when the market price for the contract reaches the specified
stop order price.
UNREALIZED PROFIT OR LOSS. The profit or loss which would be realized on an
open position if it were closed out at the current settlement price.
SEC.16. FUTURES TRADING
(TO BE READ IN CONJUNCTION WITH SEC.15 -- "GLOSSARY" ABOVE)
The following general description of various aspects of securities and
commodities futures trading does not purport to be a complete explanation of the
pertinent markets or regulations. Because commodity trading in particular is a
rapidly developing economic activity, a potential investor should consult with
independent qualified sources of investment advice before determining to invest
in the Interests.
GENERALLY
Commodity futures contracts are standardized agreements traded on commodity
exchanges that call for the future delivery of the commodity at a specified time
and place. A futures trader that enters into a contract to take delivery of the
underlying commodity is "long" the contract or has "bought" the contract. A
trader that is obligated to make delivery is "short" or has "sold" the contract.
Actual delivery on the contract rarely occurs. Futures traders invariably offset
(liquidate) their contract obligation by entering into an equal but offsetting
futures position. For example, a trader who is long one March wheat contract on
the Chicago Board of Trade (i.e., is obligated to take delivery of a specified
grade and quantity of wheat in March at a specified location) can offset the
obligation by entering into a short position in a March wheat contract on that
exchange. Futures positions that have not yet been liquidated are known as
"open" contracts or positions.
A trader's profit or loss on a futures contract is determined by the price
at which it establishes the futures contract position and the price at which it
offsets the position (or the final settlement price on the exchange if the
trader holds the contract for delivery). For example, suppose that a trader goes
long one wheat contract (5,000 bushels) on the Chicago Board of Trade at 350
(cents per bushel). If the futures market price of the
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contract fell to 330 the next day and the trader liquidated its contract at that
price, its loss on the trade would be $1,000 ($.20 x 5,000 bushels = $1,000).
Conversely, if the price rose to 370 and the trader liquidated at that price, it
would make a profit of $1,000.
Futures contracts are traded on a wide variety of commodities, including
agricultural products, metals, livestock products, government securities,
currencies and stock market indices. Trading in futures options contracts has
recently been started on U.S. commodity exchanges, on a trial basis. The Fund
may or may not trade futures options. Among the principal U.S. commodity
exchanges are the Chicago Board of Trade, the Chicago Mercantile Exchange and
the Comex.
HEDGERS AND SPECULATORS
There are two principal types of commodity traders, hedgers and
speculators. Hedgers are commercial interests who market or process commodities
and utilize the futures market for protection against the risk of price
variation. For example, a seller or processor is at the risk of market price
fluctuations between the time he contracts to sell or process and the time he
must perform on the contract. In such cases, at the time of the contract, he
simultaneously buys futures contracts for the necessary equivalent quantity of
the commodity he needs, or sells a futures contract for the equivalent commodity
he intends to market at some later date. A cattle feeder may buy a corn contract
for delivery as much as several months ahead and simultaneously sell a cattle
contract that could be satisfied by the delivery of his herd, thus relieving
himself of exposure to price variations in either his raw material or ultimate
market product. Similarly, a farmer may hedge against price fluctuations between
the day he plants his crop and the day it is ready for delivery. In these
examples, the hedger may either make or take delivery in satisfaction of his
futures contract, or else close the position prior to delivery and buy or sell
the necessary equivalent amount of the physical commodity. In either case, the
price of the commodity is established at the time the hedger initiates his
futures position. Thus, the commodity markets enable the hedger to shift the
risk of price fluctuations to the speculator.
A speculator normally has no need for, or any inventory of, the cash
commodities involved. Rather, he buys or sells in expectation of a rise or
decline in the price of a commodity and assumes the market risk sought to be
avoided by the hedger. For instance, the speculator may take the opposite side
of a hedger's trade, as in the example above, by buying the futures contract
sold by the cattle feeder for delivery of his cattle. In every case, where one
party experiences a gain on a futures contract, the other experiences a loss.
However, because the speculator may take either a long or short position in the
commodity futures market, it is possible for him to make profits or incur losses
regardless of whether price trends are up or down. All trades ordered by the
Advisors to the Fund will be speculative.
COMPETITION
Both the rules of the various exchanges and those of the CFTC are designed
to promote free competition and to restrict manipulative and distorting pricing
practices in the purchase and sale of commodities for future delivery. Countless
hedgers and speculators offer and bid for the available supply of traded
commodities. In recent years many commodity pools have been organized whose
methods of trading utilize technical, trend-following systems and additional
commodity pools will likely be formed in the future. Since the Advisor will use
its respective technical and/or fundamental system to select a portion of the
Fund's trades, the Fund may experience greater competition in the execution of
those trades from other commodity accounts whose trading systems note the same
trends and dictate similar buy and sell orders. In addition, since the Advisors
manage accounts other that the Fund, those accounts will compete with the Fund
for the same contracts. Thus, were market volume or liquidity to remain static
or be reduced, the Fund may experience greater difficulty in executing trades at
a favorable price or in executing all the contracts called for in an order.
MARGINS
In order to establish and maintain a futures position, a trader must make a
type of good-faith deposit with its broker, known as "margin". Minimum margins
are established for each futures contract, by the exchange on which the contract
is traded. The exchanges alter their margin requirements from time to time,
sometimes
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significantly. For their protection, commodity brokers often require higher
margins from their customers than the exchange minimums.
There are two types of margin. "Initial" margin is the amount a trader is
required to deposit with its broker to open a futures position. For example, the
initial margin for a Chicago Board of Trade wheat futures contract is usually
about $1,000. The other type of margin is "maintenance" margin. When the
contract value of a trader's futures position falls below a certain percentage
(typically about 75%) of its value when the trader established the position, the
trader is required to deposit additional margin in an amount equal to the loss
in value. Any margin calls for the Fund will be met by a cash transfer from the
Fund's operating account.
For example, suppose a trader went long one Chicago Board of Trade wheat
futures contract at 330 cents per bushel. Since the contract calls for the
delivery of 5,000 bushels, the total contract value would be $16,500. If the
futures market price of the contract declined below 325 cents, the trader would
be required to deposit $250 in maintenance margin. If the deposit was not made
(the broker has the right to demand immediate payment), the broker would have
the right to liquidate the customer's position.
COMMODITY PRICES
The prices of commodities usually fluctuate rapidly and over wide ranges.
Except for the effect of government price control and support programs,
commodity prices are generally determined by the law of supply and demand. The
market is subject to the many psychological factors working on each buyer and
seller, as well as to crop conditions, deflation or inflation, strikes
(especially in the transportation and commodity storage industries), world
conditions, war or threats of war, interest rates and other factors. Any
fundamental prediction of commodity prices is necessarily subject to all of
these factors which can change day to day, if not hourly. Notwithstanding that
current and correct information as to substantially all factors is known, prices
still may not react as predicted. Prices of commodities are listed in most major
daily newspapers and financial journals.
The prices of financial instruments and foreign currencies are subject to
the factors described above. Other factors which affect foreign currency prices
include a country's balance of payments (surplus or deficit), potential
stability, treaties, government policies and exchange controls, inflation rate
and interest rates.
Under past federal economic stabilization programs, maximum prices at which
commodities could be traded were imposed. Although no such regulations are
presently in effect, no assurance can be given that price restrictions will not
against be imposed.
REGULATION
The U.S. futures markets are regulated under the Commodity Exchange Act, as
amended (the "CEA"), which is administered by the CFTC, a federal agency created
in 1974. The CFTC licenses and regulates commodity exchanges, commodity
brokerage firms (referred to in the futures industry as "futures commission
merchants"), commodity pool operators, commodity trading advisors and others.
The Manager is licensed by the CFTC as a commodity pool operator and commodity
trading advisor. If the pertinent licenses were to lapse, be suspended or be
revoked, the Pool Operator would be unable to act in such capacity on behalf of
the Fund.
Commodity professionals are also regulated by the NFA, a self-regulatory
organization for the commodity futures industry that supervises the dealings
between commodity professionals and their customers. The Pool Operator is a
member of the NFA. If such memberships were to lapse, be suspended or revoked,
the Advisor(s) and/or the Pool Operator would be unable to act as described
above.
The CFTC and the exchanges have pervasive powers over the futures markets,
including the emergency power to suspend trading and order trading for
liquidation only (i.e., traders may liquidate existing positions but not
establish new positions). Measures of the type could affect the Fund's trading.
A member has the right to maintain various types of legal actions against
the Pool Operator for damages suffered as a result of misconduct of the Pool
Operator in operation or advising the Fund. Under the
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"reparations" provision of the CEA, a member may maintain a damage action,
before the CFTC, against any CFTC registrant for violation of the CEA or CFTC
rules. In addition, a member may maintain a damage action in federal court
against the Pool Operator for loss suffered as a result of a violation of the
CEA, and, under the rules of the NFA, a member may require the Pool Operator to
arbitrate, before the NFA, a dispute between the member and the Pool Operator
relating to the Fund.
SEC.17. MISCELLANEOUS
LITIGATION
There has not been, within the past five (5) years, any material civil,
administrative, or criminal proceedings concluded, pending or on appeal against
the Fund, the Manager, the Clearing or Introducing Brokers or their respective
principals.
LEGAL OPINIONS
The legality of the Interests offered hereby have been passed upon by
Andrew M. Allamian, an attorney licensed to practice in the state of Illinois.
In addition, the description of federal tax consequences contained in Section 12
of this Prospectus are based upon the opinion of Andrew M. Allamian.
EXPERTS
The audited financials of the Fund and the Manager have been examined by
Michael Coglianese, CPA, an independent certified public accountant, as
indicated in his report with respect hereto, and are included herein in reliance
upon the authority of such as an expert in giving such reports.
ADDITIONAL INFORMATION
The Fund has filed with the Securities and Exchange Commission (the "SEC")
a registration statement on Form SB-2 and amendment(s) thereto with respect to
the securities offered hereto. (A copy of the Registration Statement, as so
amended, has also been provided to the SEC's main office and the CFTC in
Washington, DC) This Prospectus does not contain all the information set forth
in such Registration Statement, certain portions of which have been omitted
pursuant to the rules and regulations of the SEC. Reference is made to such
registration statement, including the amendments and exhibits thereto, for
further information with respect to the Fund and such securities. Such
information may be examined without charge in public reference facilities
maintained by the SEC at its principal office in Washington, D.C. and its
Chicago, Illinois regional office; copies of all or part thereof may be obtained
from the SEC at its office in Washington, DC upon payment of its prescribed
fees.
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MAXIMUS FUND I, L.L.C.
OPERATING AGREEMENT
THIS OPERATING AGREEMENT (the "Agreement") is made as of January 17, 1997
(the date its Articles of Organization as a limited liability company were filed
with the Secretary of State of the State of Delaware), by and between Maximus
Capital Management, Inc. (or any successor or affiliated entity in which Darren
R. Frye is a principal), as Managing Member (hereinafter referred to as the
"Manager"), and those subscribers for Membership Interests who hereafter execute
this Agreement, whether by counterpart or separate instrument, and are admitted
into Maximus Fund I, L.L.C. (who are hereinafter referred to as "Members").
ARTICLE I. ORGANIZATION
1.1 FORMATION AND NAME. The Fund shall be formed as a limited liability
company under the name Maximus Fund I, L.L.C. (the "Fund") under the provisions
of the Delaware Limited Liability Company Act.
1.2 PURPOSE. The Fund's business and purpose is to trade, buy, sell, spread
or otherwise acquire, hold or dispose of commodity futures and option contracts
and other commodity interests (including forward contracts on foreign
currencies) pursuant to the trading methods of one or more commodity trading
advisors. The objective of the Fund business is appreciation of its assets
through speculative trading.
1.3 TERM. The Fund shall come into existence on the date that the Articles
of Organization are filed and shall continue in existence until December 31,
2027, unless earlier terminated as provided in Section 5.1 hereof or by
operation of law. The duration of the Fund may not be extended by amendment to
this Agreement.
1.4 PRINCIPAL OFFICES. The Fund shall maintain its principal offices at
8218 N. University, Peoria Illinois, 61615. Additional or substituted places of
business may be established at such other locations as may, from time to time,
be determined by the Manager.
1.5 ORGANIZATION CERTIFICATE. The parties hereto shall immediately execute
and file all such certificates and other documents conforming hereto and do all
such other acts as may be appropriate to comply with all the requirements for
the formation and operation of a limited liability company under the laws of the
State of Delaware.
1.6 POWER OF ATTORNEY. Each Member, by the execution of this Agreement,
whether by counterpart or separate instrument, does irrevocably constitute and
appoint the Manager his true and lawful attorney and agent, with full power and
authority in his name, place and stead, to admit additional Members, to be his
agent for service of process, to file, prosecute, defend, settle or compromise
any and all actions at law or suits in equity for or on behalf of the Fund with
respect to any claim, demand or liability asserted or threatened by or against
the Fund, and to execute, acknowledge, deliver, file and record in the
appropriate public offices (i) all certificates and other instruments (including
counterparts of this Agreement) which the Manager deems appropriate to qualify
or continue the Fund as a liability company in the jurisdictions in which the
Fund may conduct business; (ii) all instruments which the Manager deems
appropriate to reflect a change or modification of the Fund in accordance with
the terms of this Agreement; (iii) all conveyances and other instruments which
the Manager deems appropriate to reflect the dissolution and termination of the
Fund; and (iv) certificates of assumed name. The Power of Attorney granted
herein shall be irrevocable and deemed to be a power coupled with an interest
and shall survive the incapacity or death of a Member. Each Member hereby agrees
to be bound by any representation made by the Manager and by any successor
thereto, acting in good faith pursuant to such Power of Attorney. Each Member
agrees to execute a special Power of Attorney on a document separate from this
Agreement. In the event of any conflict between this Agreement and any
instruments filed by such attorney pursuant to the Power of Attorney granted in
this Paragraph, this Agreement shall control.
1.7 FUND INTERESTS. All interests in the Fund shall be represented by
Membership Interests (the "Interests"), and as used herein the term "Interests"
are defined as an interest in the Fund acquired upon the
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making of a capital contribution by either the Manager or a Member. The
Interests need not be evidenced by certificates.
1.8 PROHIBITIONS. The Fund shall not:
(a) commingle its assets with those of any other person, except to the
extent permitted under the Commodity Exchange Act, as amended, and
regulations promulgated thereunder;
(b) purchase, sell or trade in securities to such extent as to be
required to be registered as an investment company under the Investment
Company Act of 1940, as amended;
(c) ordinarily initiate or, to the extent possible, maintain an open
position in a commodity futures contract during any delivery month, except
when required by exchange rules, by law or by regulations;
(d) ordinarily trade in cash commodities except for forward contracts
on foreign currencies or metals;
(e) permit any advisory service with which it contracts for the
management of its assets to churn the Fund's accounts so as to generate
excessive commissions;
(f) employ the trading technique, commonly known as "pyramiding," in
which the speculator uses unrealized profits on existing positions as
margin for the purchase or sale of additional positions in the same or a
related commodity. However, an Advisor may take into account the Fund's
open trade equity in assets of the Fund in determining whether to acquire
additional commodity futures contracts on behalf of the Fund;
(g) make loans to any person, including the Manager and its
affiliates;
(h) commingle the assets of the Fund with the assets of any other
person; Funds used to satisfy margin requirements will not be considered
commingled for this purpose; and
(i) enter into any agreement with the Advisors, the Clearing Broker(s)
or the Manager which shall exceed one year and any such agreements are
terminable without penalty upon respectively 30 days, 60 days and 120 days
written notice by the Fund.
Material changes in the Trading Policies described above must be approved by a
majority of the outstanding Interests (excluding Interests held by the Manager).
A change in commodities traded, however, will not be deemed to be a material
change in the Trading Policies. In the event the Manager shall, in its sole
discretion, using its prudent business judgment, determine that any trading
instructions issued by an Advisor violate such Trading Policies, then the
Manager may negate such Advisor's trading instructions.
ARTICLE II. THE MANAGER
2.1 MANAGEMENT. Subject to the limitations of this Agreement, the Manager
shall have full, exclusive and complete control of the management of the Fund's
affairs for the purposes herein stated, and shall make all decisions affecting
Fund affairs, including, inter alia, the power to enter into contracts with
third parties for trading management services and brokerage services at rates
which may exceed the lowest otherwise available. The Manager may take such other
actions as it deems necessary or desirable to manage the business of the Fund
including, but not limited to, the following: opening bank accounts with state
or national banks and money market funds paying, or authorizing the payment of,
distributions to the Members and expenses of the Fund such as advisory fees,
brokerage commissions, legal and accounting fees, printing fees, and
registration and other fees of governmental agencies (which expenses shall be
billed directly to the Fund); and investing or directing the investment of
assets of the Fund not involving the purchase or sale of commodity futures
contracts or contracts for forward delivery of currencies. The Manager may
engage and compensate on behalf of the Fund from the Fund's assets such persons,
firms and corporations, including any affiliated person or entity or any other
person or entity, as the Manager in its sole judgment shall deem advisable for
the conduct and operation of the business of the Fund.
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2.2 COMPENSATION AND REIMBURSEMENT. The Manager shall share in all Fund
income, gains, losses, deductions and credits to the extent of its interest in
the Fund. In addition, the Manager, the Clearing Broker or their affiliates may
advance funds or incur any expenses in the organization of the Fund and the
initial offering of its Interests for which they may be reimbursed, including
interest, out of Fund income or capital. Interest, if any, on such advances or
loans to the Fund may not exceed the cost of interest to them and an amount
which would be charged by the Fund (without reference to the Manager's financial
abilities or guarantees) by unrelated banks on comparable loans for the same
purpose. The Manager may not receive points, financing charges or fees in
connection therewith.
2.3 INDEMNIFICATION.
(a) In any threatened, pending or completed action, suit, or
proceeding to which the Manager was or is a party or is threatened to be
made a party by reason of the fact that it is or was the Manager or sponsor
of the Fund (other than an action by or in the right of the Fund), the Fund
shall indemnify and hold harmless the Manager against any loss, liability,
damage, cost, expense (including attorneys' and accountants' fees),
judgments and amounts paid in settlement actually and reasonably incurred
by it in connection with such action, suit or proceeding if the Manager
acted within the scope of its authority in good faith and in a manner it
reasonably believed to be in the best interests of the Fund, and provided
that its conduct does not constitute negligence, misconduct or a breach of
its fiduciary obligations to the Members. Such indemnity and agreement to
hold harmless is recoverable only out of Fund assets and shall not be a
liability of the Members. Notwithstanding the foregoing, the Manager and
any person acting as a broker-dealer in connection with the offer or sale
of Interests of the Fund 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 of the merits on each count involving alleged securities laws
violations as to the particular indemnity, (ii) such claims have been
dismissed with prejudice on the merits by a court of competent jurisdiction
as to the particular indemnity or (iii) a court of competent jurisdiction
approves a settlement of the claims against a particular indemnity.
(b) In any threatened, pending or completed action, suit or proceeding
by or in the right of the Fund, to which the Manager was or is a party or
is threatened to be made a party, involving an alleged cause of action by
Member(s) for damages arising from the activities of the Manager in the
management of the internal affairs of the Fund as prescribed by this
Agreement or by the laws of the State of Delaware or both, the Fund shall
indemnify and hold harmless the Manager against any loss, liability,
damage, cost and expense (including attorneys' and accountants' fees)
actually and reasonably incurred by it in connection with such action, suit
or proceeding if it acted within the scope of its authority in good faith
and in a manner it reasonably believed to be in the best interests of the
Fund, except that no indemnification shall be made in respect to any claim,
issue or matter as to which the Manager's actions constituted negligence,
misconduct or breach of its fiduciary obligations in the performance of its
duty to the Fund.
(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 and certain
state securities administrators (including Massachusetts) with respect to
the issue of indemnification for securities law violations.
(d) Such exculpation or indemnification, unless ordered by a court,
shall be made by the Fund only as authorized in a specific case and only
upon a determination by independent legal counsel in a written opinion that
exculpation or indemnification of the Manager or its affiliates is proper
in the circumstances because they have met the applicable standard of
conduct required before exculpation or indemnification will be authorized.
(e) The Fund is prohibited from paying the cost of that portion of
liability insurance which insures the Manager for any liability as to which
the Manager is prohibited from being indemnified.
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<PAGE> 46
(f) No indemnification of the Manager by the Fund shall be permitted
to the extent the Manager incurs any loss, liability, damage, cost or
expense (including legal and accounting fees, costs and expenses incurred
in investigating or defending any demand, claim or suit) resulting from or
arising out of any act or omission in connection with or related to the
offer or sale of the Interests.
(g) The Fund shall advance any and all legal expenses and other costs
incurred as a result of any legal action against the Management and its
affiliates if the following conditions are met:
(i) the legal action relates to acts or omissions with respect to
the performance of duties or services on behalf of the Fund;
(ii) the legal action is initiated by a third party who is not a
member in the Fund; or the legal action is initiated by Member(s) and a
court of competent jurisdiction specifically approves such advancement;
and
(iii) the Manager or its affiliates undertake to repay the advanced
funds to the Fund, together with the applicable legal rate of interest
thereon, in cases in which such person is not entitled to
indemnification as provided in this Section 2.3.
(h) The term "Manager" as used in this Section shall include the
Manager, its agents and affiliates to the extent such persons are
performing services on behalf of the Fund.
2.4 MANAGER'S CONTRIBUTION. The Manager shall in the aggregate purchase
Interests for its account amounting to the lesser of: 1% of the aggregate
initial capital contributions of all Members or $25,000. Capital contributions
by the Manager shall be credited to its accounts when and as paid. The Manager
and its affiliates may purchase Interests and shall share in all Fund income,
gains, losses, deductions and credits to the extent of their interest in the
Fund. The Interests representing the minimum capital contribution of the Manager
may not be transferred or redeemed so long as it acts as Manager.
2.5 OTHER BUSINESS. The Manager may engage in other business activities and
shall not be required to refrain from any other activity or disgorge any profits
from any such activity.
2.6 DISTRIBUTIONS TO MEMBERS. The Manager shall have sole discretion in
determining the amount and frequency of distributions (other than redemptions)
which the Fund shall make with respect to the Interests. In making the aforesaid
determination, the Manager will consider (but is not required to) accommodate
the Members' needs for cash adequate to pay taxes arising from the Fund's
profits. All distributions shall be in cash and shall be made pro rata to the
number of Interests held of record by the respective Members. The amounts of any
such distribution shall be a liability of the Fund for purposes of calculating
the Net Asset Value from the day when the distribution is declared.
2.7 EXPENSES.
(a) The Fund shall pay all organization and offering expenses incurred
in the creation of the Fund and sale of Interests to the public if
Interests having an aggregate offering price of $1,000,000 are sold
pursuant to the Registration Statement; if Shares having an aggregate
offering price of $1,000,000 are not sold pursuant to the Registration
Statement, the expenses shall be borne by the Manager and/or the Clearing
Broker. The foregoing expenses may be made by the Fund or may be reimbursed
by the Fund to the Manager and/or the Clearing Broker and its affiliates.
Notwithstanding the foregoing, in no event will reimbursement by the Fund
for organization and offering expenses exceed an amount during the Initial
Offering and any subsequent Offering Period equal to 5% of the gross
proceeds from the sale of Interests. Organization and offering expenses
shall mean those expenses incurred in connection with the formation,
qualification and registration of the Fund and in distributing and
processing the Interests under applicable federal and state law, and any
other expenses actually incurred and directly related to the offering of
the Interests, including, but not limited to, expenses such as: (a)
registration fees, filing fees and taxes; (b) the costs of qualifying,
printing, amending, supplementing, maintaining and distributing the
Registration Statement and Prospectus; (c) the costs of qualifying,
printing, amending, supplementing, mailing and distributing sales materials
used in connection with the issuance of the Interests;
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<PAGE> 47
(d) accounting, auditing and legal fees incurred in connection therewith;
and (e) any extraordinary expenses related thereto. Organization and
offering expenses include commissions, if any.
(b) All operating expenses of the Fund shall be billed directly to and
paid by the Fund. The Fund shall seek the best prices and services with
regard to its commodity futures brokerage transactions. Reimbursement to
the Manager for indirect expenses incurred in performing services for the
Fund, such as salaries of officers and directors and other items generally
falling within the category of Manager overhead, is prohibited.
(c) The Manager and/or the Clearing Broker and their affiliates may be
reimbursed and/or paid, so long as competitive, for the costs of legal,
accounting and auditing services used for or by the Fund, as well as
printing and filing fees and extraordinary expenses incurred for or by the
Fund.
2.8 SAFEKEEPING AND USE OF FUND ASSETS. The Manager shall have the
fiduciary responsibility for the safekeeping and use of all funds and assets of
the Fund (whether or not in its immediate possession or control) and, except as
provided herein, it shall not employ or permit others to employ such funds and
assets in any manner except for the exclusive benefit of the Fund. The Fund
shall be prohibited from entering into a contract providing for the release of
the Manager's fiduciary duties to the Fund.
2.9 WITHDRAWAL. The Manager may not withdraw from the Fund except upon one
hundred twenty (120) days prior written notice to the Fund and the Members. In
the event that the Fund incurs any costs directly attributed to the withdrawal
of the Manager, it will pay all such costs. In the event of removal or
withdrawal of the Manager, it shall be entitled to a redemption of its interest
in the Fund at the Net Asset Value per Interest at the end of the month in which
the Manager is removed or withdraws.
2.10 MANAGER'S NET WORTH. The Manager agrees that at all times after the
admission of Members to the Fund pursuant to the public offering of the Fund's
Interests, so long as it remains Manager of the Fund, it will maintain Net Worth
(as defined below) at least equal to not less than 5% of the aggregate initial
capital contributions of any entity (excluding the Fund) for which it shall act
as sponsor, manager and/or general partner but in no case is less than $50,000
or more than $1,000,000 required. For these purposes, Net Worth shall be
calculated in accordance with generally accepted accounting principles,
consistently applied, with all current assets valued at then current fair market
values, and may include promissory notes or stock subscriptions issued to the
Manager by its affiliates or other persons, including the Fund's Clearing
Broker(s), and shall exclude any interest required by its organic documents to
be held by the Manager in the Fund or any other entity for which it shall act as
sponsor, manager and/or general partner. The requirements of this paragraph may
be modified in accordance with the voting procedures set forth in Section 6.4
below, provided the Manager obtains an opinion of counsel for the Fund that a
proposed modification will not adversely affect the classification of the Fund
as a partnership for federal income tax purposes or result in a violation of the
securities laws of any states in which Interests are sold.
ARTICLE III. MEMBERS
3.1 CAPITAL. Each Member shall make a cash capital contribution in the
amount shown on his Subscription Agreement. The Manager shall make a cash
capital contribution in accordance with Section 2.4 above. Fractional Shares (to
3 decimal places) may be issued. If any Shares are purchased after trading
activity commences, the purchase price shall be at not less than the Net Asset
Value per Interest as defined in Section 3.7 for the last day of the month in
which the subscription is accepted by the Manager.
3.2 ADDITIONAL CAPITAL. No additional contributions of capital are or shall
be required of any Member during the term of the Fund.
3.3 ADMISSION OF ADDITIONAL MEMBERS. The Manager may, at its option, admit
additional Members at any time.
3.4 RIGHTS AND OBLIGATIONS. No Member shall be personally liable for any of
the debts of the Fund or any losses thereof beyond the amount of his capital
contribution and undistributed profits (if any). No Member shall take part in
the management of the business or transact any business for the Fund and only
the
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<PAGE> 48
Manager shall have power to sign for or to bind the Fund. No salary shall be
paid to any Member, nor shall any Member have a drawing account or earn interest
on his contribution. Each Interest owned by a Member shall be fully paid and no
assessment shall be made against any Member. No Member shall be entitled to the
return of his contribution except (i) to the extent, if any, that distributions
made, or deemed to be made, pursuant to this Agreement, may be considered as
such by law; (ii) upon dissolution of the Fund; or (iii) upon redemption and
then only to the extent provided for in this Agreement. No Member shall have
priority over any other Member either as to the return of contributions of
capital or as to profits, losses or distributions.
3.5 ASSIGNMENT. Subject to the provisions hereof, compliance with the
suitability standards imposed by the Fund, applicable laws (including federal
and state securities laws) and the rules of any other applicable governmental
authority. Interests may be assigned at the election of the Member and upon
notice to the Manager. No consent of the Manager is necessary. Notwithstanding
the foregoing, the assignee shall become a substituted Member in the Fund only
upon the consent of the Manager (which consent will not be unreasonably withheld
unless such substitution will jeopardize the tax status of the Fund or its safe
harbor protection under the tax laws).
3.6 REDEMPTION OF INTERESTS. The Members recognize that the profitability
of the Fund depends upon long term, uninterrupted investment of capital. It is
agreed, therefore, that Fund profits may be automatically reinvested, and that
distributions of capital and gains, if any, to the Members will be on a limited
basis. Nevertheless, the Members contemplate the possibility that one or more of
their number may elect to realize and withdraw capital, prior to the dissolution
of the Fund. Accordingly, the following provisions are hereby agreed to:
(a) Redemption of one or more Interests by Members at the month-end
Net Asset Value per Interest thereof (except as set forth in this
subsection (a) and subsection (b) below) may be made upon written notice of
intent to redeem given by the Member to the Manager, which notice shall
specify the name and address of the redeeming Member and the amount of
Interests sought to be redeemed. Payment of the Net Asset Value per
Interest as of the redemption date shall be made within two weeks of the
month-end date Interests are redeemed (unless a Interest is redeemed prior
to the time the Fund has recovered its organization and offering expenses,
in which case a pro rata portion of such unrecovered amount shall be
deducted from the proceeds of the redemption) within ten business days
following the month-end redemption date, except that under extraordinary
circumstances, including, but not limited to, the inability to liquidate
commodity positions as of such redemption date or default or delay in
payments due the Fund from commodity brokers, banks or other persons, the
Fund may in turn delay payment to Partners requesting redemption of
Interests of the proportionate part of the Net Asset Value of the Interests
represented by the sums which are the subject of such default or delay; in
that event, payment for redemption of such Interests will be made to
Members as soon thereafter as is practicable and notice must be given to
redeeming Members. A notice of redemption may be revoked prior to the
redemption date by written instructions to the Manager.
(b) If Interests redeemed during the first 13-18 months after
subscriptions are accepted, a 2% redemption penalty (payable to the Fund)
will be deducted from the amount calculated in (a above; if Interests are
redeemed within 12 months after their acceptance, a similar redemption
penalty will be deducted but in the amount of 3%. No redemption penalty
will be paid or any Interests redeemed by the Manager or its affiliates.
(c) Redemptions are permitted at the end of any month upon written
notice of Member(s)' intent to redeem which notice shall specify the name
and address of the redeeming Member and the amount of whole Interests
sought to be redeemed. The notice of redemption shall be in any form
acceptable to the Manager, and may be mailed or delivered to the principal
office of the Manager.
(d) No redemption of less than whole Interests will be permitted
unless the Member is liquidating his entire interest in the Fund.
(e) The Manager may require any Member which is an employee benefit
plan and/or IRA accounts subject to Title I of the Employee Retirement
Income Security Act of 1974 "ERISA" to
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<PAGE> 49
withdraw in whole or in part from the Fund through redemption of its
Interests if such withdrawal, in the Manager's sole good faith judgment, is
necessary to avoid violation by the Fund and/or Members which are employee
benefit plans and/or IRA accounts of applicable provisions of such statute
and pertinent regulations. That general authority also includes the
specific authority to redeem Interests of employee benefit plans and/or IRA
accounts if their aggregate ownership of Interests exceeds 25% of the Net
Asset Value and continuing ownership would violate ERISA and/or any
pertinent regulations.
(f) If the Net Asset Value per Interest of the Fund as of the close of
any business day is less than 50% of the Net Asset Value per Interest as of
the end of the prior month, trading shall be temporarily suspended for a
period of seven (7 business days during which time Members shall have the
right to redeem one or more Interests in accordance with the procedures set
forth in Section 3.6 hereof.
3.7 "NET ASSET VALUE" and "NET ASSET VALUE PER INTEREST". "Net Asset
Value" and "Net Asset Value per Interest" are defined in the Prospectus and
shall have the same meaning for purposes of this Agreement. Upon request, the
Manager shall make available to any Member the Net Asset Value per Interest. For
these purposes, Net Asset Value may be calculated daily on an approximate basis
(without accruals if such date is not one on which management, incentive,
redemptions or new investments accrue or occur.
3.8 FISCAL YEAR; BOOKS OF ACCOUNT. Proper books of account shall be kept
for at least six years and there shall be entered therein all transactions,
matters and things relating to the Fund's business as are required by the
Commodity Exchange Act, as amended, and regulations promulgated thereunder, 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
places of business of the Manager and each Member (or any duly constituted
designee of a Member) shall at all times during reasonable business hours have
access to and the right to inspect and copy the same in person or by mail upon
payment reasonable copying and mailing expenses. The fiscal year of the Fund
shall begin on January 1 and end on December 1, except that the first fiscal
year of the Fund shall commence on the date of filing the Articles of
Organization and end on the 31st day of December 1994 and the fiscal year in
which the Fund shall terminate will commence on the first day of January of such
year and end on the date of termination of the Fund. The books and records of
the Fund shall be kept on an accrual basis in accordance with generally accepted
accounting principles, consistently applied. The books of account or financial
statements of the Fund shall be audited at least annually at the Fund's expense
by an independent public accountant to be selected by the Manager.
ARTICLE IV. PROFIT AND LOSS
4.1 CAPITAL AND PROFIT/LOSS ACCOUNTS. Each Member shall have a capital
account, the initial amount of which shall be his contribution to the Fund. At
the end of each fiscal year, each capital account shall be adjusted in
accordance with generally accepted accounting principles by a portion of the
profit or loss earned or sustained by the Fund during such year in the ratio
which each capital account bears to all capital accounts. Each Member shall have
a profit/loss account which shall reflect his pro rata increase or decrease in
the Fund's Net Asset Value during each fiscal year. At the end of each fiscal
year, the balance in the profit/loss account shall be credited to or charged
against the respective capital accounts.
4.2 REDEMPTIONS AND DISTRIBUTIONS. Upon any redemption by a Member in
accordance with Section 3.6, or upon any distribution in accordance with Section
2.6, the amounts returned to a Member shall be charged first against his capital
contributions to the Fund and any balance against the profit/loss portion of his
account.
ARTICLE V. TERMINATION
5.1 DISSOLUTION. Upon the death of the principals, legal disability,
bankruptcy, or withdrawal of the Manager, the reduction of the Net Asset Value
per Interest at the end of any month to or below 50% of the highest Net Asset
Value per Interest previously obtained as of the end of any prior month, a
decrease at the close of business on any day in the Fund's Net Asset Value to
$500 (after reduction for any distributions) or the bankruptcy or insolvency of
the Fund itself, the Fund shall promptly be dissolved. However, the Manager
shall, prior to its voluntary withdrawal, give one hundred twenty days notice to
all Members pursuant to
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<PAGE> 50
Section 2.9 hereof, within such period, the Members may elect substitute in
accordance with Section 6.5 hereof and may continue the Fund.
The Fund may also be terminated by a vote of the holders of at least a
majority of the then outstanding Interests (not including the Interests held by
the Manager and its affiliates) at a meeting called and conducted in accordance
with Section 6.4 below. Unless earlier terminated as specified above or by
operation of law, the Fund shall cease on December 31, 2027.
The death, legal disability, bankruptcy, dissolution or withdrawal of any
Member shall not result in the dissolution or termination of the Fund. Upon the
death or legal disability of a Member, his interest in the Fund shall pass to
his legal representatives. Each Member (and any assignee of such Member's
interest) 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 Fund and any right to an audit or
examination of the books of the Fund; such waiver, however, does not extend to
any rights granted the Member under this Agreement.
5.2 FINAL ACCOUNTING. Upon the dissolution of and failure to reconstitute
the Fund, an accounting shall be made of the accounts of the Fund and each
Member thereof and of the Fund's assets, liabilities and operations from the
date of the last previous accounting to the date of such dissolution. Thereupon,
the Manager (or in the event the dissolution is caused by the legal disability,
bankruptcy, dissolution or withdrawal of the Manager, such person as the
majority in interest of the Members shall designate) shall act as liquidating
trustee and immediately proceed to wind up and terminate the business and
affairs of the Fund.
5.3 DISTRIBUTION. Upon the winding up and termination of the business and
affairs of the Fund, its liabilities and obligations to creditors and all
expenses incurred in its liquidation shall be paid and its remaining assets
shall be allocated pro rata to each Interest and distributed to the holders
thereof.
ARTICLE VI. MISCELLANEOUS
6.1 ANNUAL REPORTS AND PERIODIC STATEMENTS. Each Member shall be furnished
as of the end of each month and as of the end of each fiscal year with (i) such
reports as are required to be given to Members by the rules of the CFTC; (ii)
any other reports as are required by any other governmental authority which has
jurisdiction over the activities of the Fund; and (iii) any other reports or
information which the Manager, in its discretion, determines to be necessary or
appropriate.
Appropriate tax information (adequate to enable each Member to complete and
file his Federal tax return) shall be delivered to each Member under then
current IRS standards. Each Member shall be notified (i) within 7 business days
from the date of any decline in the Net Asset Value per Interest to less than
50% of the preceding month-end per Interest valuation together with a
notification of the Members' voting rights or right to redeem; and (ii) as
permitted under CFTC regulations, within thirty days of the end of the month in
which any material change in contracts with the Fund's commodity trading
advisor(s), including any change in such advisors or any material modification
in connection with the method of calculating the incentive fees, or any other
material change affecting the compensation of any party.
6.2 NOTICES. All notices or other communications required or permitted to
be given pursuant to this Agreement shall be in writing and shall be considered
as properly given or made if delivered in person or by certified mail, or mailed
postage prepaid, or if telegraphed, by prepaid telegram, and addressed, if to
the Manager, to Maximus Capital Management, Inc. 8218 N. University, Peoria,
Illinois 61615 and if to a Member, to the address set forth below such Member's
signature on the Subscription Agreement. Any Member may change his address by
giving notice in writing to the Manager stating his new address, and the Manager
may change its address by giving such notice to all Members. Commencing on the
tenth day after the giving of such notice, such newly designated address shall
be such Member's address for the purpose of all notices or other communications
required or permitted to be given pursuant to this Agreement.
6.3 LAW GOVERNING. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to contracts made
and to be performed in that State.
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<PAGE> 51
6.4 AMENDMENTS AND MEETINGS. Amendments to this Agreement may be proposed
by the Manager or by Members owning not less than ten percent (10%) of the
Interests. Within ten days following such proposal, subject to the limitation
imposed by the final sentence of Section 6.5, the Manager shall submit the
proposed amendment to the Members together with an opinion of counsel, if
applicable, as to the legality of amendment, its effect on the liability of
Members for the Fund's debts and its compliance with the last sentence of this
paragraph. The Manager shall make its recommendation with regard to each such
proposal advanced by Members. A simple majority of the Interests outstanding
(excluding those Interests held by the Manager and its affiliates and without
the necessity for concurrence by the Manager) shall be required to pass an
amendment. For purposes of obtaining a written vote, the Manager may require
response within a specified time. Notwithstanding the above provision with
regard to amendment, no amendment shall change the Fund to a general
partnership, change the liability of the Manager or the Members, extend the
duration of the Fund or change the provisions of this sentence.
Any provisions to the contrary contained herein notwithstanding, the
Manager may (without the consent of the Members) make such amendment(s) to this
Agreement which are necessary (a) to add to the representations, duties or
obligations of the Manager or surrender any right or power granted to the
Manager herein, for the benefit of the Members, (b) to cure any ambiguity, to
correct or supplement any provisions herein which may be inconsistent with any
other provisions herein and (c) to delete from or add any provision to this
Agreement required to be so deleted or added by representatives of the CFTC or
any other government authority, which addition or deletion is deemed by such
agency, authority or representative to be for the benefit or protection of the
Members; provided, however, that no amendment shall be adopted pursuant to this
clause (c) unless the adoption thereof (i) is for the benefit of, or not adverse
to, the interests of the Members; (ii) is consistent with Section 2.1 hereof;
(iii) does not affect the allocation of profits and losses among or between the
Members and the Manager; and (iv) does not affect the limited liability of the
Members or the status of the Fund as a partnership for federal income tax
purposes.
Upon any amendment of this Agreement, the Fund's Articles of Organization
shall also be amended, if necessary, to reflect such change.
Meetings of the Fund for purposes of amending this Agreement or taking any
action permitted to be taken by the Members under this Agreement may be called
by the Manager and shall, subject to the limitation imposed by the final
sentence of Section 6.5, be called by it when requested in writing by Members
holding ten percent (10%) or more of the Interests. The call shall state the
nature of the business to be transacted and shall set forth any amendments
proposed to be adopted. The Manager shall deposit the call in the United States
mail within fifteen calendar days after receipt of such written requests by the
requisite percentage of Members. No other business shall be conducted at the
meeting, which shall be held not less than thirty days nor more than sixty days
after the date of the mailing of the call. Any notice of meeting shall be
accompanied by a description of the action to be taken at the meeting and the
above described opinion of counsel. The Members may vote in person or by proxy
at any such meeting.
6.5 ELECTION OR REMOVAL OF MANAGER; SALE OR PLEDGE OF ASSETS; TERMINATION
OF THE FUND. The Manager or any successor may be elected to or removed from
office, all or substantially all of the Fund assets may be sold or pledged, a
contract for services with the Manager may be canceled upon 60 days prior
written notice, or the Fund may be terminated by a vote of the holders of a
simple majority of the Interests (excluding those Interests held by the Manager
and its affiliates) at a meeting called and conducted in accordance with Section
6.4 above. However, nothing contained in this Section, in Section 6.4 above or
in any other section of this Agreement shall imply that the Members have any
rights of management or control over the operations of the Fund.
6.6 SUCCESSORS AND ASSIGNS. This Agreement and all the terms and provisions
hereof shall be binding upon and shall inure to the benefit of the Members,
their respective legal representatives, heirs, successors and assigns. Any
person hereafter admitted to the Fund as a managing member or Member shall be
subjected to all of the provisions of this Agreement as if an original signatory
hereto.
6.7 COUNTERPARTS. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original but all of which shall constitute one
instrument.
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IN WITNESS WHEREOF, the parties hereto have set their hands.
<TABLE>
<S> <C>
MANAGING MEMBER: MEMBERS
Maximus Capital Management, Inc.
By: /s/ DARREN R. FRYE By: /s/ DARREN R. FRYE
----------------------------- ----------------------------------
Darren R. Frye, President of Darren R. Frye, President of
the Managing Member the Managing Member, Pursuant
to Special Power of Attorney
</TABLE>
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<PAGE> 53
EXHIBIT B
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
(TO BE EXECUTED BY ALL PURCHASERS)
MAXIMUS FUND I, L.L.C. -- Class
- --------- Interests
C/O Maximus Capital Management, Inc.
8218 N. University, Peoria, IL 61615
By executing this Subscription Agreement and Power of Attorney (hereafter,
the "Subscription Agreement") of Maximus Fund I, L..L.C. (hereafter, the
"Fund"), the undersigned purchaser (hereafter, the "Purchaser") hereby
irrevocably subscribes for Class
- --------- Membership Interests ("Interests") in the Fund. Purchaser herewith
encloses the sum of $
- --------------- (minimum $20,000, or $2,000 for IRAs, unless waived by Maximus
Capital Management, Inc., the Managing Member -- hereinafter the "Manager").
Subscriptions, whether checks or wire transfers, should be made payable to
Maximus Fund I, L.L.C. If this Subscription Agreement is accepted, Purchaser
agrees to contribute the amount enclosed to the Fund and to be bound by the
terms of the Operating Agreement.
Purchaser represents that he, she or it has (i) a net worth of at least
$250,000 (exclusive of home, furnishings and automobiles) or (ii) an annual
adjusted gross income of at least $60,000 and a net worth (similarly calculated)
of at least $100,000 (the "Subscription Agreement"). Certain states may impose
greater net worth or net income requirements, as set forth in the attached Annex
to this Subscription Agreement. Purchaser represents that he meets these
financial requirements and that he is of legal age. Purchaser is urged to review
carefully the responses, representations and warranties he is making herein.
Purchaser agrees that this subscription may be accepted or rejected in whole or
in part by the Manager in its sole and absolute discretion.
READ THIS PROSPECTUS CAREFULLY BEFORE YOU SUBSCRIBE. CONTAINED HEREIN ARE
DISCLOSURES CONCERNING VARIOUS RISKS, CONFLICTS, FEES AND EXPENSES RELATING TO
OR TO BE PAID BY THE FUND. YOU SHOULD BE AWARE THAT THE DISCLOSURES MADE MAY BE
USED AS A DEFENSE IF PROCEEDINGS ARE BROUGHT BY MEMBERS RELATING TO THE FUND.
REPRESENTATIONS AND WARRANTIES
Purchaser makes the following representations and warranties in order to
permit the Fund to determine his suitability as a purchaser of Interests:
(1) The undersigned has received the Fund's Prospectus and the
exhibits thereto and is aware of and can afford the risks of an investment
in the Fund as described in such Prospectus.
(2) The undersigned understands that the Fund has made all documents
pertaining to the transactions described in the Fund's Prospectus available
to the undersigned in making the decision to purchase the Interests
subscribed for herein and that no representations or agreements other than
those set forth in the Prospectus and the exhibits thereto have been made
to the undersigned in respect thereto.
(3) The undersigned is not in the business of being a commodity pool
operator (as defined under the Commodity Exchange Act, as defined) or is
exempt pursuant to pertinent Commodity Futures Trading Commission
regulations and is not required to be so registered.
(4) The undersigned is reminded that:
(a) The Interests are speculative investments, the purchase of
which involves a high degree of risk of loss of the entire investment of
the undersigned in the Fund.
(b) He is encouraged to discuss the proposed purchase with his
attorney, accountant or a Purchaser Representative (as defined under
Regulation D, promulgated under the Securities Act of
B-1
<PAGE> 54
1933, as amended) or take the opportunity to do so, is aware of and can
afford the risks of an investment in the Fund, and is satisfied that he
has had an adequate opportunity to ask questions concerning the Fund,
the Interests and the transactions described in the Prospectus.
(c) No federal or state agency has passed upon the adequacy or
accuracy of the information set forth in the Prospectus or made any
finding or determination as to the fairness of the investment, or any
recommendation or endorsement of the Interests as an investment.
(d) He must not be dependent upon a current cash return with
respect to his investment in the Interests. He understands that
distributions are not required to be made, and that redemptions (which
are subject to redemption penalties during the first 18 months after
Interests are accepted) probably will be the sole method for Members to
withdraw profits and capital from the Fund.
(e) The Fund is not a "tax shelter," and any information to be
furnished to him concerning the federal income tax consequences arising
from an investment in the Fund is necessarily general in nature, and the
specific tax consequences to him relative to an investment in the Fund
will depend on his individual circumstances.
(f) Trading in commodity futures contracts involves investing
capital in assets that can fluctuate rapidly and substantially in value,
often resulting in quick and substantial gains and losses.
(g) Management fees of the Advisors, transaction fees and certain
other expenses must be paid regardless of whether the Fund realizes
profits.
(5) If the Interests are being subscribed for by a pension or
profit-sharing plan, the undersigned independent trustee represents that he
has reviewed the plan's portfolio and finds (considering such factors as
diversification, liquidity and current return and projected return of the
portfolio) this purchase to be a prudent investment under applicable rules
and regulations, and acknowledges that no representation is made on behalf
of the Fund that an investment in the Fund by such plan is suitable for any
particular plan or constitutes a prudent investment thereby. Moreover, the
undersigned independent trustee represents that he understands that income
generated by the Fund may be subject to tax, that he is authorized to
execute such subscription on behalf of the plan or trust and that such
investment is not prohibited by law or the plan's or trust's governing
documents.
The undersigned understands and agrees that this subscription may be
accepted or rejected by the Fund in whole or in part, in its sole and
absolute discretion. The undersigned hereby acknowledges and agrees that
this Subscription Agreement shall survive (i) changes in the transactions,
documents and instruments described in the Prospectus which are not
material, (ii) death or disability of the undersigned and (iii) the
acceptance of this subscription by the Manager.
By executing this Subscription Agreement below, the undersigned (i)
acknowledges the accuracy of all statements and (ii) appoints the Manager
to act as his true and lawful attorney and agent to execute the Operating
Agreement and to file any documents or take any action required for the
Fund to carry out its business activities. In addition, the undersigned by
executing this Subscription Agreement waives on behalf of himself and his
estate the furnishing of any inventory, accounting or appraisal of the
assets of the Fund; providing that such waiver does not extend to any
rights granted a Member under the Operating Agreement.
The foregoing information which the undersigned has provided to the Manager
is true and accurate as of the date hereof and shall be true and accurate
as of the date of the undersigned's admission to the Fund as a Member. If
in any respect such representations, warranties or information shall not be
true and accurate at any time prior to the undersigned's admission as a
member, he will give written notice of such fact to the Manager, specifying
which representation, warranty or information is not true and accurate and
the reason therefore.
B-2
<PAGE> 55
By executing this Subscription Agreement, the undersigned certifies, under
penalty of perjury:
(1) That the Social Security Number or Taxpayer Identification Number
provided below is correct; and
(2) That the IRS has never notified him that he is subject to 20%
backup withholding, or has notified him that he is no longer subject to
such backup withholding. (NOTE: IF THIS PART (2) IS NOT TRUE IN YOUR CASE,
PLEASE STRIKE OUT THIS PART BEFORE SIGNING).
(3) The undersigned is a U.S. citizen or resident, or is a domestic
corporation, partnership or trust, as defined in the Internal Revenue Code
of 1986, as amended.
(4) THAT THE UNDERSIGNED ACKNOWLEDGES AND AGREES THAT THIS INFORMATION
MAY BE DISCLOSED TO THE INTERNAL REVENUE SERVICE BY THE FUND AND THAT ANY
FALSE STATEMENT CONTAINED HEREIN IS PUNISHABLE BY FINE, IMPRISONMENT OR
BOTH. The undersigned will notify the Fund within sixty (60) days of the
date upon which any of the information contained herein becomes false or
otherwise changes in a material manner, or the undersigned becomes a
foreign person. The undersigned agrees to update this information whenever
requested by the Fund. Under penalties of perjury, the undersigned declares
that the undersigned has examined the information contained herein and to
the best of the undersigned's knowledge and belief, it is true, correct and
complete, and that the undersigned has the authority to execute this
Subscription Agreement. This Subscription Agreement and the representations
and warranties contained herein shall be binding upon the heirs, executors,
administrators and other successors of the undersigned. If there is more
than one signatory hereto, the obligations, representations, warranties and
agreements of the undersigned are made jointly and severally.
The undersigned is the following kind of entity (please check):
[ ] Individual [ ] IRA
[ ] Joint Account -- JTWROS [ ] Pension Plan
[ ] Joint Account -- TENCOM [ ] Trust
[ ] UGMA (Gift to Minor) [ ] Non-Profit Organization
[ ] Partnership [ ] Employee of NASD member firm
[ ] Corporation [ ] Other (Specify)
SUBSCRIPTION AMOUNT $
Make checks payable to: Maximus Fund I, L.L.C.
DATED THIS DAY OF OF 199
Mr./Ms.
- --------------------------------------------------------------------------------
Purchaser's Name Social Security or Tax ID#
Mr./Ms.
- --------------------------------------------------------------------------------
Name of Second Purchaser Date of Birth of First Purchaser
- ----------------------------------------------------- ( ) -------------------
Street Address of First Purchaser Business Phone (Day)
- ----------------------------------------------------- ( ) -------------------
City State and Zip Code Home Phone
- --------------------------------------------------------------------------------
Signature of First Purchaser (individual, Signature of Second Purchaser
Custodian Officer or Partner of Equity)
B-3
<PAGE> 56
NOTE: IF A JOINT SUBSCRIPTION, PLEASE INDICATE WHETHER JOINT TENANTS WITH RIGHT
OF SURVIVORSHIP (JTWROS) OR TENANTS IN COMMON (TENCOM). EACH JOINT TENANT OR
TENANT IN COMMON MUST SIGN IN THE SPACE PROVIDED. IF PURCHASER IS A TRUST,
PARTNERSHIP, CORPORATION OR OTHER BUSINESS ASSOCIATION, THE SIGNING TRUSTEE,
PARTNER OR OFFICER REPRESENTS AND WARRANTS THAT HE/SHE/IT HAS FULL POWER AND
AUTHORITY TO EXECUTE THIS SUBSCRIPTION AGREEMENT ON ITS BEHALF. IF PURCHASER IS
A TRUST OR PARTNERSHIP, PLEASE ATTACH A COPY OF THE TRUST INSTRUMENT OR
PARTNERSHIP AGREEMENT. IF PURCHASER IS A CORPORATION, PLEASE ATTACH CERTIFIED
CORPORATE RESOLUTION AUTHORIZING SIGNATURE.
TO BE COMPLETED BY MANAGING MEMBER
The undersigned certifies that he has informed the Purchaser of all
pertinent facts relating to the liquidity and marketability of the Interests as
set forth in the Prospectus. In addition, the undersigned has reasonable grounds
to believe on the basis of information obtained from the Purchaser concerning
his investment objectives, other investments, financial situation and needs, and
any other information known by the undersigned, that: (i) the Purchaser is or
will be in a financial position appropriate to enable him to realize to a
significant extent the benefits described in the Prospectus; (ii) the Purchaser
has a fair market net worth sufficient to sustain the risks inherent in the
Fund, including losses of investment and lack of liquidity; and (iii) the Fund
is otherwise a suitable investment for the Purchaser.
Accepted by:
--------------------------------------
Darren R. Frye, President
Maximus Capital Management, Inc.,
Managing Member of Maximus Fund I,
L.L.C.
Mail Subscription Agreement and Power of Attorney and Check to:
Maximus Fund I, L.L..C.
c/o Maximus Capital Management, Inc.
8218 North University
Peoria, IL 61615
MAKE CHECK PAYABLE TO MAXIMUS FUND I, L.L.C.
B-4
<PAGE> 57
EXHIBIT C
MAXIMUS FUND I, L.L.C.
REQUEST FOR REDEMPTION
To: Maximus Capital Management, Inc. Date:
RE: Maximus Fund I, L.L.C.
I hereby give notice of my intent to redeem __________ Class ___________
Interests in Maximus Fund I, L.L.C.. (the "Fund"). In giving this notice, I
certify my full understanding as follows that: (1) this notice is irrevocable;
(2) this notice must be received by the Manager during business hours at least
30 business days prior to the last business day of the calendar month in which
redemption shall be effected (the "Redemption Date"); and (3) that the
redemption shall be governed by the Fund's Operating Agreement, including the
payment of redemption penalties if the Interests being redeemed were subscribed
less than 18 months previously.
Redemption Proceeds should be remitted as follows:
<TABLE>
<S> <C> <C>
A. If by check: Payee:
-----------------------------------------------------
Address:
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
INVESTOR'S SIGNATURE(S) MUST BE IDENTICAL TO NAME IN WHICH THE UNITS ARE
REGISTERED.
<TABLE>
<S> <C>
- --------------------------------------- Partnership, Plan, Trust or Corporate Investor
- --------------------------------------- -----------------------------------------------------
- --------------------------------------- By:
-------------------------------------------------
Partner, Trustee or Authorized Officer
- ---------------------------------------
Limited Partner's Signature(s)
</TABLE>
C-1
<PAGE> 58
MICHAEL COGLIANESE
Certified Public Accountant, P.C.
Member: One Tiffany Pointe
- - Illinois CPA Society Bloomingdale, Illinois 60108
- - Managed Futures Association Phone: (630) 351-5877
- - American Institute of Certified Public Accountants Fax: (630) 351-8963
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Maximus Capital Management, Inc.:
We have audited the accompanying balance sheet of Maximus Capital
Management, Inc. as of March 15, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Maximus Capital Management,
Inc. as of March 15, 1997 in conformity with generally accepted accounting
principles.
Michael Coglianese
Certified Public Accountant
Bloomingdale, Illinois
March 21, 1997
D-1
<PAGE> 59
MAXIMUS CAPITAL MANAGEMENT, INC.
BALANCE SHEET
MARCH 15, 1997
<TABLE>
<S> <C>
ASSETS
Cash........................................................ $6,480
------
Total Assets........................................... $6,480
======
SHAREHOLDER EQUITY
Shareholder Equity.......................................... $6,480
------
Total Equity........................................... $6,480
======
</TABLE>
D-2
<PAGE> 60
MAXIMUS CAPITAL MANAGEMENT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1
Organization:
The Company is incorporated in the state of Illinois and serves as a
commodity trading advisor (CTA) and commodity pool operator (CPO) in the
speculative trading of futures, options, and other commodity interests on both
foreign and domestic markets. As a CTA and CPO, the Company is subject to the
rules and regulations of the National Futures Association.
D-3
<PAGE> 61
MICHAEL COGLIANESE
Certified Public Accountant, P.C.
Member: One Tiffany Pointe
- - Illinois CPA Society Bloomingdale, Illinois 60108
- - Managed Futures Association Phone: (630) 351-5877
- - American Institute of Certified Public Accountants Fax: (630) 351-8963
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Maximus Fund I, L.L.C.:
We have audited the accompanying balance sheet of Maximus Fund I, L.L.C. as
of March 15, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of Maximus Fund I, L.L.C. as of
March 15, 1997 in conformity with generally accepted accounting principles.
Michael Coglianese
Certified Public Accountant
Bloomingdale, Illinois
March 21, 1997
D-4
<PAGE> 62
MAXIMUS FUND I, L.L.C.
BALANCE SHEET
MARCH 15, 1997
<TABLE>
<S> <C>
ASSETS
Cash........................................................ $1,000
------
Total Assets........................................... $1,000
======
CAPITAL
Membership (One Unit)....................................... $1,000
------
Total Capital.......................................... $1,000
======
</TABLE>
D-5
<PAGE> 63
MAXIMUS FUND I, L.L.C.
NOTES TO FINANCIAL STATEMENTS
NOTE 1.
Organization:
The Company is organized as a limited liability company in the state of
Delaware to engage in speculative trading of futures, options, and other
commodity interests on both foreign and domestic exchanges. The Company operates
as a commodity pool and is therefore under the jurisdiction of the Commodity
Futures Trading Commission.
D-6
<PAGE> 64
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to Section 2.3 of the Operating Agreement, attached to
the Prospectus as Exhibit A, relating to the indemnification of the Managing
Member, its officers, directors, stockholders, employees, agents and affiliates.
The Registrant is prohibited from indemnifying the Managing Member and its
affiliates for liabilities resulting from violations or alleged violations of
the Securities Act of 1933 or any state securities laws in connection with the
issuance or sale of the Membership Interests, except in the case of successful
defense of an action in which such violations are alleged, and then only if a
court approved such indemnification after being apprised of relevant regulatory
positions on indemnification.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC Registration............................................ $ 7,575.00
Printing Costs.............................................. $ 35,000.00
Legal Fees.................................................. $ 35,000.00
Accounting Fees............................................. $ 10,000.00
Blue Sky Fees............................................... $ 6,300.00
Organizational Costs........................................ $ 7,000.00
Miscellaneous Expenses...................................... $ 9,125.00
-----------
TOTAL.................................................. $115,000.00
===========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
On January 17, 1997, in order to organize itself, the Registrant sold one
Membership Interest to its Managing Member for $1,000. The Registrant claims an
exemption from registration based on Section 4(2) of the Securities Act of 1933,
as amended, as a sale by an issuer not involving a public offering.
ITEM 27. LIST OF EXHIBITS
<TABLE>
<S> <C>
3 Certificate of Formation
5(a) Opinion of Counsel as to the legality of the Interests
5(b) Opinion of Counsel as to the tax consequences of the
Interests
10(a) Form of Customer Agreement between Registrant and Iowa Grain
Company
(b) Stock Subscription Agreement between Maximus Capital
Management, Inc. and Darren Frye
24(a) Consent of Counsel -- Andrew M. Allamian, Esq.
24(b) Consent of Accountant
</TABLE>
ITEM 28. UNDERTAKINGS
A. Certificates
Inapplicable
B. Rule 415 Offering
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement to: (i)
include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) reflect in the Prospectus any facts or events which, together,
represent a fundamental
II-1
<PAGE> 65
change in the information in the Registration Statement and; (iii) include
any additional or changed material information on the plan of distribution.
(2) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
C. Request for Acceleration of Effective Date
The Registrant may elect to request acceleration of the effective date of
the Registration Statement under Rule 461 of the 1933 Act.
D. Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, Registrant has been advised that, in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the 1993 Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
D. Rule 430A
The undersigned Registrant will:
(1) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in the form of a
Prospectus filed by the small business issuer under Rule 424(b)(1) or (4)
or 497(h) under the Act as part of this Registration Statement as of the
time the Commission declared it effective.
(2) For any liability under the Act, treat each post-effective
amendment that contains a form of Prospectus as a new Registration
Statement for the securities offered in the Registration Statement, and
that the offering of the securities at that time as the initial bona fide
offering of those securities.
II-2
<PAGE> 66
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement to be signed on its behalf by the Undersigned, thereunto duly
authorized, in the City of Bloomingdale, and State of Illinois, on the 10th day
of April, 1997.
MAXIMUS FUND I, L.L.C.
By: Maximus Capital Management, Inc.,
its Managing Member
By:
-----------------------------------
Darren R. Frye, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following person in his
respective capacity as sole officer and director of Maximus Capital Management,
Inc., the Managing Member of the Registrant, on the date indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
President, Chief Executive April 10, 1997
- ----------------------------------------------------- Officer
Darren R. Frye
</TABLE>
II-3
<PAGE> 1
CORPORATE AGENTS INC.
1013 CENTRE ROAD BOX 9237, WILMINGTON, DE
OFFICE OF THE SECRETARY OF STATE
Exhibit 3
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF LIMITED
LIABILITY COMPANY OF "MAXIMUS FUND I, L.L.C.", FILED IN THIS OFFICE ON THE
SEVENTEENTH DAY OF JANUARY, A.D. 1997, AT 9 O'CLOCK A.M.
[GREAT SEAL OF THE STATE OF DELAWARE]
/s/ Edward J. Freel
------------------------------------
Edward J. Freel, Secretary of State
[Secretary's Seal] AUTHENTICATION: 8291461
DATE: 01-21-97
<PAGE> 2
CERTIFICATE OF FORMATION
OF
MAXIMUS FUND I, L.L.C.
A LIMITED LIABILITY COMPANY
FIRST: The name of the limited liability company is:
MAXIMUS FUND I, L.L.C.
SECOND: Its registered office in the State of Delaware is to be located at
1013 Centre Road, in the City of Wilmington, County of New Castle, 19805, and
its registered agent at such address is CORPORATE AGENTS, INC.
IN WITNESS WHEREOF, the undersigned, being the individual forming the Company,
has executed, signed and acknowledged this Certificate of Formation this
seventeenth day of January, A.D. 1997.
/s/ Carrie Hagan
- -----------------------
Carrie Hagan
Authorized Person
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 09:00 AM 01/17/1997
971016921-2707628
<PAGE> 1
[ANDREW M. ALLAMIAN LETTERHEAD]
Exhibit 5(a) and (b)
April 10, 1997
Maximus Fund I, L.L.C.
c/o Maximus Capital Management, Inc.
8218 North University
Peoria, IL 61615
RE: REGISTRATION STATEMENT ON FORM SB-2 FOR $25,000,000 OF MEMBERSHIP
INTERESTS
Gentlemen,
I have acted as counsel for Maximus Fund I, L.L.C., a limited liability
company organized under the Delaware Limited Liability Company Act (the
"Fund"), and Maximus Capital Management, Inc. (the "Managing Member"), in
connection with the registration under the Securities Act of 1933, as amended,
of Membership Interests (the "Interests") in the Fund, having a maximum
aggregate offering price of $25,000,000, pursuant to the referenced
Registration Statement.
You have requested my opinion regarding the legality of the Interests
registered pursuant to the Registration Statement on Form SB-2. I have examined
originals or copies, certified to my satisfaction, of such records,agreements,
and other instruments of the Fund, certificates of public officials,
certificates of the Managing Member or other representative of the Fund, and
other documents, as I have deemed necessary as a basis for the opinions
hereinafter set forth. As to various questions of fact material to such
opinions, I have, when relevant facts were not independently established,
relied upon written certifications of the Managing Member or other
representatives of the Fund and other appropriate persons and references,
including, but not limited to statements contained in the Registration
Statement.
I am admitted to practice law only in the State of Illinois. My opinions,
insofar as they address issues of Delaware law, are based solely on my review
of (i) the records of the Fund, (ii) the Delaware Limited Liability Act and
(iii) a
<PAGE> 2
Maximus Fund I, L.L.C.
April 10, 1997
page 2
certified copy of the Fund's January 17, 1997 certificate of Formation.
Subject to the foregoing, I do not express any opinion herein concerning any
law other than the laws of Illinois and the federal laws of the United States.
I have assumed the genuineness of all signatures on documents reviewed by
or presented to me, the legal capacity of natural persons, the authenticity of
all items submitted to me as originals and the conformity with originals of all
items submitted to me as copies.
Based upon the foregoing, I am of the opinion that:
1. The Fund is a duly organized, validly existing limited liability company
under the laws of the State of Delaware.
2. The Interests of the Fund to be offered pursuant to the Prospectus forming
a part of the Registration Statement are validly authorized and when (a) the
pertinent provisions of the Securities Act of 1933, as amended, state
securities laws and regulations as may be applicable have been complied with
and (b) such interests have been duly delivered against payment therefor as
contemplated by the offer contained in the Prospectus, such Interests will be
validly issued, fully paid and nonassessable under the laws of Delaware.
With respect to the section of the Prospectus captioned Tax Considerations,
I confirm that, subject to the foregoing and to the qualifications and
limitations stated therein, I render the opinion of counsel expressly set forth
in the aforesaid section.
My opinion is expressed as of the date hereof, and I do not assume any
obligations to update or supplement my opinion to reflect any fact or
circumstance which hereafter comes to my attention or any change in the law that
hereafter occurs.
I hereby consent to the reference to my name in the "Legal Opinions"
and "Tax Considerations" sections of the Prospectus and to the inclusion
of this opinion as an Exhibit to the Registration Statement.
Sincerely,
Andrew M. Allamian
<PAGE> 1
EXHIBIT 10(a)
IOWA GRAIN COMPANY
141 West Jackson Boulevard
Suite 1520-A
Chicago, Illinois 60604
BOOKLET NO. 1
WELCOME TO IOWA GRAIN COMPANY
To make your trading as satisfying as possible and to comply with governmental
regulations, we both need to cooperate fully. The process of trading begins
with your completing at least one set of account forms:
BOOKLET No.1 is a General Application which must be read carefully and
signed by EVERY person or group trading commodity futures or options
through Iowa Grain Company and its affiliates.
BOOKLET No.2 is to be reviewed and maintained by you so you may trade
OPTIONS OR FUTURES.
Please be sure that you read and understand everything in these applications.
Fill them out fully and legibly, signing where required. Otherwise, the opening
of your account may be delayed. A new account can be traded only when the
application forms and initial funds are accepted by Iowa Grain Company,
following IB approval.
CUSTOMER AGREEMENT
Basic account agreements required for trading commodity futures and related
financial transactions, for the use of customers of Iowa Grain Company, its
Introducing Brokers, Futures Commission Merchants, and all other associates.
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Fact Sheet and W-9 ............................ 1-3 Corporate Authorization ....................... 15
Duplicate Statements .......................... 3 Trading Authorization ......................... 16
Customer Agreement ............................ 4-11 Third Party Authorization ..................... 17
Risk Disclosure For Futures and Options ....... 11 Special Notice to Customer .................... 18
Individual Account ............................ 12 Guarantee Agreement ........................... 19-20
Personal Trust ................................ 12 C.F.T.C. Option Statement ..................... 21
Joint Account ................................ 13 Hedge Representation Letter ................... 22
Partnership Account ........................... 13 Arbitration Agreement ......................... 23-24
Corporate Account ............................. 14 Notes ......................................... 25
Instruction to Transfer ....................... 26
</TABLE>
<PAGE> 2
Iowa Approval & Date IOWA GRAIN COMPANY Salesman Number
________________________ 141 West Jackson Blvd. _________________
IB Approval & Date Suite 1520-A Account Number
________________________ Chicago, IL 60604 _________________
NEW ACCOUNT FACT SHEET
ACCOUNT IDENTIFICATION
LEGAL ENTITY: (Choose only one) / / Individual / / Partnership Corporation
/ / Trust/Pension/IRA, Keogh (Attach Trust Documentation)
Federal Tax Identification Number: (Complete only one)
Social Security Number: - - Federal Employer ID Number: -
________________ ___________
Legal Account Name:_____________________________________________________________
Additional Account Description: ________________________________________________
INTERNAL REVENUE CODE SUBSTITUTE FORM W-9
If you have NOT furnished Iowa Grain Co. with your taxpayer identification
number (usually your Social Security number) and do NOT sign below, Iowa Grain
Co. must generally withhold 20% of certain income from your account. I hereby
certify under penalties of perjury that I am not subject to backup withholding
under the provisions of Section 3406 (a) (1) (c) of the Internal Revenue Code.
X___________________________________ ________________________________
Signature Date
PLEASE NOTE THAT ALL REQUIRED REGULATORY INFORMATION REPORTING APPLICABLE TO
ACTIVITY WITHIN THIS ACCOUNT (INCLUDING INTERNAL REVENUE SERVICE REPORTING)
WILL BE SUBMITTED WITH THE LEGAL NAME AND FEDERAL TAX IDENTIFICATION NUMBER
STATED ABOVE.
<TABLE>
<S> <C>
MAILING ADDRESS HOME ADDRESS (If Different)
Street_________________________________ Street__________________________
City __________________________________ City ___________________________
State ______________Zip________________ State________________Zip________
FOR INDIVIDUAL: FOR CORPORATION, PARTNERSHIP OR TRUST:
Date of Birth _________________________ Date Incorporated or Established
Occupation ____________________________ ________________________________
Employer Name _________________________ Person with Primary Account Authority
Employer Address ______________________ ________________________________
_______________________________________ Other Persons Authorized to Act on
Nature of Business or Industry ________ Behalf of Entity Regarding Account
_______________________________________ ________________________________
Home Telephone ________________________ Nature of Business or Industry
Business Telephone ____________________ ________________________________
Facsimile Telephone ___________________ Country of Registration:
Number of Dependents __________________ U.S. / / State ________________
</TABLE>
1
<PAGE> 3
Are you a U.S. Citizen? Yes / / No / / Other / / _______________________
FINANCIAL INFORMATION
Bank Name: _______________________________ ACCOUNT NUMBERS
Address: _________________________________ Checking: _______________________
_________________________________ Savings: ________________________
_________________________________ Phone: __________________________
FOR INDIVIDUALS - ANNUAL INCOME: NET WORTH:
__________Less than $25,000 __________Less than $25,000
__________$25,000 - $50,000 __________$25,000 - $50,000
__________$50,000 - $100,000 __________$50,000 - $100,000
__________more than $100,000 __________$100,000 - $250,000
__________$250,000 - $500,000
__________more than $500,000
FOR CORPORATIONS: Attach a copy of the most recent audited financial statement.
Please indicate "yes" or "no" for each of the following:
<TABLE>
<CAPTION>
INVESTMENT EXPERIENCE YES HOW NO
MANY DO YOU UNDERSTAND?
YEARS YES NO
<S> <C> <C> <C> <C> <C> <C>
COMMODITY FUTURES / / _____ / / BASICS OF FUTURES TRADING? / / / /
COMMODITY OPTIONS / / _____ / / RISK OF LOSS AND THE
STOCKS AND BONDS / / _____ / / POSSIBILITY OF INCURRING A
STOCK OPTIONS / / _____ / / DEBIT BALANCE? / / / /
</TABLE>
IS THIS A JOINT ACCOUNT? YES / / NO / / (IF YES, COMPLETE NEXT SECTION.)
<TABLE>
<CAPTION>
FOR INDIVIDUAL (2) OF JOINT ACCOUNT: ANNUAL INCOME: NET WORTH:
<S> <C> <C>
Name________________________________ _____Less than $25,000 _____Less than $25,000
Date of Birth ______________________ _____$25,000-$50,000 _____$25,000-$50,000
Occupation _________________________ _____$50,000-$100,000 _____$50,000-$100,000
Employer Name ______________________ _____more than $100,000 _____$100,000-$250,000
Employer Address ___________________ _____$250,000-$500,000
____________________________________
____________________________________ INVESTMENT EXPERIENCE: YES HOW NO
Nature of Business or Industry _____ MANY
____________________________________ YEARS
Business Telephone _________________ Commodity futures / / _______ / /
Facsimile Telephone_________________ Commodity Options / / _______ / /
Number of Dependents____________ Stocks and bonds / / _______ / /
Are you a U.S. Citizen? Yes / / No / / Stock Options / / _______ / /
IF YES TO ANY OF THE ABOVE, INDICATE NAME
OF COMPANY AND ACCOUNT NUMBER _______________________
</TABLE>
2
<PAGE> 4
PLEASE MAIL DUPLICATE STATEMENTS TO (IF APPLICABLE)
NAME ________________________________ NAME __________________________________
ADDRESS _____________________________ ADDRESS _______________________________
CITY _______STATE _________ZIP ______ CITY ________STATE _________ZIP _______
Have you ever been subject to federal or state bankruptcy proceedings,
receivership or similar actions, voluntarily or involuntarily? / / No / / Yes
If YES, Describe briefly _______________________________________________________
________________________________________________________________________________
Iowa Grain Company reserves the right to request additional financial
information from you in order to continue processing this account.
Do you maintain any other accounts or control the trading in any other accounts
with Iowa Grain Company?
/ / No / / Yes (If yes, list account numbers) ________________________________
Is this a Hedge account? / / No / / Yes (If yes, complete page 22)
Will this account be traded on your behalf by any other person? / / No / / Yes
yes, complete pages 16-18)
Have you ever been in a legal dispute or involved in arbitration proceedings,
arising from a commodities or securities account? / / No / / Yes If YES,
please describe below or on a separate
page. __________________________________________________________________________
Do you have an unsatisfied debit balance on an account with Iowa Grain Company,
or with any other commodities or securities firm? / / No / / Yes.
If YES, please identify the firm, account number and the amount of the
debt ______________________________________________________________________
Are you an "Affiliated Person" of a futures commission merchant or introducing
broker? / / No / / Yes
(The CFTC definition of an "Affiliated Person" is "Any general partner,
officer, director, owner of more than ten percent of the equity interest,
associated person or employee of the futures commission merchant or introducing
broker, and any relative or spouse of any of the foregoing persons, or relative
of such spouse who shares the same home as any of the foregoing persons.")
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<PAGE> 5
CUSTOMER AGREEMENT
In consideration of the acceptance by Iowa Grain Company of one or more
accounts of Customer and its agreement to act as Customer's broker in the
purchase and sale of commodity futures contracts and options thereon, Customer
agrees as follows:
1. ACKNOWLEDGMENT OF RISK
Customer acknowledges that the purchase and sale of commodity futures
contracts, exchange-traded and dealer commodity options ("commodity options")
is speculative, involves a high degree of risk and is suitable only for persons
who can assume the risk of loss in excess of their margin deposits or of the
entire option cost. Customer understands that because of the low margin
normally required in commodity futures trading, price changes in commodity
futures contracts may result in significant Customer losses, which losses may
substantially exceed Customer's margin deposits and any other deposit he may
make. Customer also acknowledges that he has received, has read and understands
this Agreement and understands that brokerage commissions and other
transactions fees for commodity futures contracts and commodity options vary
substantially among brokerage firms.
2. RULES AND REGULATIONS
All transactions executed for Customer's account shall be subject to the
constitution, rules, regulations, and customs, as they may be amended, of the
exchange (and clearing organization) where executed and to the provisions of
any applicable law and to the rules and regulations promulgated from time to
time thereunder. Customer shall hold Iowa Grain and its agents harmless for any
actions taken or not taken in order to comply with any such constitution, law,
rule, regulation or custom and customer shall not be relieved of any obligation
as a result of the failure of Iowa Grain to so comply. If Customer is subject
to regulation, Customer agrees that Iowa Grain has no duty to ascertain or
ensure that customer is in compliance with any governing statutes or rules.
3. ORDERS
Customer authorizes Iowa Grain to make transactions for Customer's account in
accordance with Customer's oral or written instructions. Iowa Grain reserves
the right to refuse to accept any orders. Iowa Grain may process and handle
Customer orders in any manner Iowa Grain believes appropriate. Customer
acknowledges that while Iowa Grain shall execute Customer transactions as
Customer's agent, Iowa Grain shall have absolute discretion over the selection
of floor brokers (whether employees of Iowa Grain or otherwise) utilized in the
execution of such transactions. Iowa Grain shall not be responsible to Customer
in any case for said floor brokers' inability to execute orders, or for errors
or negligence on the part of floor brokers who are not employees of Iowa Grain.
Iowa Grain shall not be responsible in any way for the acts or omissions of
floor brokers selected by customer. Customer agrees to any "cross trade",
involving the account of a floor broker utilized by Iowa Grain or an account of
Iowa Grain deemed to be proprietary on the one hand and Customer's account on
the other, as permitted and defined by any applicable exchange rules.
4. COMMISSIONS AND OTHER CHARGES
Customer shall promptly pay Iowa Grain brokerage commissions and service
charges as in effect from time to time and interest on debit balances, together
with any reasonable charges or expenses, including court costs and attorneys'
fees, incurred in collecting any debit balance or other liability of Customer
to Iowa Grain. Customer shall also pay Iowa Grain's costs and attorneys' fees
incurred in defending against any
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<PAGE> 6
claim brought by Customer in any suit, Arbitration or reparations proceeding in
which Iowa Grain is the prevailing party or in which Customer recovers an
amount less than that offered in settlement by Iowa Grain.
5. MIDAMERICA TRANSACTIONS
Customer acknowledges that the price at which Iowa Grain confirms a transaction
executed on the MidAmerica Commodity Exchange may include a Changer's fee. The
amount of the Changer's fee included in the transaction shall be provided to
the Customer upon written request to Iowa Grain.
6. MARGIN
Iowa Grain may set and revise margin requirements in its absolute discretion.
As used herein, the term margin requirement also includes any amount which may
be due from Customer as a result of options transactions. These requirements
may exceed the margin requirements set by any exchange or other regulatory
authority, may apply to existing positions as well as to new positions and may
differ from those set for any other account of Iowa Grain. Customer shall
maintain adequate funds at all times on deposit with Iowa Grain so as to
continuously meet the margin requirements established by Iowa Grain. Customer
agrees, when required, to wire transfer funds to Iowa Grain and furnish to Iowa
Grain with names of bank officers for immediate verification of such wire
transfer.
If at any time Customer's account does not contain the amount of funds required
to meet Iowa Grain's then applicable margin requirements, Iowa Grain may, in
its absolute discretion and without notice or demand to Customer, close out
Customer's open positions, in whole or in part, or otherwise take action to
protect itself under paragraph 11 hereof. Customer understands and agrees
that Iowa Grain has no obligation to take any such action in the absence of
specific instructions from the Customer. Iowa Grain may in some situations
determine not to take any such actions or not to make a margin demand upon
Customer. However, any such determination by Iowa Grain (including its
decision not to make a margin demand) shall not be construed to be a waiver
by Iowa Grain from taking any action available to it in the future.
7. BROKER MAY LIMIT POSITIONS HELD
Customer acknowledges that Iowa Grain has the right, but no responsibility or
obligation, to limit the number of commodity futures and commodity options
which Customer may maintain or acquire through Iowa Grain at any time. Customer
agrees not to make any trade through Iowa Grain which would have the effect of
exceeding any limitations imposed on Customer by Iowa Grain.
8. DELIVERY
Customer acknowledges that all transactions may result in the making or
accepting of delivery of the underlying commodity or security or other property
("Physical"). Customer agrees that Iowa Grain may, in its sole discretion,
liquidate any short position in Customer's account if Customer has not
delivered to Iowa Grain certificates, receipts, or other appropriate
instruments of delivery at least seven days prior to the time Iowa Grain is
obligated to make a commitment to deliver the Physical on behalf of Customer
under the rules of the applicable exchange and/or clearing organization. If at
any time Customer shall be unable to deliver to Iowa Grain any Physical
underlying a short position in Customer's account, Customer unconditionally
designates Iowa Grain its agent to borrow or buy and deliver the same. Customer
shall immediately pay and indemnify Iowa Grain for all costs, losses, damages
and premiums which Iowa Grain may incur in making such delivery or which Iowa
Grain may sustain from its inability to borrow or buy the underlying Physical.
In the event Iowa Grain takes delivery of any Physical for Customer's account,
Customer agrees to pay all
5
<PAGE> 7
delivery, insurance, interest and related charges, and to indemnify Iowa Grain
for any loss Iowa Grain may suffer, directly or indirectly, from a decline in
value of said Physical. Customer expressly acknowledges that, particularly in
volatile markets, the making or accepting of delivery may involve a much higher
degree of risk than liquidating a position by offset.
9. EXERCISE OF OPTION
Customer understands that: (a) in order to exercise a commodity option,
Customer must affirmatively notify Iowa Grain prior to the applicable exercise
and expiration date and time established by Iowa Grain from time to time; (b)
the exercise and expiration date and time established by Iowa Grain may be
earlier than those set by an exchange; and (c) failure to provide such notice
will constitute an abandonment of the option by Customer. Customer understands
and acknowledges that in the absence of a direction to Iowa Grain from Customer
(not later than 6:00 p.m. on the day prior to the last trading day) that
Customer's commodity option position should not be exercised, commodity option
positions held by Customer will be exercised in accordance with the rules then
in effect of the exchange upon which such commodity option was purchased.
10. TRADING AND MARKET RECOMMENDATIONS
Customer acknowledges that: (a) any market recommendations and any information
communicated to Customer by Iowa Grain does not constitute an offer to sell or
the solicitation of an offer to buy any commodity, commodity futures contract
or commodity option; (b) any recommendations and market information as to
proposed transactions, although based upon information obtained from sources
believed to be reliable, may be incomplete and unverified and Iowa Grain makes
no representation, warranty, or guarantee as to the accuracy thereof; and (c)
recommendations to Customer as to any particular transactions at any given time
may differ among Iowa Grain personnel due to diversity in analysis of
fundamental and technical factors and may vary from any standard recommendation
made by Iowa Grain in its market letters or otherwise.
Customer also understands that the market recommendations of Iowa Grain may or
may not be consistent with the market position or intentions of Iowa Grain, its
subsidiaries, affiliates, officers, directors, employees, or agents and that
Iowa Grain will not disclose such positions or intentions to Customer due to
their confidential and proprietary nature.
11. LIQUIDATION
Customer acknowledges that all monies, securities, negotiable instruments, open
positions in futures contracts or options, or other property (collectively
"Property") now or at any future time held in Customer's account or which may
be in Iowa Grain's possession for any purpose, including safekeeping, shall be
subject to a general lien and security interest for the discharge of all
obligations of Customer to Iowa Grain. Iowa Grain may, at any time in its sole
and absolute discretion, liquidate any of the property in order to satisfy any
margin deficiency or any other liability of Customer to Iowa Grain and may
transfer said property to the general ledger account of Iowa Grain, all without
liability on the part of Iowa Grain to Customer or any third party.
12. DEATH, INCAPACITY OR OTHER CUSTOMER INFIRMITY; BROKER'S RIGHT TO LIQUIDATE
In the event that: (a) Customer shall be judicially declared incompetent; (b)
Customer shall die, or in the case of corporation, partnership or other entity,
terminate or be dissolved; (c) a preceding under the Bankruptcy Act, an
assignment for the benefit of creditors, or an application for receiver,
custodian or trustee shall be filed or applied for, by or against Customer; (d)
the property in customer's account shall be
6
<PAGE> 8
garnished or attached; (e) the property deposited in Customer's account shall
be determined by Iowa Grain in its sole and absolute discretion, and regardless
of current market quotations, to be inadequate to secure the account; (f)
Customer's account shall incur a deficit balance; (g) Customer shall acquire or
maintain open positions with Iowa Grain in excess of the limit imposed by Iowa
Grain pursuant to the terms of the Agreement; or (h) at any time Iowa Grain for
any reason shall feel insecure with respect to the sufficiency of the property
deposited by Customer or deem it necessary for its protection, Iowa Grain may
close out Customer's account in whole or in part, refuse to accept new orders,
exercise any option, sell any or all of Customer's property held by Iowa Grain,
take an offsetting position in the cash market, buy or sell any securities,
commodities, commodity futures or commodity options contracts, or other
property in or for Customer's account, or cancel any outstanding orders to
close out any account of Customer or to close out any commitment made by Iowa
Grain on behalf of Customer. Such sale, purchase or cancellation may be made at
Iowa Grain's discretion on a contract market or at public auction or at private
sale, without advertising the same and without notice, prior tender, demand or
call upon Customer. No prior tender, demand, call nor prior notice from Iowa
Grain of the time and place of such sale or purchase shall be deemed to be a
waiver of Iowa Grain's right to sell or buy any property held by Iowa Grain, or
owed to Iowa Grain by customer. Iowa Grain may, to extent permitted by law,
purchase the whole or any part thereof free from any right of redemption, and
Customer shall remain liable for and shall pay to Iowa Grain the amount of any
deficiency resulting from any such transactions.
13. PLEDGING AND HYPOTHECATION
All property now or hereafter held or carried by Iowa Grain for Customer may
from time to time and without notice to Customer be carried in Iowa Grain's
general loan account and may be pledged or hypothecated, separately or in
common with other securities and commodities or any other property, for the sum
due to Iowa Grain thereon or for a greater sum and without retaining in Iowa
Grain's possession and control for delivery a like amount of similar securities
or commodities, loaned or invested.
14. COMMUNICATIONS AND REPORTS
All communications, monies, securities, and other property shall be transmitted
to Customer at the account mailing address as shown on the New Account Fact
Sheet or to such other address as Customer may designate in writing. Reports of
executions and all statements of account rendered by Iowa Grain from time to
time to Customer shall be conclusively deemed correct and final unless Customer
gives written notice to the contrary within five days from the date of the
notices in the case of reports of executions and within ten days of the date of
the statement in the case of monthly statements of account. Iowa Grain shall
not be responsible for losses to Customer occasioned by delays or inaccuracies
in the transmission of orders due to failure or malfunctioning of communication
facilities.
15. RECORDING
Recognizing the protection afforded to both Customer and Iowa Grain by the
recording of telephone conversations, Customer acknowledges, authorizes, and
consents to the recording of his telephone conversations with Iowa Grain, or
any of its agents or solicitors, by means of electronic telephone recording
equipment with or without the use of an automatic tone warning device and
ratifies any recordings previously made. Customer hereby authorizes use of such
recorded conversations as evidence by either party in any action or proceeding
arising out of this Agreement.
7
<PAGE> 9
16. ACCOUNT NUMBER
Customer agrees that Iowa Grain may, from time to time, change the account
number assigned to any account covered by this agreement, and in such case this
Agreement shall remain in full force and effect. Customer agrees further that
this account, if closed and reopened, as well as all additional accounts opened
by him at Iowa Grain, shall be covered by this same Agreement with the
exception of any new account for which a new customer Agreement is signed.
17. OBLIGATION FOR DEBITS AND OTHER CHARGES
Customer acknowledges his unconditional obligation to pay Iowa Grain the amount
of any and all losses, costs and damages (including costs and attorneys' fees)
sustained by Iowa Grain resulting in any way or arising out of customer's
account including, without limitation, any debit balance which may occur in
customer's account and any charges in connection with delivery of Physicals as
set forth in Paragraph 8 hereof. Any obligation to Iowa Grain pursuant to this
paragraph shall be deemed due and owing to Iowa Grain on the date incurred, and
any unpaid balance thereupon shall bear interest as provided in Paragraph 23
hereof.
18. CUSTOMER REPRESENTATIONS
Customer represents that: (a) Customer (or its officers and directors in the
case of a corporation or partners in the case of a partnership) is not an
employee or affiliate of any contract market, any corporation of which a
contract market owns a majority of the capitol stock, any member of any
contract market, the Commodity Futures Trading Commission or any firm
registered on any contract market except as disclosed on Customer's
Application; (b) Customer and any person who owns any interest in the Account
is 21 years of age or older; (c) Customer is under no disability which would
prevent him from trading commodities, commodity futures contracts, or options
on commodity futures contracts or from understanding and entering into this
Agreement; (d) the statements contained on Customer's Application are true and
correct; (e) no one except Customer has an interest in any account or accounts
carried for Customer by Iowa Grain except as disclosed in writing to Iowa
Grain, and (f) Customer will promptly notify Iowa Grain in writing if any of
the above representations shall materially change or cease to be true and
correct.
This agreement shall not be deemed to be accepted by Iowa Grain or become a
binding Contract between Customer and Iowa Grain until approved by Iowa Grain
at 141 West Jackson Boulevard, Chicago, IL 60604.
19. THIRD PARTY INDEMNIFICATION
Customer acknowledges and agrees that Iowa Grain shall not be responsible to
Customer for any losses resulting from conduct or advice (including but not
limited to errors and negligence) on the part of any broker/dealer, futures
commission merchant, introducing broker, commodity trading advisor, or any
other person or entity introducing Customer to Iowa Grain or having trading
authority over the account of Customer at Iowa Grain. Customer specifically
agrees that Iowa Grain shall have no obligation to supervise the activities of
any such person or entity and Customer will indemnify Iowa Grain and hold Iowa
Grain harmless from and against all losses, liabilities, and damages (including
attorneys' fees) incurred by Iowa Grain as a result of any actions taken or not
taken by such person or entity.
In the event that this is an introduced account, Customer hereby confirms that
customer has appointed the Introducing Broker as Customer's agent and that Iowa
Grain's sole responsibility to Customer shall be to execute, clear and
account for orders transmitted to Iowa Grain on behalf of Customer.
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<PAGE> 10
20. CONSENT TO CREDIT CHECK
Customer authorizes Iowa Grain to contact such banks, financial institutions,
credit agencies, and other references as Iowa Grain shall deem appropriate from
time to time to verify the information regarding Customer which may be provided
by Customer. Customer understands that an investigation may be made pertaining
to his personal and business credit standing and that Customer may make a
written request within a reasonable period of time for complete and accurate
disclosure of its nature and scope.
21. FOREIGN CURRENCY TRANSACTIONS
Customer agrees that any risk or cost resulting from conversion of United
States dollars to other currencies for the purpose of trading foreign
commodities or for transmission from Customer to foreign exchanges or to
Customer from outside of the United States will be borne by Customer.
22. TRANSFER OF FUNDS AUTHORIZATION
In the event that at any time Customer has an account in commodities which
comes under the regulation of the Commodity Futures Trading Commission, and
also an account or transaction in unregulated commodities, then Customer agrees
that until Iowa Grain actually receives written notice to the contrary signed
by customer Iowa Grain is hereby authorized to transfer from Customer's
Regulated Commodity account to any other account of Customer such amount of
excess funds or equities as in Iowa Grain's judgment may be required for margin
or to reduce or pay in full any deficit in such other account. By "Regulated
Commodity" is meant any commodity covered by the Commodity Exchange Act.
23. INTEREST
Wherever under this Agreement interest is chargeable upon amounts owed by
Customer, interest shall be the lesser of the highest rate permitted by law or
two percent above the then prevailing prime rate charged by the Harris Trust
and Savings Bank of Chicago.
24. FORUM SELECTION AND CONSENT TO JURISDICTION
The undersigned ("Customer") agrees to bring any judicial action, including any
complaint, counterclaim, cross-claim or third party complaint, arising
directly, indirectly, or otherwise in connection with, out of, related to or
from this Agreement or any transaction covered hereby or otherwise arising in
connection with the relationship between the parties including any action by
Customer against Iowa Grain or any person who is an officer, agent, employee
or associated person of Iowa Grain at the time the cause of action arises,
only in courts located with the Northern District of Illinois. The
undersigned ("Customer") also consents and submits to the jurisdiction of any
state or federal court located within the Northern District of Illinois.
Customer waives any right Customer may have to transfer or change the venue
of any litigation brought against Customer by Iowa Grain.
25. SUBORDINATION AGREEMENT
Funds of customers trading on United States contract markets may be held in
accounts denominated in a foreign currency with depositories located outside
the United States or its territories if the customer is domiciled in a foreign
country or if the funds are held in connection with contracts priced and
settled hinder or prevent the availability of these funds for distribution to
customers. Such accounts also may be subject to foreign currency exchange rate
risks.
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<PAGE> 11
The customer authorizes the deposit of funds into such foreign depositories.
For customers domiciled in the United States, this authorization permits the
holding of funds in regulated accounts offshore only if such funds are used to
margin, guarantee, or secure positions in such contracts or accrue as a result
of such positions.
In order to avoid the possible dilution of other customer funds, a customer who
has funds held outside the United States must further agree that his claims
based on such funds will be subordinated as described below in the unlikely
event BOTH of the following conditions are met: (1) the customer's futures
commission merchant is placed in receivership or bankruptcy, and (2) there are
insufficient funds available for distribution denominated in the foreign
currency as to which the customer has a claim to satisfy all claims against
those funds.
By signing the accompanying acknowledgment the customer agrees that if both of
the conditions listed above occur, the customer's claim against the futures
commission merchant's assets attributable to funds held overseas in a
particular foreign currency may be satisfied out of segregated customer funds
held in accounts denominated in dollars or other foreign currencies only after
each customer whose funds are held in dollars or in such other foreign
currencies receives its pro-rata portion of such funds. It is further agreed
that in no event may a customer whose funds are held overseas receive more than
its pro-rata share of the aggregate pool consisting of funds held in dollars,
funds held in the particular foreign currency, and non-segregated assets of the
futures commission merchant.
26. LIMITATIONS OF ACTIONS
No legal or administrative action may be commenced arising out of this
agreement or the relationship of Customer with Iowa Grain or any transactions
under this agreement after ONE YEAR after any claim arises. This paragraph acts
as a waiver of the Commodity Exchange Act's two-year statute of limitations for
filing reparations, arbitrations or court proceedings and also acts as a waiver
of other state law limitations periods.
27. GENERAL
If any provisions herein are or should become inconsistent with any present or
future law, rule or regulation of any government or regulatory body having
jurisdiction over the subject matter of this Agreement, such provisions shall
be deemed to be rescinded or modified in accordance with any such law, rule or
regulation. In all other respects, this Agreement shall continue and remain in
full force and effect.
This Agreement shall be governed by the laws of the State of Illinois and shall
be binding upon Customer's estate, executors, administrators, successors and
assigns and shall inure to the benefit of Iowa Grain's successors and assigns
and Iowa Grain may transfer Customer's account to any such successors or
assigns, and to such clearing broker as may be engaged by Iowa Grain from time
to time.
These account forms may not be transferred or assigned without the express
written consent of an officer of Iowa Grain Company. This Agreement is
negotiable.
28. RIGHTS AND REMEDIES
The rights and remedies conferred upon the parties hereto, shall be cumulative,
and the exercise or waiver of any such rights or remedies shall not preclude or
inhibit the exercise of additional rights and remedies.
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<PAGE> 12
29. ENTIRE AGREEMENT
This Agreement, and, if executed, the Arbitration Agreement, any Trading
Authorization Limiting the Purchases and Sales of Commodities, Hedge
Representation Letter, and Risk Disclosure Statement, the terms of which are
incorporated herein by reference, represent the entire agreement between Iowa
Grain and Customer.
This Agreement may be altered or amended by Iowa Grain from time to time by
written notice to Customer. No employee of Iowa Grain has any authority to
waive, modify, or alter in any respect any of the terms of this Agreement and no
supplement or special understanding shall be binding upon Iowa Grain unless one
of Iowa Grain's officers shall have consented thereto in writing.
30. SIGNATURE
This Agreement shall not be deemed to be accepted by Iowa Grain or become a
binding Contract between Customer and Iowa Grain until approved by Iowa Grain
at 141 W. Jackson Boulevard, Chicago, Illinois 60604.
IN THE EVENT THAT THIS IS AN INTRODUCED ACCOUNT, IOWA GRAIN'S ROLE AND
LIABILITY IS LIMITED TO EXECUTION AND CLEARING MATTERS. (See paragraph 19
above)
X __________________________________ _______________________________
Signature Date
____________________________________
Name (Print)
X __________________________________ _______________________________
Signature Date
____________________________________
Name (Print)
________________________________________________________________________________
I HEREBY ACKNOWLEDGE THAT I HAVE RECEIVED, READ, UNDERSTAND AND ACCEPT THE
TERMS OF THE RISK DISCLOSURE FOR FUTURES AND OPTIONS (BOOKLET NO. 2).
X __________________________________ _______________________________
Signature Date
____________________________________
Name (Print)
X __________________________________ _______________________________
Signature Date
____________________________________
Name (Print)
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A. INDIVIDUAL ACCOUNT
Customer represents that this is an individual or sole proprietorship account
and no one else has an interest in this account.
X __________________________________ _______________________________
Signature Date
____________________________________
Name (Print)
B. PERSONAL TRUST: IRA: KEOGH PLAN: PENSION OR PROFIT SHARING TRUST OR PLAN
The undersigned Trustee warrants and represents that he is a Trustee of
_____________________ , a duly formed Trust (Plan), dated _____________, 19 __,
for the benefit of _____________________ and a copy of the instrument by which
he was appointed Trustee is attached. Trustee represents that he has a proper
authority to sign this Customer Agreement and all related documents on behalf
of the Trust (Plan) and specifically represents that he or any successor
Trustee is authorized to trade commodities, commodity futures contracts and
options thereon for the account and risk of the Trust (Plan).
In the case of Keogh Plans, Pension and Profit Sharing Trusts, and other
entities governed by the Employee Retirement Insurance Security Act, Trustee
acknowledges that the amount of assets of said entity allowed to be invested in
such commodities is subject to a "prudent man" standard. Trustee acknowledges
that any investment decisions made on behalf of such entity is solely that of
the entity's internal investment management and not of Iowa Grain. Trustee
expressly acknowledges that Iowa Grain is not its agent or fiduciary with
respect to any "prudent man" standard, statutory or otherwise, and indemnifies
Iowa Grain for any losses resulting from any breach of said standard.
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<PAGE> 14
C. JOINT ACCOUNT.
Each of us agree that the liability of each of us with respect to said account
shall be joint and several
Each of us shall have authority: (1) to give any instructions with respect to
the account, including but not limited to instructions with respect to buying
or selling or withdrawals of excess funds; (2) to receive any demands, notices,
confirmations, reports, statements and other communications of any kind; (3) to
sign any other documents related to the opening or maintenance of the account;
and (4) generally to deal with Iowa Grain in connection herewith as fully and
completely as if the other joint tenant or tenants had no interest herein. Iowa
Grain shall be under no duty or obligation to inquire into the purpose or
propriety of any instruction given and shall be under no obligation to see to
the application of any funds so delivered; however, no payments shall be made
by Iowa Grain except in the name of the account.
/ / Tenants in common / / Tenants with right of survivorship
X __________________________________ _______________________________
Signature Date
____________________________________
Name (Print)
X __________________________________ _______________________________
Signature Date
____________________________________
Name (Print)
D. PARTNERSHIP ACCOUNT (GENERAL OR LIMITED).
The undersigned, _______________________________________, hereby represents to
you that he is a general partner in a general or limited partnership
known as _________________________________ (the "Partnership"), and attached
hereto is a copy of its signed Partnership Agreement. In consideration of your
opening one or more commodities accounts for and in the name of the Partnership,
the undersigned further represents that as a partner in the Partnership having a
significant interest therein, he has proper authority to sign this Agreement and
all related documents on behalf of Partnership and, for the account and risk of
the Partnership, to buy, sell, and trade in commodities, commodity futures
contracts and options thereon of every kind whatsoever, and to borrow money for
such purposes in said account in accordance with your terms and conditions.
X __________________________________ _______________________________
Signature Date
____________________________________
Name (Print)
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<PAGE> 15
E. CORPORATE ACCOUNT.
Customer represents and warrants that the Corporation is duly organized and in
good standing under the laws of its state of incorporation and that trading in
commodities, commodity futures contracts and options thereon is within the
powers granted to it. The undersigned represents that he has full authority to
enter into this Agreement on behalf of the Corporation and is concurrently
furnishing to Iowa Grain a Corporate Authorization as prescribed by Iowa Grain.
____________________________________
NAME OF CORPORATION
______________________________ By: ________________________________
Date
Title: _________________________________
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CORPORATE AUTHORIZATION
I, __________________________________________________________________________
Secretary of _____________________________________________________________ a
corporation organized under the laws of the State of _______________ having its
principal office at ___________________________________________ DO HEREBY
CERTIFY THAT at a meeting of the Board of Directors of said corporation duly
held on the ___________ day of _________________, 19_, the following
resolutions were duly adopted, that said resolutions have not been amended,
rescinded or revoked, and are in no way in conflict with any of the
provisions of the charter of by-laws of said corporation:
(1) RESOLVED: That _______________________________ of this corporation, or
(Name and Office Held)
such other person as this corporation may designate from time to time in either
writing or by his apparent authority be and hereby are authorized to trade
in commodity futures contracts and options thereon for the account and risk of
this corporation through and with Iowa Grain Company, as now constituted or
hereafter constituted, the authority hereby granted including the power to do
any and/or all of the following:
(a) To buy, sell and trade commodity futures contracts and
options thereon, on margin or otherwise;
(b) To deposit with and withdraw from said firm money, commodity
futures contracts and options, securities and any other property;
(c) To receive requests and demands for additional margin,
notices of intention to sell or purchase and other notices and
demand of whatsoever character;
(d) To receive and acquiesce in the correctness of such notices,
statements of account and other records and documents.
(2) RESOLVED: That Iowa Grain be directed to send duplicates of written
confirmations of all commodity trades effected by Iowa Grain for this
corporation and all statements of account of this corporation with Iowa Grain
and other pertinent records and documents to __________________________________
_______________________________________________________________________________
(The person named here cannot be the officer named in (1) above)
at ____________________________________________________________________________
(Address)
who is hereby authorized to receive and acquiesce in the correctness of such
confirmations, statements, and other records and documents:
(3) RESOLVED: That any and all past transactions which may have been
heretofore made on behalf of this corporation through or with Iowa Grain be and
they hereby are ratified;
(4) RESOLVED: That Iowa Grain is authorized to act upon the authority of
these resolutions until receipt of a certificate showing rescission or
modification thereof signed by the Secretary of this corporation and under its
seal, and that Iowa Grain is also authorized to recognize and deal with
officers of this corporation whose names are set forth in this certificate,
until receipt by Iowa Grain of a further certificate, setting forth the names
of another person or persons as such officers.
IN WITNESS THEREOF, I have hereunto subscribed my name and affixed the seal of
said corporation this ___________________ day of _________________, 19___.
SEAL OF CORPORATION ____________________________________
Secretary
15
<PAGE> 17
TRADING AUTHORIZATION LIMITED TO PURCHASES AND SALES OF COMMODITIES
The undersigned hereby authorizes __________________________________________
whose address is __________________________________________as his agent and
attorney-in-fact to buy and sell commodities, commodity futures contracts
and options thereon for the undersigned's account and risk. The undersigned
hereby agrees to indemnify and hold you harmless from all loss, cost,
indebtedness and liabilities arising therefrom.
In all such purchases and sales you are authorized to follow the instructions
of the aforesaid agent in every respect concerning the undersigned's account
with you; and except as herein otherwise provided, he is authorized to act for
the undersigned in the same manner and with the same force and effect as the
undersigned might or could do with respect to such purchases and sales as well
as with respect to all other things necessary or incidental thereto, except
that he is not authorized to withdraw any money, securities, or other property
either in the name of the undersigned or otherwise.
The undersigned hereby ratifies and confirms any and all transactions with you
heretofore or hereafter made by the aforesaid agent on behalf of or for the
account of the undersigned.
This authorization and indemnity is in addition to (and in no way limits or
restricts) any rights which you may have under any other agreement between you
and the undersigned.
This authorization and indemnity is a continuing one and shall remain in full
force and effect until revoked by the undersigned by a written notice addressed
to you and delivered to you at the above address, but such revocation shall not
affect any liability in any way resulting from transactions initiated prior to
such revocation. This authorization and indemnity shall inure to your benefit
and that of your successors and assigns.
I have carefully examined the provisions of this document by which I have given
trading control over my account to _________________________________________
and I understand fully the obligations which I have assumed by executing this
document. I understand:
(1) that your firm is in no way responsible for any loss to me occasioned
by the actions of the individual or organization named above and that your firm
does not, by implication or otherwise, endorse the operating methods of such
individual or organization;
(2) that neither the Chicago Board of Trade, the Chicago Mercantile
Exchange and/or any other futures exchange has jurisdiction over a non-member
who is not employed by one of its members, and that if I give to such
individual or organization authority to exercise any of my right over my
account I do so at my own risk.
X ______________________________________ _______________________________
Signature Date
________________________________________
Name (Print)
X ______________________________________ _______________________________
Signature Date
________________________________________
Name (Print)
16
<PAGE> 18
THIRD PARTY AUTHORIZATION
SIGNED BY TRADER AND CUSTOMER
The National Futures Association requires:
An acknowledgment from the customer that the customer has received a
disclosure document from the account controller, or a written statement from
the account controller explaining why the account controller is not required to
provide a disclosure document to the customer.
AGREEMENT OF ACCOUNT CONTROLLER:
I am not required to provide a disclosure document to my customer because I am
exempt from registering as a Commodity Trading Advisor (CTA) as indicated
below:
<TABLE>
<S> <C> <C>
______ a) I have provided advice to 15 or fewer persons during the past 12 months and do not hold myself out generally to the
public as a CTA.
______ b) I am a (1) dealer, processor, broker, or seller in cash market transactions or (2) nonprofit, voluntary membership,
general farm organization, who provides advice on the sale or purchase of commodities; and any trading advice is solely
incidental to the conduct of my business.
______ c) I am registered under the Commodity Exchange Act in another capacity and my advice is solely incidental to my principal
business or employment in such registered capacity.
______ d) I am a relative of the account holder. My relationship to the customer is
_____________________________________________.
______ e) Other (Please explain) ______________________________________________________________________________.
</TABLE>
I agree to hold Iowa Grain Company harmless and indemnify Iowa Grain for any
cost, expense, or debit balance (including reasonable attorney fees) incurred
by Iowa Grain as a result of my activity.
_____________________________ __________________________________________
Date Third Party Account Controller Signature
FOR THE CUSTOMER:
I acknowledge that the Third Party Account Controller has provided me with a
disclosure document or a written statement explaining why the Account
Controller is not required to provide me with a disclosure document.
______________________________________ ____________________________________
Date Customer's Signature
______________________________________ ____________________________________
Date Customer's Signature
17
<PAGE> 19
SPECIAL NOTICE TO CUSTOMERS
We have received a document by which you have granted trading authority or
control over your commodity account carried by us to ________________________.
Since the risk factor is high in futures trading, only genuine "risk" funds
should be used in such trading. A person who does not have extra capital he can
afford to lose should not trade in the futures market. No "safe" trading system
has ever been devised, and no one can guarantee you profits or freedom from
loss. In fact, no one can even guarantee to limit the extent of your loss.
Even though you have granted trading authority to another, you should keep
posted on what is going on in your account. We shall send you a confirmation of
every trade made for your account. In addition, we shall send you monthly
statements showing your ledger balance, the exact position in your account, the
net profit or loss in all contracts closed since the date of your last previous
statement, and the net unrealized profit and loss in all open contracts marked
to the market. You should carefully review these statements. If you have any
questions, call us.
The Trading authorization over your account remains in effect until revoked by
you in writing. If for any reason you wish to revoke the trading authorization
which you have given, please bear this in mind.
X _______________________________ ___________________________________
Signature Date
_________________________________
Name (Print)
X _______________________________ ___________________________________
Signature Date
_________________________________
Name (Print)
18
<PAGE> 20
GUARANTEE AGREEMENT
THIS SECTION MUST BE COMPLETED IF THE CUSTOMER'S ACCOUNT IS
GUARANTEED BY ANOTHER PARTY
FOR VALUE RECEIVED, and in consideration of Iowa Grain Company ("Iowa
Grain") entering into transactions for and on behalf of the account
of____________, the person named below, (the "Guarantor") hereby
unconditionally guarantees to Iowa Grain, its successors and assigns, prompt
payment when due of all liabilities, debts, obligations, claims, losses,
commitments (and any expenses including reasonable attorney's fees arising
therefrom) incurred by the Customer pursuant to transactions heretofore or
hereafter entered into between Iowa and the customer ("Obligations"),
irrespective of the validity or enforceability of any instrument evidencing any
such Obligations by reason of the Customer, or the commencement against the
Customer of a case on bankruptcy or any other law affecting creditors' rights
generally or the seeking of a trustee, receiver, liquidator, custodian or other
similar official.
The Guarantor agrees that Iowa Grain shall have a lien on and a continuing
security interest in all the Guarantor's property (and the proceeds of any
thereof) in whatever form now or hereafter held by Iowa Grain including but not
limited to securities, commodity futures contracts, monies and after acquired
property held or carried in the Guarantor's account or accounts (the
"Guarantor's Property") as security for the payment of all of the Guarantor's
Obligations to Iowa Grain arising under this guarantee for as long as the
guarantee and the Obligations incurred by the Customer are outstanding.
Iowa Grain may proceed at any time, in its sole discretion, and without prior
demand or notice, to enforce said lien by the sale of any of the Guarantor's
Property in any manner and upon such terms as it may determine. The assertions
or enforcement by Iowa Grain of said lien or any demand that the Guarantor
perform its Obligation under this guarantee, or any action or proceedings
brought to enforce this guarantee shall not release the Guarantor as guarantor
or otherwise affect this guarantee, or the liability of the Guarantor for any
Obligations incurred by the Customer and shall not release or otherwise affect
this lien.
The Guarantor hereby waives any requirement that Iowa Grain shall take legal
action against the Customer before enforcing this guarantee and waives any
requirements as to diligence, demand for payment, receipt of duplicate copies
of the Customer's monthly statements or notices of the Customer's Obligations,
including those concerning the conduct or closing of any accounts or of
acceptance of this guarantee. This guarantee is in addition to (and in no way
limits or restricts) any rights which Iowa Grain may have under any other
agreement between it and the Guarantor. This is a continuing guarantee governed
by the laws of the State of Illinois which shall remain in full force and affect
and be binding upon the Guarantor until written notice of its revocation shall
actually be received by Iowa Grain at 141 W. Jackson Boulevard, Chicago,
Illinois, 60604, Attention: Compliance Department. No such revocation shall
release the Guarantor or affect in any manner the rights by Iowa Grain
under this guarantee with respect to any obligation arising prior to actual
receipt by Iowa Grain in liquidating the Customer's account within a reasonable
time subsequent to the receipt of such notice.
If the Guarantor is an individual, this guarantee shall be binding upon the
respective estate, heirs, personal representatives, and successors. Death
of the Guarantor shall not terminate liability hereunder until receipt by Iowa
Grain of written notice to the Compliance Department, at the address set forth
above of such death and the estate, heirs, personal representatives or successor
of Guarantor shall remain liable for all Obligations incurred prior to receipt
of such notice and also for any losses
19
<PAGE> 21
which may be incurred in liquidating the Customer's accounts within a
reasonable time subsequent to receipt of such notice.
Guarantor hereby submits to the jurisdiction of any state or federal court
located within Cook County, Illinois and agrees that any action proceeding or
claim for relief arising out of, or in any way related to, this agreement shall
be brought only in such courts. Guarantor further agrees that service of
process by certified mail to the address stated below shall be deemed effective
ten (10) days after mailing unless Guarantor has previously notified Iowa Grain
in writing of a change in address in which case service to that address in the
manner described above shall be effective.
___________________________________ _______________________________
Authorized Signatory Account Title
___________________________________ _______________________________
Print Name Account Number
___________________________________ _______________________________
Name of Guarantor Title
___________________________________ _______________________________
Guarantor's Account Number (if any) Date
20
<PAGE> 22
C.F.T.C. REQUIRED OPTION CUSTOMER STATEMENT OF OCCUPATIONAL CATEGORIES
Please answer the following questions about your commodity futures options
trading account:
My account is: (check one) _________ Commercial or Non-Commercial _____________
If your account is COMMERCIAL, please select the appropriate Occupational
Category box for all options contracts for which you will be a participant.
<TABLE>
<CAPTION>
COMMODITY OCCUPATIONAL COMMODITY OCCUPATIONAL
CATEGORIES CATEGORIES
<S> <C> <C> <C>
SUGAR & COCOA, _ 1. Producer FINANCIAL _ 23. Other Commercial
AND COFFEE "C" _ 2. Merchant or Dealer INSTRUMENTS/ _ 24. Importers/Exporters
_ 3. Refiner/Processor of FOREIGN of Goods and Services
Raw Commodities EXCHANGE _ 25. Investor/Issuer of
_4. Manufacturer of Foreign Currency
Intermediate or Final Denominated Securities
Products
_5. Other Commercial
METALS/ _6. Miner/Producer GRAINS, SOYBEANS _ 26. Grain or Soybean
PRECIOUS METALS _7. Primary or Secondary AND SOYBEAN Producer
Refiner PRODUCTS _ 27. Producer
_8. Dealer (Metal Cooperative
Merchant) _ 28. Elevator Operator or
_9. Commercial End User Merchant Other than a
_46. Fabricator or Alloyer Producer Cooperative
_11. Other Commercial _ 29. Processor, including
Feed
_ 30. Livestock Feeder or
Producer
_ 47. Soybean Oil Refiner
_ 31. Other Commercial
PETROLEUM _ 39. Crude Oil Producer LIVESTOCK AND _ 32. Farmer or Rancher
_ 40. Crude Oil Reseller FROZEN PORK _ 33. Commercial Feedlot
_ 12. Refiner BELLIES Operator
_ 13. Product Marketer _ 34. Other Livestock
and/or Distributor Feeder
_ 14. End User _ 35. Marketing Agency
_ 15. Other Commercial and/or Commission
Merchant
_ 37. Meat Wholesaler,
Retailer, or Buyer
_ 38. Other Commercial
FINANCIAL _ 16. Savings and Loan, COTTON AND FROZEN _ 41. Producer/Grower
INSTRUMENTS/ Mortgage Bank or Thrift CONCENTRATED _ 42. Producer Grower
FOREIGN Institution ORANGE JUICE Cooperative
EXCHANGE _ 17. Commercial Bank _ 43. Merchant/
_ 18. Insurance Company Wholesaler
_ 19. Pension or _ 44. Mill Operator/
Retirement Fund Processor
_ 20. Mutual Fund _ 45. Other Commercial
_ 21. Broker/Dealer
_ 22. Foundation or
Endowment
</TABLE>
21
<PAGE> 23
HEDGE ACCOUNT REPRESENTATION LETTER
Gentlemen:
Without limiting or modifying the general provisions of my Customer Agreement
with you, you are hereby notified that with respect to the commodities listed
below any and all positions taken in the above mentioned account will be bona
fide hedges which are used to offset or reduce price risks as an integral part
of my business.
___________________________ ___________________________
___________________________ ___________________________
___________________________
My business of_______________________________________________________________
requires hedging the commodities identified above. I understand that my
transactions in commodities other than those indicated here will be charged
speculative margins and I agree to notify you of any changes affecting the
hedging designation of the commodities identified above. I also agree to provide
you with verification of the foregoing upon your request.
This notification is a continuing one and shall remain in force until canceled
by me in writing.
I understand that the Commodity Futures Trading Commission requires you to give
every hedging customer an opportunity to specify whether, in the unlikely event
of your bankruptcy, such customer prefers that open commodity contracts held
in a hedging account be liquidated by the trustee without seeking customer
instructions.
_____________ I would not prefer such liquidation.
_____________ I would prefer such liquidation.
22
<PAGE> 24
ARBITRATION AGREEMENT
YOU NEED NOT SIGN THIS AGREEMENT TO OPEN AN ACCOUNT WITH IOWA GRAIN. SEE 17 CFR
180.1-180.5.
Iowa Grain and the undersigned Customer agree that any controversies arising
out of or relating to any of the Customer's accounts with Iowa Grain, relating
to transactions with Iowa Grain and/or its employees, affiliates, and/or agents
or arising out of the Customer Agreement executed by the Customer, including
any counterclaims to any action brought against Customer by or on behalf of
Iowa Grain, shall be settled by arbitration in accordance with the rules, then
in effect, of any contract market where the transaction(s) giving rise to the
controversy were or could have been executed, the American Arbitration
Association or the National Futures Association. The laws of the State of
Illinois shall govern any arbitration.
At such time as the Customer may notify Iowa Grain of its intention to submit a
claim to arbitration, or at such time as Iowa Grain may notify the Customer of
its intention to submit a claim to arbitration, the Customer will have the
opportunity to elect a forum for conducting the proceedings.
Within ten business days after Iowa Grain receives the Customer's notice of
intention to arbitrate or upon the Customer's receipt of Iowa Grain's notice of
intention to arbitrate, Iowa Grain will provide the Customer with a list of the
organizations specified above and a copy of their arbitration rules. The
Customer shall within 45 days of receipt of said list notify Iowa Grain of its
election of forum. If the Customer fails to make such an election, Iowa Grain
will then have the right to select the forum of its choice.
It is further understood that Iowa Grain will pay any incremental fees which
may be assessed by the chosen forum if a mixed panel decides the claim unless
the arbitrators in a particular proceeding determine that the Customer has
acted in bad faith in initiating or conducting that proceeding.
THREE FORUMS EXIST FOR THE RESOLUTION OF COMMODITY DISPUTES: CIVIL COURT
LITIGATION, REPARATIONS AT THE COMMODITY FUTURES TRADING COMMISSION (CFTC) AND
ARBITRATION CONDUCTED BY A SELF-REGULATORY OR OTHER PRIVATE ORGANIZATION.
THE CFTC RECOGNIZES THAT THE OPPORTUNITY TO SETTLE DISPUTES BY ARBITRATION MAY
IN SOME CASES PROVIDE MANY BENEFITS TO CUSTOMERS, INCLUDING THE ABILITY TO
OBTAIN AN EXPEDITIOUS AND FINAL RESOLUTION OF DISPUTES WITHOUT INCURRING
SUBSTANTIAL COSTS. THE CFTC REQUIRES, HOWEVER, THAT EACH CUSTOMER INDIVIDUALLY
EXAMINE THE RELATIVE MERITS OF ARBITRATION AND THAT YOUR CONSENT TO THIS
ARBITRATION AGREEMENT BE VOLUNTARY.
BY SIGNING THIS AGREEMENT, YOU: (1) MAY BE WAIVING YOUR RIGHT TO SUE IN A COURT
OF LAW; AND (2) ARE AGREEING TO BE BOUND BY ARBITRATION OF ANY CLAIMS OR
COUNTERCLAIMS WHICH YOU OR IOWA GRAIN MAY SUBMIT TO ARBITRATION UNDER THIS
AGREEMENT. YOU ARE NOT, HOWEVER WAIVING YOUR RIGHT TO ELECT INSTEAD TO PETITION
THE CFTC TO INSTITUTE REPARATIONS PROCEEDINGS UNDER SECTION 14 OF THE COMMODITY
EXCHANGE ACT WITH RESPECT TO ANY DISPUTE WHICH MAY BE ARBITRATED PURSUANT TO
THIS AGREEMENT. IN THE EVENT A DISPUTE ARISES, YOU WILL BE NOTIFIED IF IOWA
GRAIN INTENDS TO SUBMIT THE DISPUTE TO ARBITRATION. IF YOU BELIEVE A VIOLATION
OF THE COMMODITY EXCHANGE ACT IS INVOLVED AND IF YOU PREFER TO REQUEST A
SECTION 14
23
<PAGE> 25
"REPARATIONS" PROCEEDING BEFORE THE CFTC, YOU WILL HAVE 45 DAYS FROM THE DATE
OF SUCH NOTICE IN WHICH TO MAKE THAT ELECTION.
The Customer understands that if he seeks reparations under Section 14 of the
CEA and the Commodity Futures Trading Commission declines to institute
reparation proceedings, all claims or grievances will be subject to this
arbitration agreement. Customer further understands and agrees that aspects of
claims or grievances that are not subject to the reparation procedure, i.e., do
not constitute a violation of the Commodity Exchange Act, as amended, (the
"CEA") or rules thereunder, may be immediately submitted to arbitration. When
executed this Arbitration Agreement is an integral part of the Customer
Agreement and is incorporated therein by reference.
X _________________________________________ ______________________________
Signature Date
___________________________________________
Name (Print)
X _________________________________________ ______________________________
Signature Date
___________________________________________
Name (Print)
24
<PAGE> 26
NOTES
NOTICE TO CUSTOMERS
EACH TRANSACTION ENTERED INTO ON YOUR BEHALF WILL BE CONFIRMED IN WRITING AND
MAILED TO YOU NO LATER THAN THE BUSINESS DAY FOLLOWING THE DAY ANY SUCH
TRANSACTION SHOULD TAKE PLACE.
IOWA GRAIN WILL ENDEAVOR TO PROVIDE ORAL CONFIRMATIONS OF ALL FILLS ON THE DAY
AN ORDER IS EXECUTED BUT DOES NOT GUARANTEE THAT ORAL CONFIRMATIONS WILL BE
INITIATED BY IOWA GRAIN ON ANY ORDER. A CUSTOMER REQUIRING ORAL CONFIRMATION OF
TRADES SHOULD CONTACT IOWA GRAIN PRIOR TO THE CLOSE OF TRADING IF ORAL NOTICE
OF A FILL HAS NOT ALREADY BEEN RECEIVED.
SHOULD YOU RECEIVE A COMBINED COMMODITY STATEMENT WHICH CONTAINS TRANSACTIONS,
QUANTITIES, CONTRACT MONTH, PRICES, ETC. THAT YOU BELIEVE TO BE INCORRECT, YOU
MUST IMMEDIATELY CONTACT IOWA GRAIN.
SHOULD YOU FAIL TO RECEIVE A COMBINED COMMODITY STATEMENT WITHIN A REASONABLE
TIME CONFIRMING ANY TRANSACTION WHICH YOU HAVE REASON TO BELIEVE WAS MADE ON
YOUR BEHALF, YOU MUST IMMEDIATELY CALL IOWA GRAIN.
SHOULD YOU RECEIVE A MONTHLY ACCOUNT STATEMENT THAT CONTAINS ANY INFORMATION
THAT YOU BELIEVE TO BE INCOMPLETE OR INACCURATE, YOU MUST IMMEDIATELY CALL IOWA
GRAIN.
PLEASE BE ADVISED THAT YOUR FAILURE IN ANY CASE TO FOLLOW THE ABOVE PROCEDURES
SHALL BE DEEMED AS A RATIFICATION BY YOU OF ANY TRADES WHICH APPEAR ON ANY SUCH
COMBINED COMMODITY OR MONTHLY ACCOUNT STATEMENTS AND SHALL BE DEEMED A WAIVER
BY YOU OF ANY INACCURACY, OR INCOMPLETENESS REGARDING THE SAME PURSUANT TO
SECTION 16 OF YOUR CUSTOMER AGREEMENT WITH IOWA GRAIN OR OTHERWISE.
IOWA GRAIN STRONGLY RECOMMENDS THAT YOU RETAIN THIS NOTICE WITH YOUR ACCOUNT
RECORDS.
25
<PAGE> 27
INSTRUCTIONS TO TRANSFER ACCOUNT AND CUSTOMER DECLARATION OF
OWNERSHIP
TO: Date:
_______________________________________________ __________________________
Name of firm where account(s) is now carried
_______________________________________________ __________________________
Account Title Present account no.
_______________________________________________ __________________________
Account Title Present account no.
_______________________________________________ __________________________
Account Title Present account no.
To whom it may concern:
Regarding the above account(s), this is my authorization to you to promptly
deliver to Iowa Grain Company, 141 W. Jackson Boulevard, Chicago, Illinois
60604, said accounts, including all open positions and ledger balances. Kindly
send me a confirmation of this transfer, including information on prices of
original long and short positions, debit or credit balances, and any treasury
bills or securities held as margin or security.
Also, please cancel any and all open orders for my accounts.
I understand that new account forms will be required by Iowa Grain Company.
Further instructions: _________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
____________________________________________________
Yours truly,
__________________________________ x ____________________________________
Date Customer's Signature
X_____________________________________
Customer's Signature
______________________________________
Customer's name-printed
Received at Iowa Grain Company ______________________ Date: ___________________
SIGNATURES MUST MATCH DOCUMENTS
26
<PAGE> 28
IOWA GRAIN COMPANY
141 West Jackson Boulevard
Chicago, Illinois 60604
BOOKLET NO. 2
WELCOME TO IOWA GRAIN COMPANY
SINCE TRADES INVOLVE AN IMMEDIATE OBLIGATION BY IOWA GRAIN COMPANY TO THE
RESPECTIVE EXCHANGE, YOUR TRADING CAN BEGIN ONLY WHEN FUNDS ARE MADE OUT TO
IOWA GRAIN COMPANY, AND PROVIDED BY EITHER
A. A BANK WIRE to the Harris Bank of Chicago, for the account of Iowa Grain
Company, Customer Segregated Account 302-72-57. The ABA routing number, if
necessary, is 071-000-288. (Be sure to include your name and account
number.)
B. A CERTIFIED CHECK, CASHIER'S CHECK OR MONEY ORDER made payable to Iowa
Grain Company, will also allow you to begin trading immediately. If you
are a new account, personal checks, money market checks and savings & loan
checks may require clearance before you can trade. NEVER mail cash
currencies! NEVER GIVE CASH TO YOUR SALESMAN!
C. If you are TRANSFERRING your account from another firm, fill out the
transfer form, return it to Iowa Grain Company with the other required
documents (via your IB), and we will transfer positions and funds
accordingly.
WHEN YOUR ACCOUNT IS OPEN AND TRADING, READ YOUR STATEMENTS CAREFULLY, AS SOON
AS THEY ARE RECEIVED. IF YOU PLAN TO BE AWAY, CHECK IN WITH YOUR BROKER AS
FREQUENTLY AS PRUDENT! DO NOT DELAY REVIEWING YOUR TRADING STATUS....THIS IS
IMPORTANT! IF YOU HAVE ANY QUESTIONS ABOUT AN INDIVIDUAL TRADE OR YOUR BALANCE
OR POSITION, EITHER PHONE YOUR ACCOUNT REPRESENTATIVE (BROKER) IMMEDIATELY, OR
IF HE OR SHE IS UNAVAILABLE OR A PROBLEM IS NOT RESOLVED AT ONCE, CALL THE IOWA
GRAIN COMPANY COMPLIANCE DIRECTOR IN CHICAGO AT 312-786-9760.
MAKE ALL CHECKS PAYABLE TO: IOWA GRAIN COMPANY
THIS BOOKLET IS YOURS TO KEEP
RISK DISCLOSURE STATEMENT FOR FUTURES AND OPTIONS
INTRODUCTION
This Disclosure Statement is divided into three parts.
Part I of this Risk Disclosure Statement For Futures and Options contains
disclosures regarding exchange-traded commodity futures and options trading
which the Commodity Futures Trading Commission requires to be made. Part II
contains CFTC Regulation 190.10 (C), Disclosure Statement For Non-Cash Margin.
Part III contains additional information. A customer should review Part I of
this Disclosure Statement in connection with Parts II and III.
<PAGE> 29
RISK DISCLOSURE STATEMENT FOR FUTURES AND OPTIONS
THIS BRIEF STATEMENT DOES NOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT
ASPECTS OF TRADING IN FUTURES AND OPTIONS. IN LIGHT OF THE RISKS, YOU SHOULD
UNDERTAKE SUCH TRANSACTIONS ONLY IF YOU UNDERSTAND THE NATURE OF THE CONTRACTS
(AND CONTRACTUAL RELATIONSHIPS) INTO WHICH YOU ARE ENTERING AND THE EXTENT OF
YOUR EXPOSURE TO RISK. TRADING IN FUTURES AND OPTIONS IS NOT SUITABLE FOR MANY
MEMBERS OF THE PUBLIC. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS
APPROPRIATE FOR YOU IN LIGHT OF YOUR EXPERIENCE, OBJECTIVES, FINANCIAL
RESOURCES AND OTHER RELEVANT CIRCUMSTANCES.
FUTURES
1. Effect of 'Leverage' or 'Gearing'
Transactions in futures carry a high degree of risk. The amount of initial
margin is small relative to the value of the futures contract so that
transactions are 'leveraged' or 'geared'. A relatively small market movement
will have a proportionately larger impact on the funds you have deposited or
will have to deposit: this may work against you as well as for you. You may
sustain a total loss of initial margin funds and any additional funds deposited
with the firm to maintain your position. If the market moves against your
position or margin levels are increased, you may be called upon to pay
substantial additional funds on short notice to maintain your position. If you
fail to comply with a request for additional funds within the time prescribed,
your position may be liquidated at a loss and you will be liable for any
resulting deficit.
2. Risk-reducing orders or strategies
The placing of certain orders (e.g. 'stop-loss' orders, where permitted under
local law, or 'stop-limit' orders) which are intended to limit losses to
certain amounts may not be effective because market conditions may make it
impossible to execute such orders. Strategies using combinations of positions,
such as 'spread' and 'straddle' positions may be as risky as taking simple
'long' or 'short' positions.
OPTIONS
3. Variable degree of risk
Transactions in options carry a high degree of risk. Purchasers and sellers of
options should familiarize themselves with the type of option (i.e. put or
call) which they contemplate trading and the associated risks. You should
calculate the extent to which the value of the options must increase for your
position to become profitable, taking into account the premium and all
transaction costs.
The purchaser of options may offset or exercise the options or allow the
options to expire. The exercise of an option results either in a cash
settlement or the purchaser acquiring or delivering the underlying interest. If
the option is on a future, the purchaser will acquire a futures position with
associated liabilities for margin (see the section on Futures above). If the
purchased options expire worthless, you will suffer a total loss of your
investment which will consist of the option premium plus transaction costs. If
you are contemplating purchasing deep-out-of-the-money options, you should be
aware that the hence of such options becoming profitable ordinarily is remote.
Selling ('writing' or 'granting') an option generally entails considerably
greater risk than purchasing options. Although the premium received by the
seller is fixed, the seller may sustain a loss well in excess of that amount.
The seller will be liable for additional margin to maintain the position if the
market moves unfavorably. The seller will also be exposed to the risk of the
purchaser exercising the option and the seller will be obligated to either
settle the option in cash or to acquire or deliver the underlying interest. If
the option is on a future, the seller will acquire a position in a future with
2
<PAGE> 30
associated liabilities for margin (see the section on Futures above). If the
position is 'covered' by the seller holding a corresponding position in the
underlying interest or a future or another option, the risk may be reduced. If
the option is not covered, the risk of loss can be unlimited.
Certain exchanges in some jurisdictions permit deferred payment of the option
premium, exposing the purchaser to liability for margin payments not exceeding
the amount of the premium. The purchaser is still subject to the risk of losing
the premium and transaction costs. When the option is exercised or expires, the
purchaser is responsible for any unpaid premium outstanding at that time.
ADDITIONAL RISKS COMMON TO FUTURES AND OPTIONS.
4. Terms and conditions of contracts
You should ask the firm with which you deal about the term and conditions of
the specific futures or options which you are trading and associated
obligations (e.g. the circumstances under which you may become obligated to
make or take delivery of the underlying interest of a futures contract and, in
respect of options, expiration dates and restrictions on the time for
exercise). Under certain circumstances the specifications of outstanding
contracts (including the exercise price of an option) may be modified by the
exchange or clearing house to reflect changes in the underlying interest.
5. Suspension or restriction of trading and pricing relationships
Market conditions (e.g. illiquidity) and/or the operation of the rules of
certain markets (e.g. the suspension of trading in any contract or contract
month because of price limits or 'circuit breakers') may increase the risk of
loss by making it difficult or impossible to effect transactions or
liquidate/offset positions. If you have sold options, this may increase the
risk of loss.
Further, normal pricing relationships between the underlying interest and the
future, and the underlying interest and the option may not exist. This can
occur when, for example, the futures contract underlying the option is subject
to the price limits while the option is not. The absence of an underlying
reference price may make it difficult to judge 'fair' value.
6. Deposited cash and property
You should familiarize yourself with the protections accorded money or other
property you deposit for domestic and foreign transactions, particularly in the
event of a firm insolvency and or bankruptcy. The extent to which you may
recover your money or property may be governed by specific legislation or local
rules. In some jurisdictions, property which has been specifically identifiable
as your own will be pro-rated in the same manner as cash for purposes of
distribution in the event of a shortfall.
7. Commission and other charges
Before you begin to trade, you should obtain a clear explanation of all
commissions, fees and other charges for which you will be liable. These charges
will effect your net profit (if any) or increase your loss.
8. Transaction in other jurisdictions
Transactions on markets in other jurisdictions, including markets formerly
linked to a domestic market, may expose you to additional risk. Such markets
may be subject to regulation which may offer different or diminished investor
protection. Before you trade you should inquire about any rules relevant to
your
3
<PAGE> 31
particular transactions. Your local regulatory authority will be unable to
compel the enforcement of the rules of regulatory authorities or markets in
other jurisdictions where your transactions have been effected. You should ask
the firm with which you deal for details about the types of redress available
in both your home jurisdiction and other relevant jurisdictions before you
start to trade.
9. Currency risks
The profit or loss in transactions in foreign currency denomination contracts
(whether they are traded in your own or another jurisdiction) will be affected
by fluctuations in currency rates where there is a need to convert from the
currency denomination of the contract to another currency.
10. Trading facilities
Most open-outcry and electronic trading facilities are supported by computer
based component systems for the order-routing, execution, matching,
registration or clearing of trades. As with all facilities and systems, they
are vulnerable to temporary disruption or failure. Your ability to recover
certain losses may be subject to limits on liability imposed by the system
provider, the market, the clearing house and/or member firms. Such limits may
vary, you should ask the firm with which you deal for details in this respect.
11. Electronic trading
Trading on an electronic trading system may differ not only from trading in an
open-outcry market but also may differ from trading on other electronic trading
systems. If you undertake transactions on an electronic trading system, you
will be exposed to risks associated with the system including the failure of
hardware and software. The result of any system failure may be that your order
is either not executed according to your instructions or is not executed at
all.
12. Off-exchange transactions
In some jurisdictions, and only then in restricted circumstances, firms are
permitted to effect off-exchange transactions. The firm with which you
deal may be acting as your counterparty to the transaction. It may be difficult
or impossible to liquidate an existing position, to assess the value, to
determine a fair price or to assess the exposure to risk. For these reasons,
those transactions may involve increased risks. Off-exchange transactions may be
less regulated or subject to a separate regulatory regime. Before you undertake
such transactions, you should familiarize yourself with applicable rules and
attendant risks.
4
<PAGE> 32
PART II
DISCLOSURE STATEMENT FOR NON-CASH MARGIN
CFTC REGULATION 190.10 (c)
THIS STATEMENT IS FURNISHED TO YOU BECAUSE RULE 190.10 (c) OF THE COMMODITY
FUTURES TRADING COMMISSION REQUIRES IT FOR REASONS OF FAIR NOTICE UNRELATED TO
THIS COMPANY'S CURRENT FINANCIAL CONDITION.
1. YOU SHOULD KNOW THAT IN THE UNLIKELY EVENT OF THIS COMPANY'S BANKRUPTCY,
PROPERTY, INCLUDING PROPERTY SPECIFICALLY TRACEABLE TO YOU, WILL BE RETURNED,
TRANSFERRED OR DISTRIBUTED TO YOU, OR ON YOUR BEHALF, ONLY TO THE EXTENT OF
YOUR PRO RATA SHARE OF ALL PROPERTY AVAILABLE FOR DISTRIBUTION TO CUSTOMERS.
2. NOTICE CONCERNING THE TERMS FOR THE RETURN OF SPECIFICALLY IDENTIFIABLE
PROPERTY WILL BE BY PUBLICATION IN A NEWSPAPER OF GENERAL CIRCULATION.
3. THE COMMISSION'S REGULATIONS CONCERNING BANKRUPTCIES OF COMMODITY BROKERS
CAN BE FOUND AT 17 CODE OF FEDERAL REGULATIONS PART 190.
5
<PAGE> 33
PART III
ADDITIONAL DISCLOSURE MATERIAL
1. MECHANICS OF OPTION TRADING
The options described herein are limited to those which may be traded on a
commodity exchange designated by the Commodity Futures Trading Commission to
list commodity options. The options are bought and sold on the trading floor of
the exchange authorized to trade a particular option and the options are traded
pursuant to the rules of that exchange. The exchange sets the option contract
months, trading hours, price fluctuations, margins, expiration dates and strike
prices. The amount of the premium is determined at the time of the purchase of
the option through competitive bids and offers on the exchange floor.
The option itself is a contractual right to buy, in the case of a call option,
or to sell, in the case of a put option, a futures contract or physical
commodity underlying the option, at a stated strike price prior to the
expiration date and time of the option. The purchaser of an option may: 1)
offset the option before expiration date and time, 2) exercise the option
before expiration date and time, or 3) let the option expire.
If the option purchaser does not offset or exercise the option by expiration
date and time, the purchaser loses the premium paid, commissions and all other
costs incurred in purchasing the option.
A CUSTOMER WHO HAS PURCHASED AN OPTION AND WISHES TO EXERCISE THE OPTION MUST
NOTIFY THE ACCOUNT EXECUTIVE HANDLING THE CUSTOMER'S ACCOUNT TWO DAYS PRIOR TO
THE LAST DAY SPECIFIED BY THE EXCHANGE. When a customer exercises an option, he
purchases or sells the quantity of commodity futures contracts or underlying
physical commodity specified in the option contract at the strike price. In the
case of a futures option, the customer will thus acquire a long futures
position in the case of a call option and a short futures position in the case
of a put option. Once an option is exercised the customer is subject to all the
risks, margin requirements and commissions associated with commodity futures
trading.
Certain exchanges may have provisions for the automatic exercise of
in-the-money options. In the absence of instructions from the customer in
accordance with the provisions of the Customer Agreement that commodity option
positions should not be exercised, Iowa will follow the automatic exercise
provisions specified by respective exchanges. The adherence by Iowa to such
provisions may cause the exercise of an option that the customer has not
specifically ordered. A customer is fully responsible for learning and
understanding the specifications of options contracts that he may trade.
2. PURCHASE PRICE OF THE OPTION AND OTHER COSTS
The purchase price of an option includes the premium, commission, and other
fees and charges.
(a) Premium. The amount of the premium is determined at the time of the
purchase of the option through competitive bids and offers on the exchange
floor. Iowa Grain requires the estimated amount of the premium to be in
the customer's account prior to the purchase of the option.
(b) Commission. The amount of the commission is determined by Iowa Grain and
is subject to change by Iowa Grain at any time. Iowa Grain charges its
customers a commission of the purchase of an option. When a futures option
is exercised, the customer is charged an additional commission upon
liquidation of the underlying futures contract.
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<PAGE> 34
(c) Other Fees and Charges. When an option or a resulting contract is
purchased or sold, Iowa Grain may charge its customers additional fees
imposed by Iowa Grain or by governmental or self-regulatory authorities
such as exchanges or the National Futures Association.
The Iowa Grain account executive will provide the customer with the following
amounts, or approximations of such amounts, prior to the first commodity option
transaction: the premium, commission, and other fees and charges to be incurred
in connection with the commodity option transaction and with the exercise of a
commodity option.
3. THE GRANTOR'S MARGIN REQUIREMENTS AND OBLIGATIONS
(a) Margin. The exchanges upon which commodity options are traded require the
grantor (seller) of an option to deposit an amount of funds as "initial
margin" when an option position is opened. After depositing initial
margin, the grantor is obligated to maintain a level of margin funds in
his account called "maintenance margin", which may require payment of
additional funds in the event of adverse market movement. The grantor of
an option is subject to risk of substantial losses which may be many times
greater than the margin deposit required to open the option position.
The exchanges set minimum margin requirements that Iowa Grain must receive and
maintain from the grantor. Iowa Grain may, from time to time, at its discretion
require margin higher than the minimum margin set by the relevant exchange. In
addition, the margin requirements of the various exchanges may differ. A
customer should contact his account executive for specific information on
margin requirements for any option position customer is considering.
The failure on the part of an option grantor to maintain the required margin on
the option position may result in liquidation of the grantor's option position.
However, any such liquidation of the grantor's option position will not affect
the option purchaser's option position or right to exercise a purchased option
any time prior to the expiration date of the option.
If the granted option is exercised by the option purchaser, then the grantor
(seller) is obligated to sell, in the case of a call option, or purchase, in
the case of a put option, an underlying futures contract or physical commodity.
If the grantor does not already have an offsetting position in the underlying
futures contract he is required to margin the resulting futures position.
(b) Commission. The amount of commission is determined by Iowa Grain and is
subject to change by Iowa Grain at any time. Iowa Grain charges grantors a
commission on the sale of an option. When a futures option is exercised
the customer is charged additional commissions applicable to all futures
transactions involving the underlying futures contract.
(c) Other Fees and Charges. When an option or a resulting futures contract is
purchased or sold, Iowa Grain may charge its customers additional fees
imposed by Iowa Grain or by governmental or self-regulatory authorities
such as exchanges or the National Futures Association.
ADDITIONAL RISKS
A. Trading may be illiquid.
As discussed above, exchange rules govern trading of exchange-traded options.
Options are bought and sold on the trading floor of the exchange authorized to
list that particular option for trading. The trading mechanisms are designed to
provide for competitive execution and to make available to buyers and sellers a
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<PAGE> 35
continuous market in which an option once purchased can later be sold, and in
which an option, once granted, can later be liquidated by an offsetting
purchase. There is no guarantee, however, that purchases or sales of options
can be offset at the price or time desired.
The commodity options market may become illiquid in certain contract months for
short periods of time. In an illiquid market there may be insufficient buyers
or sellers to execute an order to purchase or sell an option and it may become
impossible to offset an option position. Markets may become illiquid due to:
(i) insufficient trading interest in certain options; (ii) exchange imposed
restrictions on certain options; (iii) trading halts, suspensions or other
restrictions may be imposed; (iv) unusual or unforeseen circumstances may
interrupt normal exchange operations; (v) exchanges could discontinue or
restrict trading of commodity options. In such circumstances the offset market
could cease to exist; however, existing options would continue to be
exercisable in accordance with their terms (subject to the imposition of
exercise restrictions by the exchange where the option is listed.)
If it is not possible to effect offsetting transactions in a particular option,
in order to realize a profit the holder of a long futures option position would
have to exercise the option and either offset or comply with margin
requirements for the underlying futures contract. In this situation, the holder
of a short futures option position could not terminate his obligations unless
or until the option was exercised or expired. In addition, because many of the
same factors affect the underlying futures market it may be difficult or
impossible to liquidate the resulting futures position because of lack of
liquidity.
B. Exercise of the Option.
A customer should be aware that when a futures option is exercised, the
customer is subject to all the risks associated with commodity futures
trading. Therefore, although the purchaser of a futures option is only
subject to the risk of loss of the premium, commission and transaction costs
incurred in purchasing the option, the holder of a futures contract is
subject to risk of substantial losses as a result of adverse market
movements. Such losses may be many times greater than the margin deposit
required to open the futures contract position.
C. Failure to Satisfy Margin or Premium Obligations.
Iowa Grain requires the estimated amount of the premium or the required amount
of margin to be in a customer's account prior to the purchase, sale or exercise
of a commodity option. If a customer fails to fulfill these obligations, Iowa
Grain may liquidate the open positions in customer's account.
D. Daily Price Limits.
The principal commodity exchanges on which Iowa Grain trades on behalf of its
customers limit fluctuation in commodity futures contract prices during a
single day by regulations referred to as "daily limits." These exchanges may
also limit the amount of fluctuation in the price of an option contract in a
single day. Where daily limits are in effect for a commodity option contract
they establish the maximum amount the premium may vary from the previous day's
settlement price. Once the premium price has increased or decreased to the
limit point, no trades may be executed at prices beyond the daily limit and
positions in the option contract can neither be taken nor liquidated unless
traders are willing to effect trades at or within the limit. The "daily limit"
rule does not limit the losses which may be incurred, because a limit move
could prevent the liquidation of an unfavorable option position. Option premium
prices may move the daily limit for several consecutive trading days, thus
preventing liquidation and subjecting a customer with a position to potential
substantial losses.
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<PAGE> 36
After a futures option is exercised the customer may also be subject to limit
moves in the applicable commodity futures contract.
E. Transfer of Accounts.
A customer may transfer his option account from one futures commission merchant
to another provided that the other futures commission merchant is willing to
accept the account. A customer who wishes to make such a transfer should
contact his new futures commission merchant for instructions. However,
customers should be aware that there may be a commission, costs, fees or other
charges related to transfers and these may be assessed by both Iowa Grain and
your new broker.
EXERCISE AND ASSIGNMENT POLICY
Exercise and assignment is the procedure by which an option position is
converted into a futures position. The buyer of an option on a futures contract
has the right (but not the obligation) to assume a specified futures position
at a predetermined price (the exercise or strike price) at any time prior to
the expiration of the option. The seller of the option must assume the opposite
futures position if the buyer exercises this right.
There are four major differences between exercising an option on a futures
position and making delivery on a futures contract:
(1) An option may be exercised on any business day between its sale and
expiration.
(2) An option is exercised by the buyer's Clearing Member while a selling
Clearing Member is randomly selected to satisfy the obligation of the
option.
(3) An option contract does not have to be exercised; it may be allowed to
expire, or be liquidated (offset).
(4) When an option is exercised, assignment of the short and long futures
position is accomplished by the Clearing House or Corporation through a
book entry into the futures clearing system. The Clearing Members of the
buyer and the seller are assigned futures positions at the strike price,
and are subject to immediate variation margin calls.
The commodity exchanges have various provisions for exercising
in-the-money options at expiration date. Customers have an obligation to
monitor in-the-money options as the expiration dates approach.
Iowa Grain has procedures for assigning exercise notices to customers on a
first-in-first-out non-preferential basis when it receives a notice from the
clearing house or corporation.
When an account executive's customer, who has a short option position, is
assigned an exercise notice, the account executive (AP) should attempt to
notify such customer prior to trading the next business day. If the assigned
futures position results in an open futures position, as opposed to offsetting
an existing futures position, the customer must promptly pay any additional
margins required.
9
<PAGE> 1
Exhibit 10 (b)
STOCK SUBSCRIPTION AGREEMENT
BETWEEN
MAXIMUS CAPITAL MANAGEMENT INC.
AND
DARREN FRYE
This is a Subscription Agreement between Maximus Capital Management, Inc.
(the "Managing Member") and Darren R. Frye (the "Subscriber") made as of this
18th day of March, 1997.
WHEREAS, the Managing Member is a corporation formed for the purpose of
acting as the sponsor, general partner and/or managing member of commodity
pools, including Maximus Fund I, L.L.C. (the "Fund"), which will engage in
speculative trading in commodity futures and options contracts and other
commodity interests.
WHEREAS, it is anticipated that the Fund will register with the Securities
and Exchange Commissions Membership Interests (the "Interests") having an
aggregate purchase price of $25,000,000 at $1,000 per Interest during the
Initial Offering Period and thereafter will offer such Interests to the public
at a Selling Price based on the current Net Asset Value;
WHEREAS, the Managing Member is obligated under the Fund's Operating
Agreement, for as long as it continues to serve as Managing Member of the Fund,
to contribute and maintain an investment in the Fund in an amount mandated
under the North American Securities Administrators Association ("NASAA")
Commodity Pool Guidelines (currently equal to the greater of 1% of the
aggregate capital contributions of all Members or $25,000) (the "Purchase
Requirement");
WHEREAS, the Managing Member, for as long as it continues to serve, as
Managing Member of the Fund, is obligated by the NASAA Guidelines and under the
Fund's Agreement to maintain a minimum net worth equal to not less than
mandated under the NASAA Guidelines (currently 5% of the aggregate initial
capital contributions to the Fund any other commodity pool for which it acts as
sponsor, general partner and/or Managing Member) (the "Net Worth
Requirement");
Therefore, Subscriber agrees with the Managing Member to purchase or
subscribe for the number of shares of common stock of the Managing Member as
provided for herein, and the Managing Member agrees to issue its shares of
common stock to Subscriber in the amounts as provided herein, upon receipt of
the full purchase price.
<PAGE> 2
1. At the initial and any subsequent closing date relating to the sale of
Interests -- provided that subscriptions for a minimum of 1,000 Interests have
been received and accepted during the Fund's Initial Offering Period --
Subscriber shall make cash contributions, if required, to the capital of the
Managing Member in amounts sufficient to meet the Purchase Requirement and the
Managing Member shall issue shares of its common stock at a price to the
Subscriber of the book value per share (as determined by an independent
certified public accountant selected and paid for by the Subscriber) on the
date such option is exercised, but in no event less than $.01 per share;
provided, however, that the Managing Member shall use its best efforts to use
its own capital first to meet the Interest Purchase Requirement. The
Subscriber will, in consideration of this financing arrangement, have a
security interest in any Interests purchased by the Managing Member through the
exercise of this paragraph. Moreover, in consideration for such funding
agreement, the Managing Member agrees to pay to the Subscriber profits (if any)
on such Subscriber shares.
Shares of the Managing Member acquired by the Subscriber pursuant to this
paragraph 1 may be repurchased by the Managing Member within 90 days and any
security interest therein held by the Subscriber shall be extinguished; if it
exercises such option to repurchase within a 90 day period, the Managing Member
will pay (i) the same price per share as the Subscriber did plus (ii) interest
at the then current Chemical Bank, N.A. prime rate plus two (2)%
2. At the initial and any subsequent closing date -- provided that
subscriptions for a minimum of 1,000 Interests have been received and accepted
during the Fund's Initial Offering Period -- Subscriber and the Managing Member
shall determine the aggregate amount of subscriptions to shares of the Managing
Member's common stock (at a price to Subscriber of book value per share as
determined by an independent certified public accountant selected and paid for
by the Fund on the date this option is exercised, but in no event less than
$.01 per share) required to enable the Managing Member to meet the Net Worth
Requirement. Based upon such determination (as confirmed in writing in the
form attached as Exhibit A), Subscriber will subscribe for the total
subscriptions required. All subscriptions shall be callable by the Managing
Member on demand; provided, however, that the Managing Member shall use its
best efforts to use its own capital first to meet the net worth test. Payment
for the subscriptions called shall be made in cash within 30 days after the
date of its call. Upon payment, the Managing Member shall issue to Subscriber
that number of shares for which full consideration has been paid. Moreover, in
consideration for such funding agreement, the Managing Member agrees to pay to
the Subscriber profits (if any) on such Subscriber shares.
3. Upon issuance, all shares of the Managing Member's common stock shall
be fully paid, non-assessable and shall entitle the holder to all rights
applicable to such shares.
4. For purpose of meeting the Net Worth Requirement, all subscriptions for
common stock shall be carried at face amount without deduction or discount.
Any Interests owned by the Managing Member in the Fund or any other commodity
pool of which it is the sponsor, general partner and/or managing member shall
not be included in the computation of its net worth for compliance with the Net
Worth Requirement.
<PAGE> 3
5. The Net Worth Requirement shall be the Net Worth Requirement imposed by
the then current NASAA Guidelines. If the standard of the net worth
requirement is lowered and, in the opinion of counsel, the Managing Member can
lower its Net Worth Requirement without an adverse affect on the Fund or the
Managing Member, the lower Net Worth Requirement will thereafter apply.
6. So long as the Managing Member is the managing member of the Fund,
Darren Frye agrees not to cause the Managing Member to: (a) declare any
dividend; (b) redeem any shares of any class of capital stock; or (c)
intentionally take any other formal corporate action which would cause the
Managing Member's net worth to fall below a level required to satisfy the
Fund's Net Worth Requirements. Such undertaking shall include Mr. Frye's best
efforts to conserve capital and avoid expenses of the Managing Member to the
extent feasible to minimize the need of the Managing Member to call the
subscription, especially as it relates to the Net Worth Requirement.
7. In the event that, at any time, the Managing Member is not required by
the Fund's Operating Agreement to maintain a net worth as great as the
aggregate face amount of the subscriptions provided for herein, the Managing
Member will immediately notify the Subscriber and, upon demand by Subscriber,
effect a reduction in its net worth (but not below that required by the
Operating Agreement) by cancellation of such excess subscriptions in
appropriate fashion.
8. This Agreement constitutes the entire understanding between the parties
hereto and with respect to the matters referred to herein and no change or
modification to this Agreement shall be effective unless the same shall be in
writing and signed by each of the parties hereto.
IN WITNESS WHEREOF, the parties have duly executed this Agreement under
seal as of the date first above written.
DARREN FRYE ("Subscriber"), individually
/s/ Darren Frye
--------------------------------------
MAXIMUS CAPITAL MANAGEMENT, INC.
Managing Member for Maximus Fund I, L.L.C.
By: /s/ Darren Frye
----------------------------------
Darren Frye, President
<PAGE> 4
EXHIBIT A
Darren Frye, President
Maximus Capital Management, Inc.
8218 N. University
Peoria, IL 61615
Dear Mr. Frye:
This is to confirm to you the obligation of Darren Frye ("Subscriber")
pursuant to the March 18, 1997 Subscription Agreement between Maximus Capital
Management, Inc. and Darren Frye (the "Agreement"), to purchase certain shares
of Maximus Capital Management, Inc. outlined below. As of the initial (or ____
subsequent) closing this date for Maximus Fund I, L.L.C. (the "Fund"), the
aggregate initial capital contributions by the Members of the Fund were
$______________. Pursuant to the Agreement, accordingly, Subscriber hereby
subscribes to purchase ___________ shares of Maximus Capital Management, Inc.
(at $ ___________ per share), that number of its shares which will enable
Maximus Capital Management, Inc. to maintain its Net Worth Requirement as
defined in the Agreement. It is our understanding under the Agreement that
such subscription will be called only if absolutely required by Maximus Capital
Management, Inc. to meet its Net Worth Requirement (as defined) and only if, in
the exercise of its best efforts, it is otherwise unable to meet the Net Worth
Requirement except by call of the subscription. Therefore, no cash is needed
until all or a portion of this subscription is called by Maximus Capital
Management, Inc.
DARREN FRYE, individually
/s/ Darren Frye
-----------------------
ACKNOWLEDGED:
MAXIMUS CAPITAL MANAGEMENT, INC.
Managing Member for Maximus Fund I, L.L.C.
By: /s/ Darren Frye
----------------------------
Darren Frye, President
<PAGE> 1
[Andrew M. Allamian Letterhead]
Exhibit 24(a-1)
Consent of Counsel
I hereby consent to the reference to me in the prospectus constituting part
of this Registration Statement for Maximus Fund I, L.L.C. under the caption
"Legal Matters"
/s/ Andrew Allamian
- --------------------
Andrew Allamian
DesPlaines, IL
March 18, 1997
<PAGE> 1
[MICHAEL COGLIANESE LETTERHEAD]
Exhibit 24(b)
Consent of Independent Public Accountant
I hereby consent to the reference to me under the caption "Experts" and to
the use of my report dated March 1, 1997 with respect to the statements of
financial condition of Maximus Fund I, L.L.C. and Maximus Capital Management,
Inc. in the Form SB-2 Registration Statement and related Prospectus for the
registration of $25,000,000 of its Membership Interests. I also consent to the
reference to me under the heading "Experts" in such Prospectus.
/s/ Micheal Collianese
- -----------------------
Michael Coglianese, CPA
Bloomingdale, IL
March 18, 1997
