United States 12 Month Oil Fund, LP - Annual Report: 2007 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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x
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Annual
report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
fiscal year ended December 31, 2007.
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¨
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Transition
report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
transition period from
to .
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Commission
file number: 001-33859
United
States 12 Month Oil Fund,
LP
(Exact
name of registrant as
specified in its charter)
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Delaware
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20-0431897
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(State
or other jurisdiction of
incorporation
or
organization)
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(I.R.S.
Employer
Identification
No.)
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1320
Harbor Bay Parkway, Suite
145
Alameda,
California
94502
(Address
of principal executive
offices) (Zip Code)
(510)
522-3336
(Registrant’s
telephone number,
including area code)
Securities
registered pursuant to
Section 12(b) of the Act:
Units American
Stock
Exchange
(Title
of class)
(Name of exchange on which
registered)
Securities
registered pursuant to
Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
¨
Yes x
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
¨
Yes x
No
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
x
Yes ¨
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one.)
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer x
Smaller reporting company ¨
(Do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.).
¨
Yes x
No
The
aggregate market value of the registrant’s units held by non-affiliates of the
registrant as of June
30,
2007 was: $0.
The
registrant had 200,000 outstanding units as of March
18, 2008.
DOCUMENTS
INCORPORATED BY
REFERENCE:
None.
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Business.
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What
is US12OF?
United
States 12 Month Oil Fund, LP ("US12OF") is a Delaware limited partnership
organized on June 27, 2007. US12OF maintains its main business office at
1320
Harbor Bay Parkway, Suite 145, Alameda, California 94502. US12OF is a commodity
pool that issues limited partnership interests ("units") traded on the American
Stock Exchange (the "AMEX"). It operates pursuant to the terms of
the Amended and Restated Agreement of Limited Partnership dated as of
December 4, 2007 (the "LP Agreement"), which grants full management control
to
the general partner.
Who
is the General
Partner?
US12OF's general
partner is Victoria Bay Asset Management, LLC (the "General Partner"), a
single
member limited liability company that was formed in the state of Delaware
on May
10, 2005. It maintains its main business office at 1320 Harbor Bay Parkway,
Suite 145, Alameda, California 94502. The General Partner is a wholly-owned
subsidiary of Wainwright Holdings, Inc., a Delaware corporation (“Wainwright”).
Mr. Nicholas Gerber (discussed below) controls Wainwright by virtue of his
ownership of Wainwright’s shares. Wainwright is a holding company that also owns
an insurance company organized under Bermuda law and a registered investment
adviser firm named Ameristock Corporation. The General Partner is a member
of
the National Futures Association (the "NFA") and was registered with the
Commodity Futures Trading Commission (the "CFTC") as of December 1, 2005.
The
General Partner’s registration as a Commodity Pool Operator ("CPO") was approved
on December 1, 2005.
On
May
12, 2005, the General Partner formed the United States Oil Fund, LP
(“USOF”), another limited partnership that is a commodity pool and
issues units traded on the AMEX. The investment objective
of USOF is for the changes in percentage terms of its units’ net asset value
(“NAV”) to reflect the changes in percentage terms of the price of light, sweet
crude oil delivered to Cushing, Oklahoma, as measured by the changes in
the
price of the futures contract for light, sweet crude oil traded on the
New York
Mercantile Exchange (the "NYMEX"), less USOF's expenses. USOF began
trading on April 10, 2006. The General Partner is the general partner
of USOF and is responsible for the management of the USOF. Wainwright
was the initial limited partner of USOF. Investors in US12OF who wish to
receive
additional information concerning the United States Oil Fund, LP, may do
so by
calling 1-800-920-0259, or going on-line to
www.unitedstatesoilfund.com.
On
September 8, 2006, the General Partner formed the United States Natural Gas
Fund, LP ("USNG'), also a limited partnership that is a commodity pool
and issues units traded on the AMEX. The investment objective of USNG
is for the changes in percentage terms of its units' NAV to reflect the changes
in percentage terms of the price of natural gas delivered at the Henry Hub,
Louisiana, as measured by the changes in the price of the futures contract
on
natural gas traded on the NYMEX, less USNG’s expenses. USNG began trading on
April 18, 2007. The General Partner is the general partner of USNG and is
responsible for the management of USNG. Wainwright was the initial limited
partner of USNG. Investors in US12OF who wish to receive additional information
concerning the United States Natural Gas Fund, LP, may do so by calling
1-800-920-0259, or going on-line to
www.unitedstatesnaturalgasfund.com.
On
April
12, 2007, the General Partner formed the United States Gasoline Fund, LP
(“USG”), also a limited partnership that is a commodity pool and issues units
traded on the AMEX. The investment objective of USG is for
the changes in percentage terms of its units’ NAV to reflect the changes in
percentage terms of the price of unleaded gasoline delivered to the New
York
harbor, as measured by the changes in the price of the futures contract
on
gasoline traded on the NYMEX, less USG's expenses. USG began trading
on February 26, 2008. The General Partner is the general partner of
USG and is responsible for the management of USG. Wainwright was the
initial limited partner of USG. Investors in US12OF who wish to receive
additional information concerning the United States Gasoline Fund, LP, may
do so by calling 1-800-920-0259, or going on-line to
www.unitedstatesgasolinefund.com.
The
General Partner is currently in the process of registering two other exchange
traded securities, the United States Heating Oil Fund, LP (“USHO")
and the United States 12 Month Natural Gas Fund, LP
(“US12NG”). USHO will be a publicly traded limited partnership which
seeks to have the changes in percentage terms of its units’ NAV track the
changes in percentage terms of the price of heating oil (also known as
No. 2
fuel) delivered to the New York harbor. US12NG will be a publicly
traded limited partnership which will seek to have the changes in percentage
terms of its units’ NAV reflect the changes in percentage terms of the price of
natural gas delivered at the Henry Hub, Louisiana, as measured by the changes
in
the average of the prices of 12 futures contracts on natural gas traded
on the
NYMEX, consisting of the near month contract to expire and the contracts
for the
following 11 months, for a total of 12 consecutive months’
contracts.
1
The
General Partner is required to evaluate the credit risk for US12OF to
the
futures commission merchant, oversee the purchase and sale of US12OF’s units by
certain authorized purchasers ("Authorized Purchasers"), review daily
positions
and margin requirements of US12OF and manage US12OF’s investments. The General
Partner also pays the fees of ALPS Distributors, Inc. (the "Marketing
Agent")
and Brown Brothers Harriman & Co. ("BBH&Co."), which acts as
the administrator (the "Administrator") and the custodian (the "Custodian")
for
US12OF.
Limited
partners have no right to elect the General Partner on an annual or
any other
continuing basis. If the General Partner voluntarily withdraws, however,
the
holders of a majority of US12OF's outstanding units (excluding for
purposes of
such determination units owned, if any, by the withdrawing General Partner
and its affiliates) may elect its successor. The General Partner may
not be
removed as general partner except upon approval by the affirmative
vote of the
holders of at least 66 and 2/3 percent of US12OF's outstanding units
(excluding
units owned, if any, by the General Partner and its affiliates), subject to
the satisfaction of certain conditions set forth in the LP
Agreement.
The
business and affairs of the General Partner are managed by a board
of directors,
which is comprised of four management directors, some of whom are also
its
executive officers (the “Management Directors”) and three independent directors
who meet the independent director requirements established by the AMEX
and the
Sarbanes-Oxley Act of 2002. Notwithstanding the foregoing, the Management
Directors have the authority to manage the General Partner pursuant
to
its Third Amended and Restated Limited Liability Company Agreement. The
board of directors of the General Partner has an audit committee which
is made
up of the three independent directors (Peter M. Robinson, Gordon L.
Ellis and
Malcolm R. Fobes III). The audit committee is governed by an audit
committee
charter that is posted on US12OF’s website,
http://www.unitedstates12monthoilfund.com. Mr. Fobes and Mr. Ellis
meet the financial sophistication requirements of the AMEX and the
audit
committee charter. Through its Management Directors, the General Partner
manages
the day-to-day operations of US12OF.
How
Does US12OF
Operate?
The
net
assets of US12OF consist primarily of investments in futures contracts
for light, sweet crude oil, but may also consist of other types of crude
oil, heating oil, gasoline, natural gas and other petroleum-based fuels
that are
traded on the NYMEX, ICE Futures or other U.S. and foreign exchanges
(collectively, “Futures Contracts”). US12OF may also invest in other oil-related
investments such as cash-settled options on Futures Contracts, forward
contracts for oil, and over-the-counter transactions that are based on
the price
of crude oil, heating oil, gasoline, natural gas and other
petroleum-based fuels, Futures Contracts and indices based on the foregoing
(collectively, “Other Crude Oil Related Investments”). For convenience and
unless otherwise specified, Futures Contracts and Other Crude Oil Related
Investments collectively are referred to as “Crude Oil Interests” in this annual
report on Form 10-K.
US12OF
invests in Crude Oil Interests to the fullest extent possible without being
leveraged or unable to satisfy its current or potential margin or collateral
obligations with respect to its investments in Futures Contracts and Other
Crude Oil Related Investments. In pursuing this objective, the primary
focus of
the General Partner is the investment in Futures Contracts and the
management of its investments in short-term obligations of the United States
of
two years or less (“Treasuries”), cash and/or cash equivalents for
margining purposes and as collateral.
The
investment objective of US12OF is to have the changes in percentage terms
of the
units’ NAV reflect the changes in percentage terms of the price
of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by
the changes in the average of the prices of the 12 Futures Contracts
on crude oil traded on the NYMEX (the "Benchmark Futures Contracts"),
consisting of the near month contract to expire and the contracts for the
following eleven months, for a total of 12 consecutive months' contracts,
except
when the near month contract is within two weeks of expiration, in which
case it
will be measured by the futures contracts that are the next month contract
to
expire and the contracts for the following 11 consecutive months, less
US12OF's
expenses. When calculating the daily movement of the average price of the
12
contracts each contract month is equally weighted.
It
is not
the intent of US12OF to be operated in a fashion such that its NAV will
equal,
in dollar terms, the dollar price of spot crude oil or any particular
futures
contract based on crude oil.
2
The
General Partner believes that holding futures contracts whose expiration
dates
are spread out over a 12 month period of time will cause the total return
of
such a portfolio to vary compared to a portfolio that holds only a single
month’s contract (such as the near month contract). In particular, the General
Partner believes that the total return of a portfolio holding contracts with
a
range of expiration months will be impacted differently by the price
relationship between different contract months of the same commodity future
compared to the total return of a portfolio consisting of the near month
contract. For example, in cases in which the near month contract’s price is
higher than the price of contracts that expire later in time (a situation
known
as “backwardation” in the futures markets), then absent the impact of the
overall movement in crude oil prices the value of the near month contract
would
tend to rise as it approaches expiration. Conversely, in cases in which the
near
month contract’s price is lower than the price of contracts that expire later in
time (a situation known as “contango” in the futures markets), then absent the
impact of the overall movement in crude oil prices the value of the near
month
contract would tend to decline as it approaches expiration. The total return
of
a portfolio that owned the near month contract and “rolled” forward each month
by selling the near month contract as it approached expiration and purchasing
the next month contract to expire would be positively impacted by a
backwardation market, and negatively impacted by a contango market. Depending
on
the exact price relationship of the different months' prices, portfolio
expenses, and the overall movement of crude oil prices, the impact of
backwardation and contango could have a major impact on the total return
of such
a portfolio over time. The General Partner believes that based on historical
evidence a portfolio that held futures contracts with a range of expiration
dates spread out over a 12 month period of time would typically be impacted
less
by the positive effect of backwardation and the negative effect of contango
compared to a portfolio that held contracts of a single near month. As a
result,
absent the impact of any other factors, a portfolio of 12 different monthly
contracts would tend to have a lower total return than a near month only
portfolio in a backwardation market and a higher total return in a contango
market. However there can be no assurance that such historical relationships
would provide the same or similar results in the future.
As
a
specific benchmark, the General Partner will endeavor to place US12OF’s trades
in Futures Contracts and Other Crude Oil-Related Investments and otherwise
manage US12OF’s investments so that “A” will be within plus/minus 10 percent of
“B”, where:
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•
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A
is the average daily change in US12OF’s NAV for any period of 30
successive valuation days, i.e., any day as of which US12OF calculates
its
NAV, and
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|
•
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B
is the average daily change in the average of the prices of the
Benchmark
Futures Contracts over the same
period.
|
An
investment in the units allows both retail and institutional investors to
easily
gain exposure to the crude oil market in a cost-effective manner. The units
are
also expected to provide additional means for diversifying an investor’s
investments or hedging exposure to changes in crude oil prices.
The
Benchmark Futures Contracts will be changed or “rolled” from the near month
contract and the eleven following months to expire to the next month to expire
and the eleven following months during one day.
3
The
General Partner believes that market arbitrage opportunities will cause changes
in US12OF’s unit price on the AMEX to closely track changes in US12OF’s NAV. The
General Partner believes that changes in US12OF’s NAV in percentage terms will
closely track the changes in percentage terms in the Benchmark Futures
Contracts, less US12OF’s expenses.
These relationships are illustrated in the following diagram:
The
Price of US12OF’s Units Is
Expected to Correlate Closely
With
US12OF’S NAV
US12OF’s
units are traded on the AMEX. The price of
units
fluctuates in response to US12OF’s NAV and the supply and demand
pressures
of the AMEX. Because of certain arbitrage opportunities, the
General
Partner believes the price of US12OF’s units traded on the
AMEX
will
correlate closely with US12OF’s NAV.
Changes
in US12OF’s NAV Are Expected
to Correlate Closely With
the
Changes in the Price of the
Benchmark
Futures
Contracts
The
General Partner endeavors to invest US12OF’s assets as fully as
possible
in Futures Contracts and Other Crude Oil Related Investments so that
the
changes
in the NAV closely correlate with the changes in the price of the
Benchmark Futures
Contracts.
4
The
General Partner employs a “neutral” investment strategy in order to track
changes in the price of the Benchmark Futures Contracts regardless of
whether these prices go up or go down. US12OF’s “neutral” investment
strategy is designed to permit investors generally to purchase and sell
US12OF’s
units for the purpose of investing indirectly in crude oil in a cost-effective
manner, and/or to permit participants in the crude oil markets or other
industries to hedge the risk of losses in their crude oil-related transactions.
Accordingly,
depending on the investment objective of an individual investor, the
risks
generally associated with investing in crude oil and/or the risks involved
in
hedging may exist. In addition, an investment in US12OF involves the
risk that
the changes in the price of US12OF’s units will not accurately track the changes
in the Benchmark Futures Contract.
US12OF’s
total portfolio composition is disclosed each business day that the AMEX
is open
for trading on US12OF’s website and through the AMEX’s website at
http://www.amex.com. The website disclosure of portfolio holdings is made
daily
and includes, as applicable, the name and value of each Crude Oil Interest,
the
specific types of Other Crude Oil Related Investments and characteristics
of
such Other Crude Oil Related Investments, Treasuries, and the amount of
cash
and/or cash equivalents held in US12OF’s portfolio. US12OF’s website is publicly
accessible at no charge. US12OF’s assets are held in segregation pursuant to the
Commodity Exchange Act (the "CEA") and CFTC regulations.
The
units issued by US12OF may be purchased
only by Authorized Purchasers only in blocks of 100,000 units called
Creation
Baskets. The amount of the purchase payment for a Creation Basket is
equal to
the aggregate NAV of units in the Creation Basket. Similarly, Authorized
Purchasers may redeem units only in blocks of 100,000 units called Redemption
Baskets. The amount of the redemption proceeds for a Redemption Basket
is equal
to the aggregate NAV of the units in the Redemption Basket. The purchase
price
for Creation Baskets and the redemption price for Redemption Baskets
is the
actual NAV calculated at the end of the business day when notice for
a purchase
or redemption is received by US12OF. The AMEX publishes an approximate
intra-day
NAV based on the prior day’s NAV and the current price of the
Benchmark Futures Contracts, but the basket price is determined based on
the actual NAV at the end of the day.
While
US12OF issues units only in Creation Baskets, units may also be
purchased and sold in much smaller increments on the AMEX. These
transactions, however, are effected at the bid and ask prices established
by specialist firm(s). Like any listed security, units can be purchased
and sold
at any time a secondary market is open.
5
What
is US12OF’s Investment
Strategy?
In
managing US12OF’s assets, the General Partner does not use a technical trading
system that issues buy and sell orders. The General Partner instead employs
a
quantitative methodology whereby each time a Creation Basket is sold, the
General Partner purchases Crude Oil Interests, such as the Benchmark Futures
Contracts, that have an aggregate face amount that approximates the amount
of
Treasuries and/or cash received upon the issuance of the Creation
Basket.
As
an
example, assume that a Creation Basket is sold by US12OF, and that US12OF’s
closing NAV per unit is $50.00. In that case, US12OF would receive
$5,000,000 in proceeds from the sale of the Creation Basket ($50 NAV
per unit
multiplied by 100,000 units, and ignoring the Creation Basket fee of
$1,000).
If
one
were to assume further that the General Partner wants to invest the entire
proceeds from the Creation Basket in the Benchmark Futures Contracts
and that
the average face amount of the Benchmark Futures Contracts is $59,950,
US12OF would be unable to buy the exact number of Benchmark Futures Contracts
with an aggregate face amount equal to $5,000,000. Instead, US12OF would
be able
to purchase Benchmark Futures Contracts only with an aggregate face amount
of
$4,975,850. Assuming a margin requirement equal to 10% of the value of
the
Benchmark Futures Contract, US12OF would be required to deposit $497,585
in
Treasuries and cash with the futures commission merchant through which
the
Benchmark Futures Contracts were purchased. The remainder of the proceeds
from
the sale of the Creation Basket would remain invested in Treasuries,
cash and/or
cash equivalents as determined by the General Partner from time to time
based on
factors such as potential calls for margin or anticipated
redemptions.
The
specific Futures Contracts to be purchased will depend on various factors,
including a judgment by the General Partner as to the appropriate
diversification of US12OF’s investments in futures contracts with respect to the
month of expiration, and the prevailing price volatility of particular
contracts. In addition, US12OF may make use of a mixture of standard
sized
futures contracts as well as the smaller sized “mini” contracts. While the
General Partner anticipates significant investments in NYMEX futures
contracts,
as US12OF reaches certain position limits on the NYMEX, or for other
reasons, it
will invest in Futures Contracts traded on other exchanges or invest
in Other
Crude Oil-Related Investments such as contracts in the “over-the-counter”
market.
The
General Partner does not anticipate letting its Futures Contracts expire
and
taking delivery of the underlying crude oil. Instead, the General Partner
will
close existing positions when it is determined appropriate to do so and
reinvest
the proceeds in new Futures Contracts. Positions may also be closed out
to meet
orders for Redemption Baskets.
By
remaining invested as fully as possible in Futures Contracts or Other
Crude
Oil-Related Investments, the General Partner believes that the changes
in
percentage terms in US12OF’s NAV will closely track the changes in percentage
terms in the prices of the futures contracts in which US12OF invests.
The
General Partner believes that certain arbitrage opportunities will result
in the
price of the units traded on the AMEX closely tracking the NAV of
US12OF.
6
The
specific Futures Contracts purchased depend on various factors, including a
judgment by the General Partner as to the appropriate diversification of
US12OF’s investments in futures contracts with respect to the month of
expiration, and the prevailing price volatility of particular contracts.
While
the General Partner has made significant investments in NYMEX Futures
Contracts, as US12OF reaches certain position limits on the
NYMEX, or for other reasons, it may also invest in Futures Contracts
traded on other exchanges or invest in Other Crude Oil Related Investments
such
as contracts in the “over-the-counter” market.
What
are Futures
Contracts?
Futures
Contracts are agreements between two parties. One party agrees to buy crude
oil
from the other party at a later date at a price and quantity agreed upon
when
the contract is made. Futures Contracts are traded on futures exchanges.
For
example, crude oil futures contracts traded on the NYMEX trade in units
of 1,000
barrels (a “mini” contract is 500 barrels). The price of crude oil
futures contracts traded on the NYMEX are priced by floor brokers and other
exchange members both through an “open outcry” of offers to purchase or sell the
contracts and through an electronic, screen-based system that determines
the
price by matching electronically offers to purchase and sell.
Certain
typical and significant characteristics of Futures Contracts are discussed
below. Additional risks of investing in Futures Contracts are included in
“What are the Risk Factors Involved with an Investment in US12OF?”
Impact
of Accountability Levels,
Position Limits and Price Fluctuation Limits. Futures
Contracts include typical and significant characteristics. Most significantly,
the CFTC and U.S. designated contract markets such as the NYMEX have
established
accountability levels and position limits on the maximum net long or
net short
Futures Contracts in commodity interests that any person or group of
persons
under common trading control (other than as a hedge, which an investment
in
US12OF is not) may hold, own or control. The net position is the difference
between an individual or firm’s open long contracts and open short contracts in
any one commodity. In addition, most U.S. futures exchanges, such as
the NYMEX,
limit the daily price fluctuation for Futures Contracts.
7
The
accountability levels for the Benchmark Futures Contract and
other Futures Contracts traded on the NYMEX are not a fixed ceiling, but
rather a threshold above which the NYMEX may exercise greater scrutiny
and
control over an investor’s positions. The current accountability level for
investments at any one time in crude oil Futures Contracts (including
investments in the Benchmark Oil Futures Contract) is 20,000 contracts.
If
US12OF exceeds this accountability level for investments in crude oil
Futures
Contracts, the NYMEX will monitor US12OF’s exposure and ask for further
information on US12OF’s activities including the total size of all positions,
investment and trading strategy, and the extent of US12OF’s liquidity resources.
If deemed necessary by the NYMEX, it could also order US12OF to reduce
its
position back to the accountability level. As of December 31, 2007,
US12OF held
232 Futures Contracts traded on the NYMEX.
If
the
NYMEX orders US12OF to reduce its position back to the accountability
level, or
to an accountability level that the NYMEX deems appropriate for US12OF,
such an
accountability level may impact the mix of investments in crude oil interests
made by US12OF. To illustrate, assume that the Benchmark Futures
Contract and the unit price of US12OF are each $50, and that the NYMEX
has
determined that US12OF may not own more than 20,000 contracts in crude oil
Futures Contracts. In such case, US12OF could invest up to $1 billion
of its
daily net assets in the Benchmark Futures Contracts (i.e., $50 per contract
multiplied by 1,000 (a Benchmark Futures Contracts is a contract for 1,000
barrels, multiplied by 20,000 contracts)) before reaching the accountability
level imposed by the NYMEX. Once the daily net assets of the portfolio
exceed $1
billion in the Benchmark Futures Contract, the portfolio may not be able to make any further investments
in the
Benchmark Futures Contract, depending on whether the NYMEX imposes limits.
If the NYMEX does impose limits at the $1 billion level (or another level),
US12OF anticipates that it will invest the majority of its assets above
that
level in a mix of other Futures Contracts or Other Crude Oil Related
Investments.
In
addition to accountability levels, the NYMEX imposes position limits
on
contracts held in the last few days of trading in the near month contract
to
expire. It is unlikely that US12OF will run up against such position
limits
because US12OF’s investment strategy is to change or "roll" from the near month
contract two weeks from expiration of the contract.
U.S.
futures exchanges, including the NYMEX, also limit the amount of price
fluctuation for crude oil Futures Contracts. For example, the NYMEX imposes
a $10.00 per barrel ($10,000 per contract) price fluctuation limit for
Benchmark Futures Contracts. This limit is initially based off the previous
trading day’s settlement price. If any Benchmark Futures Contract is traded,
bid, or offered at the limit for five minutes, trading is halted for
five
minutes. When trading resumes, it begins at the point where the limit
was
imposed and the limit is reset to be $10.00 per barrel in either direction
of
that point. If another halt were triggered, the market would continue
to be
expanded by $10.00 per barrel in either direction after each successive
five-minute trading halt. There is no maximum price fluctuation limit
during any
one trading session.
8
Examples
of the position and price limits imposed are as follows:
|
Futures
Contract
|
Position
Accountability
Levels
and Limits
|
Maximum
Daily
Price
Fluctuation
|
||
|
NYMEX
Light, Sweet Crude Oil
|
Any
one month/all months: 20,000 net futures, but not to exceed
3,000
contracts in the last three days of trading in the spot
month.
|
$10.00
per barrel ($10,000 per contract) for all months. If any
contract is
traded, bid, or offered at the limit for five minutes,
trading is halted
for five minutes. When trading resumes, the limit is expanded by $10.00
per barrel in either direction. If another halt were triggered,
the market
would continue to be expanded by $10.00 per barrel in either
direction
after each successive five-minute trading halt. There will
be no maximum
price fluctuation limits during any one trading
session.
|
||
|
ICE
Futures Brent Crude Futures
|
There
are no position limits.
|
There
is no maximum daily price fluctuation limit.
|
||
|
ICE
WTI Crude Futures
|
There
are no position limits.
|
There
is no maximum daily price fluctuation.
|
||
|
NYMEX
Heating Oil
|
Any
one month/all months: 7,000 net futures, but not to exceed
1,000 contracts
in the last three days of trading in the spot month
|
$0.25
per gallon ($10,500 per contract) for all months. If any
contract is
traded, bid, or offered at the limit for five minutes,
trading is halted
for five minutes. When trading resumes, the limit is expanded
by $0.25 per
gallon in either direction. If another halt were triggered,
the market
would continue to be expanded by $0.25 per gallon in either
direction
after each successive five-minute trading halt. There will
be no maximum
price fluctuation limits during any one trading
session.
|
||
|
NYMEX
Gasoline
|
Any
one month/all months: 7,000 net futures, but not to exceed
1,000 contracts
in the last three days of trading in the spot month.
|
$0.25
per gallon ($10,500 per contract) for all months. If any
contract is
traded, bid, or offered at the limit for five minutes,
trading is halted
for five minutes. When trading resumes, the limit is expanded
by $0.25 per
gallon in either direction. If another halt were triggered,
the market
would continue to be expanded by $0.25 per gallon in either
direction
after each successive five-minute trading halt. There will
be no maximum
price fluctuation limits during any one trading
session.
|
||
|
NYMEX
Natural Gas
|
Any
one month/all months: 12,000 net futures, but not to exceed
1,000
contracts in the last three days of trading in the spot
month.
|
$3.00
per mmBtu ($30,000 per contract) for all months. If any
contract is
traded, bid, or offered at the limit for five minutes,
trading is halted
for five minutes. When trading resumes, the limit is expanded
by $3.00 per
mmBtu in either direction. If another halt were triggered,
the market
would continue to be expanded by $3.00 per mmBtu in either
direction after
each successive five-minute trading halt. There will be
no maximum price
fluctuation limits during any one trading
session.
|
9
Price
Volatility. Despite
daily price limits, the price volatility of Futures Contracts generally has
been historically greater than that for traditional securities such as
stocks
and bonds. Price volatility often is greater day-to-day as opposed to
intra-day. Crude oil Futures Contracts tend to be more volatile than stocks
and bonds because price movements for crude oil are more currently and
directly
influenced by economic factors for which current data is available and
are
traded by crude oil futures traders throughout the day. These economic
factors
include: changes in interest rates; governmental, agricultural, trade,
fiscal,
monetary and exchange control programs and policies; weather and climate
conditions; changing supply and demand relationships; changes in balances
of
payments and trade; U.S. and international rates of inflation; currency
devaluations and revaluations; U.S. and international political and economic
events; and changes in philosophies and emotions of market participants.
Because
US12OF invests a significant portion of its assets in Futures Contracts,
the assets of US12OF, and therefore the prices of US12OF units, may be
subject
to greater volatility than traditional securities.
Marking-to-Market
Futures
Positions. Futures Contracts are marked to market at the end of each
trading day and the margin required with respect to such contracts is adjusted
accordingly. This process of marking-to-market is designed to prevent losses
from accumulating in any futures account. Therefore, if US12OF’s futures
positions have declined in value, US12OF may be required to post variation
margin to cover this decline. Alternatively, if US12OF futures positions
have
increased in value, this increase will be credited to US12OF’s
account.
What
is the Crude Oil Market and the
Petroleum-Based Fuel Market?
Light,
Sweet Crude Oil. Crude
oil is the world’s most actively traded commodity. The Futures Contracts for
light, sweet crude oil that are traded on the NYMEX are the world’s most liquid
forum for crude oil trading, as well as the most liquid futures contracts
on a
physical commodity. Due to the liquidity and price transparency of
oil Futures
Contracts, they are used as a principal international pricing benchmark.
The
Futures Contracts for light, sweet crude oil trade on the NYMEX in
units of
1,000 U.S. barrels (42,000 gallons) and, if not closed out before maturity,
will
result in delivery of oil to Cushing, Oklahoma, which is also accessible
to the
world market by two major interstate petroleum pipeline
systems.
The
price
of crude oil is established by the supply and demand conditions in
the global
market overall, and more particularly, in the main refining centers
of
Singapore, Northwest Europe, and the U.S. Gulf Coast. Demand for petroleum
products by consumers, as well as agricultural, manufacturing and transportation
industries, determines demand for crude oil by refiners. Since the
precursors of
product demand are linked to economic activity, crude oil demand will
tend to
reflect economic conditions. However, other factors such as weather
also
influence product and crude oil demand.
The
price
of light, sweet crude oil has historically exhibited periods of significant
volatility.
In
Europe, Brent crude oil is the standard for
futures contracts traded on the ICE Futures, an electronic marketplace
for
energy trading and price discovery. Brent crude oil is the price reference
for
two-thirds of the world's traded oil.
10
Heating
Oil. Heating oil,
also known as No. 2 fuel oil, accounts for 25% of the yield of a barrel
of crude
oil, the second largest “cut” from oil after gasoline. The heating oil futures
contract, listed and traded on the NYMEX, trades in units of 42,000 gallons
(1,000 barrels) and is based on delivery in the New York harbor, the
principal
cash market center.
Gasoline.
Gasoline is the
largest single volume refined product sold in the U.S. and accounts for
almost
half of national oil consumption. The gasoline Futures Contract, listed
and
traded on the NYMEX, trades in units of 42,000 gallons (1,000 barrels)
and is
based on delivery at petroleum products terminals in the New York harbor,
the
major East Coast trading center for imports and domestic shipments from
refineries in the New York harbor area or from the Gulf Coast refining
centers.
The price of gasoline is volatile.
Natural
Gas. Natural gas accounts for almost a quarter of U.S. energy
consumption. The natural gas futures contract, listed and traded on the
NYMEX, trades in units of 10,000 million British thermal units (mmBtu)
and is
based on delivery at the Henry Hub in Louisiana, the nexus of 16 intra-
and
interstate natural gas pipeline systems that draw supplies from the region's
prolific gas deposits. The pipelines serve markets throughout the U.S.
East
Coast, the Gulf Coast, the Midwest, and up to the Canadian border. The
price of
natural gas has historically been volatile.
Why
Does US12OF Purchase and
Sell Futures Contracts?
US12OF’s
investment objective is to have the changes in percentage terms of the
units’
NAV reflect the changes in percentage terms of the Benchmark Futures Contract,
less US12OF’s expenses. US12OF invests primarily in Futures Contracts. US12OF
seeks to have its aggregate NAV approximate at all times the aggregate
face
amount of the Futures Contracts and Other Crude Oil Related
Investments it holds.
Other
than investing in Futures Contracts and Other Crude Oil Related
Investments, US12OF only invests in assets to support these investments
in crude
oil interests. At any given time, most of US12OF’s investments will be in
Treasuries, cash and/or cash equivalents that serve as segregated assets
supporting US12OF’s positions in Futures Contracts and Other Crude Oil
Related Investments. For example, the purchase of a Futures Contract with
a
stated value of $10 million would not require US12OF to pay $10 million
upon
entering into the contract; rather, only a margin deposit, generally of
5% to
10% of the stated value of the Futures Contract, would be required. To
secure its Futures Contract obligations, US12OF would deposit the
required margin with the futures commission merchant and would separately
hold,
through its Custodian, Treasuries, cash and/or cash equivalents in an
amount equal to the balance of the current market value of the contract,
which
at the contract’s inception would be $10 million minus the amount of the margin
deposit, or $9.5 million (assuming a 5% margin).
As
a
result of the foregoing, typically only 5% to 10% of US12OF’s assets are held as
margin in segregated accounts with the futures commission merchant. In
addition to the Treasuries or cash it posts with the futures commission
merchant
for the Futures Contracts it owns, US12OF holds through the Custodian,
Treasuries, cash and/or cash equivalents that can be posted as margin or as
collateral to support its over-the-counter contracts. US12OF earns interest
income from the Treasuries and/or
cash equivalents that it purchases, and on the cash it holds through the
Custodian. It anticipates that the earned interest income will increase
the NAV
and limited partners’ capital contribution accounts. US12OF reinvests the earned
interest income, holds it in cash, or uses it to pay its expenses. If US12OF
reinvests the earned interest income, it will make investments that are
consistent with its investment objectives.
11
What
is the Flow of
Units?
What
are the Trading Policies of
US12OF?
Liquidity
US12OF
invests only in Futures Contracts and Other Crude Oil Related Investments
that are traded in sufficient volume to permit, in the opinion of the General
Partner, ease of taking and liquidating positions in these financial interests.
This can include both standard sized futures contracts as well as smaller
sized
mini contracts.
Spot
Commodities
While
the
crude oil Futures Contracts traded on the NYMEX can be physically settled,
US12OF does not intend to take or make physical delivery. However, US12OF
may
from time to time trade in Other Crude Oil Related Invetsments, including
contracts based on the spot price of crude oil.
12
While
US12OF’s historical ratio of margin to total assets has generally ranged
from 0% to 5%, the General Partner endeavors to have the value of US12OF’s
Treasuries, cash and/or cash equivalents, whether held by US12OF or posted
as
margin or collateral at all times, approximate the aggregate face value of
US12OF's obligations under its Futures Contracts and Other Crude Oil Related
Investments.
Borrowings
Borrowings
are not used by US12OF, unless US12OF is required to borrow money in the
event of physical delivery, if US12OF trades in cash commodities, or for
short-term needs created by unexpected redemptions. US12OF expects to have
the
value of its Treasuries, cash and/or cash equivalents whether held by US12OF
or
posted as margin or collateral, at all times approximate the aggregate face
value of its obligations under US12OF's Futures Contracts and Other Crude
Oil
Related Investments. US12OF has not established and does not plan to establish
credit lines.
US12OF
has not and will not employ the technique, commonly known as pyramiding,
in
which the speculator uses unrealized profits on existing positions as variation
margin for the purchase or sale of additional positions in the same or another
commodity interest.
Who
are the Service
Providers?
BBH&Co.
is the registrar and transfer agent for the units. BBH&Co. is also the
Custodian for US12OF. In this capacity, BBH&Co. holds
US12OF’s Treasuries, cash and/or cash equivalents pursuant to a
custodial agreement. In addition, BBH&Co. performs certain administrative
and accounting services for US12OF and prepares certain Securities and Exchange
Commission ("SEC") and CFTC reports on behalf of US12OF. The General Partner
pays BBH&Co. a fee for these services.
US12OF
also employs a Marketing Agent. The General Partner pays the Marketing
Agent’s marketing fee of 0.06% on US12OF's assets up to $3 billion; and
0.04% on US12OF's assets in excess of $3 billion.
UBS
Securities LLC (“UBS Securities”) is US12OF’s futures commission merchant.
US12OF and UBS Securities have entered into an Institutional Futures Client
Account Agreement. This Agreement requires UBS Securities to provide services
to
US12OF in connection with the purchase and sale of crude oil interests that
may
be purchased or sold by or through UBS Securities for US12OF’s account. US12OF
pays the fees of UBS Securities.
UBS
Securities’ principal business address is 677 Washington Blvd, Stamford, CT
06901. UBS Securities is a futures clearing broker for US12OF. UBS Securities
is
registered in the U.S. with the Financial Industry Regulatory
Authority ("FINRA") as a broker-dealer and with the CFTC as a futures
commission merchant. UBS Securities is a member of various U.S. futures and
securities exchanges.
UBS
Securities is not affiliated with us or our General Partner. Therefore, US12OF
does not believe that it has any conflicts of interest with them or their
trading principals arising from their acting as our futures commission
merchant.
UBS
Securities was involved in the 2003 Global Research Analyst Settlement. This
settlement was part of the global settlement that UBS Securities and nine
other
firms reached with the SEC, FINRA, New York Stock Exchange ("NYSE") and
various state regulators. As part of the settlement, UBS Securities agreed
to pay $80,000,000 divided among retrospective relief, for procurement of
independent research and for investor education. UBS Securities has also
undertaken to adopt enhanced policies and procedures reasonably designed
to
address potential conflicts of interest arising from research
practices.
On
June
27, 2007, the Office of the Secretary of the Commonwealth of Massachusetts
filed
an administrative complaint (the “Complaint”) and notice of adjudicatory
proceeding, captioned In The Matter of UBS Securities, LLC, Docket No.
E-2007-0049, which alleges, in sum and substance, that UBS Securities has
been
violating the Massachusetts Uniform Securities Act (the “MUSA”) and related
regulations by providing the advisers for certain hedge funds with gifts
and
gratuities in the form of below market office rents, personal loans with
below
market interest rates, event tickets and other perks, in order to induce
those
hedge fund advisers to increase or retain their level of prime brokerage
fees
paid to UBS Securities. The Secretary seeks to require UBS Securities
to permanently cease and desist from conduct that violates the MUSA and
regulations, to censure UBS Securities, to require UBS Securities to pay
an
administrative fine of an unspecified amount, and to find as fact the
allegations of the Complaint.
13
Further,
UBS Securities, like most large, full service investment banks and
broker-dealers, receives inquiries and is sometimes involved in investigations
by the SEC, FINRA, NYSE and various other regulatory organizations,
exchanges and government agencies. UBS Securities fully cooperates with the
authorities in all such requests. UBS
Securities regularly discloses to FINRA arbitration awards, disciplinary
action
and regulatory events.
These disclosures are publicly available on FINRA’s website at www.finra.org.
Actions with respect to UBS Securities’ futures commission merchant business are
publicly available on the website of the NFA (www.nfa.futures.org).
UBS
Securities acts only as clearing broker for US12OF and, as such, is paid
commissions for executing and clearing trades on behalf of US12OF. UBS
Securities neither acts in any supervisory capacity with respect to the General
Partner nor participates in the management of the General Partner or
US12OF.
Currently,
the General Partner does not employ commodity trading advisors. If, in the
future, the General Partner does employ commodity trading advisors, it will
choose each advisor based on arms-length negotiations and will consider the
advisor’s experience, fees and reputation.
Fees
and Compensation Arrangements with the General Partner and Non-Affiliated
Service Providers*
|
Service
Provider
|
Compensation
Paid by the General Partner
|
|
Brown
Brothers Harriman & Co., Custodian and Administrator
|
Minimum
amount of $125,000 annually* for its custody, fund accounting
and fund
administration services rendered to all funds, as well as a $25,000
annual
fee for its transfer agency services. In addition, an asset-based
charge
of (a) 0.06% for the first $500 million of US12OF, USOF, USNG and
USG’s combined assets, (b) 0.0465% for US12OF, USOF, USNG and USG’s
combined assets greater than $500 million but less than $1 billion,
and
(c) 0.035% once US12OF, USOF, USNG and USG’s combined net assets exceed $1
billion.**
|
|
ALPS
Distributors, Inc., Marketing Agent
|
0.06%
on assets up to $3 billion; 0.04% on assets in excess of $3
billion.**
|
*
The annual minimum amount will not apply if the asset-based charge for
all
accounts in the aggregate exceeds $125,000. The General Partner also will
pay
transaction charge fees to BBH&Co., ranging from $7.00 to $15.00 per
transaction for the funds.
**
The
General Partner pays this compensation.
|
Service
Provider
|
Compensation
Paid by US12OF
|
|
Non-Affiliated
Brokers
|
Approximately
0.016% of assets (including futures commission merchant fees
of
approximately $4.00 per buy or
sell)***
|
***
US12OF pays this compensation.
14
New
York Mercantile Exchange Licensing Fee****
|
Assets
|
Licensing
Fee
|
|
First
$1,000,000,000
|
0.04%
of NAV
|
|
After
the first $1,000,000,000
|
0.02%
of NAV
|
****
Fees are calculated on a daily basis (accrued at 1/365 of the applicable
percentage of NAV on that day) and paid on a monthly basis. US12OF is
responsible for its pro rata share of the assets held by USOF, USNG,
US12OF and
USG as well as other funds managed by the General Partner, including US12NG
and USHO, when and if such funds commence operations.
Form
of Units
Registered
Form.
Units
are issued in registered form in accordance with the LP Agreement. The
Administrator has been appointed registrar and transfer agent for the purpose
of
transferring units in certificated form. The Administrator keeps a record
of all
holders of the units in the registry (the “Register”). The General Partner
recognizes transfers of units in certificated form only if done in accordance
with the LP Agreement. The beneficial interests in such units are held
in
book-entry form through participants and/or accountholders in the Depository
Trust Company ("DTC").
Book
Entry.
Individual certificates are not issued for the units. Instead, units are
represented by one or more global certificates, which are deposited by
the
Administrator with DTC and registered in the name of Cede & Co., as
nominee for DTC. The global certificates evidence all of the units outstanding
at any time. Unitholders are limited to (1) participants in DTC such as
banks, brokers, dealers and trust companies ("DTC Participants"), (2) those
who maintain, either directly or indirectly, a custodial relationship with
a DTC
Participant ("Indirect Participants"), and (3) those banks, brokers,
dealers, trust companies and others who hold interests in the units through
DTC
Participants or Indirect Participants, in each case who satisfy the requirements
for transfers of units. DTC Participants acting on behalf of investors
holding
units through such participants’ accounts in DTC will follow the delivery
practice applicable to securities eligible for DTC’s Same-Day Funds Settlement
System. Units are credited to DTC Participants’ securities accounts following
confirmation of receipt of payment.
DTC.
DTC is
a limited purpose trust company organized under the laws of the State of
New
York and is a member of the Federal Reserve System, a “clearing corporation”
within the meaning of the New York Uniform Commercial Code and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). DTC holds securities for
DTC Participants and facilitates the clearance and settlement of transactions
between DTC Participants through electronic book-entry changes in accounts
of
DTC Participants.
15
Transfer
of Units
Transfers
of Units Only Through
DTC. The units are only transferable through the book-entry
system
of DTC. Limited partners who are not DTC Participants may transfer their
units
through DTC by instructing the DTC Participant holding their units (or
by
instructing the Indirect Participant or other entity through which their
units
are held) to transfer the units. Transfers are made in accordance with
standard
securities industry practice.
Transfers
of interests in units with DTC will be made in accordance with the usual
rules
and operating procedures of DTC and the nature of the transfer. DTC has
established procedures to facilitate transfers among the participants and/or
accountholders of DTC. Because DTC can only act on behalf of DTC Participants,
who in turn act on behalf of Indirect Participants, the ability of a person
or
entity having an interest in a global certificate to pledge such interest
to
persons or entities that do not participate in DTC, or otherwise take actions
in
respect of such interest, may be affected by the lack of a definitive security
in respect of such interest.
DTC
has
advised us that it will take any action permitted to be taken by a unitholder
(including, without limitation, the presentation of a global certificate
for
exchange) only at the direction of one or more DTC Participants in whose
account
with DTC interests in global certificates are credited and only in respect
of
such portion of the aggregate principal amount of the global certificate
as to
which such DTC Participant or Participants has or have given such
direction.
Transfer/Application
Requirements. All purchasers of US12OF’s units, and potentially
any purchasers of units in the future, who wish to become limited partners
or
other record holders and receive cash distributions, if any, or have certain
other rights, must deliver an executed transfer application in which the
purchaser or transferee must certify that, among other things, he, she
or it
agrees to be bound by US12OF’s LP Agreement and is eligible to purchase US12OF’s
securities. Each purchaser of units must execute a transfer application
and
certification. The obligation to provide the form of transfer application
will
be imposed on the seller of units or, if a purchase of units is made through
an
exchange, the form may be obtained directly through US12OF. Further, the
General
Partner may request each record holder to furnish certain information,
including
that holder’s nationality, citizenship or other related status. A record holder
is a unitholder that is, or has applied to be, a limited partner. An investor
who is not a U.S. resident may not be eligible to become a record holder
or one
of the US12OF’s limited partners if that investor’s ownership would subject
US12OF to the risk of cancellation or forfeiture of any of US12OF’s assets under
any federal, state or local law or regulation. If the record holder fails
to
furnish the information or if the General Partner determines, on the basis
of
the information furnished by the holder in response to the request, that
such
holder is not qualified to become one of US12OF’s limited partners, the General
Partner may be substituted as a holder for the record holder, who will
then be
treated as a non-citizen assignee, and US12OF will have the right to redeem
those securities held by the record holder.
A
transferee’s broker, agent or nominee may complete, execute and deliver a
transfer application and certification. US12OF may, at its discretion,
treat the
nominee holder of a unit as the absolute owner. In that case, the beneficial
holder’s rights are limited solely to those that it has against the nominee
holder as a result of any agreement between the beneficial owner and the
nominee
holder.
A
person
purchasing US12OF’s existing units, who does not execute a transfer application
and certify that the purchaser is eligible to purchase those securities
acquires
no rights in those securities other than the right to resell those securities.
Whether or not a transfer application is received or the consent of the
General
Partner obtained, our units will be securities and will be transferable
according to the laws governing transfers of securities.
16
Any
transfer of units will not be recorded by the transfer agent or recognized
by
the General Partner unless a completed transfer application is delivered
to the
General Partner or the Administrator. When acquiring units, the transferee
of
such units that completes a transfer application will:
·
be
an
assignee until admitted as a substituted limited partner upon the consent
and
sole discretion of the General Partner and the recording of the assignment
on
the books and records of the partnership;
·
automatically
request admission as a substituted limited partner;
·
agree
to
be bound by the terms and conditions of, and execute, our LP
Agreement;
·
represent
that such transferee has the capacity and authority to enter into our LP
Agreement;
·
grant
powers of attorney to our General Partner and any liquidator of us;
and
·
make
the
consents and waivers contained in our LP Agreement.
An
assignee will become a limited partner in respect of the transferred units
upon
the consent of the General Partner and the recordation of the name of the
assignee on our books and records. Such consent may be withheld in the
sole
discretion of the General Partner.
If
consent of the General Partner is withheld, such transferee shall be an
assignee. An assignee shall have an interest in the partnership equivalent
to
that of a limited partner with respect to allocations and distributions,
including, without limitation, liquidating distributions, of the partnership.
With respect to voting rights attributable to units that are held by assignees,
the General Partner shall be deemed to be the limited partner with respect
thereto and shall, in exercising the voting rights in respect of such units
on
any matter, vote such units at the written direction of the assignee who
is the
record holder of such units. If no such written direction is received,
such
units will not be voted. An assignee shall have no other rights of a limited
partner.
Until
a
unit has been transferred on US12OF's books, we and the transfer agent
may treat
the record holder of the unit as the absolute owner for all purposes, except
as
otherwise required by law or stock exchange regulations.
Withdrawal
of Limited
Partners
As
discussed in the LP Agreement, if the General Partner gives at least fifteen
(15) days’ written notice to a limited partner, then the General Partner may for
any reason, in its sole discretion, require any such limited partner to
withdraw
entirely from the partnership or to withdraw a portion of its partner capital
account. If the General Partner does not give at least fifteen (15) days’
written notice to a limited partner, then it may only require withdrawal
of all
or any portion of the capital account of any limited partner in the following
circumstances: (i) the unitholder made a misrepresentation to the General
Partner in connection with its purchase of units; or (ii) the limited
partner’s ownership of units would result in the violation of any law or
regulations applicable to the partnership or a partner. In these circumstances,
the General Partner without notice may require the withdrawal at any time,
or
retroactively. The limited partner thus designated shall withdraw from
the
partnership or withdraw that portion of its partner capital account specified,
as the case may be, as of the close of business on such date as determined
by
the General Partner. The limited partner thus designated shall be deemed
to have
withdrawn from the partnership or to have made a partial withdrawal from
its
partner capital account, as the case may be, without further action on
the part
of the limited partner and the provisions of the LP Agreement shall
apply.
17
Calculating
NAV
US12OF’s
NAV is calculated by:
|
·
|
Taking
the current market value of its total
assets
|
|
·
|
Subtracting
any liabilities
|
The
Administrator calculates the NAV of US12OF once each trading day. The NAV
for a
particular trading day is released after 4:15 p.m. New York time. It calculates
the NAV as of the earlier of the close of the NYSE or 4:00 p.m. New York
time.
Trading on the AMEX typically closes at 4:15 p.m. New York time. US12OF
uses the
NYMEX closing price (determined at the earlier of the close of that Exchange
or
2:30 p.m. New York time) for the contracts held on the NYMEX, but calculates
or
determines the value of all other US12OF investments as of the earlier
of the
close of the NYSE or 4:00 p.m. New York time.
In
addition, in order to provide updated information relating to US12OF for
use by
investors and market professionals, the AMEX calculates and disseminates
throughout the trading day an updated indicative fund value. The indicative
fund
value is calculated by using the prior day’s closing NAV per unit of US12OF as a
base and updating that value throughout the trading day to reflect changes
in
the most recently reported trade price for the Benchmark Futures Contracts
on the NYMEX. The prices reported for the active Benchmark Futures Contract
month are adjusted based on the prior day’s spread differential between
settlement values for that contract and the spot month contract. In the
event
that the spot month contract is also the active contract, the last sale
price
for the active contract is not adjusted. The indicative fund value unit
basis
disseminated during AMEX trading hours should not be viewed as an actual
real
time update of the NAV, because the NAV is calculated only once at the
end of
each trading day.
The
indicative fund value is disseminated on a per unit basis every 15 seconds
during regular AMEX trading hours of 9:30 a.m. New York time to 4:15 p.m.
New
York time. The normal trading hours of the NYMEX are 10:00 a.m. New York
time to
2:30 p.m. New York time. This means that there is a gap in time at the
beginning
and the end of each day during which US12OF’s units are traded on the AMEX, but
real-time NYMEX trading prices for oil futures contracts traded on the
NYMEX are
not available. As a result, during those gaps there will be no update to
the
indicative fund value.
The
AMEX
disseminates the indicative fund value through the facilities of CTA/CQ
High
Speed Lines. In addition, the indicative fund value is published on the
AMEX’s
website and is available through on-line information services such as Bloomberg
and Reuters.
Dissemination
of the indicative fund value provides additional information that is not
otherwise available to the public and is useful to investors and market
professionals in connection with the trading of US12OF units on the AMEX.
Investors and market professionals are able throughout the trading day
to
compare the market price of US12OF and the indicative fund value. If the
market
price of US12OF units diverges significantly from the indicative fund value,
market professionals will have an incentive to execute arbitrage trades.
For
example, if US12OF appears to be trading at a discount compared to the
indicative fund value, a market professional could buy US12OF units on
the AMEX
and sell short futures contracts. Such arbitrage trades can tighten the
tracking between the market price of US12OF and the indicative fund value
and
thus can be beneficial to all market participants.
In
addition, other Futures Contracts, Other Crude Oil Related Investments
and Treasuries held by US12OF are valued by the Administrator, using rates
and
points received from client approved third party vendors (such as Reuters
and WM
Company) and advisor quotes. These investments are not included in the
indicative value. The indicative fund value is based on the prior day’s NAV and
moves up and down according solely to changes in the average of the price
of
the Benchmark Futures Contracts.
18
Creation
and Redemption of
Units
US12OF
creates and redeems units from time to time, but only in one or more Creation
Baskets or Redemption Baskets. The creation and redemption of baskets are
only
made in exchange for delivery to US12OF or the distribution by US12OF of
the
amount of Treasuries and any cash represented by the baskets being created
or
redeemed, the amount of which is based on the combined NAV of the number
of
units included in the baskets being created or redeemed determined as of
4:00
p.m. New York time on the day the order to create or redeem baskets is
properly
received.
Authorized
Purchasers are the only persons that may place orders to create and redeem
baskets. Authorized Purchasers must be (1) registered broker-dealers or
other
securities market participants, such as banks and other financial institutions,
that are not required to register as broker-dealers to engage in securities
transactions as described below, and (2) DTC Participants. To become an
Authorized Purchaser, a person must enter into an Authorized Purchaser
Agreement
with the General Partner. The Authorized Purchaser Agreement provides the
procedures for the creation and redemption of baskets and for the delivery
of
the Treasuries and any cash required for such creations and redemptions.
The
Authorized Purchaser Agreement and the related procedures attached thereto
may
be amended by US12OF, without the consent of any limited partner or unitholder
or Authorized Purchaser. Authorized Purchasers pay a transaction fee of
$1,000
to US12OF for each order they place to create or redeem one or more baskets.
Authorized Purchasers who make deposits with US12OF in exchange for baskets
receive
no fees, commissions or other form of compensation or inducement of any
kind
from either US12OF or the General Partner, and no such person will have
any
obligation or responsibility to the General Partner or US12OF to effect
any sale
or resale of units. As of December 31, 2007, 2 Authorized Purchasers had
entered
into agreements with US12OF to purchase Creation Baskets.
Certain
Authorized Purchasers are expected to have the facility to participate
directly
in the physical crude oil market and the crude oil futures market. In
some
cases, an Authorized Purchaser or its affiliates may from time to time
acquire
crude oil or sell crude oil and may profit in these instances. The General
Partner believes that the size and operation of the crude oil market
make it
unlikely that an Authorized Purchaser’s direct activities in the crude oil or
securities markets will impact the price of crude oil, Futures Contracts,
or the
price of the units.
Each
Authorized Purchaser is required to be registered as a broker-dealer under
the
Exchange Act and is a member in good standing with FINRA, or exempt from
being
or otherwise not required to be licensed as a broker-dealer or a member
of
FINRA, and qualified to act as a broker or dealer in the states or other
jurisdictions where the nature of its business so requires. Certain Authorized
Purchasers may also be regulated under federal and state banking laws and
regulations. Each Authorized Purchaser has its own set of rules and procedures,
internal controls and information barriers as it determines is appropriate
in
light of its own regulatory regime.
Under
the
Authorized Purchaser Agreement, the General Partner has agreed to indemnify
the
Authorized Purchasers against certain liabilities, including liabilities
under
the Securities Act of 1933, as amended, and to contribute to the payments
the
Authorized Purchasers may be required to make in respect of those
liabilities.
The
following description of the procedures for the creation and redemption
of
baskets is only a summary and an investor should refer to the relevant
provisions of the LP Agreement and the form of Authorized Purchaser Agreement
for more detail, each of which is attached as an exhibit to this annual
report
on Form 10-K.
Creation
Procedures
On
any
business day, an Authorized Purchaser may place an order with the Marketing
Agent to create one or more baskets. For purposes of processing purchase
and
redemption orders, a “business day” means any day other than a day when any of
the AMEX, the NYMEX or the NYSE is closed for regular trading. Purchase
orders
must be placed by 12:00 p.m. New York time or the close of regular trading
on
the AMEX, whichever is earlier; except in the case of the initial Authorized
Purchaser’s or any other Authorized Purchaser’s initial order to purchase one or
more Creation Baskets on the first day the baskets are to be offered and
sold,
when such orders shall be placed by 9:00 a.m. New York time on the day
agreed to
by the General Partner and the initial Authorized Purchaser. The day on
which
the Marketing Agent receives a valid purchase order is the purchase order
date.
By
placing a purchase order, an Authorized Purchaser agrees to deposit Treasuries,
cash or a combination of Treasuries and cash with US12OF, as
described below. Prior to the delivery of baskets for a purchase order,
the
Authorized Purchaser must also have wired to the Custodian the non-refundable
transaction fee due for the purchase order. Authorized Purchasers may not
withdraw a creation request.
The
manner by which creations are made is dictated by the terms of the Authorized
Purchaser Agreement. By placing a purchase order, an Authorized Purchaser
agrees
to (1) deposit Treasuries, cash, or a combination of Treasuries and cash
with
the Custodian of US12OF, and (2) enter into or arrange for a block trade,
an
exchange for physical or exchange for swap, or any other over-the-counter
energy
transaction (through itself or a designated acceptable broker) with US12OF
for
the purchase of a number and type of futures contracts at the closing
settlement
price for such contracts on the purchase order date. If an Authorized Purchaser
fails to consummate (1) and (2), the order shall be cancelled. The number
and
type of contracts specified shall be determined by the General Partner,
in its
sole discretion, to meet US12OF’s investment objective and shall be purchased as
a result of the Authorized Purchaser’s purchase of units.
Determination
of Required Deposits
The
total deposit required to create each basket (“Creation Basket Deposit”) is the
amount of Treasuries and/or cash that is in the same proportion to the
total
assets of US12OF (net of estimated accrued but unpaid fees, expenses
and other
liabilities) on the date the order to purchase is accepted as the number
of
units to be created under the purchase order is in proportion to the
total
number of units outstanding on the date the order is received. The General
Partner determines, directly in its sole discretion or in consultation
with the
Administrator, the requirements for Treasuries and the amount of cash,
including
the maximum permitted remaining maturity of a Treasury and proportions
of
Treasury and cash that may be included in deposits to create baskets.
The
Marketing Agent publishes such requirements at the beginning of each
business
day. The amount of cash deposit required is the difference between the
aggregate
market value of the Treasuries required to be included in a Creation
Basket
Deposit as of 4:00 p.m. New York time on the date the order to purchase
is
properly received and the total required deposit.
Delivery
of Required Deposits
An
Authorized Purchaser who places a purchase order is responsible for transferring
to US12OF’s account with the Custodian the required amount of Treasuries and
cash by the end of the third business day following the purchase order
date.
Upon receipt of the deposit amount, the Administrator directs DTC to
credit the
number of baskets ordered to the Authorized Purchaser’s DTC account on the third
business day following the purchase order date. The expense and risk
of delivery
and ownership of Treasuries until such Treasuries have been received
by the
Custodian on behalf of US12OF shall be borne solely by the Authorized
Purchaser.
Because
orders to purchase baskets must be placed by 12:00 p.m., New York time,
but the
total payment required to create a basket during the continuous offering
period
will not be determined until 4:00 p.m., New York time, on the date the
purchase
order is received, Authorized Purchasers will not know the total amount
of the
payment required to create a basket at the time they submit an irrevocable
purchase order for the basket. US12OF’s NAV and the total amount of the payment
required to create a basket could rise or fall substantially between
the time an
irrevocable purchase order is submitted and the time the amount of the
purchase
price in respect thereof is determined.
19
Rejection
of Purchase Orders
The
General Partner acting by itself or through the Marketing Agent may reject
a
purchase order or a Creation Basket Deposit if:
|
·
|
it
determines that the investment alternative available to US12OF
at that
time will not enable it to meet its investment
objective;
|
|
·
|
it
determines that the purchase order or the Creation Basket Deposit
is not
in proper form;
|
|
·
|
it
believes that the purchase order or the Creation Basket Deposit
would have
adverse tax consequences to US12OF or its
unitholders;
|
|
·
|
the
acceptance or receipt of the Creation Basket Deposit would,
in the opinion
of counsel to the General Partner, be unlawful;
or
|
|
·
|
circumstances
outside the control of the General Partner, Marketing Agent
or Custodian
make it, for all practical purposes, not feasible to process
creations of
baskets.
|
None
of the General Partner, Marketing Agent or Custodian will be liable for
the
rejection of any purchase order or Creation Basket
Deposit.
Redemption
Procedures
The
procedures by which an Authorized Purchaser can redeem one or more baskets
mirror the procedures for the creation of baskets. On any business day,
an
Authorized Purchaser may place an order with the Marketing Agent to redeem
one
or more baskets. Redemption orders must be placed by 12:00 p.m. New York
time or
the close of regular trading on the NYMEX, whichever is earlier. A redemption
order so received will be effective on the date it is received in satisfactory
form by the Marketing Agent. The redemption procedures allow Authorized
Purchasers to redeem baskets and do not entitle an individual unitholder
to
redeem any units in an amount less than a Redemption Basket, or to redeem
baskets other than through an Authorized Purchaser. By placing a redemption
order, an Authorized Purchaser agrees to deliver the baskets to be redeemed
through DTC’s book-entry system to US12OF not later than 3:00 p.m. New York time
on the third business day following the effective date of the redemption
order.
Prior to the delivery of the redemption distribution for a redemption order,
the
Authorized Purchaser must also have wired to US12OF’s account at the Custodian
the non-refundable transaction fee due for the redemption order. Authorized
Purchasers may not withdraw a redemption request.
The
manner by which redemptions are made is dictated by the terms of the
Authorized
Purchaser Agreement. By placing a redemption order, an Authorized Purchaser
agrees to (1) deliver the Redemption Basket to be redeemed through DTC’s
book-entry system to US12OF’s account with the Custodian not later than 3:00
p.m. New York time on the third business day following the effective
date of the
redemption order (“Redemption Distribution Date”), and (2) enter into or arrange
for a block trade, an exchange for physical or exchange for swap, or
any other
over-the-counter energy transaction (through itself or a designated acceptable
broker) with US12OF for the sale of a number and type of futures contracts
at
the closing settlement price for such contracts on the redemption order
date. If
an Authorized Purchaser fails to consummate (1) and (2) above, the order
shall
be cancelled. The number and type of contracts specified shall be determined
by
the General Partner, in its sole discretion, to meet US12OF’s investment
objective and shall be sold as a result of the Authorized Purchaser’s sale of
units. Prior to the delivery of the redemption distribution for a redemption
order, the Authorized Purchaser must also have wired to US12OF’s account at the
Custodian the non-refundable transaction fee due for the redemption
order.
Determination
of Redemption Distribution
The
redemption distribution from US12OF consists of a transfer to the redeeming
Authorized Purchaser of an amount of Treasuries and/or cash that is in
the same
proportion to the total assets of US12OF (net of estimated accrued but
unpaid
fees, expenses and other liabilities) on the date the order to redeem
is
properly received as the number of units to be redeemed under the redemption
order is in proportion to the total number of units outstanding on the
date the
order is received. The General Partner, directly or in consultation with
the
Administrator, determines the requirements for Treasuries and the amounts
of
cash, including the maximum permitted remaining maturity of a Treasury,
and the
proportions of Treasuries and cash that may be included in distributions
to
redeem baskets. The Marketing Agent publishes such requirements as of
4:00 p.m.
New York time on the redemption order date.
Delivery
of Redemption Distribution
The
redemption distribution due from US12OF will be delivered to the Authorized
Purchaser by 3:00 p.m. New York time on the third business day following
the
redemption order date if, by 3:00 p.m. New York time on such third business
day,
US12OF’s DTC account has been credited with the baskets to be redeemed. If
US12OF’s DTC account has not been credited with all of the baskets to be
redeemed by such time, the redemption distribution will be delivered
to the
extent of whole baskets received. Any remainder of the redemption distribution
will be delivered on the next business day to the extent of remaining
whole
baskets received if US12OF receives the fee applicable to the extension
of the
redemption distribution date which the General Partner may, from time
to time,
determine and the remaining baskets to be redeemed are credited to US12OF’s DTC
account by 3:00 p.m. New York time on such next business day. Any further
outstanding amount of the redemption order shall be cancelled. Pursuant
to
information from the General Partner, the Custodian will also be authorized
to
deliver the redemption distribution notwithstanding that the baskets
to be
redeemed are not credited to US12OF’s DTC account by 3:00 p.m. New York time on
the third business day following the redemption order date if the Authorized
Purchaser has collateralized its obligation to deliver the baskets through
DTC’s
book entry-system on such terms as the General Partner may from time
to time
determine.
Suspension
or Rejection of Redemption Orders
The
General Partner may, in its discretion, suspend the right of redemption,
or
postpone the redemption settlement date, (1) for any period during which
the
AMEX or the NYMEX is closed other than customary weekend or holiday
closings, or trading on the AMEX or the NYMEX is suspended or restricted,
(2)
for any period during which an emergency exists as a result of which
delivery,
disposal or evaluation of Treasuries is not reasonably practicable, or
(3) for
such other period as the General Partner determines to be necessary for
the
protection of the limited partners. None of the General Partner, the
Marketing
Agent, the Administrator, or the Custodian will be liable to any person
or in
any way for any loss or damages that may result from any such suspension
or
postponement.
The
General Partner will reject a redemption order if the order is not in
proper
form as described in the Authorized Purchaser Agreement or if the fulfillment
of
the order, in the opinion of its counsel, might be unlawful. The General
Partner
may also reject a redemption order if the number of units being redeemed
would
reduce the remaining outstanding units to 100,000 units (i.e., one basket)
or
less, unless the General Partner has reason to believe that the placer
of the
redemption order does in fact possess all the outstanding units and can
deliver
them.
Creation
and Redemption Transaction
Fee
To
compensate US12OF for its expenses in connection with the creation and
redemption of baskets, an Authorized Purchaser is required to pay a transaction
fee to US12OF of $1,000 per order to create or redeem baskets. An order
may
include multiple baskets. The transaction fee may be reduced, increased
or
otherwise changed by the General Partner. The General Partner shall notify
DTC
of any change in the transaction fee and will not implement any increase
in the
fee for the redemption of baskets until 30 days after the date of the
notice.
Tax
Responsibility
Authorized
Purchasers are responsible for any transfer tax, sales or use tax, stamp
tax,
recording tax, value added tax or similar tax or governmental charge applicable
to the creation or redemption of baskets, regardless of whether or not
such tax
or charge is imposed directly on the Authorized Purchaser, and agree to
indemnify the General Partner and US12OF if they are required by law to
pay any
such tax, together with any applicable penalties, additions to tax or interest
thereon.
Secondary
Market
Transactions
As
noted,
US12OF will create and redeem units from time to time, but only in one
or more
Creation Baskets or Redemption Baskets. The creation and redemption of
baskets
will only be made in exchange for delivery to US12OF or
the
distribution by US12OF of the amount of Treasuries and cash represented
by the
baskets being created or redeemed, the amount of which will be based on
the
aggregate NAV of the number of units included in the baskets being created
or
redeemed determined on the day the order to create or redeem baskets is
properly
received.
20
As
discussed above, Authorized Purchasers are the only persons that may place
orders to create and redeem baskets. Authorized Purchasers must be registered
broker-dealers or other securities market participants, such as banks and
other
financial institutions that are not required to register as broker-dealers
to
engage in securities transactions. An Authorized Purchaser is under no
obligation to create or redeem baskets, and an Authorized Purchaser is
under no
obligation to offer to the public units of any baskets it does create.
Authorized Purchasers that do offer to the public units from the baskets
they
create will do so at per-unit offering prices that are expected to reflect,
among other factors, the trading price of the units on the AMEX, the NAV
of
US12OF at the time the Authorized Purchaser purchased the Creation Baskets
and
the NAV at the time of the offer of the units to the public, the supply of
and demand for units at the time of sale, and the liquidity of the Futures
Contract market and the market for Other Crude Oil Related Investments.
The
prices of units offered by Authorized Purchasers are expected to fall between
US12OF’s NAV and the trading price of the units on the AMEX at the time of sale.
Units initially comprising the same basket but offered by Authorized Purchasers
to the public at different times may have different offering prices. An
order
for one or more baskets may be placed by an Authorized Purchaser on behalf
of
multiple clients. Authorized Purchasers who make deposits with US12OF in
exchange for baskets receive no fees, commissions or other form of compensation
or inducement of any kind from either US12OF or the General Partner, and
no such
person has any obligation or responsibility to the General Partner or US12OF
to
effect any sale or resale of units. Units are expected to trade in the
secondary
market on the AMEX. Units may trade in the secondary market at prices that
are
lower or higher relative to their NAV per unit. The amount of the discount
or
premium in the trading price relative to the NAV per unit may be influenced
by
various factors, including the number of investors who seek to purchase
or sell
units in the secondary market and the liquidity of the Futures Contracts
market
and the market for Other Crude Oil Related Investments. While the units
trade on the AMEX until 4:15 p.m. New York time, liquidity in the market
for
Futures Contracts and Other Crude Oil Related Investments may be reduced
after
the close of the NYMEX at 2:30 p.m. New York time. As a result, during
this
time, trading spreads, and the resulting premium or discount, on the units
may
widen.
Prior
Performance of US12OF and
Affiliates
PAST
PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS
Experience
in Raising and Investing
in Funds through
December 31, 2007
|
Dollar
Amount Offered:
|
$
|
550,000,000
|
|
|
||
|
Dollar
Amount Raised:
|
$
|
20,127,316
|
|
|
||
|
Organizational
Expenses*:
|
||
|
SEC
registration fee**:
|
$
|
16,885
|
| FINRA registration fees**: | $ | 75,500 |
|
AMEX
Listing fee**:
|
$
|
5,000
|
|
Auditor's
fees and expenses**:
|
$
|
10,700
|
|
Legal
fees and expenses**:
|
$
|
233,799
|
|
Printing
expenses:
|
$
|
23,755
|
|
|
||
|
Length
of Offering:
|
Continuous
|
——————
*
Amounts are for organizational and offering expenses incurred in connection
with
the initial public offering on December 6, 2007.
**
Paid
for
by the General Partner in connection with the initial public
offering.
Performance
Capsule
|
Name
of Commodity Pool:
|
US12OF
|
|||
|
Type
of Commodity Pool:
|
Exchange
traded security
|
|||
|
Inception
of Trading:
|
December
6, 2007
|
|||
|
Aggregate
Gross Capital Subscriptions (from inception through
December 31, 2007):
|
$
|
20,126,316
|
||
|
Total
Net Assets as of December 31, 2007:
|
$
|
21,691,479
|
*
|
|
|
Initial
NAV Per Unit as of Inception:
|
$
|
50.00
|
||
|
NAV
per Unit as of December 31, 2007:
|
$
|
54.23
|
||
|
Worst
Monthly Percentage Draw-down:
|
N/A
|
|
||
|
Worst
Peak-to-Valley Draw-down:
|
N/A
|
|
||
|
Total
Rate of Return Since Inception:
|
8.46
|
%
|
||
——————
* Inclusive
of transactions recorded on a trade date + 1 basis.
|
Month
|
Rates of Return
For the Year 2007
|
|||
|
December
|
8.46
|
%
|
||
21
The
General Partner is also currently the general partner of USOF, USNG
and USG.
Each of the General Partner, USNG, USOF and USG is located in
California.
USOF
is a
publicly traded limited partnership which seeks to have the changes
in
percentage terms of its units' NAV track the changes in the spot
price of light,
sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes
in the price of the futures contract on light, sweet, crude oil traded
on the
NYMEX that is the near month contract to expire, except when the
near month
contract is within two weeks of expiration, in which case the futures
contract
will be the next month contract to expire, less USOF's expenses.
USOF invests in
a mixture of listed crude oil futures contracts, other non-listed
oil related
investments, Treasuries, cash and cash equivalents. USOF began trading
on the
AMEX on April 10, 2006 and is a continuous offering. As of December
31, 2007,
the total amount of money raised by USOF from Authorized Purchasers
was
$6,142,801,106; the total number of Authorized Purchasers was 12;
the number of
baskets purchased by Authorized Purchasers was 1,074; and the aggregate
amount
of units purchased was 107,400,000.
USNG
is a
publicly traded limited partnership which seeks to have the changes
in
percentage terms of its units' NAV track the changes in percentage
terms price of natural gas delivered at the Henry Hub, Louisiana, as
measured by the changes in th eprice of the futures contract on natural
gas
traded on the NYMEX that is the near month contract to expire, except
when the
near month contract is within two weeks of expiration, in which case
it will be
measured by the futures contract that is the next month contract
to expire, less
USNG's expenses. USNG invests in a mixture of listed natural gas
futures
contracts, other natural gas related investments, Treasuries, cash
and cash
equivalents. USNG began trading on the AMEX on April 18, 2007 and
is a
continuous offering. As of December 31, 2007, the total amount of
money raised by USNG from Authorized Purchasers was $1,458,787,976;
the total
number of Authorized Purchasers was 4; the number of baskets purchased
by
Authorized Purchasers was 379; and the aggregate amount of units
purchased was
37,900,000.
USG
is a
publicly traded limited partnership which seeks to have the changes
in
percentage terms of its units’ NAV track the changes in percentage terms of the
price of unleaded gasoline delivered to the New York harbor, as
measured by the
changes in the price of the futures contract on gasoline traded
on the NYMEX,
less USG’s expenses. USG invests in a mixture of listed gasoline
futures contracts, other gasoline related investments, Treasuries,
cash and cash
equivalents. USG began trading on the AMEX on February 26, 2008 and
is a continuous offering. During the year ended December 31, 2007,
USG had not yet commenced investment activities nor issued
units.
Since
the
offering of USOF units to the public on April 10, 2006 to December
31, 2007, the
simple average daily change in the Benchmark Oil Futures Contract
was -0.031%,
while the simple average daily change in the NAV of USOF over the
same time
period was 0.042%. The average daily difference was 0.011% (or 1.1
basis point,
where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement
of the Benchmark Oil Futures Contract, the average error in daily
tracking by
the NAV was 2.98%, meaning that over this time period USOF’s tracking error was
within the plus or minus 10% range established as its benchmark tracking
goal.
Since
the
offering of USNG units to the public on April 18, 2007 to December
31, 2007, the
simple average daily change in the Benchmark Futures Contract was
-0.154%, while
the simple average daily change in the NAV of USNG over the same
time period was
-0.143%. The average daily difference was 0.012% (or 1.2 basis points,
where 1
basis point equals 1/100 of 1%). As a percentage of the daily movement
of the
Benchmark Futures Contract, the average error in daily tracking by
the NAV was
1.994%, meaning that over this time period USNG’s tracking error was within the
plus or minus 10% range established as its benchmark tracking goal.
There
are
significant differences between investing in USOF and USNG and investing
directly in the futures market. The General Partner’s results with USOF and USNG
may not be representative of results that may be experienced with
a fund
directly investing in futures contracts or other managed funds investing
in
futures contracts. For more information on the performance of USOF
and USNG, see
the Performance Tables below. Since
USG
did not commence investment activities nor issue units during the
year ended
December 31, 2007, performance information has not been included
for
USG.
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Experience
in Raising and Investing in Funds through December 31, 2007
|
Dollar
Amount Offered in USOF Offering*:
|
$ | 7,094,860,000 | ||
|
Dollar
Amount Raised in USOF Offering:
|
$ | 6,142,801,105 | ||
|
Organizational
Expenses in USOF Offering:
|
||||
|
SEC
registration fee**:
|
$ | 800,474 | ||
|
FINRA
registration fee**:
|
$ | 377,500 | ||
|
AMEX
listing fee**:
|
$ | 5,000 | ||
|
Auditor’s
fees and expenses**:
|
$ | 59,000 | ||
|
Legal
fees and expenses**:
|
$ | 1,249,109 | ||
|
Printing
expenses**:
|
$ | 241,977 | ||
|
Length
of USOF offering:
|
Continuous
|
|||
|
*
|
Reflects
the offering price per unit set forth on the cover page
of the
registration statement registering such units filed with
the SEC.
|
|
**
|
Through
December 31, 2006, these expenses were paid for by an affiliate
of the
General Partner in connection with the initial public offering.
Following
December 31, 2006, USOF has recorded these expenses.
|
|
Dollar
Amount Offered in USNG Offering*:
|
$ | 3,664,500,000 | ||
|
Dollar
Amount Raised in USNG Offering:
|
$ | 1,458,787,976 | ||
|
Organizational
Expenses in USNG Offering:
|
||||
|
SEC
registration fee**:
|
$ | 104,010 | ||
|
FINRA
registration fee**:
|
$ | 151,000 | ||
|
AMEX
listing fee**:
|
$ | 5,000 | ||
|
Auditor’s
fees and expenses**:
|
$ | 29,000 | ||
|
Legal
fees and expenses**:
|
$ | 526,746 | ||
|
Printing
expenses**:
|
$ | 40,323 | ||
|
Length
of USNG offering:
|
Continuous
|
|||
|
*
|
Reflects
the offering price per unit set forth on the cover page
of the
registration statement registering such units filed with
the SEC.
|
22
Compensation
to the General Partner and Other Compensation
USOF:
Expenses
Paid by USOF through
December 31, 2007 in dollar terms (unaudited):
|
Expense
|
Amount
in Dollar
Terms
|
|||
|
Amount
Paid to General Partner in USOF Offering:
|
$ | 3,622,613 | ||
|
Amount
Paid in Portfolio Brokerage Commissions in USOF offering:
|
$ | 1,184,956 | ||
|
Other
Amounts Paid in USOF Offering:
|
$ | 1,530,281 | ||
|
Total
Expenses Paid in USOF Offering:
|
$ | 6,337,850 | ||
Expenses
Paid by USOF through
December 31, 2007 as a Percentage of Average Daily Net Assets
(unaudited):
|
Expenses
in USOF Offering:
|
Amount
As a Percentage of Average
Daily Net Assets
|
|||
|
General
Partner:
|
0.50%
annualized
|
|||
|
Portfolio
Brokerage Commissions:
|
0.16%
annualized
|
|||
|
Other
Amounts Paid in USOF Offering
|
0.21%
annualized
|
|||
|
Total
Expense Ratio:
|
0.87%
annualized
|
|||
|
USOF
Performance:
|
|
|||
|
Name
of Commodity Pool:
|
USOF
|
|||
|
Type
of Commodity Pool:
|
Exchange
traded security
|
|||
|
Inception
of Trading:
|
April
10, 2006
|
|||
|
Aggregate
Gross Capital Subscriptions (from inception through December
31,
2007):
|
$6,142,801,105
|
|||
|
Total
Net Assets as of December 31, 2007:
|
$485,222,737
|
|||
|
Initial
NAV Per Unit as of Inception:
|
$67.39
|
|||
|
NAV
per Unit as of December 31, 2007:
|
$75.82
|
|||
|
Worst
Monthly Percentage Draw-down:
|
September
2006 (11.71%)
|
|||
|
Worst
Peak-to-Valley Draw-down:
|
June
2006 - January 2007 (30.60%)
|
|||
USNG:
Expenses
Paid by USNG through
December 31, 2007 in dollar terms (unaudited):
|
Expense
|
Amount
in Dollar
Terms
|
|||
|
Amount
Paid to General Partner in USNG Offering:
|
$ | 1,239,862 | ||
|
Amount
Paid in Portfolio Brokerage Commissions in USNG offering:
|
$ | 351,310 | ||
|
Other
Amounts Paid in USNG Offering:
|
$ | 454,149 | ||
|
Total
Expenses Paid in USNG Offering:
|
$ | 2,045,321 | ||
Expenses
Paid by USNG through
December31, 2007 as a Percentage of Average Daily Net Assets
(unaudited):
|
Expenses
in USNG Offering:
|
Amount
As a Percentage of Average
Daily Net Assets
|
|
General
Partner:
|
0.60%
annualized
|
|
Portfolio
Brokerage Commissions:
|
0.17%
annualized
|
|
Other
Amounts Paid in USNG Offering
|
0.22%
annualized
|
|
Total
Expense Ratio:
|
0.99%
annualized
|
|
USNG
Performance:
|
|
|
Name
of Commodity Pool:
|
USNG
|
|
Type
of Commodity Pool:
|
Exchange
traded security
|
|
Inception
of Trading:
|
April
18, 2007
|
|
Aggregate
Gross Capital Subscriptions (from inception through December
31,
2007):
|
$1,458,786,977
|
|
Total
Net Assets as of December 31, 2007:
|
$593,394,981
|
|
Initial
NAV Per Unit as of Inception:
|
$50.00
|
|
NAV
per Unit as of December 31, 2007:
|
$36.18
|
|
Worst
Monthly Percentage Draw-down:
|
November
2007 (16.16%)
|
|
Worst
Peak-to-Valley Draw-down:
|
April
2007 - August 2007 (34.74%)
|
COMPOSITE
PERFORMANCE DATA FOR USOF
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Month
|
Rates
of Return For
the Year 2006
|
|||
|
April*
|
3.47 | % | ||
|
May
|
(2.91 | %) | ||
|
June
|
3.16 | % | ||
|
July
|
(0.50 | %) | ||
|
August
|
(6.97 | %) | ||
|
September
|
(11.71 | %) | ||
|
October
|
(8.46 | %) | ||
|
November
|
4.73 | % | ||
|
December
|
(5.21 | %) | ||
|
Annual
Rate of Return (since inception through December 31, 2006)
|
(23.03 | %) | ||
*
Partial from April 10,
2006.
23
|
Month
|
Rates
of Return For
the Year 2007
|
|||
|
January
|
(6.55 | )% | ||
|
February
|
5.63 | % | ||
|
March
|
4.61 | % | ||
|
April
|
(4.26 | )% | ||
|
May
|
(4.91 | )% | ||
|
June
|
9.06 | % | ||
|
July
|
10.57 | % | ||
|
August
|
(4.95 | )% | ||
|
September
|
12.11 | % | ||
|
October
|
16.98 | % | ||
|
November
|
(4.82 | )% | ||
|
December
|
8.67 | % | ||
|
Annual
Rate of Return (through December 31, 2007)
|
46.17 | % | ||
COMPOSITE
PERFORMANCE DATA FOR USNG
PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
|
Month
|
Rates
of Return For
the Year 2007
|
|||
|
April*
|
4.30 | % | ||
|
May
|
(0.84 | )% | ||
|
June
|
(15.90 | )% | ||
|
July
|
(9.68 | )% | ||
|
August
|
(13.37 | )% | ||
|
September
|
12.28 | % | ||
|
October
|
12.09 | % | ||
|
November
|
(16.16 | )% | ||
|
December
|
0.75 | % | ||
|
Annual
Rate of Return (through December 31, 2007)
|
(27.64 | )% | ||
*
Partial
from April 17, 2007.
Draw-down:
Losses experienced over a specified period. Draw-down is measured on
the basis
of monthly returns only and does not reflect intra-month figures.
Worst
Monthly Percentage Draw-down: The largest single month loss sustained
since
inception of trading.
Worst
Peak-to-Valley Draw-down: The largest percentage decline in the NAV
per unit
over the history of the fund. This need not be a continuous decline,
but can be
a series of positive and negative returns where the negative returns
are larger
than the positive returns. Worst Peak-to-Valley Draw-down represents
the greatest percentage decline from any month-end NAV per unit that
occurs
without such month-end NAV per unit being equaled or exceeded as of
a subsequent
month-end. For example, if the NAV per unit declined by $1 in each
of January
and February, increased by $1 in March and declined again by $2 in
April, a
“peak-to-trough drawdown” analysis conducted as of the end of April would
consider that “drawdown” to be still continuing and to be $3 in amount, whereas
if the NAV per unit had increased by $2 in March, the January-February
drawdown
would have ended as of the end of February at the $2 level.
Nicholas
Gerber, the president and CEO of the General Partner, ran the Marc
Stevens
Futures Index Fund over 10 years ago. This fund combined commodity
futures with
equity stock index futures. It was a very small private offering, which
had
under $1 million in assets. The Marc Stevens Futures Index Fund was
a commodity
pool and Mr. Gerber was the CPO. Ameristock Corporation is an affiliate
of the
General Partner and it is a California-based registered investment
advisor
registered under the Investment Advisers Act of 1940, as amended (the
"Advisers
Act") that has been sponsoring and providing portfolio management services
to
mutual funds since 1995. Ameristock Corporation is the investment adviser
to the
Ameristock Mutual Fund, Inc., a mutual fund registered under the Investment
Company Act of 1940, as amended (the "1940 Act") that focuses on large
cap U.S.
equities that has approximately $425 million in assets as of December
31, 2007.
Ameristock
Corporation is also the investment advisor to the Ameristock ETF Trust,
an
open-end management investment company registered under the 1940 Act
that seeks
investment results that correspond to the performance of U.S. Treasury
indices
owned and compiled by Ryan Holdings LLC and Ryan ALM,
Inc.
Investments
The
General Partner applies substantially all of US12OF’s assets toward trading
in Futures Contracts and Other Crude Oil Related Investments, Treasuries,
cash and/or cash equivalents. The General Partner has sole authority
to
determine the percentage of assets that are:
|
·
|
held
on deposit with the futures commission merchant or other
custodian,
|
|
·
|
used
for other investments, and
|
|
·
|
held
in bank accounts to pay current obligations and as
reserves.
|
The
General Partner deposits substantially all of US12OF’s net assets with the
Custodian or other custodian for trading. When US12OF purchases a Futures
Contract and certain exchange traded Other Crude Oil Related Investments,
US12OF
is also required to deposit with the futures commission merchant on behalf
of
the exchange a portion of the value of the contract or other interest
as
security to ensure payment for the obligation under crude oil interests
at
maturity. This deposit is known as “margin.” US12OF invests the remainder of its
assets equal to the difference between the margin deposited and the face
value
of the Futures Contract in Treasuries, cash and/or cash
equivalents.
The
General Partner believes that all entities that hold or trade US12OF’s assets
are based in the United States and are subject to United States
regulations.
Approximately
5% to 10% of US12OF’s assets have normally been committed as margin
for Futures Contracts. However, from time to time, the percentage of assets
committed as margin may be substantially more, or less, than such range.
The
General Partner invests the balance of US12OF’s assets not invested in Crude Oil
Interests or held in margin as reserves to be available for changes in
margin.
All interest income is used for US12OF’s benefit.
The
futures commission merchant, a government agency or a commodity exchange
could
increase margins applicable to US12OF to hold trading positions at any
time.
Moreover, margin is merely a security deposit and has no bearing on the
profit
or loss potential for any positions taken.
US12OF’s
assets are held in segregation pursuant to the CEA and CFTC
regulations.
24
The
Commodity Interest
Markets
General
The CEA
governs the regulation of commodity interest transactions, markets and
intermediaries. In December 2000, the CEA was amended by the Commodity
Futures
Modernization Act of 2000 (the "CFMA"), which substantially revised the
regulatory framework governing certain commodity interest transactions
and the
markets on which they trade. The CEA, as amended by the CFMA, now provides
for
varying degrees of regulation of commodity interest transactions depending
upon
the variables of the transaction. In general, these variables include
(1) the
type of instrument being traded (e.g., contracts for future delivery,
options,
swaps or spot contracts), (2) the type of commodity underlying the instrument
(distinctions are made between instruments based on agricultural commodities,
energy and metals commodities and financial commodities), (3) the nature
of the
parties to the transaction (retail, eligible contract participant, or
eligible
commercial entity), (4) whether the transaction is entered into on a
principal-to-principal or intermediated basis, (5) the type of market
on which
the transaction occurs, and (6) whether the transaction is subject to
clearing
through a clearing organization. Information regarding commodity interest
transactions, markets and intermediaries, and their associated regulatory
environment, is provided below.
Futures
Contracts
A
futures
contract such as a Futures Contract is a standardized contract traded
on, or
subject to the rules of, an exchange that calls for the future delivery
of a
specified quantity and type of a commodity at a specified time and place.
Futures contracts are traded on a wide variety of commodities, including
agricultural products, bonds, stock indices, interest rates, currencies,
energy
and metals. The size and terms of futures contracts on a particular commodity
are identical and are not subject to any negotiation, other than with
respect to
price and the number of contracts traded between the buyer and
seller.
The
contractual obligations of a buyer or seller may generally be satisfied
by
taking or making physical delivery of the underlying of commodity or
by making
an offsetting sale or purchase of an identical futures contract on the
same or
linked exchange before the designated date of delivery. The difference
between
the price at which the futures contract is purchased or sold and the
price paid
for the offsetting sale or purchase, after allowance for brokerage commissions,
constitutes the profit or loss to the trader. Some futures contracts,
such as
stock index contracts, settle in cash (reflecting the difference between
the
contract purchase/sale price and the contract settlement price) rather
than by
delivery of the underlying commodity.
In
market
terminology, a trader who purchases a futures contract is long in the
market and
a trader who sells a futures contract is short in the market. Before
a trader
closes out his long or short position by an offsetting sale or purchase,
his
outstanding contracts are known as open trades or open positions. The
aggregate
amount of open positions held by traders in a particular contract is
referred to
as the open interest in such contract.
Forward
Contracts
A
forward
contract is a contractual obligation to purchase or sell a specified
quantity of
a commodity at or before a specified date in the future at a specified
price
and, therefore, is economically similar to a futures contract. Unlike
futures
contracts, however, forward contracts are typically traded in the
over-the-counter markets and are not standardized contracts. Forward
contracts
for a given commodity are generally available for various amounts and
maturities
and are subject to individual negotiation between the parties involved.
Moreover, generally there is no direct means of offsetting or closing
out a
forward contract by taking an offsetting position as one would a futures
contract on a U.S. exchange. If a trader desires to close out a forward
contract
position, he generally will establish an opposite position in the contract
but
will settle and recognize the profit or loss on both positions simultaneously
on
the delivery date. Thus, unlike in the futures contract market where
a trader
who has offset positions will recognize profit or loss immediately, in
the
forward market a trader with a position that has been offset at a profit
will
generally not receive such profit until the delivery date, and likewise
a trader
with a position that has been offset at a loss will generally not have
to pay
money until the delivery date. In recent years, however, the terms of
forward
contracts have become more standardized, and in some instances such contracts
now provide a right of offset or cash settlement as an alternative to
making or
taking delivery of the underlying commodity.
25
Further,
as the result of the CFMA, over-the-counter derivative instruments such
as
forward contracts and swap agreements (and options on forwards and physical
commodities) may begin to be traded on lightly-regulated exchanges or
electronic
trading platforms that may, but are not required to, provide for clearing
facilities. Exchanges and electronic trading platforms on which over-the-counter
instruments may be traded and the regulation and criteria for that trading
are
more fully described below under “Futures Exchanges and Clearing Organizations.”
Nonetheless, absent a clearing facility, US12OF’s trading in foreign exchange
and other forward contracts is exposed to the creditworthiness of the
counterparties on the other side of the trade.
Options
on Futures
Contracts
Options
on futures contracts are standardized contracts traded on an exchange.
An option
on a futures contract gives the buyer of the option the right, but not
the
obligation, to take a position at a specified price (the striking, strike,
or
exercise price) in the underlying futures contract or underlying interest.
The
buyer of a call option acquires the right, but not the obligation, to
purchase
or take a long position in the underlying interest, and the buyer of
a put
option acquires the right, but not the obligation, to sell or take a
short
position in the underlying interest.
The
seller, or writer, of an option is obligated to take a position in the
underlying interest at a specified price opposite to the option buyer
if the
option is exercised. Thus, the seller of a call option must stand ready
to take
a short position in the underlying interest at the strike price if the
buyer
should exercise the option. The seller of a put option, on the other
hand, must
stand ready to take a long position in the underlying interest at the
strike
price.
A
call
option is said to be in-the-money if the strike price is below current
market
levels and out-of-the-money if the strike price is above current market
levels.
Conversely, a put option is said to be in-the-money if the strike price
is above
the current market levels and out-of-the-money if the strike price is
below
current market levels.
Options
have limited life spans, usually tied to the delivery or settlement date
of the
underlying interest. Some options, however, expire significantly in advance
of
such date. The purchase price of an option is referred to as its premium,
which
consists of its intrinsic value (which is related to the underlying market
value) plus its time value. As an option nears its expiration date, the
time
value shrinks and the market and intrinsic values move into parity. An
option
that is out-of-the-money and not offset by the time it expires becomes
worthless. On certain exchanges, in-the-money options are automatically
exercised on their expiration date, but on others unexercised options
simply
become worthless after their expiration date.
Regardless
of how much the market swings, the most an option buyer can lose is the
option
premium. The option buyer deposits his premium with his broker, and the
money
goes to the option seller. Option sellers, on the other hand, face risks
similar
to participants in the futures markets. For example, since the seller
of a call
option is assigned a short futures position if the option is exercised,
his risk
is the same as someone who initially sold a futures contract. Because
no one can
predict exactly how the market will move, the option seller posts margin
to
demonstrate his ability to meet any potential contractual
obligations.
26
Options
on Forward Contracts or
Commodities
Options
on forward contracts or commodities operate in a manner similar to
options on
futures contracts. An option on a forward contract or commodity gives
the buyer
of the option the right, but not the obligation, to take a position
at a
specified price in the underlying forward contract or commodity. However,
similar to forward contracts, options on forward contracts or on commodities
are
individually negotiated contracts between counterparties and are typically
traded in the over-the-counter market. Therefore, options on forward
contracts
and physical commodities possess many of the same characteristics of
forward
contracts with respect to offsetting positions and credit risk that
are
described above.
Swap
Contracts
Swap
transactions generally involve contracts between two parties to exchange
a
stream of payments computed by reference to a notional amount and the
price of
the asset that is the subject of the swap. Swap contracts are principally
traded
off-exchange, although recently, as a result of regulatory changes
enacted as
part of the CFMA, certain swap contracts are now being traded in electronic
trading facilities and cleared through clearing organizations.
Swaps
are
usually entered into on a net basis, that is, the two payment streams
are netted
out in a cash settlement on the payment date or dates specified in
the
agreement, with the parties receiving or paying, as the case may be,
only the
net amount of the two payments. Swaps do not generally involve the
delivery of
underlying assets or principal. Accordingly, the risk of loss with
respect to
swaps is generally limited to the net amount of payments that the party
is
contractually obligated to make. In some swap transactions one or both
parties
may require collateral deposits from the counterparty to support that
counterparty’s obligation under the swap agreement. If the counterparty to such
a swap defaults, the risk of loss consists of the net amount of payments
that
the party is contractually entitled to receive less any collateral deposits
it is holding.
Block
Trading
Block
Trading refers to privately negotiated futures or option transactions
executed
apart from the public auction market. A block transaction may be
executed either
on or off the exchange trading floor but is still reported to and
cleared by the
exchange.
Exchange
for Physical
A
technique (originated in physical commodity markets) whereby a position
in the
underlying subject of a derivatives contract is traded for a futures
position.
In financial futures markets, the EFP bypasses any cash settlement
mechanism
that is built into the contract and substitutes physical settlement.
EFPs are
used primarily to adjust underlying cash market positions at a low
trading cost.
An EFP by itself will not change either party’s net risk position materially,
but EFPs are often used to set up a subsequent trade which will modify
the
investor’s market risk exposure at low cost.
Exchange
for Swap
An
Exchange For Swap (“EFS”) is an off market transaction which involves the
swapping (or exchanging) of an over-the-counter (OTC) position for
a futures
position. The OTC transaction must be for the same or similar quantity
or amount
of a specified commodity, or a substantially similar commodity or
instrument.
The OTC side of the EFS can include swaps, swap options, or other
instruments
traded in the OTC market.
In
order
that an EFS transaction can take place, the OTC side and futures
components must
be “substantially similar” in terms of either value and or quantity. The net
result is that the OTC position (and the inherent counterparty credit
exposure)
is transferred from the OTC market to the futures market. EFSs can
also work in
reverse, where a futures position can be reversed and transferred
to the OTC
market.
Participants
The
two
broad classes of persons who trade commodities are hedgors and speculators.
Hedgors include financial institutions that manage or deal in interest
rate-sensitive instruments, foreign currencies or stock portfolios,
and
commercial market participants, such as farmers and manufacturers,
that market
or process commodities. Hedging is a protective procedure designed
to lock in
profits that could otherwise be lost due to an adverse movement in
the
underlying commodity, for example, the adverse price movement between
the time a
merchandiser or processor enters into a contract to buy or sell a raw
or
processed commodity at a certain price and the time he must perform
the
contract. In such a case, at the time the hedgor contracts to physically
sell
the commodity at a future date he will simultaneously buy a futures
or forward
contract for the necessary equivalent quantity of the commodity. At
the time for
performance of the contract, the hedgor may accept delivery under his
futures
contract and sell the commodity quantity as required by his physical
contract or
he may buy the actual commodity, sell if under the physical contract
and close
out his position by making an offsetting sale of a futures
contract.
The
commodity interest markets enable the hedgor to shift the risk of price
fluctuations. The usual objective of the hedgor is to protect the profit
that he
expects to earn from farming, merchandising, or processing operations
rather
than to profit from his trading. However, at times the impetus for
a hedge
transaction may result in part from speculative objectives.
Unlike
the hedgor, the speculator generally expects neither to make nor take
delivery
of the underlying commodity. Instead, the speculator risks his capital
with the
hope of making profits from price fluctuations in the commodities.
The
speculator is, in effect, the risk bearer who assumes the risks that
the hedgor
seeks to avoid. Speculators rarely make or take delivery of the underlying
commodity; rather they attempt to close out their positions prior to
the
delivery date. Because the speculator may take either a long or short
position
in commodities, it is possible for him to make profits or incur losses
regardless of whether prices go up or down.
27
Futures
Exchanges and Clearing
Organizations
Futures
exchanges provide centralized market facilities in which multiple persons
have
the ability to execute or trade contracts by accepting bids and offers
from
multiple participants. Futures exchanges may provide for execution
of trades at
a physical location utilizing trading pits and/or may provide for trading
to be
done electronically through computerized matching of bids and offers
pursuant to
various algorithms. Members of a particular exchange and the trades
executed on
such exchange are subject to the rules of that exchange. Futures exchanges
and
clearing organizations are given reasonable latitude in promulgating
rules and
regulations to control and regulate their members. Examples of regulations
by
exchanges and clearing organizations include the establishment of initial
margin
levels, rules regarding trading practices, contract specifications,
speculative
position limits, daily price fluctuation limits, and execution and
clearing
fees.
Clearing
organizations provide services designed to mutualize or transfer the
credit risk
arising from the trading of contracts on an exchange or other electronic
trading
facility. Once trades made between members of an exchange or electronic
trading
facility have been confirmed, the clearing organization becomes substituted
for
the clearing member acting on behalf of each buyer and each seller
of contracts
traded on the exchange or trading platform and in effect becomes the
other party
to the trade. Thereafter, each clearing member party to the trade looks
only to
the clearing
organization for performance. The clearing organization generally establishes
some sort of security or guarantee fund to which all clearing members
of the
exchange must contribute; this fund acts as an emergency buffer that
is intended
to enable the clearing organization to meet its obligations with regard
to the
other side of an insolvent clearing member’s contracts. Furthermore, the
clearing organization requires margin deposits and continuously marks
positions
to market to provide some assurance that its members will be able to
fulfill
their contractual obligations. Thus, a central function of the clearing
organization is to ensure the integrity of trades, and members effecting
transactions on an exchange need not concern themselves with the solvency
of the
party on the opposite side of the trade; their only remaining concerns
are the
respective solvencies of their own customers, their clearing broker
and the
clearing organization. The clearing organizations do not deal with
customers,
but only with their member firms and the guarantee of performance for
open
positions provided by the clearing organization does not run to
customers.
U.S.
Futures
Exchanges
Futures
exchanges in the United States are subject to varying degrees of regulation
by
the CFTC based on their designation as one of the following: a designated
contract market, a derivatives transaction execution facility, an exempt
board
of trade or an electronic trading facility.
A
designated contract market is the most highly regulated level of futures
exchange. Designated contract markets may offer products to retail
customers on
an unrestricted basis. To be designated as a contract market, the exchange
must
demonstrate that it satisfies specified general criteria for designation,
such
as having the ability to prevent market manipulation, rules and procedures
to
ensure fair and equitable trading, position limits, dispute resolution
procedures, minimization of conflicts of interest and protection of
market
participants. Among the principal designated contract markets in the
United
States are the Chicago Board of Trade, the Chicago Mercantile Exchange
and the
NYMEX. Each of the designated contract markets in the United States
must provide
for the clearance and settlement of transactions with a CFTC-registered
derivatives clearing organization.
28
A
derivatives transaction execution facility (a "DTEF"), is a new type
of exchange
that is subject to fewer regulatory requirements than a designated
contract
market but is subject to both commodity interest and participant limitations.
DTEFs limit access to eligible traders that qualify as either eligible
contract
participants or eligible commercial entities for futures and option
contracts on
commodities that have a nearly inexhaustible deliverable supply, are
highly
unlikely to be susceptible to the threat of manipulation, or have no
cash
market, security futures products, and futures and option contracts
on
commodities that the CFTC may determine, on a case-by-case basis, are
highly
unlikely to be susceptible to the threat of manipulation. In addition,
certain
commodity interests excluded or exempt from the CEA, such as swaps,
etc. may be
traded on a DTEF. There is no requirement that a DTEF use a clearing
organization, except with respect to trading in security futures contracts,
in
which case the clearing organization must be a securities clearing
agency.
However, if futures contracts and options on futures contracts on a
DTEF are
cleared, then it must be through a CFTC-registered derivatives clearing
organization, except that some excluded or exempt commodities traded
on a DTEF
may be cleared through a clearing organization other than one registered
with
the CFTC.
An
exempt
board of trade is also a newly designated form of exchange. An exempt
board of
trade is substantially unregulated, subject only to CFTC anti-fraud
and
anti-manipulation authority. An exempt board of trade is permitted
to trade
futures contracts and options on futures contracts provided that the
underlying
commodity is not a security or securities index and has an inexhaustible
deliverable supply or no cash market. All traders on an exempt board
of trade
must qualify as eligible contract participants. Contracts deemed eligible
to be
traded on an exempt board of trade include contracts on interest rates,
exchange
rates, currencies, credit risks or measures, debt instruments, measures
of
inflation, or other macroeconomic indices or measures. There is no
requirement
that an exempt board of trade use a clearing organization. However,
if contracts
on an exempt board of trade are cleared, then it must be through a
CFTC-registered derivatives clearing organization. A board of trade
electing to
operate as an exempt board of trade must file a written notification
with the
CFTC.
An
electronic trading facility is a new form of exchange that operates
by means of
an electronic or telecommunications network and maintains an automated
audit
trail of bids, offers, and the matching of orders or the execution
of
transactions on the electronic trading facility. The CEA does not apply
to, and
the CFTC has no jurisdiction over, transactions on an electronic trading
facility in certain excluded commodities that are entered into between
principals that qualify as eligible contract participants, subject
only to CFTC
anti-fraud and anti-manipulation
authority. In general, excluded commodities include interest rates,
currencies,
securities, securities indices or other financial, economic or commercial
indices or measures.
The
General Partner intends to monitor the development of and opportunities
and
risks presented by the new less-regulated exchanges and exempt boards
and may,
in the future, allocate a percentage of US12OF’s assets to trading in products
on these exchanges. Provided US12OF maintains assets exceeding $5 million,
US12OF would qualify as an eligible contract participant and thus would
be able
to trade on such exchanges.
Non-U.S.
Futures
Exchanges
Non-U.S.
futures exchanges differ in certain respects from their U.S. counterparts.
Importantly, non-U.S. futures exchanges are not subject to regulation
by the
CFTC, but rather are regulated by their home country regulator. In
contrast to
U.S. designated contract markets, some non-U.S. exchanges are principals’
markets, where trades remain the liability of the traders involved,
and the
exchange or an affiliated clearing organization, if any, does not become
substituted for any party. Due to the absence of a clearing system,
such
exchanges are significantly more susceptible to disruptions. Further,
participants in such markets must often satisfy themselves as to the
individual
creditworthiness of each entity with which they enter into a trade.
Trading on
non-U.S. exchanges is often in the currency of the exchange’s home jurisdiction.
Consequently, US12OF is subject to the additional risk of fluctuations
in the
exchange rate between such currencies and U.S. dollars and the possibility
that
exchange controls could be imposed in the future. Trading on non-U.S.
exchanges
may differ from trading on U.S. exchanges in a variety of ways and,
accordingly,
may subject US12OF to additional risks.
29
Accountability
Levels
and Position Limits
The
CFTC
and U.S. designated contract markets have established accountability
levels and
position limits on the maximum net long or net short futures contracts in
commodity interests that any person or group of persons under common
trading control (other than a hedgor, which US12OF is not) may hold,
own or
control. Among the purposes of accountability levels and position limits
is to
prevent a corner or squeeze on a market or undue influence on prices
by any
single trader or group of traders. The position limits currently established
by
the CFTC apply to certain agricultural commodity interests, such as
grains
(oats, barley, and flaxseed), soybeans, corn, wheat, cotton, eggs,
rye, and
potatoes, but not to interests in energy products. In addition, U.S.
exchanges
may set accountability levels and position limits for all commodity
interests
traded on that exchange. For example, the current accountability level
for
investments at any one time in crude oil Futures Contracts (including
investments in the Benchmark Futures Contract) on the NYMEX is 20,000
contracts. The NYMEX also imposes position limits on contracts held
in the last
few days of trading in the near month contract to expire. Certain exchanges
or
clearing organizations also set limits on the total net positions that
may be
held by a clearing broker. In general, no position limits are in effect
in
forward or other over-the-counter contract trading or in trading on
non-U.S.
futures exchanges, although the principals with which US12OF and the
clearing
brokers may trade in such markets may impose such limits as a matter
of credit
policy. For purposes of determining accountability levels and position
limits
US12OF’s commodity interest positions will not be attributable to investors
in
their own commodity interest trading.
Daily
Price
Limits
Most
U.S.
futures exchanges (but generally not non-U.S. exchanges) limit the amount
of fluctuation in some futures contract or options on a futures contract
prices
during a single trading period by regulations. These regulations specify
what
are referred to as daily price fluctuation limits or more commonly,
daily
limits. The daily limits establish the maximum amount that the price
of a
futures or options on futures contract may vary either up or down from
the
previous day’s settlement price. Once the daily limit has been reached in a
particular futures or option on a futures contract, no trades may be made
at a price beyond the limit. Positions in the futures or options contract
may
then be taken or liquidated, if at all, only at inordinate expense
or if traders
are willing to effect trades at or within the limit during the period
for
trading on such day. Because the daily limit rule governs price movement
only
for a particular trading day, it does not limit losses and may in fact
substantially increase losses because it may prevent the liquidation
of
unfavorable positions. Futures contract prices have occasionally moved
to the daily limit for several consecutive trading days, thus preventing
prompt liquidation of positions and subjecting the trader to substantial
losses
for those days. The concept of daily price limits is not relevant to
over-the-counter contracts, including forwards and swaps, and thus
such limits
are not imposed by banks and others who deal in those markets.
In
contrast, the NYMEX does not impose daily limits but rather limits
the amount of
price fluctuation for Futures Contracts. For example, the NYMEX imposes
a
$10.00 per barrel ($10,000 per contract) price fluctuation limit for crude
oil Futures Contracts. This limit is initially based off of the previous
trading day’s settlement price. If any Futures Contract is traded, bid, or
offered at the limit for five minutes, trading is halted for five minutes.
When
trading resumes it begins at the point where the limit was imposed
and the limit
is reset to be $10.00 per barrel in either direction of that point.
If another
halt were triggered, the market would continue to be expanded by $10.00
per
barrel in either direction after each successive five-minute trading
halt. There
is no maximum price fluctuation limit during any one trading
session.
Commodity
Prices
Commodity
prices are volatile and, although ultimately determined by the interaction
of
supply and demand, are subject to many other influences, including
the
psychology of the marketplace and speculative assessments of future
world and
economic events. Political climate, interest rates, treaties, balance
of
payments, exchange controls and other governmental interventions as
well as
numerous other variables affect the commodity markets, and even with
comparatively complete information it is impossible for any trader
to predict
reliably commodity prices.
30
Regulation
Futures
exchanges in the United States are subject to varying degrees of regulation
under the CEA depending on whether such exchange is a designated contract
market, DTEF, exempt board of trade or electronic trading facility.
Derivatives
clearing organizations are also subject to the CEA and CFTC regulation.
The CFTC
is the governmental agency charged with responsibility for regulation
of futures
exchanges and commodity interest trading conducted on those exchanges.
The
CFTC’s function is to implement the CEA’s objectives of preventing price
manipulation and excessive speculation and promoting orderly and efficient
commodity interest markets. In addition, the various exchanges and
clearing
organizations themselves exercise regulatory and supervisory authority
over
their member firms.
The
CFTC
possesses exclusive jurisdiction to regulate the activities of CPOs
and
commodity trading advisors and has adopted regulations with respect
to the
activities of those persons and/or entities. Under the CEA, a registered
CPO,
such as the General Partner, is required to make annual filings with
the CFTC
describing its organization, capital structure, management and controlling
persons. In addition, the CEA authorizes the CFTC to require and review
books
and records of, and documents prepared by, registered CPOs. Pursuant
to this
authority, the CFTC requires CPOs to keep accurate, current and orderly
records
for each pool that they operate. The CFTC may suspend the registration
of
a CPO (1) if the CFTC finds that the operator’s trading practices tend to
disrupt orderly market conditions, (2) if any controlling person of
the operator
is subject to an order of the CFTC denying such person trading privileges
on any
exchange, and (3) in certain other circumstances. Suspension, restriction
or
termination of the General Partner’s registration as a CPO would prevent it,
until that registration were to be reinstated, from managing US12OF,
and might
result in the termination of US12OF. US12OF itself is not required
to be
registered with the CFTC in any capacity.
The
CEA
gives the CFTC similar authority with respect to the activities of
commodity
trading advisors. If a trading advisor’s commodity trading advisor registration
were to be terminated, restricted or suspended, the trading advisor
would be
unable, until the registration were to be reinstated, to render trading
advice
to US12OF.
The
CEA
requires all futures commission merchants, such as US12OF’s clearing brokers, to
meet and maintain specified fitness and financial requirements, to
segregate
customer funds from proprietary funds and account separately for all
customers’
funds and positions, and to maintain specified books and records open
to
inspection by the staff of the CFTC. The CFTC has similar authority
over
introducing brokers, or persons who solicit or accept orders for commodity
interest trades but who do not accept margin deposits for the execution
of
trades. The CEA authorizes the CFTC to regulate trading by futures
commission
merchants and by their officers and directors, permits the CFTC to
require
action by exchanges in the event of market emergencies, and establishes
an
administrative procedure under which customers may institute complaints
for
damages arising from alleged violations of the CEA. The CEA also gives
the
states powers to enforce its provisions and the regulations of the
CFTC.
US12OF’s
investors are afforded prescribed rights for reparations under the
CEA.
Investors may also be able to maintain a private right of action for
violations
of the CEA. The CFTC has adopted rules implementing the reparation
provisions of
the CEA, which provide that any person may file a complaint for a reparations
award with the
CFTC
for violation of the CEA against a floor broker or a futures commission
merchant, introducing broker, commodity trading advisor, CPO, and their
respective associated persons.
Pursuant
to authority in the CEA, the NFA has been formed and registered with
the CFTC as
a registered futures association. At the present time, the NFA is the
only
self-regulatory organization for commodity interest professionals,
other than
futures exchanges. The CFTC has delegated to the NFA responsibility
for the
registration of commodity trading advisors, CPOs, futures commission
merchants,
introducing brokers, and their respective associated persons and floor
brokers.
The General Partner, each trading advisor, the selling agents and the
clearing
brokers are members of the NFA. As such, they are subject to NFA standards
relating to fair trade practices, financial condition and consumer
protection.
US12OF itself is not required to become a member of the NFA. As the
self-regulatory body of the commodity interest industry, the NFA promulgates
rules governing the conduct of professionals and disciplines those
professionals
that do not comply with these rules. The NFA also arbitrates disputes
between
members and their customers and conducts registration and fitness screening
of
applicants for membership and audits of its existing members.
31
The
regulations of the CFTC and the NFA prohibit any representation by
a person
registered with the CFTC or by any member of the NFA, that registration
with the
CFTC, or membership in the NFA, in any respect indicates that the CFTC
or the
NFA, as the case may be, has approved or endorsed that person or that
person’s
trading program or objectives. The registrations and memberships of
the parties
described in this summary must not be considered as constituting any
such
approval or endorsement. Likewise, no futures exchange has given or
will give
any similar approval or endorsement.
The
regulation of commodity interest trading in the United States and other
countries is an evolving area of the law. The various statements made
in this
summary are subject to modification by legislative action and changes
in the
rules and regulations of the CFTC, the NFA, the futures exchanges,
clearing
organizations and other regulatory bodies.
The
function of the CFTC is to implement the objectives of the CEA of preventing
price manipulation and other disruptions to market integrity, avoiding
systemic
risk, preventing fraud and promoting innovation, competition and financial
integrity of transactions. As mentioned above, this regulation, among
other
things, provides that the trading of commodity interest contracts generally
must
be upon exchanges designated as contract markets or DTEFs and that
all trading
on those exchanges must be done by or through exchange members. Under
the CFMA,
commodity interest trading in some commodities between sophisticated
persons may
be traded on a trading facility not regulated by the CFTC. As a general
matter,
trading in spot contracts, forward contracts, options on forward contracts
or
commodities, or swap contracts between eligible contract participants
is not
within the jurisdiction of the CFTC and may therefore be effectively
unregulated. The trading advisors may engage in those transactions
on behalf of
US12OF in reliance on this exclusion from regulation.
In
general, the CFTC does not regulate the interbank and forward foreign
currency
markets with respect to transactions in contracts between certain sophisticated
counterparties such as US12OF or between certain regulated institutions
and
retail investors. Although U.S. banks are regulated in various ways
by the
Federal Reserve Board, the Comptroller of the Currency and other U.S.
federal
and state banking officials, banking authorities do not regulate the
forward
markets.
While
the
U.S. government does not currently impose any restrictions on the movements
of
currencies, it could choose to do so. The imposition or relaxation
of exchange
controls in various jurisdictions could significantly affect the market
for that
and other jurisdictions’ currencies. Trading in the interbank market also
exposes US12OF to a risk of default since failure of a bank with which
US12OF
had entered into a forward contract would likely result in a default
and thus
possibly substantial losses to US12OF.
The
CFTC
is prohibited by statute from regulating trading on non-U.S. futures
exchanges
and markets. The CFTC, however, has adopted regulations relating to
the
marketing of non-U.S. futures contracts in the United States. These
regulations
permit certain contracts traded on non-U.S. exchanges to be offered
and sold in
the United States.
Commodity
Margin
Original
or initial margin is the minimum amount of funds that must be deposited
by a
commodity interest trader with the trader’s broker to initiate and maintain an
open position in futures contracts. Maintenance margin is the amount
(generally
less than the original margin) to which a trader’s account may decline before he
must deliver additional margin. A margin deposit
is like a
cash performance bond. It helps assure the trader’s performance of the futures
contracts that he or she purchases or sells. Futures contracts are
customarily
bought and sold on initial margin that represents a very small percentage
(ranging upward from less than 2%) of the aggregate purchase or sales
price of
the contract. Because of such low margin requirements, price fluctuations
occurring in the futures markets may create profits and losses that,
in relation
to the amount invested, are greater than are customary in other forms
of
investment or speculation. As discussed below, adverse price changes
in the
futures contract may result in margin requirements that greatly exceed
the
initial margin. In addition, the amount of margin required in connection
with a
particular futures contract is set from time to time by the exchange
on which
the contract is traded and may be modified from time to time by the
exchange
during the term of the contract.
32
Brokerage
firms, such as US12OF’s clearing brokers, carrying accounts for traders in
commodity interest contracts may not accept lower, and generally require
higher,
amounts of margin as a matter of policy to further protect themselves.
The
clearing brokers require US12OF to make margin deposits equal to exchange
minimum levels for all commodity interest contracts. This requirement
may be
altered from time to time in the clearing brokers’ discretion.
Trading
in the over-the-counter markets where no clearing facility is provided
generally
does not require margin but generally does require the extension of
credit
between counterparties.
When
a
trader purchases an option, there is no margin requirement; however,
the option
premium must be paid in full. When a trader sells an option, on the
other hand,
he or she is required to deposit margin in an amount determined by
the margin
requirements established for the underlying interest and, in addition,
an amount
substantially equal to the current premium for the option. The margin
requirements imposed on the selling of options, although adjusted to
reflect the
probability that out-of-the-money options will not be exercised, can
in fact be
higher than those imposed in dealing in the futures markets directly.
Complicated margin requirements apply to spreads and conversions, which
are
complex trading strategies in which a trader acquires a mixture of
options
positions and positions in the underlying interest.
Margin
requirements are computed each day by a trader’s clearing broker. When the
market value of a particular open commodity interest position changes
to a point
where the margin on deposit does not satisfy maintenance margin requirements,
a
margin call is made by the broker. If the margin call is not met within
a
reasonable time, the broker may close out the trader’s position. With respect to
US12OF’s trading, US12OF (and not its investors personally) is subject to
margin
calls.
Finally,
many major U.S. exchanges have passed certain cross margining arrangements
involving procedures pursuant to which the futures and options positions
held in
an account would, in the case of some accounts, be aggregated and margin
requirements would be assessed on a portfolio basis, measuring the
total risk of
the combined positions.
33
|
Risk
Factors.
|
The
risk
factors should be read in connection with the other information
included in this
annual report on Form 10-K, including Management’s Discussion and Analysis of
Financial Condition and Results of Operations and US12OF’s condensed financial
statements and the related notes.
Investing
in Crude Oil Interests subjects US12OF to the risks of the crude
oil industry
and this could result in large fluctuations in the price of US12OF’s
units.
US12OF
is
subject to the risks and hazards of the crude oil industry because
it invests in
oil interests. The risks and hazards that are inherent in the
oil industry may
cause the price of oil to widely fluctuate. If US12OF’s units accurately track
the percentage changes in the Benchmark Futures Contracts or
the spot price of
light, sweet crude oil, then the price of its units may also
fluctuate.
The
risks
of crude oil drilling and production activities include the
following:
|
•
|
no
commercially productive crude oil or natural gas reservoirs
will be
found;
|
|
•
|
crude
oil and natural gas drilling and production activities
may be shortened,
delayed or canceled;
|
|
•
|
the
ability of an oil producer to develop, produce and
market reserves may be
limited by:
|
|
•
|
title
problems,
|
|
•
|
political
conflicts, including war,
|
|
•
|
weather
conditions,
|
|
•
|
compliance
with governmental requirements,
|
|
•
|
refinery
capacity, and
|
|
•
|
mechanical
difficulties or shortages or delays in the delivery
of drilling rigs and
other equipment;
|
|
•
|
decisions
of the cartel of oil producing countries (e.g., OPEC),
to produce more or
less oil;
|
|
•
|
increases
in oil production due to price rises may make it more
economical to
extract oil from additional sources and may later temper
further oil price
increases; and
|
|
•
|
economic
activity of users, as certain economies expand, oil
consumption and prices
increase (e.g., China, India) and as economies contract
(in a recession or
depression), oil demand and prices
fall.
|
The
crude
oil industry experiences numerous operating risks. These operating
risks include
the risk of fire, explosions, blow-outs, pipe failure, abnormally
pressured
formations and environmental hazards. Environmental hazards include
oil spills,
natural gas leaks, ruptures and discharges of toxic gases.
Crude
oil
operations also are subject to various U.S. federal, state and
local regulations
that materially affect operations. Matters regulated include
discharge permits
for drilling operations, drilling and abandonment bonds, reports
concerning
operations, the spacing of wells and pooling of properties and
taxation. At
various times, regulatory agencies have imposed price controls
and limitations
on production. In order to conserve supplies of crude oil and
natural gas, these
agencies have restricted the rates of flow of crude oil and natural
gas wells
below actual production capacity. Federal, state, and local laws
regulate
production, handling, storage, transportation and disposal of
crude oil and
natural gas, by-products from crude oil and natural gas and other
substances and
materials produced or used in connection with crude oil and natural
gas
operations.
The
price of US12OF’s units may be influenced by factors such as the supply and
demand for crude oil and the supply and demand for US12OF’s units. This may
cause the units to trade at a price that is above or below US12OF’s NAV per
unit. Accordingly, changes in the price of units may substantially
vary from
changes in the price of light, sweet crude oil. If this variation
occurs, then
investors may not be able to effectively use US12OF as a way
to hedge against
crude oil-related losses or as a way to indirectly invest in
crude
oil.
While
it
is expected that the trading prices of the units will fluctuate
in accordance
with the changes in US12OF’s NAV, the prices of units may also be influenced by
other factors, including the supply and demand for crude oil
and the units.
There is no guarantee that the units will not trade at appreciable
discounts
from, and/or premiums to, US12OF’s NAV. This could cause the changes in the
price of the units to substantially vary from the changes in
the price of light,
sweet crude oil. This may be harmful to investors because if
changes in the
price of units vary substantially from changes in the Benchmark
Futures Contract
or the spot price of light, sweet crude oil, then investors may
not be able to
effectively use US12OF as a way to hedge the risk of losses in
their crude
oil-related transactions or as a way to indirectly invest in
crude oil.
34
Changes
in US12OF’s NAV may not correlate with changes in the price of the Benchmark
Futures Contracts. If this were to occur, investors may not be
able to
effectively use US12OF as a way to hedge against crude oil-related
losses or as
a way to indirectly invest in crude oil.
The
General Partner will endeavor to invest US12OF’s assets as fully as possible in
Futures Contracts and Other Crude Oil-Related Investments so that
the changes in
percentage terms in the NAV will closely correlate with the changes
in
percentage terms in the price of the Benchmark Futures Contracts.
However,
changes in US12OF’s NAV may not correlate with changes in the price of the
Benchmark Futures Contracts for several reasons as set forth below:
|
·
|
US12OF
(i) may not be able to buy/sell the exact amount of Futures
Contracts and
Other Crude Oil-Related Investments to have a perfect
correlation with
NAV; (ii) may not always be able to buy and sell Futures
Contracts or
Other Crude Oil-Related Investments at the market price;
(iii) may not
experience a perfect correlation between the Benchmark
Futures Contract
and the underlying investments in Futures Contracts,
Other Crude
Oil-Related Investments and Treasuries, cash and/or cash
equivalents; and
(iv) is required to pay fees, including brokerage fees
and the management
fee, which will have an effect on the
correlation.
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·
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Supply
and demand for crude oil may cause the changes in the
market price of the
Benchmark Futures Contracts to vary from changes in US12OF’s NAV if US12OF
has fully invested in Futures Contracts that do not reflect
such supply
and demand and it is unable to replace such contracts
with Futures
Contracts that do reflect such supply and
demand.
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·
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US12OF
plans to buy only as many Futures Contracts and Other
Crude Oil-Related
Investments that it can to get the changes in percentage
terms of the NAV
as close as possible to the changes in percentage terms
in the price of
the Benchmark Futures Contracts. The remainder of its
assets will be
invested in Treasuries, cash and/or cash equivalents
and will be used to
satisfy initial margin and additional margin requirements,
if any, and to
otherwise support its investments in Crude Oil Interests.
Investments in
Treasuries, cash and/or cash equivalents, both directly
and as margin,
will provide rates of return that will vary from changes
in the value of
the price of light, sweet crude oil and the price of
the Benchmark Futures
Contract.
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·
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In
addition, because US12OF will incur certain expenses
in connection with
its investment activities, and will hold most of its
assets in more liquid
short-term securities for margin and other liquidity
purposes and for
redemptions that may be necessary on an ongoing basis,
the General Partner
will not be able to fully invest US12OF’s assets in Futures Contracts or
Other Crude Oil-Related Investments and there cannot
be perfect
correlation between changes in US12OF’s NAV and changes in the price of
the Benchmark Futures Contracts.
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·
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As
US12OF grows, there may be more or less correlation.
For example, if
US12OF only has enough money to buy three Benchmark Futures
Contracts and
it needs to buy four contracts to track the price of
light, sweet crude
oil then the correlation will be lower, but if it buys
20,000 Benchmark
Futures Contracts and it needs to buy 20,001 contracts
then the
correlation will be higher. At certain asset levels,
US12OF may be limited
in its ability to purchase the Benchmark Futures Contracts
or other
Futures Contracts due to accountability levels imposed
by the relevant
exchanges. To the extent that US12OF invests in these
other Futures
Contracts or Other Crude Oil-Related Investments, the
correlation with the
Benchmark Futures Contracts may be lower. If US12OF is
required to invest
in other Futures Contracts and Other Crude Oil-Related
Investments that
are less correlated with the Benchmark Futures Contracts,
US12OF would
likely invest in over-the-counter contracts to increase
the level of
correlation of US12OF’s assets. Over-the-counter contracts entail certain
risks described below under “Over-the-Counter Contract
Risk.”
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US12OF
anticipates that it will invest in equal amounts of each
of the Benchmark
Futures Contracts. Certain months of these futures contracts
may have less
liquidity and availability than other months of these
future contracts.
The inability to purchase and hold the Benchmark Futures
Contracts in
equal amounts may cause less correlation between the
units’ NAV and the
average of the prices of the Benchmark Futures
Contracts.
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US12OF
may not be able to buy the exact number of Futures Contracts
and Other
Crude Oil-Related Investments to have a perfect correlation
with the
Benchmark Futures Contracts if the purchase price of
Futures Contracts
required to be fully invested in such contracts is higher
than the
proceeds received for the sale of a Creation Basket on
the day the basket
was sold. In such case, US12OF could not invest the entire
proceeds from
the purchase of the Creation Basket in such futures contracts
(for
example, assume US12OF receives $4,000,000 for the sale
of a Creation
Basket and assume that the average of the prices of the
Futures Contracts
for crude oil that reflects the prices of the Benchmark
Futures Contracts
is $65.94, then US12OF could only invest in Futures Contracts
with an
aggregate value of $3,956,700), US12OF would be required
to invest a
percentage of the proceeds in Treasuries to be deposited
as margin with
the futures commission merchant through which the contract
was purchased.
The remainder of the purchase price for the Creation
Basket would remain
invested in Treasuries, cash and/or cash equivalents
as determined by the
General Partner from time to time based on factors such
as potential calls
for margin or anticipated redemptions. If the trading
market for Futures
Contracts is suspended or closed, US12OF may not be able
to purchase these
investments at the last reported price for such
investments.
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US12OF
may make use of “mini” contracts as a way of investing a dollar amount in
contracts that may more closely match the dollar amount
of net assets of
the fund. However, even the use of mini contracts does
not completely
eliminate the risk that US12OF will not be able to buy
or sell the exact
number of Futures Contracts necessary. In addition there
is a risk that
because of the size and relative liquidity of such contracts
when compared
to standard size Futures Contracts such as the Benchmark
Futures
Contracts, the price of a smaller contract for a particular
month may not
equate to the Benchmark Futures Contract for the same
month, which could
cause the change in the US12OF’s per unit price and NAV to vary from
changes in the average price of the Benchmark Futures
Contracts.
|
If
changes in US12OF’s NAV do not correlate with changes in the price of the
Benchmark Futures Contracts, then investing in US12OF may not be
an effective
way to hedge against crude oil-related losses or indirectly invest
in crude
oil.
The
Benchmark Futures Contracts may not correlate with the price of
light, sweet
crude oil and this could cause the changes in the price of units
to
substantially vary from changes in the price of light, sweet crude
oil. If this
were to occur, then investors may not be able to effectively use
US12OF as a way
to hedge against crude oil-related losses or as a way to indirectly
invest in
crude oil.
When
using the Benchmark Futures Contracts as a strategy to track the
price of light,
sweet crude oil, at best the correlation between changes in prices
of such Crude
Oil Interests and the delivery price of crude oil can be only approximate.
The
degree of imperfection of correlation depends upon circumstances
such as
variations in the speculative crude oil market, supply of and demand
for such
Crude Oil Interests and technical influences in futures trading.
If there is a
weak correlation between the Crude Oil Interests and the price
of light, sweet
crude oil, then the price of units may not accurately track the
price of light,
sweet crude oil and investors may not be able to effectively use
US12OF as a way
to hedge the risk of losses in their crude oil-related transactions
or as a way
to indirectly invest in crude oil.
35
US12OF
may experience a loss if it is required to sell Treasuries at a
price lower than
the price at which they were acquired.
The
value
of Treasuries generally moves inversely with movements in interest
rates. If
US12OF is required to sell Treasuries at a price lower than the
price at which
they were acquired, US12OF will experience a loss. This loss may
adversely
impact the price of the units and may decrease the correlation
between the price
of the units, the price of the Benchmark Futures Contracts and
Other Crude
Oil-Related Investments, and the delivery price of light, sweet
crude
oil.
Certain
of US12OF’s investments could be illiquid which could cause large losses
to
investors at any time or from time to time.
At
any
given time, US12OF may own 12 different monthly crude oil contracts
which have
differing expiration schedules. The amount of liquidity in the
crude oil futures
market for each of those months will vary. In some cases certain
of those months
may have relatively small amounts of open interest and daily trading
volume. As
a result, US12OF may not always be able to liquidate its positions
in its
investments at the desired price. It is difficult to execute a
trade at a
specific price when there is a relatively small volume of buy and
sell orders in
a market. A market disruption, such as a foreign government taking
political
actions that disrupt the market in its currency, its crude oil
production or
exports, or in another major export, can also make it difficult
to liquidate a
position. Alternatively, limits imposed by futures exchanges or
other regulatory
organizations, such as accountability levels, position limits and
price
fluctuation limits, may contribute to a lack of liquidity with
respect to some
Crude Oil Interests.
Unexpected
market illiquidity may cause major losses to investors at any time
or from time
to time. In addition, US12OF does not intend at this time to establish
a credit
facility, which would provide an additional source of liquidity
and instead will
rely only on the Treasuries, cash and/or cash equivalents that
it holds. The
anticipated large value of the positions in Futures Contracts that
the General
Partner will acquire or enter into for US12OF increases the risk
of illiquidity.
Other Crude Oil-Related Investments that US12OF invests in, such
as negotiated
over-the-counter contracts, may have a greater likelihood of being
illiquid
since they are contracts between two parties that take into account
not only
market risk, but also the relative credit, tax, and settlement
risks under such
contracts. Such contracts also have limited transferability that
results from
such risks and from the contract’s express limitations.
Because
both Futures Contracts and Other Crude Oil-Related Investments
may be illiquid,
US12OF’s Crude Oil Interests may be more difficult to liquidate at favorable
prices in periods of illiquid markets and losses may be incurred
during the
period in which positions are being liquidated.
If
the nature of hedgors and speculators in futures markets has shifted
such that
crude oil purchasers are the predominant hedgors in the market,
US12OF might
have to reinvest at higher futures prices or choose Other Crude
Oil-Related
Investments.
The
changing nature of the hedgors and speculators in the crude oil
market will
influence whether futures prices are above or below the expected
future spot
price. In order to induce speculators to take the corresponding
long side of the
same futures contract, crude oil producers must generally be willing
to sell
futures contracts at prices that are below expected future spot
prices.
Conversely, if the predominant hedgors in the futures market are
the purchasers
of the crude oil who purchase futures contracts to hedge against
a rise in
prices, then speculators will only take the short side of the futures
contract
if the futures price is greater than the expected future spot price
of crude
oil. This can have significant implications for US12OF when it
is time to
reinvest the proceeds from a maturing Futures Contract into a new
Futures
Contract.
36
While
it
is not the current intention of US12OF to take physical delivery
of crude oil
under its Futures Contracts, futures contracts are not required
to be
cash-settled and it is possible to take delivery under these
contracts. Storage
costs associated with purchasing crude oil could result in
costs and other
liabilities that could impact the value of Futures Contracts
or Other Crude
Oil-Related Investments. Storage costs include the time value
of money invested
in crude oil as a physical commodity plus the actual costs
of storing the crude
oil less any benefits from ownership of crude oil that are
not obtained by the
holder of a futures contract. In general, Futures Contracts
have a one-month
delay for contract delivery and the back month (the back month
is any future
delivery month other than the spot month) includes storage
costs. To the extent
that these storage costs change for crude oil while US12OF
holds Futures
Contracts or Other Crude Oil-Related Investments, the value
of the Futures
Contracts or Other Crude Oil-Related Investments, and therefore
US12OF’s NAV,
may change as well. Because it holds Futures Contracts that
will mature up to 13
months later than the spot or current month, US12OF’s NAV will be impacted more
from the changes in storage costs than would the NAV of a fund
that holds more
current futures contracts.
The
price relationship between the near month contract and the
other monthly
contracts that compose the Benchmark Futures Contracts will
vary and may impact
both the total return over time of US12OF’s NAV, as well as the degree to which
its total return tracks other crude oil price indices’ total
returns.
The
Benchmark Futures Contracts consist of the near month contract
to expire and the
contracts for the following eleven months, except during the
last two weeks of
the current month when the near month contract is sold and
replaced by the
futures contract for the thirteenth month following the current
month. In the
event of a crude oil futures market where near month contracts
trade at a higher
price than the price of contracts that expire later in time,
a situation
described as “backwardation” in the futures market, then absent the impact of
the overall movement in crude oil prices the value of the benchmark
contract
would tend to rise as it approaches expiration. As a result
the total return of
the Benchmark Futures Contract would tend to track higher.
Conversely, in the
event of a crude oil futures market where near month contracts
trade at a lower
price than the price of contracts that expire later in time,
a situation
described as “contango” in the futures market, then absent the impact of the
overall movement in crude oil prices the value of the benchmark
contract would
tend to decline as it approaches expiration. As a result the
total return of the
Benchmark Futures Contract would tend to track lower. When
compared to total
return of other price indices, such as the spot price of crude
oil, the impact
of backwardation and contango may lead the total return of
US12OF’s NAV to vary
significantly. In the event of a prolonged period of contango,
and absent the
impact of rising or falling crude oil prices, this could have
a significant
negative impact on US12OF’s NAV and total return. Furthermore, a portfolio that
consists of twelve different monthly contracts, ranging in
a “strip” from the
first month to the twelfth month, will be impacted differently
by contango and
backwardation than a portfolio that consists of just the first
month
contract.
Because
US12OF’s portfolio will typically hold as many as 12 different crude
oil futures
contracts at all times, it may be more expensive for US12OF
to buy or sell
futures contracts for its portfolio.
Because
US12OF will typically hold as many as 12 different futures
contracts at any one
time, the cost of trading a large number of different contracts
could be greater
than the cost of trading the same dollar amount using just
one contract. In
addition, the bid/ask spread for buying these different contracts
could also on
average be greater than the bid/ask spread for buying a single
futures contract
month. This could make it more expensive for US12OF to invest
compared to
investing in a single monthly contract. Wider bid/ask spreads
and/or higher
commission or brokerage costs would negatively impact an investor’s investment
returns in US12OF.
Because
US12OF’s portfolio will typically hold as many as 12 different crude
oil futures
contracts at all times, firms that make a market in the units
will also need to
hold multiple contracts when hedging their inventories of units
and when
creating or redeeming baskets. This could lead to the units
of US12OF trading at
wider bid/ask spreads in the secondary market than an exchange
traded security
holding crude oil futures that uses a fewer number of futures
contracts at any
given time.
Brokerage
firms or other market participants that make a secondary market
in the units of
US12OF may do so by simultaneously hedging their positions
by being long, or
short, the same Futures Contracts that US12OF holds in its
portfolio. The cost
to brokerage firms or other market participants in putting
on and taken off
these hedges is one of the factors that determine the size
of the bid/ask spread
they quote on a security such as US12OF. Because US12OF will
typically hold as
many as 12 different futures contracts at any one time, the
brokerage firms or
other market participants will also find themselves having
to trade a number of
different contracts as well. The cost of trading a large number
of different
contracts may be greater than the cost of trading the same
dollar amount using
just one contract. As a result, the bid/ask spread for US12OF
may be wider than
the bid/ask spread for an exchange traded security investing
in a fewer number
of futures contracts at any given time. The wider bid/ask spread
may negatively
impact an investor’s investment returns in US12OF.
37
Regulation
of the commodity interests and energy markets is extensive and
constantly
changing; future regulatory developments are impossible to predict
but may
significantly and adversely affect US12OF.
The
regulation of commodity interest transactions in the United
States is a rapidly
changing area of law and is subject to ongoing modification
by governmental and
judicial action. In addition, various national governments
have expressed
concern regarding the disruptive effects of speculative trading
in the energy
markets and the need to regulate the derivatives markets in
general. The effect
of any future regulatory change on US12OF is impossible to
predict, but could be
substantial and adverse.
If
an investor invests in US12OF for purposes of hedging, it might
be subject to
several risks including the possibility of losing the benefit
of favorable
market movement.
While
US12OF does not intend to engage in hedging strategies, participants
in the
crude oil or in other industries may use US12OF as a vehicle
to hedge the risk
of losses in their crude oil-related transactions. There are
several risks in
connection with using US12OF as a hedging device. While hedging
can provide
protection against an adverse movement in market prices, it
can also preclude a
hedgor’s opportunity to benefit from a favorable market movement.
In a hedging
transaction, the hedgor may be concerned that the hedged item
will increase in
price, but must recognize the risk that the price may instead
decline and if
this happens he will have lost his opportunity to profit from
the change in
price because the hedging transaction will result in a loss
rather than a gain.
Thus, the hedgor foregoes the opportunity to profit from favorable
price
movements.
In
addition, if the hedge is not a perfect one, the hedgor can
lose on the hedging
transaction and not realize an offsetting gain in the value
of the underlying
item being hedged.
When
using futures contracts as a hedging technique, at best, the
correlation between
changes in prices of futures contracts and of the items being
hedged can be only
approximate. The degree of imperfection of correlation depends
upon
circumstances such as: variations in speculative markets, demand
for futures and
for crude oil products, technical influences in futures trading,
and differences
between anticipated energy costs being hedged and the instruments
underlying the
standard futures contracts available for trading. Even a well-conceived
hedge
may be unsuccessful to some degree because of unexpected market
behavior as well
as the expenses associated with creating the hedge.
In
addition, using an investment in US12OF as a hedge for changes
in energy costs
(e.g.,
investing in
crude oil, heating oil, gasoline, natural gas or other fuels,
or electricity)
may not correlate because changes in the spot price of crude
oil may vary from
changes in energy costs because the spot price may not be at
the same rate as
changes in the price of other energy products, and, in any
case, the price of
crude oil does not reflect the refining, transportation, and
other costs that
may impact the hedgor’s energy costs.
An
investment in US12OF may provide investors little or no diversification
benefits. Thus, in a declining market, US12OF may have no gains
to offset an
investor’s losses from other investments, and an investor may suffer
losses on its investment in US12OF at the same time
it incurs losses with respect to other asset classes.
Historically,
Futures Contracts and Other Crude Oil-Related Investments have
generally been
non-correlated to the performance of other asset classes such
as stocks and
bonds. Non-correlation means that there is a low statistically
valid
relationship between the performance of futures and other commodity
interest
transactions, on the one hand, and stocks or bonds, on the
other hand. However,
there can be no assurance that such non-correlation will continue
during future
periods. If, contrary to historic patterns, US12OF’s performance were to move in
the same general direction as the financial markets, an investor
will obtain
little or no diversification benefits from an investment in
the units. In such a
case, US12OF may have no gains to offset an investor’s losses from other
investments, and an investor may suffer losses on its investment
in US12OF at
the same time it incurs losses with respect to other investments.
Variables
such as drought, floods, weather, embargoes, tariffs and other
political events
may have a larger impact on crude oil prices and crude oil-linked
instruments,
including Futures Contracts and Other Crude Oil-Related Investments,
than on
traditional securities. These additional variables may create
additional
investment risks that subject US12OF’s investments to greater volatility than
investments in traditional securities.
Non-correlation
should not be confused with negative correlation, where the
performance of two
asset classes would be opposite of each other. There is no
historic evidence
that the spot price of crude oil and prices
of
other financial assets, such as stocks and bonds, are negatively
correlated. In
the absence of negative correlation, US12OF cannot be expected
to be
automatically profitable during unfavorable periods for the
stock market, or
vice versa.
38
US12OF
is not a registered investment company so investors do not
have the protections
of the 1940 Act.
US12OF
is
not an investment company subject to the 1940 Act. Accordingly,
investors do not
have the protections afforded by that statute which, for example,
requires
investment companies to have a majority of disinterested directors
and regulates
the relationship between the investment company and its investment
manager.
US12OF
has no operating history so there is no performance history
to serve as a basis
for an investor to evaluate an investment in US12OF.
US12OF
is
new and has no operating history. Therefore, an investor does
not have the
benefit of reviewing the past performance of US12OF as a basis
for an investor
to evaluate an investment in US12OF. The General Partner’s current experience
involves managing USOF, an exchange traded security that invests primarily
in Futures Contracts for light, sweet crude oil, Treasuries,
cash and/or cash
equivalents. However, USOF has a different Benchmark Futures
Contract than
US12OF. USOF’s Benchmark Futures Contract consists of a single contract
which is
the contract nearest to expiration (unless that contract is
within two weeks of
expiration in which case it is the next nearest month to expiration).
The use of
a single contract as its benchmark means that the General Partner’s experience
with USOF may not be directly applicable to US12OF.
The
General Partner’s current experience also involves managing USNG, an
exchange traded security that invests primarily in Futures
Contracts for natural
gas, Treasuries, cash and/or cash equivalents. However,
there are significant
differences between the natural gas futures market and
that of crude oil
futures. The General Partner’s results with USNG may not be representative of
results that may be experienced with a fund investing in
crude oil
futures.
The
General Partner’s current experience also
involves managing USG, an exchange traded security that
invests primarily in
Futures Contracts for gasoline, cash and/or cash
equivalents. However, there are significant differences between the
gasoline futures market and that of crude oil futures. The General
Partner’s results with USG may not be representative of results
that may be
experienced with a fund investing in crude oil futures.
The
General Partner is leanly staffed and relies heavily on key
personnel to manage
trading activities.
In
managing and directing the day-to-day activities and affairs
of US12OF, the
General Partner relies heavily on Messrs. Nicholas Gerber, John Love
and John Hyland. If Messrs. Gerber, Love or Hyland were to leave
or be unable to carry out their present responsibilities, it
may have an adverse
effect on the management of US12OF. Furthermore, Messrs. Gerber,
Hyland
and Love currently are involved in the management of USOF, USNG
and
USG and the General Partner is currently in the process of registering
two
other exchange traded securities, USHO and US12NG. Messrs.
Gerber and Love
are also employed by Ameristock Corporation, a registered investment
adviser
that manages a public mutual fund. It is estimated that Mr.
Gerber will spend
approximately 50% of his time on US12OF, USNG, USOF, USG, USHO and
US12NG matters. Mr. Love will spend approximately 95% of his time
on
US12OF, USNG, USOF, USG, USHO and US12NG matters and Mr. Hyland will spend
approximately 75% of his time on US12OF, USNG, USOF, USG, USHO and
US12NG matters. To the extent that the General Partner establishes
additional funds, even greater demands will be placed on Messrs.
Gerber, Love and Hyland, as well as the other officers of the General
Partner, including Mr. Mah, the Chief Financial Officer, and
its Board of
Directors.
Accountability
levels, position limits, and daily price fluctuation limits
set by the exchanges
have the potential to cause a tracking error, which could cause
the price of
units to substantially vary from the price of the Benchmark
Futures Contracts
and prevent an investor from being able to effectively use
US12OF as a way to
hedge against crude oil-related losses or as a way to indirectly
invest in crude
oil.
U.S.
designated contract markets such as the NYMEX have established
accountability
levels and position limits on the maximum net long or net short
futures
contracts in commodity interests that any person or group of
persons under
common trading control (other than as a hedge, which an investment
in US12OF is
not) may hold, own or control. For example, the current accountability
level for
investments at any one time in the Benchmark Futures Contract is 20,000.
While this is not a fixed ceiling, it is a threshold above
which the NYMEX may
exercise greater scrutiny and control over an investor, including
limiting an
investor to holding no more than 20,000 Benchmark Futures Contracts.
With regard
to position limits, the NYMEX limits an investor from holding
more than 3,000
net futures in the last 3 days of trading in the near month
contract to
expire.
In
addition to accountability levels and position limits, the
NYMEX also sets daily
price fluctuation limits on the Benchmark Futures Contracts.
The daily price
fluctuation limit establishes the maximum amount that the price
of a futures
contract may vary either up or down from the previous day’s settlement price.
Once the daily price fluctuation limit has been reached in
a particular Futures
Contract, no trades may be made at a price beyond that limit.
For
example, the NYMEX imposes a $10.00 per barrel ($10,000 per
contract) price
fluctuation limit for the Benchmark Futures Contracts. This
limit is initially
based off of the previous trading day’s settlement price. If any Benchmark
Futures Contract is traded, bid, or offered at the limit for
five minutes,
trading is halted for five minutes. When trading resumes it
begins at the point
where the limit was imposed and the limit is reset to be $10.00
per barrel in
either direction of that point. If another halt were triggered,
the market would
continue to be expanded by $10.00 per barrel in either direction
after each
successive five-minute trading halt. There is no maximum price
fluctuation limit
during any one trading session.
All
of
these limits may potentially cause a tracking error between
the price of the
units and the price of the Benchmark Futures Contracts. This
may in turn prevent
an investor from being able to effectively use US12OF as a
way to hedge against
crude oil-related losses or as a way to indirectly invest in
crude
oil.
US12OF
is
not limiting the size of the offering and is committed to utilizing
substantially all of its proceeds to purchase Futures Contracts
and Other Crude
Oil-Related Investments. If US12OF encounters accountability
levels, position
limits, or price fluctuation limits for crude oil contracts
on the NYMEX, it may
then, if permitted under applicable regulatory requirements,
purchase Futures
Contracts on the ICE Futures (formerly, the International Petroleum
Exchange) or
other exchanges that trade listed crude oil futures. The Futures
Contracts
available on the ICE Futures are comparable to the contracts
on the NYMEX, but
they may have different underlying commodities, sizes, deliveries,
and
prices.
39
There
are technical and fundamental risks inherent in the trading
system the General
Partner intends to employ.
The
General Partner’s trading system is quantitative in nature and it is possible
that the General Partner might make a mathematical error. In
addition, it is
also possible that a computer or software program may malfunction
and cause an
error in computation.
US12OF
and the General Partner may have conflicts of interest, which
may permit them to
favor their own interests to the detriment of an investor.
US12OF
and the General Partner may have inherent conflicts to the
extent the General
Partner attempts to maintain US12OF’s asset size in order to preserve its fee
income and this may not always be consistent with US12OF’s objective of having
the value of its unit’s NAV track changes in the price of the Benchmark Futures
Contracts. The General Partner’s officers, directors and employees do not devote
their time exclusively to US12OF. These persons are directors,
officers or
employees of other entities that may compete with US12OF for
their services.
They could have a conflict between their responsibilities to
US12OF and to those
other entities.
In
addition, the General Partner’s principals, officers, directors or employees may
trade futures and related contracts for their own account.
A conflict of
interest may exist if their trades are in the same markets
and at the same time
as US12OF trades using the clearing broker to be used by US12OF.
A potential
conflict also may occur if the General Partner’s principals, officers, directors
or employees trade their accounts more aggressively or take
positions in their
accounts which are opposite, or ahead of, the positions taken
by
US12OF.
The
General Partner has sole current authority to manage the investments
and
operations of US12OF, and this may allow it to act in a way
that furthers its
own interests which may create a conflict with the best interests
of an
investor. Limited partners have limited voting control, which
will limit the
ability to influence matters such as amendment of the LP Agreement,
change in
US12OF’s basic investment policy, dissolution of this fund, or the
sale or
distribution of US12OF’s assets.
The
General Partner serves as the general partner of each of USOF,
USNG, USG, USHO
and US12NG, as well as US12OF. The General Partner may have a conflict
to the extent that its trading decisions for US12OF may be
influenced by the
effect they would have on the other funds it manages. These
trading decisions
may be influenced since the General Partner also serves as
the general partner
for all of the funds, and is required to meet all of the funds’ investment
objectives as well as US12OF’s. If the General Partner believes that a trading
decision it made on behalf of US12OF might (i) impede its other
funds from
reaching their investment objectives, or (ii) improve the likelihood
of meeting
its other funds’ objectives, then the General Partner may choose to change its
trading decision for US12OF, which could either impede or improve
the
opportunity for US12OF from meeting its investment objective.
In addition, the
General Partner is required to indemnify the officers and directors
of its other
funds if the need for indemnification arises. This potential
indemnification
will cause the General Partner’s assets to decrease. If the General Partner’s
other sources of income are not sufficient to compensate for
the
indemnification, then the General Partner may terminate and
an investor could
lose its investment.
Unitholders
may only vote on the removal of the General Partner and limited
partners have
only limited voting rights. Unitholders and limited partners
will not
participate in the management of US12OF and do not control
the General Partner
so they will not have influence over basic matters that affect
US12OF.
Unitholders
that have not applied to become limited partners have no voting
rights, other
than to remove the General Partner. Limited partners will have
limited voting
rights with respect to US12OF’s affairs. Unitholders may remove the General
Partner only if 66 and 2/3% of the unitholders elect to do
so. Unitholders and
limited partners will not be permitted to participate in the
management or
control of US12OF or the conduct of its business. Unitholders
and limited
partners must therefore rely upon the duties and judgment of
the General Partner
to manage US12OF’s affairs.
40
The
General Partner may manage a large amount of assets and this
could affect
US12OF’s ability to trade profitably.
Increases
in assets under management may affect trading decisions. In
general, the General
Partner does not intend to limit the amount of assets of US12OF that it
may
manage. The more assets the General Partner manages, the more
difficult it may
be for it to trade profitably because of the difficulty of
trading larger
positions without adversely affecting prices and performance
and of managing
risk associated with larger positions.
US12OF
could terminate at any time and cause the liquidation and potential
loss of an
investor’s investment and could upset the overall maturity and timing
of
an investor’s investment portfolio.
US12OF
may terminate at any time, regardless of whether US12OF has
incurred losses,
subject to the terms of the LP Agreement. In particular, unforeseen
circumstances, including the death, adjudication of incompetence,
bankruptcy,
dissolution, or removal of the General Partner could cause
US12OF to terminate
unless a majority interest of the limited partners within 90
days of the event
elects to continue the partnership and appoints a successor
general partner.
However, no level of losses will require the General Partner
to terminate
US12OF. US12OF’s termination would cause the liquidation and potential loss
of
an investor’s investment. Termination could also negatively affect the
overall
maturity and timing of an investor’s investment portfolio.
Limited
partners may not have limited liability in certain circumstances,
including
potentially having liability for the return of wrongful
distributions.
Under
Delaware law, a limited partner might be held liable for our
obligations as if
it were a General Partner if the limited partner participates
in the control of
the partnership’s business and the persons who transact business with the
partnership think the limited partner is the General Partner.
A
limited
partner will not be liable for assessments in addition to its
initial capital
investment in any of our capital securities representing
units. However, a limited partner may be required to repay to us any
amounts wrongfully returned or distributed to it under some
circumstances. Under
Delaware law, US12OF may not make a distribution to limited
partners if the
distribution causes our liabilities (other than liabilities
to partners on
account of their partnership interests and nonrecourse liabilities)
to exceed
the fair value of our assets. Delaware law provides that a
limited partner who
receives such a distribution and knew at the time of the distribution
that the
distribution violated the law will be liable to the limited
partnership for the
amount of the distribution for three years from the date of
the
distribution.
With
adequate notice, a limited partner may be required to withdraw
from the
partnership for any reason.
If
the
General Partner gives at least fifteen (15) days’ written notice to a limited
partner, then the General Partner may for any reason, in its
sole discretion,
require any such limited partner to withdraw entirely from
the partnership or to
withdraw a portion of its partner capital account. The General
Partner may
require withdrawal even in situations where the limited partner
has complied
completely with the provisions of the LP Agreement.
41
US12OF’s
existing units are, and any units US12OF issues in the future
will be, subject
to restrictions on transfer. Failure to satisfy these requirements
will preclude
an investor from being able to have all the rights of a limited
partner.
No
transfer of any unit or interest therein may be made if such
transfer would (a)
violate the then applicable federal or state securities laws
or rules and
regulations of the SEC, any state securities commission, the
CFTC or any other
governmental authority with jurisdiction over such transfer,
or (b) cause US12OF
to be taxable as a corporation or affect US12OF’s existence or qualification as
a limited partnership. In addition, investors may only become
limited partners
if they transfer their units to purchasers that meet certain
conditions outlined
in the LP Agreement, which provides that each record holder
or limited partner
or unitholder applying to become a limited partner (each a
record holder) may be
required by the General Partner to furnish certain information,
including that
holder’s nationality, citizenship or other related status. A transferee
who is
not a U.S. resident may not be eligible to become a record
holder or a limited
partner if its ownership would subject US12OF to the risk of
cancellation or
forfeiture of any of its assets under any federal, state or
local law or
regulation. All purchasers of US12OF’s units, who wish to become limited
partners or record holders, and receive cash distributions,
if any, or have
certain other rights, must deliver an executed transfer application
in which the
purchaser or transferee must certify that, among other things,
he, she or it
agrees to be bound by US12OF’s LP Agreement and is eligible to purchase US12OF’s
securities. Any transfer of units will not be recorded by the
transfer agent or
recognized by us unless a completed transfer application is
delivered to the
General Partner or the Administrator. A person purchasing US12OF’s existing
units, who does not execute a transfer application and certify
that the
purchaser is eligible to purchase those securities acquires
no rights in those
securities other than the right to resell those securities.
Whether or not a
transfer application is received or the consent of the General
Partner obtained,
our units will be securities and will be transferable according
to the laws
governing transfers of securities. See “Transfer of Units.”
US12OF
does not expect to make cash distributions.
The
General Partner intends to re-invest any realized gains in
Crude Oil Interests
rather than distributing cash to limited partners. Therefore,
unlike mutual
funds, commodity pools or other investment pools that actively
manage their
investments in an attempt to realize income and gains from
their investing
activities and distribute such income and gains to their investors,
US12OF
generally does not expect to distribute cash to limited partners.
An investor
should not invest in US12OF if it will need cash distributions
from US12OF to
pay taxes on its share of income and gains of US12OF, if any,
or for any other
reason. Although US12OF does not intend to make cash distributions,
the income
earned from its investments held directly or posted as margin
may reach levels
that merit distribution, e.g., at levels where such income
is not necessary to
support its underlying investments in crude oil interests and
an investor
adversely reacts to being taxed on such income without receiving
distributions
that could be used to pay such tax. If this income becomes
significant then cash
distributions may be made.
There
is a risk that US12OF will not earn trading gains sufficient
to compensate for
the fees and expenses that it must pay and as such US12OF may
not earn any
profit.
US12OF
pays brokerage charges of approximately 0.016% (including futures
commission
merchant fees of $4.00 per buy or sell), any licensing fees
for the use of
intellectual property, registration fees with the SEC, FINRA,
or other
regulatory agency in connection with offers and sales of the
units subsequent to
the initial offering of the units including the legal, printing,
accounting and
other expenses associated therewith. US12OF also pays the fees
and expenses,
including directors and officers liability insurance, of the
independent
directors, management fees of 0.60% of NAV on its average net
assets, tax
accounting and reporting costs and over-the-counter spreads
and extraordinary
expenses (i.e.
expenses
not in the ordinary course of business, including the indemnification
of any
person against liabilities and obligations to the extent permitted
by law and
required under the LP Agreement and under agreements entered
into by the General
Partner on US12OF’s behalf and the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of litigation
and the incurring
of legal expenses and the settlement of claims and litigation)
that cannot be
quantified. These fees and expenses must be paid in all cases
regardless of
whether US12OF’s activities are profitable. Accordingly, US12OF must earn
trading gains sufficient to compensate for these fees and expenses
before it can
earn any profit.
42
US12OF,
to date, has depended upon the General Partner to pay all its
expenses. If this
offering of units does not raise sufficient funds to pay US12OF’s future
expenses, the General Partner no longer pays such expenses
and no other source
of funding of expenses is found, US12OF will terminate and
an investor may lose
all or part of its investment.
To
date,
all of US12OF’s expenses have been funded by the General Partner. If the
General
Partner and US12OF are unsuccessful in raising sufficient funds
to cover its
expenses or in locating any other source of funding, US12OF
will terminate and
an investor may lose all or part of its investment.
US12OF
may incur higher fees and expenses upon renewing existing or
entering into new
contractual relationships.
The
clearing arrangements between the clearing brokers and US12OF
generally are
terminable by the clearing brokers once the clearing broker
has given US12OF
notice. Upon termination, the General Partner may be required
to renegotiate or
make other arrangements for obtaining similar services if US12OF
intends to
continue trading in Futures Contracts or Other Crude Oil-Related
Investments at
its present level of capacity. The services of any clearing
broker may not be
available, or even if available, these services may not be
available on the
terms as favorable as those of the expired or terminated clearing
arrangements.
US12OF
may miss certain trading opportunities because it will not
receive the benefit
of the expertise of independent trading advisors.
The
General Partner does not employ trading advisors for US12OF;
however, it
reserves the right to employ them in the future. The only advisor
to US12OF is
the General Partner. A lack of independent trading advisors
may be
disadvantageous to US12OF because it will not receive the benefit
of a trading
advisor’s expertise.
An
unanticipated number of redemption requests during a short
period of time could
have an adverse effect on the NAV of US12OF.
If
a
substantial number of requests for redemption of Redemption
Baskets are received
by US12OF during a relatively short period of time, US12OF
may not be able to
satisfy the requests from US12OF’s assets not committed to trading. As a
consequence, it could be necessary to liquidate positions in
US12OF’s trading
positions before the time that the trading strategies would
otherwise dictate
liquidation.
The
failure or bankruptcy of a clearing broker could result in
a substantial loss of
US12OF’s assets.
Under
CFTC regulations, a clearing broker maintains customers’ assets in a bulk
segregated account. If a clearing broker fails to do so, or
is unable to satisfy
a substantial deficit in a customer account, its other customers
may be subject
to risk of a substantial loss of their funds in the event of
that clearing
broker’s bankruptcy. In that event, the clearing broker’s customers, such as
US12OF, are entitled to recover, even in respect of property
specifically
traceable to them, only a proportional share of all property
available for
distribution to all of that clearing broker’s customers. US12OF also may be
subject to the risk of the failure of, or delay in performance
by, any exchanges
and markets and their clearing organizations, if any, on which
commodity
interest contracts are traded.
From
time
to time, the clearing brokers may be subject to legal or regulatory
proceedings
in the ordinary course of their business. A clearing broker’s involvement in
costly or time-consuming legal proceedings may divert financial
resources or
personnel away from the clearing broker’s trading operations, which could impair
the clearing broker’s ability to successfully execute and clear US12OF’s
trades.
Third
parties may infringe upon or otherwise violate intellectual
property rights or
assert that the General Partner has infringed or otherwise
violated their
intellectual property rights, which may result in significant
costs and diverted
attention.
Third
parties may utilize US12OF’s intellectual property or technology, including the
use of its business methods, trademarks and trading program
software, without
permission. The General Partner has a patent pending for US12OF’s business
method and it is registering its trademarks. US12OF does not
currently have any
proprietary software. However, if it obtains proprietary software
in the future,
then any unauthorized use of US12OF’s proprietary software and other technology
could also adversely affect its competitive advantage. US12OF
may have
difficulty monitoring unauthorized uses of its patents, trademarks,
proprietary
software and other technology. Also, third parties may independently
develop
business methods, trademarks or proprietary software and other
technology
similar to that of the General Partner or claim that the General
Partner has
violated their intellectual property rights, including their
copyrights,
trademark rights, trade names, trade secrets and patent rights.
As a result, the
General Partner may have to litigate in the future to protect
its trade secrets,
determine the validity and scope of other parties’ proprietary rights, defend
itself against claims that it has infringed or otherwise violated
other parties’
rights, or defend itself against claims that its rights are
invalid. Any
litigation of this type, even if the General Partner is successful
and
regardless of the merits, may result in significant costs,
divert its resources
from US12OF, or require it to change its proprietary software
and other
technology or enter into royalty or licensing agreements. See
“Legal Risks”
below.
43
The
success of US12OF depends on the ability of the General Partner to accurately
implement trading systems, and any failure to do so could subject US12OF
to
losses on such transactions.
The
General Partner anticipates using mathematical formulas built into a generally
available spreadsheet program to decide whether it should buy or sell Crude
Oil
Interests each day. Specifically, the General Partner anticipates using
the
spreadsheet to make mathematical calculations and to monitor positions
in Crude
Oil Interests and Treasuries and correlations to the Benchmark Futures
Contracts. The General Partner must accurately process the spreadsheets’ outputs
and execute the transactions called for by the formulas. In addition, US12OF
relies on the General Partner to properly operate and maintain its computer
and
communications systems. Execution of the formulas and operation of the
systems
are subject to human error. Any failure, inaccuracy or delay in implementing
any
of the formulas or systems and executing US12OF’s transactions could impair its
ability to achieve US12OF’s investment objective. It could also result in
decisions to undertake transactions based on inaccurate or incomplete
information. This could cause substantial losses on transactions.
US12OF
may experience substantial losses on transactions if the computer or
communications system fails.
US12OF’s
trading activities, including its risk management, depend on the integrity
and
performance of the computer and communications systems supporting them.
Extraordinary transaction volume, hardware or software failure, power or
telecommunications failure, a natural disaster or other catastrophe could
cause
the computer systems to operate at an unacceptably slow speed or even fail.
Any
significant degradation or failure of the systems that the General Partner
uses
to gather and analyze information, enter orders, process data, monitor
risk
levels and otherwise engage in trading activities may result in substantial
losses on transactions, liability to other parties, lost profit opportunities,
damages to the General Partner’s and US12OF’s reputations, increased operational
expenses and diversion of technical resources.
If
the computer and communications systems are not upgraded, US12OF’s financial
condition could be harmed.
The
development of complex computer and communications systems and new technologies
may render the existing computer and communications systems supporting
US12OF’s
trading activities obsolete. In addition, these computer and communications
systems must be compatible with those of third parties, such as the systems
of
exchanges, clearing brokers and the executing brokers. As a result, if
these
third parties upgrade their systems, the General Partner will need to make
corresponding upgrades to continue effectively its trading activities.
US12OF’s
future success will depend on US12OF’s ability to respond to changing
technologies on a timely and cost-effective basis.
US12OF
depends on the reliable performance of the computer and communications
systems
of third parties, such as brokers and futures exchanges, and may experience
substantial losses on transactions if they fail.
US12OF
depends on the proper and timely function of complex computer and communications
systems maintained and operated by the futures exchanges, brokers and other
data
providers that the General Partner uses to conduct trading activities.
Failure
or inadequate performance of any of these systems could adversely affect
the
General Partner’s ability to complete transactions, including its ability to
close out positions, and result in lost profit opportunities and significant
losses on commodity interest transactions. This could have a material adverse
effect on revenues and materially reduce US12OF’s available capital. For
example, unavailability of price quotations from third parties may make
it
difficult or impossible for the General Partner to use its proprietary
software
that it relies upon to conduct its trading activities. Unavailability of
records
from brokerage firms may make it difficult or impossible for the General
Partner
to accurately determine which transactions have been executed or the details,
including price and time, of any transaction executed. This unavailability
of
information also may make it difficult or impossible for the General Partner
to
reconcile its records of transactions with those of another party or to
accomplish settlement of executed transactions.
The
occurrence of a terrorist attack, or the outbreak, continuation or expansion
of
war or other hostilities could disrupt US12OF’s trading activity and materially
affect US12OF’s profitability.
The
operations of US12OF, the exchanges, brokers and counterparties with which
US12OF does business, and the markets in which US12OF does business could
be
severely disrupted in the event of a major terrorist attack or the outbreak,
continuation or expansion of war or other hostilities. The terrorist attacks
of
September 11, 2001 and the war in Iraq, global anti-terrorism initiatives
and
political unrest in the Middle East and Southeast Asia continue to fuel
this
concern.
44
Risk
of Leverage and Volatility
If
the General Partner permits US12OF to become leveraged, an investor
could lose
all or substantially all of its investment if US12OF’s trading positions
suddenly turn unprofitable.
Commodity
pools’ trading positions in futures contracts or other commodity interests
are
typically required to be secured by the deposit of margin funds that
represent
only a small percentage of a futures contract’s (or other commodity interests’)
entire face value. This feature permits commodity pools to “leverage” their
assets by purchasing or selling futures contracts (or other commodity
interests)
with an aggregate value in excess of the commodity pool’s assets. While this
leverage can increase the pool’s profits, relatively small adverse movements in
the price of the pool’s futures contracts can cause significant losses to the
pool. While the General Partner does not currently intend to leverage
US12OF’s
assets, it is not prohibited from doing so under the LP Agreement or
otherwise.
The
price of crude oil is volatile which could cause large fluctuations
in the price
of units.
Movements
in the price of crude oil may be the result of factors outside of the
General
Partner’s control and may not be anticipated by the General Partner. Among
the
factors that can cause volatility in the price of crude oil are:
|
•
|
worldwide
or regional demand for energy, which is affected by economic
conditions;
|
|
•
|
the
domestic and foreign supply and inventories of oil and
gas;
|
|
•
|
weather
conditions, including abnormally mild winter or summer weather,
and
abnormally harsh winter or summer
weather;
|
|
•
|
availability
and adequacy of pipeline and other transportation
facilities;
|
|
•
|
domestic
and foreign governmental regulations and
taxes;
|
|
•
|
political
conditions in gas or oil producing
regions;
|
|
•
|
the
ability of members of the Organization of Petroleum Exporting
Countries
(“OPEC”) to agree upon and maintain oil prices and production
levels;
|
|
•
|
the
price and availability of alternative fuels; and
|
|
|
•
|
the
impact of energy conservation
efforts.
|
45
The
impact of environmental and other governmental laws and regulations
that may
affect the price of crude oil.
Environmental
and other governmental laws and regulations have increased the costs
to plan,
design, drill, install, operate and abandon crude oil and oil wells.
Other laws
have prevented exploration and drilling of crude oil in certain environmentally
sensitive federal lands and waters. Several environmental laws that
have a
direct or an indirect impact on the price of crude oil include, but
are not
limited to, the Clean Air Act, Clean Water Act, Resource Conservation
and
Recovery Act, and the Comprehensive Environmental Response, Compensation
and
Liability Act of 1980.
The
limited method for transporting and storing crude oil may cause the
price of
crude oil to increase.
Crude
oil
is primarily transported and stored throughout the United States by
way of
pipeline and underground storage facilities. These systems may not
be adequate
to meet demand, especially in times of peak demand or in areas of the
United
States where gas service is already limited due to minimal pipeline
and storage
infrastructure. As a result of the limited method for transporting
and storing
crude oil, the price of crude oil may increase.
Over-the-Counter
Contract Risk
Over-the-counter
transactions are subject to little, if any, regulation.
A
portion
of US12OF’s assets may be used to trade over-the-counter crude oil interest
contracts, such as forward contracts or swap or spot contracts. Over-the-counter
contracts are typically traded on a principal-to-principal basis through
dealer
markets that are dominated by major money center and investment banks
and other
institutions and are essentially unregulated by the CFTC. An investor
therefore
does not receive the protection of CFTC regulation or the statutory
scheme of
the CEA in connection with this trading activity by US12OF. The markets
for
over-the-counter contracts rely upon the integrity of market participants
in
lieu of the additional regulation imposed by the CFTC on participants
in the
futures markets. The lack of regulation in these markets could expose
US12OF in
certain circumstances to significant losses in the event of trading
abuses or
financial failure by participants.
US12OF
will be subject to credit risk with respect to counterparties to
over-the-counter contracts entered into by US12OF or held by special
purpose or
structured vehicles.
US12OF
also faces the risk of non-performance by the counterparties to the
over-the-counter contracts. Unlike in futures contracts, the counterparty
to
these contracts is generally a single bank or other financial institution,
rather than a clearing organization backed by a group of financial
institutions.
As a result, there will be greater counterparty credit risk in these
transactions. A counterparty may not be able to meet its obligations
to US12OF,
in which case US12OF could suffer significant losses on these
contracts.
If
a
counterparty becomes bankrupt or otherwise fails to perform its obligations
due
to financial difficulties, US12OF may experience significant delays
in obtaining
any recovery in a bankruptcy or other reorganization proceeding. US12OF
may
obtain only limited recovery or may obtain no recovery in such
circumstances.
US12OF
may be subject to liquidity risk with respect to its over-the-counter
contracts.
Over-the-counter
contracts have terms that make them less marketable than Futures Contracts.
Over-the-counter contracts are less marketable because they are not
traded on an
exchange, do not have uniform terms and conditions, and are entered
into based
upon the creditworthiness of the parties and the availability of credit
support,
such as collateral, and in general, they are not transferable without
the
consent of the counterparty. These conditions diminish the ability
to realize
the full value of such contracts.
46
Risk
of Trading in International Markets
Trading
in international markets would expose US12OF to credit and regulatory
risk.
The
General Partner expects to invest primarily in Futures Contracts, a
significant
portion of which will be on United States exchanges including the NYMEX.
However, a portion of US12OF’s trades may take place on markets and exchanges
outside the United States. Some non-U.S. markets present risks because
they are
not subject to the same degree of regulation as their U.S. counterparts.
None of
the CFTC, NFA, or any domestic exchange regulates activities of any
foreign
boards of trade or exchanges, including the execution, delivery and
clearing of
transactions, nor has the power to compel enforcement of the rules
of a foreign
board of trade or exchange or of any applicable non-U.S. laws. Similarly,
the
rights of market participants, such as US12OF, in the event of the
insolvency or
bankruptcy of a non-U.S. market or broker are also likely to be more
limited
than in the case of U.S. markets or brokers. As a result, in these
markets,
US12OF has less legal and regulatory protection than it does when it
trades
domestically.
In
some
of these non-U.S. markets, the performance on a contract is the responsibility
of the counterparty and is not backed by an exchange or clearing corporation
and
therefore exposes US12OF to credit risk. Trading in non-U.S. markets
also leaves
US12OF susceptible to swings in the value of the local currency against
the U.S.
dollar. Additionally, trading on non-U.S. exchanges is subject to the
risks
presented by exchange controls, expropriation, increased tax burdens
and
exposure to local economic declines and political instability. An adverse
development with respect to any of these variables could reduce the
profit or
increase the loss earned on trades in the affected international
markets.
International
trading activities subject US12OF to foreign exchange risk.
The
price
of any non-U.S. Futures Contract, option on any non-U.S. Futures Contract
or
other non-U.S. crude oil-related investment, and, therefore, the potential
profit and loss on such Crude Oil Interests, may be affected by any
variance in
the foreign exchange rate between the time the order is placed and
the time it
is liquidated, offset or exercised. As a result, changes in the value
of the
local currency relative to the U.S. dollar may cause losses to US12OF
even if
the contract traded is profitable.
US12OF’s
international trading could expose it to losses resulting from non-U.S.
exchanges that are less developed or less reliable than United States
exchanges.
Some
non-U.S. exchanges also may be in a more developmental stage so that
prior price
histories may not be indicative of current price dynamics. In addition,
US12OF
may not have the same access to certain positions on foreign trading
exchanges
as do local traders, and the historical market data on which the General
Partner
bases its strategies may not be as reliable or accessible as it is
for U.S.
exchanges.
47
Tax
Risk
An
investor’s tax liability may exceed the amount of distributions, if any, on
its units.
Cash
or
property will be distributed at the sole discretion of the General
Partner, and
the General Partner currently does not intend to make cash or other
distributions with respect to units. Investors will be required to
pay U.S.
federal income tax and, in some cases, state, local, or foreign income
tax, on
their allocable share of US12OF’s taxable income, without regard to whether they
receive distributions or the amount of any distributions. Therefore,
investors’
tax liability with respect to their units may exceed the amount of
cash or value
of property (if any) distributed.
An
investor’s allocable share of taxable income or loss may differ from its
economic income or loss on its units.
Due
to
the application of the assumptions and conventions applied by US12OF
in making
allocations for tax purposes and other factors, an investor’s allocable share of
US12OF’s income, gain, deduction or loss may be different than its economic
profit or loss from its units for a taxable year. This difference could
be
temporary or permanent and, if permanent, could result in an investor
being
taxed on amounts in excess of its economic income.
Items
of income, gain, deduction, loss and credit with respect to units could
be
reallocated if the IRS does not accept the assumptions and conventions
applied
by US12OF in allocating those items, with potential adverse consequences
for an
investor.
The
U.S.
tax rules pertaining to partnerships are complex and their application
to large,
publicly traded partnerships such as US12OF is in many respects uncertain.
US12OF will apply certain assumptions and conventions
in an attempt to comply with the intent of the applicable rules and
to report
taxable income, gains, deductions, losses and credits in a manner that
properly
reflects unitholders’ economic gains and losses. These assumptions and
conventions may not fully comply with all aspects of the Internal Revenue
Code
(the “Code”) and applicable Treasury Regulations, however, and it is possible
that the U.S. Internal Revenue Service will successfully challenge
our
allocation methods and require us to reallocate items of income, gain,
deduction, loss or credit in a manner that adversely affects an investor.
If
this occurs, an investor may be required to file an amended tax return
and to
pay additional taxes plus deficiency interest.
US12OF
could be treated as a corporation for federal income tax purposes,
which may
substantially reduce the value of an investor’s units.
US12OF
has received an opinion of counsel that, under current U.S. federal
income tax
laws, US12OF will be treated as a partnership that is not taxable as
a
corporation for U.S. federal income tax purposes, provided that (i)
at least 90
percent of US12OF’s annual gross income consists of “qualifying income” as
defined in the Code, (ii) US12OF is organized and operated in accordance
with
its governing agreements and applicable law and (iii) US12OF does not
elect to
be taxed as a corporation for federal income tax purposes. Although
the General
Partner anticipates that US12OF will satisfy the “qualifying income” requirement
for all of its taxable years, that result cannot be assured. US12OF
has not
requested and will not request any ruling from the IRS with respect
to its
classification as a partnership not taxable as a corporation for federal
income
tax purposes. If the IRS were to successfully assert that US12OF is
taxable as a
corporation for federal income tax purposes in any taxable year, rather
than
passing through its income, gains, losses and deductions proportionately
to
unitholders, US12OF would be subject to tax on its net income for the
year at
corporate tax rates. In addition, although the General Partner does
not
currently intend to make distributions with respect to units, any distributions
would be taxable to unitholders as dividend income. Taxation of US12OF
as a
corporation could materially reduce the after-tax return on an investment
in
units and could substantially reduce the value of an investor’s
units.
48
Legal
Risks
Others
may notify US12OF of intellectual property rights that could adversely
impact
US12OF.
Goldman,
Sachs & Co. (“Goldman Sachs”) sent USOF a letter on March 17, 2006,
providing USOF and the General Partner notice under 35 U.S.C. Section
154(d) of
two pending United States patent applications, Publication Nos. 2004/0225593A1
and 2006/0036533A1. Both patent applications are generally directed
to a method
and system for creating and administering a publicly traded interest
in a
commodity pool. In particular, the Abstract of each patent application
defines a
means for creating and administering a publicly traded interest in
a commodity
pool that includes the steps of forming a commodity pool having a first
position
in a futures contract and a corresponding second position in a margin
investment, and issuing equity interests of the commodity pool to third
party
investors. Subsequently, two U.S. Patents were issued; the first, patent
number
US7,283,978B2, was issued on October 16, 2007, and the second, patent
number
US7,319,984B2, was issued on January 15, 2008.
Preliminarily,
USOF's management is of the view that the structure and operations of USOF
and its affiliated commodity pools do not infringe these patents. USOF
is also
in the process of reviewing prior art (prior structures and operations
of
similar investment vehicles) that may invalidate one or more of the
claims in
these patents. In addition, USOF has retained patent counsel to advise
it on
these matters and is in the process of obtaining their opinions regarding
the
non-infringement of each of these patents by USOF and/or the patents'
invalidity
based on prior art. If the patents were alleged to apply to USOF's
structure
and/or operations, and are found by a court to be valid and infringed,
Goldman
Sachs may be awarded significant monetary damages and/or injunctive
relief.
See
“US12OF's Operating Risks — Third parties may infringe upon or
otherwise violate intellectual property rights or assert that the General
Partner has infringed or otherwise violated their intellectual property
rights,
which may result in significant costs and diverted
attention.”
|
Unresolved
Staff
Comments.
|
Not
applicable.
|
Properties.
|
Not
applicable.
49
|
Legal
Proceedings.
|
Although US12OF
may, from time to time, be involved in litigation arising out of its operations
in the normal course
of
business or otherwise, it is currently not a party to any pending material
legal
proceedings, except for the items noted below.
Goldman,
Sachs
& Co.
Goldman
Sachs sent USOF a letter on March 17, 2006, providing USOF and the
General
Partner notice under 35 U.S.C. Section 154(d) of two pending United
States
patent applications, Publication Nos. 2004/0225593A1 and 2006/0036533A1.
Both
patent applications are generally directed to a method and system
for creating
and administering a publicly traded interest in a commodity pool.
In particular,
the Abstract of each patent application defines a means for creating
and
administering a publicly traded interest in a commodity pool that
includes the
steps of forming a commodity pool having a first position in a futures
contract
and a corresponding second position in a margin investment, and issuing
equity
interests of the commodity pool to third party investors. Subsequently,
two U.S.
Patents were issued; the first, patent number US7,283,978B2, was
issued on
October 16, 2007, and the second, patent number US7,319,984B2, was
issued on
January 15, 2008.
Preliminarily,
USOF's management is of the view that the structure and operations
of USOF and
its affiliated commodity pools do not infringe these patents. USOF
is also in
the process of reviewing prior art (prior structures and operations
of similar
investment vehicles) that may invalidate one or more of the claims
in these
patents. In addition, USOF has retained patent counsel to advise
it on these
matters and is in the process of obtaining their opinions regarding
the
non-infringement of each of these patents by USOF and/or the patents'
invalidity
based on prior art. If the patents were alleged to apply to USOF's
structure
and/or operations, and are found by a court to be valid and infringed,
Goldman
Sachs may be awarded significant monetary damages and/or injunctive
relief.
See
“US12OF's Operating Risks — Third parties may infringe upon or
otherwise violate intellectual property rights or assert that the
General
Partner has infringed or otherwise violated their intellectual property
rights,
which may result in significant costs and diverted
attention.”
50
|
Submission
of Matters to a Vote
of Security Holders.
|
Not
applicable.
|
Market
for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases
of Equity
Securities.
|
Price
Range of
Units
US12OF’s
units have traded on the AMEX under the symbol “USL” since its initial public
offering on December 6, 2007. The following table sets forth the
range of
reported high and low sales prices of the units as reported on AMEX
for the
period of December 6, 2007 through December 31, 2007.
|
|
High
|
|
Low
|
|
|||
|
Fiscal
year 2007
|
|||||||
|
Fourth
quarter (beginning December 6, 2007)
|
$
|
54.37
|
$
|
50.30
|
|||
As
of December 31, 2007, US12OF had 35 holders
of units.
Dividends
US12OF
has not made and does not intend to make cash distributions to its unitholders.
Issuer
Purchases of Equity
Securities
US12OF
does not purchase units directly from its unitholders; however, in connection
with its redemption of baskets held by Authorized Purchasers, US12OF
did not
redeem any baskets during the period of December 6, 2007 to December 31,
2007.
|
Selected
Financial
Data.
|
Financial
Highlights (for the period
from December 6, 2007 to December 31, 2007)
(Dollar
amounts in 000’s except for
Income per unit)
|
Total
assets
|
$
|
21,691
|
||
|
Net
realized and unrealized gains on futures transactions, inclusive
of
commissions
|
$
|
1,524
|
|
|
|
Net
income
|
$
|
1,564
|
||
|
Weighted-average
limited partnership units
|
400,000
|
|||
| Net income per unit | $ | 4.23 | ||
|
Net
income per weighted average unit
|
$
|
3.98
|
||
|
Cash
at end of year
|
$
|
18,174
|
51
|
Management’s
Discussion and
Analysis of Financial Condition and Results of
Operations.
|
The
following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto of US12OF included elsewhere
in this
annual report on Form 10-K.
Forward-Looking
Information
This
annual report on Form 10-K, including this "Management's Discussion and
Analysis
of Financial Condition and Results of Operations," contains forward-looking
statements regarding the plans and objectives of management for future
operations. This information may involve known and unknown risks, uncertainties
and other factors that may cause US12OF's actual results, performance
or
achievements to be materially different from future results, performance
or
achievements expressed or implied by any forward-looking statements.
Forward-looking statements, which involve assumptions and describe US12OF's
future plans, strategies and expectations, are generally identifiable
by use of
the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend” or “project,” the negative of these words, other
variations on these words or comparable terminology. These forward-looking
statements are based on assumptions that may be incorrect, and US12OF
cannot
assure investors that these projections included in these forward-looking
statements will come to pass. US12OF's actual results could differ
materially from those expressed or implied by the forward-looking statements
as
a result of various factors.
US12OF
was based the forward-looking statements included in this annual report
on Form
10-K on information available to it on the date of this annual report on
Form 10-K, and US12OF assumes no obligation to update any such
forward-looking statements. Although US12OF undertakes no obligation
to revise
or update any forward-looking statements, whether as a result of new
information, future events or otherwise, investors are advised to consult
any
additional disclosures that US12OF may make directly to them or through
reports that US12OF in the future files with the SEC, including annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form
8-K.
Introduction
US12OF,
a
Delaware limited partnership, is a commodity pool that issues units that
may be purchased and sold on the AMEX. The
net
assets of US12OF consist primarily of investments in futures contracts
for
light, sweet crude oil, other types of crude oil, heating oil, gasoline,
natural
gas, and other petroleum-based fuels that are traded on the NYMEX,
ICE Futures
or other U.S. and foreign exchanges (collectively, “Futures Contracts”). This
includes contracts that are of the standard industry size as measured
in
physical amounts of crude oil, as well as similar contracts that are
financially
settled but are based on a percentage of the standard size contracts.
US12OF may
also invest in other crude oil-related investments such as cash-settled
options
on Futures Contracts, forward contracts for crude oil, and over-the-counter
transactions that are based on the price of crude oil, heating oil,
gasoline,
natural gas, and other petroleum-based fuels, Futures Contracts and
indices
based on the foregoing (collectively, “Other Crude Oil-Related Investments”).
For convenience and unless otherwise specified, Futures Contracts and
Other
Crude Oil-Related Investments collectively are referred to as “Crude Oil
Interests” in this annual report on Form 10-K.
US12OF
invests in Crude Oil Interests to the fullest extent possible without
being
leveraged or unable to satisfy its current or potential margin or
collateral
obligations with respect to its investments in Futures Contracts
and Other Crude
Oil-Related Investments. The primary focus of the General Partner
is the
investment in Futures Contracts and the management of its investments
in Treasuries, cash and/or cash equivalents for margining purposes and
as
collateral.
The
investment objective of US12OF is to have the changes in percentage
terms of the
units’ net asset value reflect the changes in percentage terms of the price
of
light, sweet crude oil delivered to Cushing, Oklahoma, as measured
by the
changes in the average of the prices of the Benchmark Futures Contracts,
consisting of the near month contract to expire and the contracts
for the
following 11 months, for a total of 12 consecutive months’ contracts, except
when the near month contract is within two weeks of expiration, in
which case it
will be measured by the futures contracts that are the next month
contract to
expire and the contracts for the following 11 consecutive months,
less US12OF’s
expenses. When calculating the daily movement of the average price
of the 12
contracts, each contract month will be equally weighted.
The General
Partner is registered as a CPO with the CFTC and is authorized by
the LP
Agreement to manage US12OF. The General Partner is authorized by
US12OF in its
sole judgment to employ, establish the terms of employment for and
terminate
commodity trading advisors or futures commission merchants.
In
December of 2007, US12OF initially registered 11,000,000 units
on Form S-1 with
the SEC. On December 6, 2007, US12OF listed its units on the AMEX
under the ticker symbol “USL”. On that day, US12OF established its initial net
asset value by setting a price per unit at $50.00 and issued 300,000
units to
the initial Authorized Purchaser, Merrill Lynch Professional Clearing
Corp., in
exchange for $15,000,000 in cash. To date, US12OF has registered a
total of 11,000,000 units. US12OF also purchased Futures Contracts
traded on the NYMEX based on light, sweet crude oil in connection
with the units
sold to the initial Authorized Purchaser.
52
Valuation
of Futures Contracts
and the Computation of the NAV
The
NAV
of US12OF units is calculated once each trading day as of the earlier
of the
close of the NYSE or 4:00 p.m.
New York time. The NAV for a particular trading day is released after
4:15 p.m. New York time. Trading
on the AMEX typically closes at 4:15 p.m. New York time. US12OF uses the
NYMEX closing price (determined at the earlier of the close of that
exchange or
2:30 p.m. New York time) for the contracts held on the NYMEX, but
calculates or determines the value of all other US12OF investments,
including
ICE Futures or other futures contracts, as of the earlier of the close
of the NYSE or 4:00 p.m. New York time.
Management’s
Discussion of Results of
Operation and the Crude Oil Market
Results
of
Operations. On
December 6, 2007, US12OF listed its units on the AMEX under the ticker
symbol
“USL.” On that day US12OF established its initial offering price at $50.00
per
unit and issued 300,000 units to the initial Authorized Purchaser,
Merrill Lynch
Professional Clearing Corp., in exchange for $15,000,000 in cash. As
of December
31, 2007, US12OF had issued 400,000 units, 400,000 of which were
outstanding.
As
of
December 31, 2007, the total unrealized gain on crude oil Futures Contracts
owned or held on that day was $1,525,370 and US12OF established cash
deposits that were equal to $20,173,384. The majority of those cash
assets were
held in overnight deposits at US12OF’s Custodian, while less
than
10% of the cash balance was held as margin deposits with
the
futures commission merchant for the Futures Contracts purchased. The ending
per unit NAV on December 31, 2007 was $54.23.
Portfolio
Expenses.
US12OF’s expenses consist of investment management fees, brokerage fees and
commissions, certain offering costs, licensing fees and the fees and
expenses of
the independent directors of the General Partner. US12OF pays the
General Partner a management fee of 0.60% of NAV on all of its net
assets.
US12OF pays
for all brokerage fees, taxes and other expenses, including licensing
fees for
the use of intellectual property, ongoing registration or other fees
paid to the
SEC, FINRA and any other regulatory agency in connection
with offers and sales of its units subsequent to the initial offering
and
all legal, accounting, printing and other expenses associated
therewith. For the period ended December 31, 2007,
US12OF incurred $0 in ongoing registration fees and other offering
expenses. US12OF is responsible for paying the fees and expenses,
including
directors' and officers' liability insurance, of the independent
directors of
the General Partner who are also audit committee
members. US12OF shares these fees with USOF and USNG based on the
relative assets of each fund computed on a daily basis. These fees
for calendar
year 2007 amounted to a total of $286,000 for all three
funds.
US12OF
also incurs commissions to brokers for the purchase and sale of Futures
Contracts, Other Crude Oil Related Investments or Treasuries. During 2007,
total commissions paid amounted to $892. Prior to the initial offering
of its
units, US12OF had estimated that its annual level of such commissions was
expected to be 0.13% of total net assets. As an annualized percentage
of total
net assets, the figure for 2007 represents approximately 0.06% of total net
assets. However, there can be no assurance that commission costs and
portfolio
turnover will not cause commission expenses to rise in future
quarters.
Interest
Income.
Unlike
some alternative investment funds, US12OF does not borrow money in
order to
obtain leverage, so US12OF does not incur any interest
expense. Rather, US12OF’s margin deposits are maintained in
Treasuries and cash and interest is earned on 100% of US12OF’s available assets,
which include unrealized profits credited to US12OF’s
accounts.
53
Tracking
US12OF’s
Benchmark.
US12OF
seeks to manage its portfolio such that changes in its average daily
NAV, on a
percentage basis, closely track changes in the average of the daily
prices of
the Benchmark Futures Contracts, also on a percentage basis. Specifically,
US12OF seeks to manage the portfolio such that over any rolling period
of 30
valuation days, the average daily change in the NAV is within a range
of 90% to
110% (0.9 to 1.1), of the average daily change of the Benchmark Futures
Contracts. As an example, if the average daily movement of the average of
the prices of the Benchmark Futures Contracts for a particular 30-day time
period was 0.5% per day, US12OF management would attempt to manage
the portfolio
such that the average daily movement of the NAV during that same time
period
fell between 0.45% and 0.55% (i.e.,
between 0.9 and 1.1 of the benchmark’s results). US12OF’s portfolio management
goals do not include trying to make the nominal price of US12OF’s NAV equal to
the average of the nominal prices of the current Benchmark Futures
Contracts or the spot price for crude oil. Management believes that
it is not
practical to manage the portfolio to achieve such an investment goal
when
investing in listed crude oil Futures Contracts.
Since
US12OF commenced operations in December of 2007, it did not have
30 valuation
days from its inception date to December 31, 2007. However, since
inception, the
simple average daily change in the Benchmark Futures Contracts was 0.480%,
while the simple average daily change in the NAV of US12OF over the
same time
period was 0.489%. The average daily difference was 0.009% (or 0.9
basis points,
where 1 basis point equals 1/100 of 1%). As a percentage of the daily
movement
of the Benchmark Futures Contracts, the average error in daily tracking by
the NAV was 2.65%, meaning that over this time period US12OF’s tracking error
was within the plus or minus 10% range established as its benchmark
tracking
goal.
Daily
Movement in
Percentage terms of US12OF's NAV versus the Benchmark
Contracts
(since
inception 12/5/07to
12/31/07)
Since
the
offering of US12OF units to the public on December 6, 2007 to December 31,
2007, the simple average daily change in the Benchmark Futures Contracts
was 0.489%, while the simple average daily change in the NAV of
US12OF over the
same time period was 0.480%. The average daily difference was 0.009%
(or 0.9
basis point, where 1 basis point equals 1/100 of 1%). As a percentage
of the
daily movement of the Benchmark Futures Contracts, the average error in
daily tracking by the NAV was 2.65%, meaning that over this time
period US12OF’s
tracking error was within the plus or minus 10% range established
as its
benchmark tracking goal.
There
are
currently three factors that have impacted, during the latest period,
or are
most likely to impact, US12OF’s ability to accurately track its
Benchmark Futures Contracts.
First,
US12OF may buy or sell its holdings in the then current Benchmark
Futures
Contracts at a price other than the closing settlement price of
that contract on
the day in which US12OF executes the trade. In that case, US12OF
may get a price
that is higher, or lower, than that of the Benchmark Futures Contracts,
which, could cause the changes in the daily NAV of US12OF to either be
too
high or too low relative to the changes in the daily benchmark.
In 2007,
management attempted to minimize the effect of these transactions
by seeking to
execute its purchase or sales of the Benchmark Futures Contracts at, or as
close as possible to, the end of the day settlement price. However,
it may not
always be possible for US12OF to obtain the closing settlement
price and there
is no assurance that failure to obtain the closing settlement price
in the
future will not adversely impact US12OF’s attempt to track its benchmark over
time.
Second,
US12OF earns interest on its cash, cash equivalents and Treasury
holdings. US12OF is not required to distribute any portion of
its income to its
unitholders and did not make any distribution to unitholders
in 2007. Interest
payments, and any other income, were retained within the portfolio
and added to
US12OF’s NAV. When this income exceeds the level of US12OF’s expenses for its
management fee, brokerage commissions and other expenses (including
ongoing
registration fees, licensing fees and the fees and expenses of the
independent directors of the General Partner), US12OF will realize
a net yield
that will tend to cause daily changes in the NAV of US12OF to
track slightly
higher than daily changes in the average of the prices of
the Benchmark Futures Contracts. During 2007, US12OF earned, on an
annualized basis, approximately 3.41% on its cash holdings. It
also incurred
cash expenses on an annualized basis of 0.60% for management
fees and
approximately 0.06% in brokerage commission costs related to
the purchase and
sale of futures contracts, and 0.24% for other expenses. The
foregoing fees and
expenses resulted in a net yield on an annualized basis of approximately
2.51%
and affected US12OF’s ability to track its benchmark. If short-term interest
rates rise above the current levels, the level of deviation created
by the yield
would increase. Conversely, if short-term interest rates were
to decline, the
amount of error created by the yield would decrease. If short-term
yields drop
to a level lower than the combined expenses of the management
fee and the
brokerage commissions, then the tracking error would become a
negative number
and would tend to cause the daily returns of the NAV to underperform
the daily
returns of the Benchmark Futures Contracts.
Third,
US12OF may hold Other Crude Oil Related Investments in its portfolio
that
may fail to closely track the Benchmark Futures Contracts' total return
movements. In that case, the error in tracking the benchmark
could result in
daily changes in the NAV of US12OF that are either too high,
or too low,
relative to the daily changes in the benchmark. During the
period from December
6, 2007 to Decemeber 31, 2007, US12OF did not hold any Other
Crude
Oil Related Investments. However, there can be no assurance that
in future
quarters US12OF will not make use of such Other Crude Oil
Related
Investments.
During
the period from December 6, 2007 to December
31, 2007, the average prices of front 12 month contracts rose from near the
$88.35 level to approximately the $93.28 level. The prices
of front month
contracts were also higher than the price of second or
third month contracts for
most of this time period.
54
Term
Structure of Crude Oil Futures
Prices and the Impact on Total Returns. Several factors determine the
total return from investing in a futures contract position. One factor that
impacts the total return that will result from investing in near month
crude oil Futures Contracts and “rolling” those contracts forward each month is
the price relationship between the current near month contract and the later
month contracts. For example, if the price of the near month contract is
higher
than the next month contract (a situation referred to as “backwardation” in the
futures market), then absent any other change there is a tendency for the
price
of a next month contract to rise in value as it becomes the near month contract
and approaches expiration. Conversely, if the price of a near month contract
is
lower than the next month contract (a situation referred to as “contango” in the
futures market), then absent any other change there is a tendency for the
price
of a next month contract to decline in value as it becomes the near month
contract and approaches expiration.
As
an
example, assume that the price of crude oil for immediate delivery (the
“spot”
price), was $50 per barrel, and the value of a position in the near month
futures contract was also $50. Over time, the price of the barrel of
crude oil
will fluctuate based on a number of market factors, including demand for
oil relative to its supply. The value of the near month contract will
likewise
fluctuate in reaction to a number of market factors. If investors seek to
maintain their holding in a near month contract position and not take
delivery
of the oil, every month they must sell their current near month contract
as it
approaches expiration and invest in the next month contract.
If
the
futures market is in backwardation, e.g., when the expected price of
oil in the
future would be less, the investor would be buying a next month contract
for a
lower price than the current near month contract. Hypothetically, and
assuming
no other changes to either prevailing crude oil prices or the price relationship
between the spot price, the near month contract and the next month contract
(and
ignoring the impact of commission costs and the interest earned on Treasuries,
cash and/or cash equivalents), the value of the next month contract would
rise
as it approaches expiration and becomes the new near month contract.
In this
example, the value of the $50 investment would tend to rise faster than
the spot
price of crude oil, or fall slower. As a result, it would be possible
in this
hypothetical example for the price of spot crude oil to have risen to
$60 after
some period of time, while the value of the investment in the futures
contract
would have risen to $65, assuming backwardation is large enough or enough
time
has elapsed. Similarly, the spot price of crude oil could have fallen
to $40
while the value of an investment in the futures contract could have fallen
to
only $45. Over time, if backwardation remained constant, the difference
would
continue to increase.
If
the
futures market is in contango, the investor would be buying a next month
contract for a higher price than the current near month contract.
Hypothetically, and assuming no other changes to either prevailing crude
oil
prices or the price relationship between the spot price, the near month
contract
and the next month contract (and ignoring the impact of commission costs
and the
interest earned on cash), the value of the next month contract would
fall as it
approaches expiration and becomes the new near month contract. In this
example,
it would mean that the value of the $50 investment would tend to rise
slower
than the spot price of crude oil, or fall faster. As a result, it would
be
possible in this hypothetical example for the spot price of crude oil to
have risen to $60 after some period of time, while the value of the investment
in the futures contract will have risen to only $55, assuming contango
is large
enough or enough time has elapsed. Similarly, the spot price of crude
oil could
have fallen to $45 while the value of an investment in the futures contract
could have fallen to $40. Over time, if contango remained constant, the
difference would continue to increase.
Historically,
the oil futures markets have experienced periods of contango and
backwardation, with backwardation being in place more often than contango.
During the past two years, including 2006 and the first half of 2007,
these
markets have experienced contango. However, starting early in the third
quarter
of 2007, the crude oil futures market moved into backwardation and remained
in
that condition for the rest of the year. The chart below compares the
price of
the front month contract to the average price of the first 12 months
over the
last 10 years (1998-2007). When the price of the front month contract
is higher
than the average price of the front 12 month contracts, the market would
be
described as being in backwardation. When the price of the front month
contract
is lower than the average price of the front 12 month contracts, the
market
would be described as being in contango. Although the prices of the front
month
contract and the average price of the front 12 month contracts do tend
to move
up or down together, it can be seen that at times the front month prices
are
clearly higher than the average price of the 12 month contracts (backwardation),
and other times they are below the average price of the front 12 month
contracts
(contango).
55
An
alternative way to view the same data is to subtract the dollar price of
the
front month contract from the average dollar price of the front 12 month
contracts. If the resulting number is a positive number, then the front
month
price is higher than the average price of the front 12 months and the market
could be described as being in backwardation. If the resulting number is
a
negative number, than the front month price is lower than the average price
of
the front 12 months and the market could be described as being in contango.
The
chart below shows the results from subtracting the front month price from
the
average price of the front 12 month contracts for the 10 year period between
1998 and 2007.
A
hypothetical investment in a portfolio that involved owning only the front
month
contract would produce a different result than a hypothetical investment
in a
portfolio that owned an equal number of each of the front 12 month’s worth of
contracts. Generally speaking, when the crude oil futures market is in
backwardation, the front month only portfolio would tend to have a higher
total
return than the 12 month portfolio. Conversely, if the crude oil futures
market
was in contango, the portfolio containing 12 months worth of contracts
would
tend to outperform the front month only portfolio. The chart below shows
the
hypothetical results of owning a portfolio consisting of the front month
contract versus a portfolio containing the front 12 month’s worth of contracts.
In this example, each month the front month only portfolio would sell the
front
month contract at expiration and buy the next month out contract. The portfolio
holding an equal number of the front 12 month’s worth of contracts would sell
the front month contract at expiration and replace it with the contract
that
becomes the new twelfth month contract.
As
seen
in the chart, there have been periods of both positive and negative annual
total
returns for both hypothetical portfolios over the last 10 years. In addition,
there have been periods during which the front month only approach had
higher
returns, and periods where the 12 month approach had higher total
returns.
56
The
General Partner believes that holding futures contracts whose expiration
dates
are spread out over a 12 month period of time will cause the total return
of
such a portfolio to vary compared to a portfolio that holds only a single
month’s contract (such as the near month contract). In particular,
the General Partner believes that the total return of a portfolio holding
contracts with a range of expiration months will be impacted differently
by the
price relationship between different contract months of the same commodity
future compared to the total return of a portfolio consisting of the
near month
contract. The General Partner believes that based on historical
evidence a portfolio that held futures contracts with a range of expiration
dates spread out over a 12 month period of time would typically be impacted
less
by the positive effect of backwardation, and less by the negative effect
of
contango, compared to a portfolio that held contracts of a single near
month. As
a result, absent the impact of any other factors, a portfolio of 12 different
monthly contracts would tend to have a lower total return than a near
month only
portfolio in a backwardation market and a higher total return in a contango
market. However there can be no assurance that such historical
relationships would provide the same or similar results in the
future.
Periods
of backwardation and
contango do not meaningfully impact US12OF’s investment objective of having
percentage changes in its per unit NAV track percentage changes in the
price of
the Benchmark Futures Contracts since the impact of backwardation
and contango tended to equally impact the percentage changes in price
of both
US12OF’s units and the Benchmark Futures Contracts. It is impossible
to predict with any degree of certainty whether backwardation or contango
will
occur in the future. It is likely that both conditions will occur during
different periods.
Crude
Oil Market. During
the year ended December 31, 2007, crude oil prices were impacted by
several
factors. On the consumption side, demand remained strong as continued
global
economic growth, especially in emerging economies such as China and
India,
remained brisk. Additionally, a falling U.S. dollar, the currency in
which crude
oil is traded globally, continued to be weak, effectively making crude
oil
cheaper for most non-U.S. dollar economies. On the supply side, production
remained steady despite concerns about violence impacting production in
Iraq and Nigeria. At the same time, a concern remains about the ability
of major
oil producing countries to continue to raise their production to accommodate
increasing demand. Additionally, a concern about the strength of the
U.S.
economy, and the risk of recession which might lead to the U.S. decreasing
its
oil consumption in 2008, began to be a factor in the crude oil markets
very late
in 2007.
Critical
Accounting
Policies
Preparation
of the financial statements and related disclosures in compliance with
accounting principles generally accepted in the United States of America
requires the application of appropriate accounting rules and guidance,
as well
as the use of estimates. US12OF's application of these policies involves
judgments and actual results may differ from the estimates used.
The
General Partner has evaluated the nature and types of estimates that
it makes in preparing US12OF's condensed financial statements and related
disclosures and has determined that the valuation of its investments which
are not traded on a United States or internationally recognized futures
exchange
(such as forward contracts and over-the-counter contracts) involves a critical
accounting policy. To the extent US12OF makes such investments, the values
used
by US12OF for its forward contracts will be provided by its commodity broker
who
values over-the-counter contracts based on the present value of estimated
future cash flows that would be received from or paid to a third party
in
settlement of these derivative contracts prior to their delivery date and
valued
on a daily basis. In addition, US12OF estimates interest income on a daily
basis
using prevailing interest rates earned on its cash and cash equivalents.
These
estimates are adjusted to the actual amount received on a monthly basis
and the
difference, if any, is not considered material.
Liquidity
and Capital
Resources
US12OF
has not made, and does not anticipate making, use of borrowings or other
lines
of credit to meet its obligations. US12OF has met, and it is anticipated
that
US12OF will continue to meet, its liquidity needs in the normal course
of
business from the proceeds of the sale of its investments, or from the
Treasuries, cash and/or cash equivalents that it intends to hold at all
times.
US12OF’s liquidity needs include: redeeming units, providing margin deposits for
its existing oil futures contracts or the purchase of additional crude
oil
Futures Contracts and posting collateral for its over-the-counter contracts
and
payment of its expenses, summarized below under “Contractual
Obligations.”
US12OF
currently generates cash primarily from (i) the sale of Creation Baskets
and
(ii) interest earned on Treasuries, cash and/or cash equivalents. US12OF
has
allocated substantially all of its net assets to trading in crude oil interests.
A significant portion of the NAV was held in cash and cash
equivalents that were used as margin for US12OF's trading in Crude Oil
Interests. The percentage that Treasuries will bear to the total net assets
vary from period to period as the market values of the crude oil interests
change. The balance of the net assets is held in US12OF's Futures Contracts
and Other Crude Oil Related Investments trading account. Interest earned
on
US12OF's interest bearing-funds is paid to US12OF.
57
US12OF's
investment in crude oil interests may be subject to periods of illiquidity
because of market conditions, regulatory considerations and other reasons.
For
example, most commodity exchanges limit the fluctuations in Futures
Contracts prices during a single day by regulations referred to as “daily
limits.” During a single day, no trades may be executed at prices beyond the
daily limit. Once the price of an Futures Contract has increased or
decreased by an amount equal to the daily limit, positions in the contracts
can
neither be taken or liquidated unless the traders are willing to effect
trades
at or within the specified daily limit. Such market conditions could prevent
US12OF from promptly liquidating its positions in Futures Contracts. During
the period from December 6, 2007 to December 31, 2007, US12OF was not
forced to purchase or liquidate any of its positions while daily limits
were in
effect; however, US12OF cannot predict whether such an event may occur
in the
future.
To
date,
all of US12OF's expenses, including its organizational and offering expenses
relating to the initial offering of its units, have been paid by the General
Partner. Fees and expenses associated with the registration of units with
the
SEC subsequent to the initial offering have been borne by US12OF. In addition,
fees and expenses (including directors' and officers' liability
insurance) of the independent directors of the General Partner, the management
fee paid to the General Partner, brokerage fees and licensing fees will be
paid directly by US12OF. If the General Partner and US12OF are unsuccessful
in
raising sufficient funds to cover US12OF's expenses or in locating any
other
source of funding, US12OF will terminate and investors may lose all or
part of
their investment.
Market
Risk
Trading
in Futures Contracts and Other Crude Oil Related Investments, such as
forwards, involves US12OF entering into contractual commitments to purchase
or sell oil at a specified date in the future. The gross or face amount
of
the contracts will significantly exceed US12OF's future cash requirements
since US12OF intends to close out its open positions prior to settlement.
As a
result, US12OF is generally only subject to the risk of loss arising
from the change in value of the contracts. US12OF considers the "fair value''
of
its derivative instruments to be the unrealized gain or loss on the contracts.
The market risk associated with US12OF's commitments to purchase oil is
limited
to the gross face amount of the contacts held. However, should US12OF enter
into
a contractual commitment to sell oil, it would be required to make delivery
of
the oil at the contract price, repurchase the contract at prevailing prices
or
settle in cash. Since there are no limits on the future price of oil, the
market
risk to US12OF could be unlimited.
US12OF's
exposure to market risk depends on a number of factors, including the
markets for oil, the volatility of interest rates and foreign exchange
rates,
the liquidity of the Futures Contracts and Other Crude Oil Related
Investments markets and the relationships among the contracts held by US12OF.
The limited experience that US12OF has in utilizing its model to trade in
crude oil interests in a manner intended to track the spot price of crude
oil,
as well as drastic market occurrences, could ultimately lead to the loss
of all
or substantially all of an investor’s capital.
Credit
Risk
When
US12OF enters into Futures Contracts and Other Crude Oil Related
Investments, it is exposed to the credit risk that the counterparty will
not be
able to meet its obligations. The counterparty for the Futures Contracts
traded on the NYMEX and on most other foreign futures
exchanges is the clearinghouse associated with the particular exchange.
In
general, clearinghouses are backed by their members who may be required
to share
in the financial burden resulting from the nonperformance of one of their
members, and therefore, this additional member support should significantly
reduce credit risk. Some foreign exchanges are not backed by their clearinghouse
members but may be backed by a consortium of banks or other financial
institutions. There
can
be no assurance that any counterparty, clearinghouse, or their members
or their
financial backers will satisfy their obligations to US12OF in such
circumstances.
The
General Partner attempts to manage the credit risk of US12OF by following
various trading limitations and policies. In particular, US12OF posts margin
and/or holds liquid assets that are approximately equal to the face amount
of
its obligations to counterparties under the Futures Contracts and Other
Crude Oil Related Investments it holds. The General Partner has implemented
procedures that include, but are not limited to, executing and clearing
trades
only with creditworthy parties and/or requiring the posting of collateral
or
margin by such parties for the benefit of US12OF to limit its credit exposure.
UBS
Securities LLC, US12OF's commodity broker, or any other broker that may
be
retained by US12OF in the future, when acting as US12OF's futures commission
merchant in accepting orders to purchase or sell Futures Contracts on United
States exchanges, is required by CFTC regulations to separately
account for and segregate as belonging to US12OF, all assets of US12OF
relating
to domestic Futures Contracts trading. A futures commission merchant is
not
allowed to commingle US12OF's assets with its other assets. In addition,
the
CFTC requires commodity brokers to hold in a secure account the US12OF
assets
related to foreign Futures Contracts trading.
Off
Balance Sheet
Financing
As
of
December 31, 2007, US12OF has no loan guarantee, credit support or other
off-balance sheet arrangements of any kind other than agreements entered
into in
the normal course of business, which may include indemnification provisions
relating to certain risks that service providers undertake in performing
services which are in the best interests of US12OF. While US12OF's exposure
under these indemnification provisions cannot be estimated, they are not
expected to have a material impact on US12OF's financial position.
58
Redemption
Basket
Obligation
In
order
to meet its investment objective and pay its contractual obligations described
below, US12OF requires liquidity to redeem units, which redemptions must be
in blocks of 100,000 units called Redemption Baskets. US12OF has to
date satisfied this obligation by paying from the cash or cash equivalents
it holds or through the sale of its Treasuries in an amount proportionate
to the number of units being redeemed.
Contractual
Obligations
US12OF's
primary contractual obligations are with the General Partner. In return
for its
services, the General Partner is entitled to a management fee calculated
as a
fixed percentage of US12OF's NAV, currently 0.60% of NAV for its average
net
assets.
The
General Partner agreed to pay the start-up costs associated with the formation
of US12OF, primarily its legal, accounting and other costs in connection
with
its contracts with service providers and its registration with the SEC
and other
regulatory filings in connection with the initial public offering of the
units,
and the registration fees paid to the SEC, FINRA and the AMEX in connection
with
such offering. The General Partner agreed to pay the fees of the custodian
and
transfer agent, BBH&Co., as well as BBH&Co.’s fees for performing
administrative services, including in connection with US12OF’s preparation of
its financial statements and its SEC and CFTC
reports.
In
addition to the General Partner’s management fee, US12OF pays its brokerage fees
(including fees to the futures commission merchant), over-the-counter dealer
spreads, any licensing fees for the use of intellectual property, registration
and, subsequent to the initial offering, the fees paid to the SEC, FINRA,
or
other regulatory agencies in connection with the offer and sale of the
units,
tax accounting and reporting fees, as well as the legal, printing, accounting,
and other expenses associated therewith, and extraordinary expenses. The
latter
are expenses not in the ordinary course of US12OF's business, including
the
indemnification of any person against liabilities and obligations to the
extent
permitted by law and under the LP Agreement, the bringing or defending
of
actions in law or in equity or otherwise conducting litigation and incurring
legal expenses and the settlement of claims and litigation. Commission
payments
to the futures commission merchant are on a contract-by-contract, or round
turn,
basis. In addition, US12OF pays a portion of the fees and expenses of
the independent directors of the General Partner. See Note 3 to the
Notes to Statement of Financial Condition.
The
parties cannot anticipate the amount of payments
that will be required under these arrangements for future periods as US12OF’s
net asset values and trading levels to meet its investment objectives will
not
be known until a future date. These agreements are effective for a specific
term
agreed upon by the parties with an option to renew, or, in some cases,
are in
effect for the duration of US12OF’s existence. Either party may terminate these
agreements earlier for certain reasons listed in the
agreements.
59
Over-the-Counter
Derivatives
(Including Spreads and Straddles)
In
the
future, US12OF may purchase over-the-counter contracts. Unlike most of
the
exchange-traded oil futures contracts or exchange-traded options on such
futures, each party to over-the-counter contract bears the credit risk
that the
other party may not be able to perform its obligations under its
contract.
Some
oil-based derivatives transactions contain fairly generic terms and conditions
and are available from a wide range of participants. Other oil-based
derivatives
have highly customized terms and conditions and are not as widely available.
Many of these over-the-counter contracts are cash-settled forwards for
the
future delivery of oil- or petroleum-based fuels that have terms similar
to the
Futures Contracts. Others take the form of “swaps” in which the two parties
exchange cash flows based on pre-determined formulas tied to the spot
price of
the crude oil, forward crude oil prices or crude oil futures prices. For
example, US12OF may enter into over-the-counter derivative contracts
whose value
will be tied to changes in the difference between the spot price of light,
sweet crude oil, the price of Futures Contracts traded on NYMEX and the
prices of other Futures Contracts that may be invested in by
US12OF.
To
protect itself from the credit risk that arises in connection with such
contracts, US12OF may enter into agreements with each counterparty that
provide
for the netting of its overall exposure to its counterparty, such as
the
agreements published by the International Swaps and Derivatives Association,
Inc. US12OF also may require that the counterparty be highly rated and/or
provide collateral or other credit support to address US12OF’s exposure to the
counterparty. In addition, it is also possible for US12OF and its counterparty
to agree to clear their agreement through an established futures clearing
house
such as those connected to the NYMEX or the ICE Futures. In that event,
US12OF
would no longer have credit risk of its original counterparty, as the
clearing
house would now be US12OF's counterparty. US12OF would still retain any
price
risk associated with its transaction.
US12OF
may employ spreads or straddles in its trading to mitigate the differences
in
its investment portfolio and its goal of tracking the price of the Benchmark
Oil
Futures Contract. US12OF would use a spread when it chooses to take simultaneous
long and short positions in futures written on the same underlying asset,
but
with different delivery months. The effect of holding such combined positions
is
to adjust the sensitivity of US12OF to changes in the price relationship
between
futures contracts which will expire sooner and those that will expire
later.
US12OF would use such a spread if the General Partner felt that taking
such long
and short positions, when combined with the rest of its holdings, would
more
closely track the investment goals of US12OF, or the General Partner
felt if it
would lead to an overall lower cost of trading to achieve a given level
of
economic exposure to movements in oil prices. US12OF would enter into
a straddle
when it chooses to take an option position consisting of a long (or short)
position in both a call option and put option. The economic effect of
holding
certain combinations of put options and call options can be very similar
to that
of owning the underlying futures contracts. US12OF would make use of
such a
straddle approach if, in the opinion of the General Partner, the resulting
combination would more closely track the investment goals of US12OF or
if it
would lead to an overall lower cost of trading to achieve a given level
of
economic exposure to movements in oil prices.
During
the period from December 6, 2007 to December 31, 2007, US12OF did not
employ any hedging methods since all of its investments were made over
an
exchange. Therefore, US12OF was not exposed to counterparty
risk.
60
|
Financial
Statements and
Supplementary Data.
|
Index
to Financial
Statements
61
To
the
Partners of
United
States 12 Month Oil Fund, LP
We
have
audited the accompanying statement of financial condition of United
States 12
Month Oil Fund, LP, (the “Fund”) as of December 31, 2007, including the
condensed schedule of investments as of December 31, 2007, and the
related
statements of operations, changes in partners’ capital and cash flows for the
period from June 27, 2007 (inception) to December 31, 2007. These
financial
statements are the responsibility of the Fund’s management. Our responsibility
is to express an opinion on these financial statements based on our
audit.
In
our
opinion, the financial statements referred to above present fairly,
in all
material respects, the financial position of United States 12 Month
Oil Fund, LP
as of December 31, 2007, and the results of its operations and its
cash flows
for the period from June 27, 2007 (inception) to December 31, 2007
in conformity
with accounting principles generally accepted in the United States
of
America.
/s/ SPICER
JEFFRIES
LLP
Greenwood
Village, Colorado
March
20, 2008
62
|
United
States 12 Month Oil Fund, LP
|
|||||
|
Statement
of Financial
Condition
|
|||||
|
At
December 31,
2007
|
|||||
|
|
|||||
|
December
31,
2007
|
|||||
|
Assets
|
|||||
|
Cash
and cash equivalents
|
$
|
18,174,276
|
|||
|
Equity
in UBS Securities LLC trading accounts:
|
|||||
|
Cash
|
1,999,108
|
||||
|
Unrealized
gain on open commodity futures contracts
|
1,525,370
|
|
|||
|
Interest
receivable
|
4,994
|
||||
|
Total
assets
|
$
|
21,703,748
|
|||
|
Liabilities
and Partners'
Capital
|
|||||
|
General
Partner management fees (Note 3)
|
$
|
8,790
|
|||
| Accrued tax reporting costs | 2,600 | ||||
|
Other
liabilities
|
879
|
||||
|
Total
liabilities
|
12,269
|
||||
|
Commitments
and Contingencies
(Notes 3,
4 and 5)
|
|||||
|
Partners'
Capital
|
|||||
|
General
Partner
|
-
|
||||
|
Limited
Partners
|
21,691,479
|
||||
|
Total
Partners'
Capital
|
21,691,479
|
||||
|
Total
liabilities and
partners' capital
|
$
|
21,703,748
|
|||
|
Limited
Partners' units outstanding, December 31, 2007
|
400,000
|
||||
| Net asset value per unit, (inception) June 27, 2007 | $ | 0.00 | |||
|
Net
asset value per unit (commencement of operations, December
6,
2007)
|
$
|
50.00
|
|||
|
Net
asset value per unit, December 31, 2007
|
$
|
54.23
|
|||
|
Market
value per unit, December 31, 2007
|
$
|
53.88
|
|||
|
See
accompanying notes
to financial statements.
|
|||||
63
|
United
States
12 Month Oil Fund, LP
|
||||||||||
|
Condensed
Schedule of
Investments
|
||||||||||
|
At
December 31,
2007
|
||||||||||
|
Open
Futures Contracts
|
||||||||||
|
Gain
on
Open
|
||||||||||
|
Number
of
|
Commodity
|
%
of
Partners'
|
||||||||
|
|
Contracts
|
Contracts
|
Capital
|
|||||||
|
United
States
Contracts
|
||||||||||
|
Crude
Oil Futures contracts, expires February 2008
|
19
|
$
|
151,860
|
|
0.70
|
|
||||
|
Crude
Oil Futures contracts, expires March 2008
|
20 | 161,850 | 0.74 | |||||||
|
Crude
Oil Futures contracts, expires April 2008
|
19 | 148,020 | 0.68 | |||||||
|
Crude
Oil Futures contracts, expires May 2008
|
20 | 149,550 | 0.69 | |||||||
|
Crude
Oil Futures contracts, expires June 2008
|
19 | 134,150 | 0.62 | |||||||
|
Crude
Oil Futures contracts, expires July 2008
|
19 | 129,490 | 0.60 | |||||||
|
Crude
Oil Futures contracts, expires August 2008
|
19 | 121,220 | 0.56 | |||||||
|
Crude
Oil Futures contracts, expires September 2008
|
20 | 121,400 | 0.56 | |||||||
|
Crude
Oil Futures contracts, expires October 2008
|
19 | 108,700 | 0.50 | |||||||
|
Crude
Oil Futures contracts, expires November 2008
|
20 | 108,700 | 0.50 | |||||||
|
Crude
Oil Futures contracts, expires December 2008
|
19 | 96,840 | 0.45 | |||||||
|
Crude
Oil Futures contracts, expires January 2009
|
19 | 93,590 | 0.43 | |||||||
| 232 | $ | 1,525,370 | 7.03 | |||||||
| Cash |
18,174,276
|
83.78
|
|||||
| Total cash and cash equivalents |
18,174,276
|
83.78
|
|||||
|
Cash
on deposit with
broker
|
|
1,999,108
|
9.22
|
||||
|
Liabilities,
less
receivables
|
(7,275
|
) |
(0.03
|
) | |||
|
Total
Partners'
Capital
|
$
|
21,691,479
|
100.00
|
||||
|
See
accompanying notes
to financial statements.
|
64
|
Statement
of Operations
|
|||||
|
For
the period from June 27,
2007 (inception) to December 31, 2007
|
|||||
| Period from | |||||
| June 27, 2007 to | |||||
|
December
31,
2007
|
|||||
|
Income
|
|||||
|
Gains on
trading of commodity futures contracts:
|
|||||
|
Change
in unrealized gains on open positions
|
$
|
1,525,370
|
|
||
|
Interest
income
|
49,954
|
||||
|
Other
income
|
2,000
|
||||
|
Total
income
|
1,577,324
|
|
|||
|
Expenses
|
|||||
|
General
Partner management fees (Note 3)
|
8,790
|
||||
|
Brokerage
commissions
|
892
|
||||
|
Other
expenses
|
3,479
|
||||
|
Total
expenses
|
13,161
|
||||
|
Net
income
|
$
|
1,564,163
|
|
||
|
Net
income per limited
partnership unit
|
$
|
4.23
|
|
|
|
|
Net
income per weighted average
limited partnership unit
|
$
|
3.98
|
|
||
|
Weighted
average limited
partnership units outstanding
|
392,593
|
||||
|
See
accompanying notes to
financial statements.
|
|||||
65
|
Statement
of Changes in
Partners' Capital
|
||||||||||
|
For
the period from June 27,
2007 (inception) to December 31, 2007
|
||||||||||
|
General
Partner
|
Limited
Partners
|
Total
|
||||||||
| Balances, at Inception, June 27, 2007 | $ | - |
$
|
- | $ | - | ||||
| Initial contribution of capital | 20 | 980 | 1,000 | |||||||
|
Addition
of 400,000 partnership units
|
-
|
20,127,316
|
20,127,316
|
|||||||
|
Redemption
of initial General Partner and Limited Partner
investment
|
(20
|
)
|
(980
|
)
|
(1,000
|
)
|
||||
|
Net
income
|
-
|
1,564,163
|
|
1,564,163
|
|
|||||
|
Balances,
at December 31,
2007
|
$
|
-
|
$
|
21,691,479
|
$
|
21,691,479
|
||||
|
Net
Asset Value Per
Unit
|
||||||||||
| At July 27, 2007 (inception) | $ | 0.00 | ||||||||
|
At
December 6, 2007 (commencement of operations)
|
$ |
50.00
|
||||||||
|
At
December 31, 2007
|
$
|
54.23
|
||||||||
|
See
accompanying notes
to financial statements.
|
||||||||||
66
|
Statement
of Cash Flows
|
|||||
|
Period
from June 27, 2007
(inception) to December 31, 2007
|
|||||
| Period from | |||||
| June 27, 2007 to | |||||
|
December
31, 2007
|
|||||
|
Cash
Flows from Operating
Activities:
|
|||||
|
Net
income
|
$
|
1,564,163
|
|
||
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|||||
|
Increase
in commodity futures trading account - cash
|
(1,999,108
|
)
|
|||
|
Unrealized
gains on futures contracts
|
(1,525,370
|
) | |||
|
Increase in
interest receivable and other assets
|
(4,994
|
)
|
|||
|
Increase
in management fees payable
|
8,790
|
||||
|
Increase
in other liabilities
|
3,479
|
||||
|
Net
cash used in operating
activities
|
(1,953,040
|
)
|
|||
|
Cash
Flows from Financing
Activities:
|
|||||
|
Subscription
of partnership units and initial contribution
|
20,128,316
|
||||
| Redemption of initial General Partner and Limited Partner investment | (1,000 | ) | |||
|
Net
cash provided
by financing activities
|
20,127,316
|
||||
|
Net
Increase in Cash and Cash
Equivalents
|
18,174,276
|
||||
|
Cash
and Cash
Equivalents,
beginning of period
|
-
|
||||
|
Cash
and Cash
Equivalents,
end of period
|
$
|
18,174,276
|
|||
|
See
accompanying notes
to financial statements.
|
|||||
67
United
States
12 Month Oil Fund, LP
Notes
to Financial
Statements
For
the period ended December 31,
2007
NOTE
1 - ORGANIZATION AND
BUSINESS
United
States 12 Month Oil Fund, LP ("US12OF"), was organized as a limited partnership
under the laws of the state of Delaware on June 27, 2007. US12OF is a commodity
pool that issues units that may be purchased and sold on the American Stock
Exchange (the "AMEX"). US12OF will continue in perpetuity, unless terminated
sooner upon the occurrence of one or more events as described in
its Amended and Restated Agreement of Limited Partnership dated as of
December 4, 2007 (the "LP Agreement"). The investment objective of US12OF
is for
the changes in percentage terms of its net asset value to reflect the changes
in
percentage terms of the price of crude oil delivered to Cushing,
Oklahoma, as measured by the changes in the average of the prices of the
12 futures contracts on crude oil as traded on the New York
Mercantile Exchange (the "NYMEX"), consisting of the near month contract to
expire and the contracts for the following 11 months for a total of 12
consecutive months' contracts, except when the near month contract is within
two
weeks of expiration, in which case it will be measured by the futures contracts
that are the next month contract to expire and the contracts for the following
11 consecutive months, less US12OF's expenses. US12OF will accomplish its
objectives through investments in futures contracts for light, sweet crude
oil,
and other types of crude oil, heating oil, gasoline, natural gas and other
petroleum-based fuels that are traded on the NYMEX, ICE Futures or other
U.S.
and foreign exchanges (collectively, "Futures Contracts") and other oil-related
investments such as cash-settled options on Futures Contracts, forward
contracts
for oil, and over-the-counter transactions that are based on the price
of crude
oil, heating oil, gasoline, natural gas and other petroleum-based fuels,
Futures
Contracts and indices based on the foregoing (collectively, "Other Crude
Oil
Related Investments"). As of December 31, 2007, US12OF held 232 Futures
Contracts traded on the NYMEX.
US12OF
commenced operations on December 6, 2007 and
has a fiscal year ending on December 31. Victoria Bay Asset Management,
LLC (the
"General Partner") and an affiliate of the General Partner were the initial
general partner and limited partner contributing $20 and $980, respectively.
When US12OF commenced operations, they redeemed their initial
investment. The General
Partner of US12OF is responsible for the management of US12OF. The
General Partner is a member of the National Futures Association (the "NFA")
and
became a commodity pool operator with the Commodity Futures Trading
Commission effective December 1, 2005. The General Partner is also the
general
partner of United States Oil Fund, LP ("USOF"), United States Natural Gas
Fund, LP ("USNG") and United States Gasoline Fund, LP ("USG") which listed
their units on the AMEX under the ticker symbols "USO" on April 10,
2006, "UNG" on April 18, 2007 and "UGA" on February 26, 2008,
respectively.
US12OF
issues limited partnership interests ("units") to certain authorized purchasers
("Authorized Purchasers") by offering baskets consisting of 100,000 units
("Creation Baskets") through ALPS Distributors, Inc. (the "Marketing
Agent"). The purchase price for a Creation Basket is based upon the net
asset
value of a unit determined as of 4:00 p.m. New York time on the day the
order to create the basket is properly received. In addition, Authorized
Purchasers pay US12OF a $1,000 fee for each order to create one or
more Creation Baskets. Units can be purchased or sold on a nationally
recognized securities exchange in smaller increments than a Creation Basket.
Units purchased or sold on a nationally recognized securities exchange
are not
made at the net asset value of US12OF but rather at market prices quoted
on such
exchange.
In
November 2007, US12OF initially registered 11,000,000 units on Form S-1
with the
Securities and Exchange Commission (the "SEC"). On
December 6, 2007, US12OF listed its units on the AMEX under the ticker
symbol
“USL”. On that day, US12OF established its initial net asset value by setting
the price at $50.00 per unit and issued 300,000 units in exchange for
$15,000,000. The initial offering price of the initial Creation Basket
was based
on the closing price of the near month Futures Contracts as traded and
reported
on the NYMEX on the last business day prior to the effective date of US12OF's
initial registration statement filed on Form S-1. As of December 31, 2007,
US12OF had registered a total of 11,000,000 units. US12OF also commenced
investment operations on December 6, 2007 by purchasing Futures Contracts
traded on the NYMEX based on light, sweet crude oil.
NOTE
2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Revenue
Recognition
Commodity
futures contracts, forward contracts, physical commodities, and related
options
are recorded on the trade date. All such transactions are recorded on the
identified cost basis and marked to market daily. Unrealized gains or losses
on
open contracts are reflected in the condensed statement of financial condition
and are the difference between the original contract amount and the market
value
(as determined by exchange settlement prices for futures contracts and
related
options and cash dealer prices at a predetermined time for forward contracts,
physical commodities, and their related options) as of the last business
day of
the year or as of the last date of the condensed financial statements.
Changes
in the unrealized gains or losses between periods are reflected in the
condensed
statement of operations. The Fund earns interest on its assets denominated
in
U.S. dollars on deposit with the futures commission merchant at the 90-day
Treasury bill rate. In addition, US12OF earns interest on funds held at
the
custodian at prevailing market rates earned on such investments.
Brokerage
Commissions
Brokerage
commissions on all open commodity futures contracts are accrued on a full-turn
basis.
Income
Taxes
US12OF
is
not subject to federal income taxes; each partner reports his/her allocable
share of income, gain, loss deductions or credits on his/her own income
tax
return.
Additions
and
Redemptions
Authorized
Purchasers may purchase Creation Baskets from US12OF as of the beginning
of each
business day based upon the prior day's net asset value. Authorized
Purchasers
may redeem units from US12OF only in blocks of 100,000 units called
“Redemption
Baskets”. The amount of the redemption proceeds for a Redemption Basket will
be
equal to the net asset value of the units in the Redemption Basket
determined as
of 4:00 p.m. New York time on the day the order to redeem the basket
is properly
received.
US12OF
receives or pays the proceeds from units sold
or redeemed one business day after the trade-date of the purchase or
redemption.
The amounts due from Authorized Purchasers are reflected in
US12OF's statement of financial condition as receivable for units sold, and
amounts payable to Authorized Purchasers upon redemption are reflected
as
payable for units redeemed.
68
Partnership
Capital and Allocation of
Partnership Income and Losses
Profit
or
loss shall be allocated among the partners of US12OF in proportion to the
number
of units each partner holds as of the close of each month. The General
Partner
may revise, alter or otherwise modify this method of allocation as described
in
the LP Agreement.
Calculation
of Net Asset
Value
US12OF
calculates net asset value on each trading day by taking the current market
value of its total assets, subtracting any liabilities and dividing the
amount
by the total number of units issued and outstanding. US12OF uses the closing
price for the contracts on the relevant exchange on that day to determine
the
value of contracts held on such exchange.
Net
Income (Loss)
per Unit
Net
income (loss) per unit is the difference between the net asset value per
unit at the beginning of each period and at the end of each period. The
weighted average number of units outstanding was computed for purposes of
disclosing net loss per weighted average unit. The weighted average units
are
equal to the number of units outstanding at the end of the period, adjusted
proportionately for units redeemed based on the amount of time the units
were
outstanding during such period. There were no units held by the General
Partner at December 31, 2007.
Offering
Costs
Offering
costs incurred in connection with the registration of additional units
after the
initial registration of units are borne by US12OF. These costs include
registration fees paid to regulatory agencies and all legal, accounting,
printing and other expenses associated therewith. These costs will be
accounted
for as a deferred charge and thereafter amortized to expense over twelve
months
on a straight line basis or a shorter period if
warranted.
Cash
Equivalents
Cash
and
cash equivalents include money market portfolios and overnight time deposits
with original maturity dates of three months or less.
Use
of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
US12OF’s
management to make estimates and assumptions that affect the reported amount
of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the condensed financial statements, and the reported amounts
of the
revenue and expenses during the reporting period. Actual results could
differ
from those estimates and assumptions.
NOTE 3
- FEES PAID BY THE FUND
AND RELATED PARTY TRANSACTIONS
General
Partner Management
Fee
Under
the
LP Agreement, the General Partner is responsible for investing the assets
of
US12OF in accordance with the objectives and policies of US12OF. In addition,
the General Partner has arranged for one or more third parties to provide
administrative, custody, accounting, transfer agency and other necessary
services to US12OF. For these services, US12OF is contractually obligated
to pay
the General Partner a fee, which is paid monthly and based on average
daily net
assets, that is equal to 0.60% per annum on average net assets.
Ongoing
Registration Fees and Other
Offering Expenses
US12OF
pays all costs and expenses associated with the
ongoing registration of units subsequent to the initial offering.
These costs include registration or other fees paid to regulatory
agencies in
connection with the offer and sale of units, and all legal, accounting,
printing
and other expenses associated with such offer and sale. For the
period from June 27, 2007 to December 31, 2007, US12OF incurred $0 in
registration fees and other offering expenses. The General Partner
incurred
$350,639 in initial registration fees and other offering expenses on
behalf of US12OF during this period.
Director's
Fees
US12OF
is
responsible for paying the fees and expenses, including directors'
and officers'
liability insurance, of the independent directors of the General
Partner who are
also audit committee members. US12OF shares these fees with USOF,
USG and USNG based on the relative assets of each fund, computed on a
daily
basis. These fees for calendar year 2007 amounted to a total of $286,000
for all
of the funds.
Investor
Tax Reporting
Cost
The
fees
and expenses associated with US12OF's tax accounting and reporting
requirements,
with the exception of certain initial implementation service fees
and base
service fees which are borne by the General Partner, are paid by
US12OF. These costs are estimated to be $25,000 for the period ended
December 31, 2007.
Other
Expenses and
Fees
In
addition to the fees described above,
US12OF pays all brokerage fees, taxes and other expenses in connection with
the operation of US12OF, excluding costs and expenses paid by the General
Partner as outlined in Note 4.
69
NOTE
4 - CONTRACTS AND
AGREEMENTS
US12OF
is
party to a marketing agent agreement, dated as of November 13, 2007, with
the Marketing Agent, whereby the Marketing Agent provides certain marketing
services for US12OF as outlined in the agreement. The fees of the Marketing
Agent, which are borne by the General Partner, are equal to 0.06% on
US12OF's assets up to $3 billion; and 0.04% on US12OF's assets in excess
of $3
billion.
The
above
fees do not include the following expenses, which are also borne by the
General
Partner: the cost of placing advertisements in various periodicals; web
construction and development; or the printing and production of various
marketing materials.
US12OF
is
also party to a custodian agreement, dated October 5, 2007, with Brown
Brothers
Harriman & Co. ("BBH&Co."), whereby BBH&Co. holds investments on
behalf of US12OF. The General Partner pays the fees of the custodian, which
shall be determined by the parties from time to time. In addition, US12OF
is
party to an administrative agency agreement, dated October 5, 2007, with
the
General Partner and BBH&Co., whereby BBH&Co. acts as the administrative
agent, transfer agent and registrar for US12OF. The General Partner also
pays
the fees of BBH&Co. for its services under this agreement and such fees will
be determined by the parties from time to time.
Currently,
the General Partner pays BBH&Co. for its services, in the foregoing
capacities, the greater of a minimum of $125,000 annually or an asset-based
charge of (a) 0.06% for the first $500 million of US12OF's, USOF's, USNG's
and USG's combined net assets, (b) 0.0465% for US12OF's, USOF's, USNG's and
USG's combined net assets greater than $500 million but less than $1
billion, and (c) 0.035% for USOF's, USNG's, US12OF's and USG's combined net
assets in excess of $1 billion. The General Partner also pays a $25,000
annual
fee for the transfer agency services and transaction fees ranging from
$7.00 to
$15.00 per transaction.
US12OF
invests primarily in Futures Contracts traded on the NYMEX. On January
16, 2008,
US12OF and the NYMEX entered into a license agreement whereby US12OF was
granted
a non-exclusive license to use certain of the NYMEX's settlement prices
and
service marks. The agreement has an effective date of December 4, 2007
with
respect to US12OF. Under the license agreement, US12OF and the
affiliated funds managed by the General Partner pay the NYMEX an asset-based
fee
for the license, the terms of which are described in Note 3.
US12OF
expressly disclaims any association with the NYMEX or endorsement of US12OF
by
the NYMEX and acknowledges that “NYMEX” and “New York Mercantile Exchange” are
registered trademarks of the NYMEX.
US12OF
has entered into a brokerage agreement with UBS Securities LLC ("UBS
Securities"). The agreement requires UBS Securities to provide services
to
US12OF in connection with the purchase and sale of Futures Contracts and
Other Crude Oil Related Investments that may be purchased and sold by or
through
UBS Securities for US12OF's account. The agreement provides that UBS Securities
charge US12OF commissions of approximately $7
per round-turn trade, plus applicable exchange and NFA fees
for Futures Contracts and options on Futures Contracts.
NOTE
5 - FINANCIAL INSTRUMENTS,
OFF-BALANCE SHEET RISKS AND CONTINGENCIES
US12OF
engages in the speculative trading of Futures Contracts and options on
Futures Contracts (collectively, "derivatives"). US12OF is exposed to both
market risk, which is the risk arising from changes in the market value
of the
contracts, and credit risk, which is the risk of failure by another party
to
perform according to the terms of a contract.
All
of
the contracts currently traded by US12OF are exchange-traded. The risks
associated with exchange-traded contracts are generally perceived to be
less
than those associated with over-the-counter transactions since, in
over-the-counter transactions, US12OF must rely solely on the credit of
their
respective individual counterparties. However, in the future, if US12OF
were to enter into non-exchange traded contracts, it would be subject to
the
credit risk associated with counterparty non-performance. The credit risk
from
counterparty non-performance associated with such instruments is the net
unrealized gain, if any. US12OF also has credit risk since the sole counterparty
to all domestic and foreign futures contracts is the exchange on which the
relevant contracts are traded. In addition, US12OF bears the risk of financial
failure by the clearing broker.
The
purchase and sale of futures and options on futures contracts require
margin
deposits with a futures commission merchant. Additional deposits may
be
necessary for any loss on contract value. The Commodity Exchange Act
requires a
futures commission merchant to segregate all customer transactions and
assets
from the futures commission merchant’s proprietary activities.
US12OF’s
cash and other property, such as U.S. Treasury Bills, deposited with
a futures
commission merchant are considered commingled with all other customer
funds
subject to the futures commission merchant’s segregation requirements. In the
event of a futures commission merchant’s insolvency, recovery may be limited to
a pro rata share of segregated funds available. It is possible that the
recovered amount could be less than the total of cash and other property
deposited.
US12OF
invests its cash in money market funds that seek to maintain a stable
net asset
value. US12OF is exposed to any risk of loss associated with an investment
in
these money market funds. As of December 31, 2007, US12OF had deposits
in
domestic and foreign financial institutions in the amount of $20,173,384.
This
amount is subject to loss should these institutions cease
operations.
For
derivatives, risks arise from changes in the market value of the contracts.
Theoretically, US12OF is exposed to a market risk equal to the value
of futures
contracts purchased and unlimited liability on such contracts sold
short. As
both a buyer and a seller of options, US12OF pays or receives a premium
at the
outset and then bears the risk of unfavorable changes in the price
of the
contract underlying the option.
US12OF’s
policy is to continuously monitor its exposure to market and counterparty
risk
through the use of a variety of financial, position and credit exposure
reporting controls and procedures. In addition, US12OF has a policy
of requiring
review of the credit standing of each broker or counterparty with which it
conducts business.
The
financial instruments held by US12OF are reported in its
condensed statement of financial condition at market or fair value, or at
carrying amounts that approximate fair value, because of their highly
liquid
nature and short-term maturity.
Goldman,
Sachs & Co. (“Goldman Sachs”) sent USOF a letter on March 17, 2006,
providing USOF and the General Partner notice under 35 U.S.C. Section
154(d) of
two pending United States patent applications, Publication Nos. 2004/0225593A1
and 2006/0036533A1. Both patent applications are generally directed
to a method
and system for creating and administering a publicly traded interest
in a
commodity pool. In particular, the Abstract of each patent application
defines a
means for creating and administering a publicly traded interest in
a commodity
pool that includes the steps of forming a commodity pool having a
first position
in a futures contract and a corresponding second position in a margin
investment, and issuing equity interests of the commodity pool to
third party
investors. Subsequently, two U.S. Patents were issued; the first,
patent number
US7,283,978B2, was issued on October 16, 2007, and the second, patent
number
US7,319,984B2, was issued on January 15, 2008.
Preliminarily,
USOF's management is of the view that the structure and operations of USOF
and its affiliated commodity pools do not infringe these patents.
USOF
is also in the process of reviewing prior art (prior structures and
operations of similar investment vehicles) that may invalidate one
or more of
the claims in these patents. In addition, USOF has retained patent
counsel to
advise it on these matters and is in the process of obtaining their
opinions
regarding the non-infringement of each of these patents by USOF and/or
the
patents' invalidity based on prior art. If the patents were alleged
to apply to
USOF's structure and/or operations, and are found by a court to be
valid and
infringed, Goldman Sachs may be awarded significant monetary damages
and/or
injunctive relief. See
“US12OF's Operating Risks — Third parties may infringe upon or
otherwise violate intellectual property rights or assert that the
General
Partner has infringed or otherwise violated their intellectual property
rights,
which may result in significant costs and diverted
attention.”
70
NOTE 6
- FINANCIAL
HIGHLIGHTS
The
following table presents per unit performance data and other supplemental
financial data for the period from December 6, 2007 (commencement of operations)
to December 31, 2007 for the limited partners. This information has been
derived
from information presented in the condensed financial statements.
|
December
6, 2007
|
||||
|
(commencement
of
|
||||
|
operations)
to
|
||||
|
December
31, 2007
|
||||
|
Per
Unit Operating
Performance:
|
||||
|
Net
asset value, commencement of operations
|
$
|
50.00
|
||
|
Total income
|
4.26
|
|
||
|
Total
expenses
|
(0.03
|
)
|
||
|
Net
increase in net asset value
|
4.23
|
|
||
|
Net
asset value, end of period
|
$
|
54.23
|
||
|
Total
Return
|
8.46
|
%
|
||
|
Ratios
to Average Net Assets
(annualized)
|
||||
|
Total income
|
107.67
|
%
|
||
|
Expenses
excluding management fees
|
(0.30
|
)%
|
||
|
Management
fees
|
(0.60
|
)%
|
||
|
Net
income
|
106.77
|
%
|
||
Total
returns are calculated based on the change in value during the period.
An
individual limited partner’s total return and ratio may vary from the above
total returns and ratios based on the timing of contributions to and withdrawals
from US12OF.
NOTE 7
- QUARTERLY FINANCIAL
DATA (Unaudited)
The
following summarized (unaudited) quarterly financial information presents
the
results of operations and other data for three-month periods ended March
31,
June 30, September 30 and December 31, 2007.
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||
|
2007
|
2007
|
2007
|
2007
|
||||||||||
|
Total
Income
|
$
|
-
|
|
$
|
-
|
$
|
-
|
$
|
1,577,324
|
|
|||
|
Total
Expenses
|
-
|
-
|
-
|
13,161
|
|||||||||
|
Net
Income
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
$
|
1,564,163
|
|
||
|
Net
Income per limited partner unit
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
$
|
4.23
|
|
||
NOTE 8
- SUBSEQUENT
EVENTS
Licensing
Fees
As
discussed in Note 4, US12OF entered into a licensing agreement with the
NYMEX on January 16, 2008. The agreement has an effective date
of December 4,
2007 with respect to US12OF. Pursuant to the agreement, US12OF
and the
affiliated funds managed by the General Partner will pay a licensing
fee that is
equal to 0.04% for the first $1,000,000,000 of combined assets of the funds
and 0.02% for combined assets above $1,000,000,000. Since inception,
US12OF has incurred $540 under this
arrangement.
71
|
Changes
in and Disagreements
With Accountants on Accounting and Financial
Disclosure.
|
Not
applicable.
|
Controls
and
Procedures.
|
Disclosure
Controls and
Procedures.
US12OF
maintains disclosure controls and procedures that are designed to ensure
that
material information required to be disclosed in US12OF’s periodic reports
filed or submitted under the Exchange Act, is recorded, processed, summarized
and reported within the time period specified in the SEC’s rules and
forms.
The
duly
appointed officers of the General Partner, including its chief executive
officer and chief financial officer who perform functions equivalent
to those of a principal executive officer and principal financial officer
of
US12OF if US12OF had any officers, have evaluated the effectiveness of
US12OF’s
disclosure controls and procedures and have concluded that the disclosure
controls and procedures of US12OF have been effective as of the end of
the
period covered by this annual report on Form
10-K.
Management’s
Annual Report on
Internal Control Over Financial Reporting and Attestation Report of Registered
Public Accounting Firm.
This
annual report on Form 10-K does not include a report of management's assessment
regarding internal control over financial reporting or an attestation report
of
US12OF's registered public accounting firm due to a transistion period
established by the rules of the SEC for newly public companies.
Change
in Internal Control Over
Financial Reporting.
There
were no changes in US12OF’s internal control over financial reporting during
US12OF’s last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, US12OF’s internal control over financial
reporting.
|
Other
Information.
|
Monthly
Account
Statements.
Pursuant
to the requirement under part 4.22 of the CEA, each month US12OF publishes
an
account statement for its unitholders, which includes a Statement of
Income
(Loss) and a Statement of Changes in NAV. The account statement is filed
with
the SEC on a current report on Form 8-K pursuant to Section 13 or 15(d)
of the
Exchange Act and posted each month on US12OF's website at
www.unitedstates12monthoilfund.com.
72
|
Directors,
Executive Officers
and Corporate Governance.
|
Messrs.
Gerber and Mah also serve as executive officers of the General Partner. US12OF
has no executive officers. Its affairs are generally managed by the General
Partner. The following individuals serve as Management Directors of the General
Partner.
Nicholas
Gerber has been the President and CEO of the General Partner since June
9, 2005 and a Management Director of the General Partner since May 10,
2005. He
maintains his main business office at 1320 Harbor Bay Parkway, Suite
145,
Alameda, California 94502. Mr. Gerber acts as a portfolio manager for
US12OF,
USOF, USNG and USG. Mr. Gerber will act as a portfolio manager for USHO
and
US12NG. He registered with the NFA as a Principal of the General Partner
in
November 2005, and as an Associated Person of the General Partner in
December
2005. Currently, Mr. Gerber manages US12OF, USOF, USNG and USG. He will
also
manage USHO and US12NG. Mr. Gerber has also served as Vice President/Chief
Investment Officer of Lyon’s Gate Reinsurance Company, Ltd. since June of 2003.
Mr. Gerber has an extensive background in securities portfolio management
and in
developing investment funds that make use of indexing and futures contracts.
He
is also the founder of Ameristock Corporation, a California-based investment
adviser registered under the Advisers Act, that has been sponsoring and
providing portfolio management services to mutual funds since 1995. Since
1995,
Mr. Gerber has been the portfolio manager of the Ameristock Mutual Fund,
Inc. a
mutual fund registered under the 1940 Act, focused on large cap U.S.
equities
that currently has approximately $482 million in assets. He has also
been a
Trustee for the Ameristock ETF Trust since June 2006, and a portfolio
manager
for the Ameristock/Ryan 1 Year, 2 Year, 5 Year, 10 Year and 20 Year Treasury
ETF
since June 2007. In these roles, Mr. Gerber has gained extensive experience
in
evaluating and retaining third-party service providers, including custodians,
accountants, transfer agents, and distributors. Prior to managing Ameristock
Mutual Fund Inc., Mr. Gerber served as a portfolio manager with Bank
of America
Capital Management. While there he was responsible for the daily stewardship
of
four funds with a combined value in excess of $240 million. At Bank of
America
Capital Management, Mr. Gerber worked extensively in the development
and
managing of mutual funds and institutional accounts that were designed
to track
assorted equity market indices such as the Standard & Poor’s 500 and the
Standard & Poor’s Midcap 400. Before joining Bank of America, he was
managing director and founder of the Marc Stevens Futures Index Fund,
a fund
that combined the use of commodity futures with equity stock index futures.
The
futures index fund was a commodity pool and Mr. Gerber was the CPO. It
was
ultimately purchased by Newport Commodities. Mr. Gerber’s two decades of
experience in institutional investment include a period of employment
as a floor
trader on the NYMEX. Mr. Gerber has passed the Series 3 examination for
associated persons. He holds an MBA in finance from the University of
San
Francisco and a BA from Skidmore College. Mr. Gerber is 45 years
old.
Howard
Mah
has been a Management Director of the General Partner since May 10, 2005,
Secretary of the General Partner since June 9, 2005, and Chief Financial
Officer
of the General Partner since May 23, 2006. In these roles, Mr. Mah is
currently
involved in the management of US12OF, USOF, USNG and USG and will be
involved in the management of USHO and US12NG. Mr. Mah also serves as
the
General Partner’s Chief Compliance Officer. He received a Bachelor of Education
from the University of Alberta, in 1986 and an MBA from the University
of San
Francisco in 1988. He has been Secretary and Chief Compliance Officer
of the
Ameristock ETF Trust since February 2007, Compliance Officer of Ameristock
Corporation since 2001, a tax & finance consultant in private practice since
1995, Secretary of Ameristock Mutual Fund since 1995 and Ameristock Focused
Value Fund from December 2000 to January 2005, Chief Compliance Officer
of
Ameristock Mutual Fund since 2004 and the Co-Portfolio Manager of the
Ameristock
Focused Value Fund from December 2000 to January 2005. Mr. Mah is 43
years
old.
Andrew
F.
Ngim has been a Management Director of the General Partner since May
10,
2005 and Treasurer of the General Partner since June 9, 2005. As Treasurer
of
the General Partner, Mr. Ngim is currently involved in the management
of US12OF,
USOF, USNG and USG and will be involved in the management of USHO and
US12NG. He received a Bachelor of Arts from the University of California
at
Berkeley in 1983. Mr. Ngim has been the Managing Director and co-portfolio
manager of Ameristock Corporation since 1999, Trustee of the Ameristock
ETF
Trust since February 2007, and a portfolio manager for the Ameristock/Ryan
1
Year, 2 Year, 5 Year, 10 Year and 20 Year Treasury ETF since June 2007.
He was
the co-portfolio manager of the Ameristock Large Company Growth Fund
from
December 2000 to June 2002 and a Benefits Consultant with PricewaterhouseCoopers
from 1994 to 1999. Mr. Ngim is 47 years old.
Robert
L.
Nguyen has been a Management Director of the General Partner since May
10, 2005. As a Management Director of the General Partner, Mr. Nguyen
is
currently involved on the management of US12OF, USOF, USNG and USG and will
be involved in the management of USHO and US12NG. He received a Bachelor
of
Science from California State University Sacramento in 1981. Mr. Nguyen
has been
the Managing Principal of Ameristock Corporation since 2000. He was Co-Portfolio
Manager of the Ameristock Large Company Growth Fund from December 2000
to June
2002 and Institutional Specialist with Charles Schwab & Company Inc. from
1995 to 1999. Mr. Nguyen is 48 years old.
73
The
following individuals provide significant services to US12OF but are
employed by
the entities noted below.
John
P.
Love acts as the Portfolio Operations Manager for US12OF, USOF, USNG
and
USG and is expected to be the Portfolio Operations Manager for USHO and
US12NG. Mr. Love is also employed by the General Partner. Mr. Love has
served as
the operations manager of Ameristock Corporation since 2002, where he
was
responsible for back office and marketing activities for the Ameristock
Mutual
Fund and Ameristock Focused Value Fund and for the firm in general. From
1993 to
September 2002, Mr. Love was a project manager and managing director
for IT and
interactive media development firms, including TouchVision Interactive
and
Digital Boardwalk Inc. providing leadership to project teams from pre-contract
through deployment, while assisting with business and process development.
As
the managing director of Jamison/Gold (Keane Interactive), he provided
leadership to all departments including operations, production, technology,
sales, marketing, administration, recruiting, and finance. Mr. Love holds
a
Series 3 license and is registered with the NFA as an Associated Person
of the
General Partner. He holds a BFA in cinema-television from the University
of
Southern California. Mr. Love is 36 years old.
John
T. Hyland,
CFA acts as a Portfolio Manager and as the Chief Investment Officer
for
the General Partner. Mr. Hyland is employed by the General Partner. He
registered with the NFA as an Associated Person of the General Partner
in
December 2005, and as a Principal of the General Partner in January
2006. Mr. Hyland became the Portfolio Manager for USOF, USNG, US12OF
and USG in April 2006, March 2007, June 2007 and April 2007, respectively,
and
as Chief Investment Officer of the General Partner, acts in such capacity
on
behalf of USOF, USNG, US12OF and USG. He is also expected to become
the Portfolio Manager for USHO and US12NG. As part of his responsibilities
for US12OF, USOF, USNG and USG, Mr. Hyland handles day-to-day trading,
helps set
investment policies, and oversees US12OF’s, USOF’s, USNG’s and
USG's activities with its futures commission brokers,
custodian-administrator, and marketing agent. Mr. Hyland has an extensive
background in portfolio management and research with both equity and
fixed
income securities, as well as in the development of new types of complex
investment funds. In July 2001, Mr. Hyland founded Towerhouse Capital
Management, LLC, a firm that provides portfolio management and new fund
development expertise to non-U.S. institutional investors. Mr. Hyland
has been,
and remains, a Principal and Portfolio Manager for Towerhouse. From July
2001 to
January 2002, Mr. Hyland was the Director of Global Property Securities
Research
for Roulac International, where he worked on the development of a hedge
fund
focused on global real estate stocks. From 1996 through 2001, Mr. Hyland
was the
Director of Securities Research and Portfolio Manager for the capital
markets
division of CB Richard Ellis, a global commercial real estate services
firm. His
division provided portfolio management of equities as an advisor or sub-advisor
for mutual funds and separate accounts focused on real estate investment
trusts.
In addition, his group conducted research in the area of structured commercial
real estate debt (including Commercial Mortgage-Back Securities, or “CMBS”), and
lead the creation of one of the earliest re-securitizations of multiple
CMBS
pool tranches into a Collateralized Debt Obligation vehicle. In the ten
years
prior to working at CB Richard Ellis, Mr. Hyland had worked as a portfolio
manager or financial representative for several other investment firms
and
mutual funds. Mr. Hyland received his Chartered Financial Analyst (“CFA”)
designation in 1994. From 1993 until 2003, Mr. Hyland was on the Board
of
Directors of the Security Analysts of San Francisco (“SASF”), a not-for-profit
organization of investment management professionals. He served as the
president
of the SASF from 2001-2002. Mr. Hyland is a member of the CFA Institute
(formerly AIMR). He is also a member of the National Association of Petroleum
Investment Analysts, a not-for-profit organization of investment professionals
focused on the oil industry. He serves as an arbitrator for FINRA, as
part of
their dispute resolution program. He is a graduate of the University
of
California, Berkeley and received a BA in political science/international
relations in 1982. Mr. Hyland is 48 years old.
74
The
following individuals serve as independent directors of the General
Partner.
Peter
M.
Robinson has been an Independent Director of the General Partner since
September 30, 2005 and, as such, serves on the board of directors of the
General
Partner, which acts on behalf of US12OF, USOF, USNG and USG and will
serve on behalf of US12NG and USHO, if such funds commence operations.
Mr.
Robinson has been employed as a Research Fellow with the Hoover Institution
since 1993. Mr. Robinson graduated from Dartmouth College in 1979 and Oxford
University in 1982. Mr. Robinson spent six years in the White House, serving
from 1982 to 1983 as chief speechwriter to Vice President George Bush and
from
1983 to 1988 as special assistant and speechwriter to President Ronald
Reagan.
After the White House, Mr. Robinson received an MBA from the Stanford University
Graduate School of Business. Mr. Robinson then spent a year in New York
City
with Fox Television. He spent a second year in Washington, D.C., with the
SEC,
where he served as the director of the Office of Public Affairs, Policy
Evaluation, and Research. Mr. Robinson has also written three books and
has been
published in the New York
Times, Red Herring, and Forbes ASAP and he
is the
editor of Can Congress Be
Fixed?: Five Essays on Congressional Reform (Hoover Institution Press,
1995). Mr. Robinson is 50 years old.
Gordon
L.
Ellis has been an Independent Director of the General Partner since
September 30, 2005 and, as such, serves on the board of directors of the
General
Partner, which acts on behalf of US12OF, USOF, USNG and USG and will
serve on behalf of US12NG and USHO, if such funds commence operations.
Mr. Ellis
has been Chairman of International Absorbents, Inc. since July 1988, President
and Chief Executive Officer since November 1996 and a Class I Director
of the
company since July 1985. Mr. Ellis is also a director of Absorption Corp.,
International Absorbents, Inc.’s wholly-owned subsidiary. Mr. Ellis is a
director/trustee of Polymer Solutions, Inc., a former publicly-held company
that
sold all of its assets effective as of February 3, 2004 and is currently
winding
down its operations and liquidating following such sale. Mr. Ellis is a
professional engineer with an MBA in international finance. Mr. Ellis is
60
years old.
Malcolm
R. Fobes
III has been an Independent Director of the General Partner since
September 30, 2005 and, as such, serves on the board of directors of the
General
Partner, which acts on behalf of US12OF, USOF, USNG and USG and will
serve on behalf of US12NG and USHO, if such funds commence operations.
Mr. Fobes
is the founder, Chairman and Chief Executive Officer of Berkshire Capital
Holdings, Inc., a California-based investment adviser registered under
the
Advisers Act, that has been sponsoring and providing portfolio management
services to mutual funds since 1997. Since 1997, Mr. Fobes has been the
Chairman
and President of The Berkshire Funds, a mutual fund investment company
registered under the 1940 Act. Mr. Fobes also serves as portfolio manager
of the
Berkshire Focus Fund, a mutual fund registered under the 1940 Act, which
concentrates its investments in the electronic technology industry. From
April
2000 to July 2006, Mr. Fobes also served as co-portfolio manager of The
Wireless
Fund, a mutual fund registered under the 1940 Act, which concentrates its
investments in companies engaged in the development, production, or distribution
of wireless-related products or services. In these roles, Mr. Fobes has
gained
extensive experience in evaluating and retaining third-party service providers,
including custodians, accountants, transfer agents, and distributors. Mr.
Fobes
was also contributing editor of Start a Successful Mutual Fund: The Step-by-Step
Reference Guide to Make It Happen (JV Books, 1995). Prior to forming Berkshire
Capital Holdings, Inc., Mr. Fobes was employed by various technology-related
companies, including Adobe Systems, Inc., a leading provider of digital
publishing and imaging software technologies. Mr. Fobes holds a B.S. degree
in
Finance and Economics from San Jose State University in California. Mr.
Fobes is
43 years old.
The
following are individual principals, as that term is defined in CFTC Rule
3.1,
for the General Partner: Melinda Gerber, the Gerber Family Trust, Howard
Mah,
Andrew Ngim, Robert Nguyen, Peter Robinson, Gordon Ellis, Malcolm Fobes,
John
Love, and John Hyland. These individuals are principals due to their positions,
however, Nicholas Gerber and Melinda Gerber are also principals due to
their
controlling stake in Wainwright. None of the principals owns or has any
other
beneficial interest in US12OF. Nicholas Gerber and John Hyland make trading
and
investment decisions for US12OF. Nicholas Gerber, John Love, and John Hyland
execute trades on behalf of US12OF. In addition, Nicholas Gerber, John
Love,
John Hyland and Robert Nguyen are registered with the CFTC as Associated
Persons
of the General Partner and are associate members of the NFA.
Audit
Committee
The
General Partner has an audit committee which is made up of the three independent
directors (Peter M. Robinson, Gordon L. Ellis, and Malcolm R. Fobes III).
The
audit committee is governed by an audit committee charter that is posted
on
US12OF’s website. The
Board
has not made a determination as to whether any of the members of the audit
committee may be considered to be an “Audit Committee Financial Expert” as such
term is defined in Item 407(d)(5) of Regulation S-K. However, the Board
believes
that Messrs. Fobes and Ellis are able to read and understand financial
statements and meet the financial sophistication requirements of the AMEX
and
applicable FINRA rules as they relate to audit committees. As such, given
the
limited scope of US12OF’s activities and the qualifications and experience of
all of the members of the audit committee, the board of directors does
not
believe it is necessary to designate a member of the audit committee as
an
“Audit Committee Financial Expert.”
Other
Committees
Since
the
individuals who perform work on behalf of US12OF are not compensated by
US12OF,
but instead by the General Partner, Ameristock or ALPS Distributors, Inc.,
US12OF does not have a compensation committee. Similarly, since the Directors
noted above serve on the board of directors of the General Partner, there
is no
nominating committee of the board of directors that acts on behalf of US12OF.
75
Code
of Ethics
The
General Partner of US12OF has adopted a Code of Business Conduct and
Ethics (the
“Code of Ethics”) that applies to its principal executive officer, principal
financial officer, principal accounting officer or controller, or persons
performing similar functions, and also to US12OF, USOF, USNG, USG,
USHO and
US12NG. US12OF has posted the text of the Code of Ethics on its
website at www.unitedstates12monthoilfund.com. US12OF intends to
disclose any amendments or waivers to the Code of Ethics applicable
to the
General Partner’s principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, on its website. A copy of the Code of Ethics has been filed
with the SEC.
|
Executive
Compensation.
|
Compensation
to the General Partner
and Other Compensation.
US12OF
does not directly compensate any of the executive officers noted above. The
executive officers noted above are compensated by the General Partner for
the work they perform on behalf of US12OF and other entities controlled
by the
General Partner. US12OF does not reimburse the General Partner, nor does
it set
the amount or form of any portion of the compensation paid to the executive
officers by the General Partner. US12OF pays fees to the General Partner
pursuant to the LP Agreement, under which the fund is obligated to pay the
General Partner an annualized fee of 0.50% of average daily net assets
of US12OF
for the first $1,000,000,000 and 0.20% of average daily net assets of US12OF
for
amounts above $1,000,000,000. For the period from December 6, 2007 to December
31, 2007 US12OF paid the General Partner aggregate fees of $8,790.
Director
Compensation
The
following table sets forth compensation earned during the period from December
6, 2007 to December 31, 2007, by the Directors of the General Partner.
|
|
|
|
|
|
|
|
|
|
|
Change
in
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
|
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
Value
and
|
|
|
|
|
|
|||||||
|
|
|
Fees
|
|
|
|
|
|
|
|
Nonqualified
|
||||||||||||
|
Earned
or
|
|
|
|
|
|
Non-Equity
|
|
Deferred
|
|
|
|
|
|
|||||||||
|
|
|
Paid
in
|
|
Stock
|
|
Option
|
|
Incentive
Plan
|
|
Compensation
|
|
All
Other
|
|
|
|
|||||||
|
Name
|
|
Cash
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Plan
|
|
Compensation
(1)
|
|
Total
|
||||||||
|
Management
Directors
|
||||||||||||||||||||||
|
Nicholas
Gerber
|
$
|
0
|
NA
|
NA
|
NA
|
$
|
0
|
$
|
0
|
$
|
0
|
|||||||||||
|
Andrew
F. Ngim
|
$
|
0
|
NA
|
NA
|
NA
|
$
|
0
|
$
|
0
|
$
|
0
|
|||||||||||
|
Howard
Mah
|
$
|
0
|
NA
|
NA
|
NA
|
$
|
0
|
$
|
0
|
$
|
0
|
|||||||||||
|
Robert
L. Nguyen
|
$
|
0
|
NA
|
NA
|
NA
|
$
|
0
|
$
|
0
|
$
|
0
|
|||||||||||
|
Independent
Directors
|
||||||||||||||||||||||
|
Peter
M. Robinson
|
$
|
0
|
NA
|
NA
|
NA
|
$
|
0
|
$
|
89,000
|
$
|
89,000
|
|||||||||||
|
Gordon
L. Ellis
|
$
|
0
|
NA
|
NA
|
NA
|
$
|
0
|
$
|
88,000
|
$
|
88,000
|
|||||||||||
|
Malcolm
R. Fobes III
|
$
|
0
|
NA
|
NA
|
NA
|
$
|
0
|
$
|
109,000
|
$
|
109,000
|
|||||||||||
(1)
Payments made under this column represent cash payments made in lieu of
directors’ and officers’ insurance coverage. Such payments were made only to the
Independent Directors of the General Partner for their service on the boards
of
USOF, USNG and US12OF.
76
|
Security
Ownership of Certain
Beneficial Owners and Management and Related Stockholder
Matters.
|
None
of
the directors or executive officers of the General Partner, nor the employees
of
US12OF own any units of US12OF. In addition, US12OF is not aware of any 5%
holder of its units.
|
Certain
Relationships and
Related Transactions, and Director
Independence.
|
US12OF
has and will continue to have certain
relationships with the General Partner and its affiliates. However, there
have been no direct financial transactions between US12OF and the directors
or
officers of the General Partner that have not been disclosed herein. See
"Item 11. Executive Compensation" and "Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters." Any
transaction with a related person that must be disclosed in accordance with
SEC
Regulation S-K item 404(a), including financial transactions by US12OF with
directors or executive officers of the General Partner or holders of beneficial
interests in the General Partner or US12OF of more than 5%, will be subject
to
the provisions regarding "Resolutions of Conflicts of Interest; Standard
of
Care" as set forth in Section 7.7 of the LP Agreement and will be reviewed
and
approved by the audit committee of the General Partner.
|
Principal
Accountant Fees and
Services.
|
During
the period from December 6, 2007 to December 31, 2007, the General Partner
made
the following payments to its independent auditors:
|
2007
|
||||
|
Audit
fees
|
$
|
27,500
|
||
|
Audit-related
fees
|
|
-
|
||
|
Tax
fees
|
|
-
|
||
|
All
other fees
|
|
-
|
||
|
$
|
27,500
|
Audit
fees consist of fees paid to Spicer Jeffries LLP for (i) the audit of
US12OF’s annual financial statements included in the Annual Report on Form 10-K,
and review of financial statements included in the Quarterly Reports on
Form
10-Q and filed on US12OF's current reports on Form 8-K; and
(ii) services
that are normally provided by the Independent Registered Public Accountants
in
connection with statutory and regulatory filings or engagements.
The
audit
committee has established policies and procedures which are intended
to control
the services provided by US12OF’s independent auditors and to monitor their
continuing independence. Under these policies and procedures, no
audit or permitted non-audit services (including fees and terms thereof),
except
for the de minimis
exceptions for non-audit services described in Section 10A(i)(1)(B) of
the
Exchange Act, may be undertaken by US12OF’s independent auditors unless the
engagement is specifically pre-approved by the audit committee. The
audit committee may form and delegate authority to subcommittees consisting
of
one or more members when appropriate, including the authority to grant
pre-approvals of audit and permitted non-audit services, provided that
decisions
of such subcommittee to grant pre-approvals must be presented to the
full audit
committee at its next scheduled meeting.
77
|
Exhibits
and Financial
Statement
Schedules.
|
|
1.
|
See
Index to Financial Statements on page 61.
|
|
2.
|
No
financial statement schedules are filed herewith because (i)
such
schedules are not required or (ii) the information required has
been
presented in the aforementioned financial statements.
|
|
3.
|
Exhibits
required to be filed by Item 601 of Regulation
S-K.
|
Listed
below are the exhibits which are filed or furnished as part of this annual
report on Form 10-K (according to the number assigned to them in Item 601
of
Regulation S-K):
|
Exhibit
Number
|
Description
of
Document
|
|
|
3.1*
|
Form
of
the Amended and Restated Agreement of Limited
Partnership.
|
|
|
3.2*
|
Certificate
of Limited
Partnership of the Registrant.
|
|
|
10.1**
|
Form
of Initial
Authorized Purchaser Agreement.
|
|
|
10.2**
|
Form
of Marketing
Agent Agreement.
|
|
|
10.3**
|
Form
of Custodian
Agreement.
|
|
|
10.4**
|
Form
of Administrative
Agency Agreement.
|
|
|
10.5***
|
Amendment
to the License Agreement.
|
|
| 14.1*** | Code of Ethics. |
|
|
||
|
|
||
|
|
||
|
|
||
* Incorporated
by reference to Registrant’s Registration Statement on Form S-1 (File No.
333-144348) filed on July 5, 2007.
**
Incorporated
by reference to
Registrant’s Pre-Effective Amendment No. 2 to the Registration Statement on Form
S-1 (File No. 333-144348) filed on November 16, 2007.
***
Filed
herewith.
**** Furnished
herewith.
78
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of
1934, the registrant has duly caused this Report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
United
States 12 Month Oil Fund, LP (Registrant)
By:
Victoria Bay Asset Management, LLC, its general partner
|
|
/s/
Nicholas D. Gerber
|
|
Nicholas
D.
Gerber
|
|
Chief
Executive Officer of
Victoria
Bay Asset
Management, LLC
(Principal
executive
officer)
|
|
DateDate:
March 26, 2008
|
| /s/ Howard Mah |
|
Howard
Mah
|
|
Chief
Financial Officer
of Victoria
Bay
Asset Management, LLC
(Principal
financial and
accounting officer)
|
|
DateDate:
March 26, 2008
|
79
Pursuant
to the requirements of
the Securities Exchange Act of 1934, this Report has been signed below by
the
following persons on behalf of the Registrant in the capacities and on the
dates
indicated.
| Signature | Title (Capacity) | Date |
| /s/ Nicholas D. Gerber | Management Director | March 26, 2008 |
| Nicholas D. Gerber | ||
| /s/ Howard Mah | Management Director | March 26, 2008 |
| Howard Mah | ||
| /s/ Andrew Ngim | Management Director | March 26, 2008 |
| Andrew Ngim | ||
| /s/ Robert Nguyen | Management Director | March 26, 2008 |
| Robert Nguyen | ||
| /s/ Peter M. Robinson | Independent Director | March 26, 2008 |
| Peter M. Robinson | ||
| /s/ Gordon L. Ellis | Independent Director | March 26, 2008 |
| Gordon L. Ellis | ||
| /s/ Malcolm R. Fobes III | Independent Director | March 26, 2008 |
| Malcolm R. Fobes III |
80